U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECU-RI-TIES EX-CHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EX-CHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 0-2882
ESCO TRANSPORTATION CO.
-----------------------
(Name of small business issuer in its charter)
Delaware 55-0257510
-------- -------------
State or other jurisdiction of (I.R.S. Employ-er
incorporation or organization) Identifi-cation No.)
6505 Homestead Road
Houston, Texas 77028
- -------------------------------------------
(Address of principal executive offices)
Registrants telephone number (713) 644-0265
----------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 .
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in defin-itive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $22,741,988
-----------
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $[4,104,836] as of July 2, 1998. Such aggregate market value was
computed by reference to the average bid and asked prices of the common stock,
as of July 2, 1998.
The number of shares outstanding of the Common Stock, $.0001 par value, as of
December 31, 1997 was 12,176,760.
Transitional Small Business Disclosure Format (Check one): Yes . No X.
--- ---
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) BUSINESS DEVELOPMENT
ESCO Transportation Co., a Delaware corporation ("ESCO" or the "Company"),
is a short haul contractor of freight for major shipping companies as well as a
national freight hauling and freight brokering company. The Company also owns
certain oil and gas prop-er-ties, which constitute an immaterial portion of the
Company's assets and generate an immaterial por-tion of the Company's reve-nues.
The Company was incorporated in 1916 under the laws of the West Virginia.
Effective May 20, 1992, the Company was rein-corpo-rated as a Delaware
corporation. Until December 1993, the Company was engaged primari-ly in the
busi-ness of explo-ration for, produc-tion of and sale of crude oil and natural
gas. On October 11, 1994, the Company changed its name from "Power Oil Company"
to "ESCO Transportation, Co." Unless otherwise indicated, the information in
this Annual Report is adjusted to reflect the one-for-four and one-for-ten
reverse stock split of the outstanding shares of the Company's common stock
effected on November 01, 1994.
(B) BUSINESS OF ISSUER
The principal business of the Company is providing contract transporting
services to major shipping companies, primarily inter-connecting short hauls of
container shipments. Most of this business consists of rail to rail or rail to
port ship-ments. In performing its services, the Company leases trucks and
trailers, with the individual truck owners providing the drivers. The owner of
the truck generally receives 75% of the revenue generated from the shipment as
compensation for providing the truck and the driver. The Company operates out
of facilities located in Houston, Texas, Dallas, Texas, Ontario, California,
Memphis, Tennessee and Springdale, Arkansas. The Company's executive offices
are located in Houston Texas. Company's freight brokerage operations pursue a
cost plus strategy in dispatching loads for various shippers in the southeastern
United States.
The Company is competing in an industry that is highly com-petitive.
The Company currently competes directly and indirectly with a large number of
contract carriers. Many of the Company's competitors are larger and have
significantly greater resources than the Company. The Company competes on the
basis of price and service.
Freight activity is typically somewhat stronger in the second half of the
year, with peak months in August, September and October. In addition, bad
weather and holidays generally affect business activity. The fact that the
Company's business is concentrated in temperate regions of the country, however,
its operations have not been historically seasonal to any material degree.
The Company believes that its current business operations are in compliance
with all applicable federal, state and local regulations governing its business.
The Company employs approximately 110 employees, all of whom are full time.
In addition, the Company employs as independent contractors approximately 190
owner/operators of the trucks used in the Company's operations.
2
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases the land and building now being used in the Houston shop
facilities and the executive offices. The facility consists of approximately
5,000 square feet of office space and eight acres of paved truck parking space.
The Company also leases the land and building now being used in Memphis
Tennessee. The property consists of approximately 3,000 square feet of office
space and fifteen acres or truck parking and container storage space. The
Company also leases approximately 2,000 square feet for its California
operations. The Company leases approximately 5000 square feet of office space
and 8 acres of truck parking in its Springdale, Arkansas location.
The company has a note payable on approximately 5 acres of undeveloped land in
Springdale, Arkansas. The company also has a note payable on approximately 4000
square feet of office space and 2 acres of truck parking in Memphis, Tennessee.
3
<PAGE>
The Company also owns producing and non-pro-ducing oil and gas leases in
the United States, which are located in Louisi-ana, New Mexico, Texas and
Wyoming.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its business,
primarily involving claims for personal injuries and property damage incurred in
the transportation of freight. The Company maintains insurance coverage that
covers the liability resulting from such claims. Adverse results in one or more
of these cases would not have a material adverse effect on the financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of the
Company through the solicitation of proxies or otherwise during the fourth
quarter of the fiscal year ending December 31, 1997.
4
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Bulletin Board under the
symbol "ETCO". The following table sets forth the high and low bid prices on for
the common stock for the periods indicated, as quoted by NASDAQ:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1996: HIGH LOW
<S> <C> <C>
First Quarter $ .10 $ 0625
Second Quarter .10 .075
Third Quarter .075 .0688
Fourth Quarter .40 .0688
FISCAL YEAR ENDED DECEMBER 31, 1997:
First Quarter $ 3.00 $.3125
Second Quarter 2.75 1.50
Third Quarter 1.75 .5625
Fourth Quarter 1.18 .375
</TABLE>
The listed quotations reflect interdealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily represent actual transactions.
As of December 31, 1997, there were 183 holders of record of the Company's
common stock.
The Company has not paid dividends on its common stock during the last four
years. The Company presently intends to retain earnings to finance the
expansion of its business and, therefore, does not expect to pay any cash
dividends in the foreseeable future. Any determination as to the payment of
cash dividends will depend upon the Company's earnings, general financial
condition, capital needs and other factors deemed pertinent by the Board of
Directors, as well as any limitations imposed by lenders under credit
facilities.
5
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERA-TION
OVERVIEW
- --------
ESCO Transportation has operated profitably in an extremely competitive industry
since from 1977 through 1996. While the company would certainly have preferred
to have shown a profit in 1997, the company had expected that the costs involved
in securing the assets necessary to facilitate the expansion that ESCO
Transportation has pursued were unavoidable.
During the last few months of 1996 through the middle of 1997, ESCO
Transportation purchased over 70 1997 Kenworth T600 tractors and purchased or
leased over 150 fifty three foot air ride trailers. Many of the trailers were
modified to accommodate several types of freight that ESCO desired to transport.
Just the down payments paid out during this period totaled over four hundred
thousand dollars. Coupled with the fact that all new equipment experiences a
certain amount of downtime immediately after acquisition as lanes are developed
and drivers are hired, it is easy to understand how the company's revenue and
cash flows can be depressed during the acquisition period.
Since 1993 ESCO's revenues have grown from a little over three million annually
to over 22 million in 1997. Company's that experience this level of growth are
usually considered to be riskier than those whose revenues remain constant over
many years. As such the financing arrangements that ESCO had in place during
1997 were not particularly attractive. The costs associated with this financing
as well as the limitations placed on the company by the lender further worked to
reduce profits and hinder the company's ability to manage cash flows.
STRATEGY FOR 1998
- -------------------
In early 1998 ESCO pursued an aggressive strategy to increase profitability.
This strategy was as follows:
Collections - ESCO aggressively pursued collections activity on all delinquent
accounts. As a result the company reduced invoices in excess of 120 days from
450 thousand dollars to less than 200 thousand dollars. The company does
recognize that this amount is still not optimal and is continuously working
towards reducing this amount further.
Restructuring Financing - In February 1998 ESCO entered into a factoring
arrangement with Compass Bank. This arrangement allows ESCO to secure
receivables financing electronically thus accelerating cash flows. The cost of
funds in this arrangement is also lower than with the company's previous
financing source and the administrative costs are also reduced.
By the ends of the first quarter of 1998, as a result of this strategy, ESCO was
able to bring all accounts payable current as well as increase cash reserves by
almost 200,000 dollars.
OTHER MAJOR DEVELOPMENTS
- --------------------------
In April 1998 ESCO entered into an agreement with Andy Freidel, President of
Intermodal Logistics Company Inc., in Memphis, Tennessee. Under this agreement
ESCO paid to Andy Freidel 100,000 dollars in cash, 200,000 shares of section 144
common stock and approximately 121,000 dollars in cash paid to Intermodal
Logistics' various vendors and contractors for an agreement not to compete
within either the Intermodal Trucking industry or the Container Storage
industry. ESCO was also assigned rights to certain leases including 15 acres of
property in Memphis, an office building, sixty chassis and a loaded container
lift. ESCO then moved its current Memphis operation into the former Intermodal
Logistics facility. This move will increase ESCO revenues by approximately six
million dollars annually as well as position ESCO as the largest full service
depot in the Memphis region.
FUTURE PLANS
- -------------
ESCO Transportation fully intends to return to profitability in 1998. Although
the company intends to continue to expand its revenue, the level of growth
sought by the company in 1998 will not affect the company's ability to show a
profit.
6
<PAGE>
The company's current growth plans include entering new markets with its
Intermodal Division since establishing operations in new geographical regions in
the Intermodal Industry is typically a low cost proposition. The Over the Road
Division's operations can be made more profitable by reducing maintenance costs
on equipment and improving driver retention. To these ends ESCO has leased a 16
bay shop in Springdale, Arkansas and has also restructured the corporate
personnel department to allow corporate management to oversee the driver
selection and control processes. ESCO has also instituted an aggressive safety
program which will ultimately lead to lower freight claims and lower liability
and cargo insurance premiums.
Management is attempting to sell nonperforming assets, specifcally the vacant
location formerly used for Houston operations and Memphis operations. It has
also restructured its administrative staffing needs by centralizing certain
administrative duties eliminating a number of administrative positions at its
satellite offices.
To improve ESCO's balance sheet statistics the company intends to increase
equity by placing a portion of the five million shares of treasury stock that
the company assumed control of in 1998. The company is also in negotiations
with several major financial institutions exploring methods for restructuring
the debt on most of the company's equipment. Together with a return to
profitability the company's equity should increase substantially thus improving
most ratios.
SUMMATION
- ---------
ESCO Transportation Co. is very serious in its efforts to improve the company's
financial positioning. The company did expect a great deal of what occurred in
1998 and so management considers that the company is definitely on course with
the company's previously stated objectives. The company fully intends to become
a very large force within the Intermodal Transportation industry as well as the
Trucking Industry as a whole.
7
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and supplementary disclosures are
included herein on pages F-1 through F-10.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In 1995 the Company filed form 8K with the SEC to become non-reporting. In
1998 the company returned to reporting status when it hired Null-Lairson PC,
(formerly Lairson, Stephens and Reimer, PC) to perform audits of the 1995 and
1996 financial statements.
8
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Position with
Name Registrant
- ---------------------- ---------------------------------------
Edwis L. Selph President & Chief Executive Officer
Edwis L. Selph, Jr. Vice Presi-dent, and Director
Each director shall hold office until his/her successor shall have been
elected and qualified or until resignation or removal by the Board of Directors
in accordance with the By-laws of the Company.
The officers of the Registrant are elected by the Board of Directors. The
term of each officer is until voluntary resignation or replacement. There is no
arrangement or understanding between any directors pursuant to selection.
Edwis L. Selph has served as a Director of the Company since April 29,
----------------
1986. He served as Chairman of the Board, President and Chief Executive Officer
from February 27, 1987 until February 1, 1990 when he resigned these positions
and was elected Vice-Chairman. He was reinstated as Chairman of the Board,
Presi-dent and Chief Executive Officer on December 31, 1990. Mr. Selph is an
investor-business person. His investments include numerous real estate holdings
and small business interests. Mr. Selph owned ESCO Transportation Inc. prior to
its acquisition by the Company on December 14, 1993.
Edwis L. Selph, Jr. has served as Secretary/Treasurer and Director of the
---------------------
Company since September 21, 1994. Mr. Selph has worked for the Company in
various capacities since graduating from high school in 1991. Edwis L. Selph,
Jr. is the son of Edwis L. Selph, Chairman of the Board, President and Chief
Executive Officer of the Company. Mr. Selph was appointed Vice-President in
1995 with unanimous consent of the board after the resignations of Mr. Cox and
Mr. Bible during that same year.
9
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended December 31,
1997, 1996 and 1995 the compensation paid by the Company to its Chief Executive
Officer:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME OTHER
AND ANNUAL ALL OTHER
PRINCIPAL COMPEN- COMPEN-
POSITION YEAR SALARY BONUS SATION OPTIONS SATION
- --------------- --------- ------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Edwis L. Selph, 1997 $250,000 $ 0 $ 0 $ 0 $ 0
CEO 1996 $150,000 $ 0 $ 0 $ 0 $ 0
1995 $150,000 $ 0 $ 0 $ 0 $ 0
</TABLE>
The Company has no long-term incentive programs and no defined benefit or
actuarial plan.
Directors of the Company currently serve without any compensation for their
service as directors.
10
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of Common Stock as of December 31, 1996 by (i) each director and executive
officer of the Company, (ii) all directors and officers of the Company as a
group, and (iii) each other person known by the Company to be the beneficial
owner of more than 5% of the outstanding Common Stock as of December 31, 1996.
<TABLE>
<CAPTION>
# of Shares and Nature of Percent of Outstanding Shares
Name and Address of Beneficial Owner Beneficial Owner
- ------------------------------------ ------------------------- ------------------------------
<S> <C> <C>
Edwis L. Selph 4,750,000 36.03%
6505 Homestead Rd
Houston, Texas 77028
Edwis L. Selph, Jr. 0 *
6505 Homestead Rd
Houston, Texas 77028
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Edwis L. Selph, Chairman of the Board, President and Chief Executive
Officer of the Company, owned 100% of the stock of ESCO Transportation Inc. and
received 875,000 shares of the Company's common stock in exchange for 100% of
the common stock of ESCO Transportation Inc. Prior to ESCO Transportation Inc.
becoming a wholly-owned subsidiary of the Company, Mr. Selph owned approximately
15.67% of the Company's outstanding common stock. Immediately after the
transaction, Mr. Selph owned approximately 86.18% of the Registrant's
outstanding common stock. On May 11, 1998, 4,000,000 shares of the Company's
common stock were purchased by the Company for $1,198,000 or 29.95 cents per
share, from a related party. This amount, including interest, will be paid over
eight (8) years. As of May 14, 1998, the Company has paid a total of $113,000
toward this debt, bringing the balance to $1,085,000.
11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Ex-change Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
there-unto duly autho-rized.
ESCO TRANSPORTATION, CO.
----------------------------
Edwis L. Selph, President
Date: June 18, 1998
---------------
In accordance with the Ex-change Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: June 18, 1998
---------------
- ---------------------------
Edwis L. Selph, President
(Chief Executive Officer)
Date: June 18, 1998
-----------------
- ---------------------------
Edwis L. Selph, Jr.,
Secretary/Treasurer
(Chief Financial Officer)
12
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIALS
CONTENTS
<S> <C>
PAGE
----
Independent Auditors' Report 13
Balance Sheets 15
Statements of Income 16
Statements of Changes in Stockholders' Equity 17
Statements of Cash Flows 18
Notes to Financial Statements 19
</TABLE>
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
ESCO Transportation Co.
Houston, Texas
We have audited the accompanying balance sheets of ESCO Transportation Co., a
Delaware Corporation (the Company), as of December 31, 1997 and 1996, and the
related statements of income, changes in stockholders' equity, and cash flows
for each of the three years in the period ended December 31,1997. These
financial statements are the responsibility of the management of ESCO
Transportation Co. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly in all
material respects, the financial position of ESCO Transportation Co. as of
December 31, 1997 and 1996 and the results of its operations and its cash flows
for the three years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company's significant operating loss raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
NULL LAIRSON, P.C.
Houston, Texas
May 15, 1998
14
<PAGE>
ESCO TRANSPORTATION CO.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
ASSETS
- ---------------------------------------------------------------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 22,678 $ 20,450
Accounts receivable, net 1,020,799 1,181,377
Notes receivable 25,015
Current portion of prepaid expenses 36,597 36,711
Other current assets 224,460
------------ -----------
TOTAL CURRENT ASSETS 1,304,534 1,263,553
------------ -----------
PROPERTY AND EQUIPMENT, net 9,100,489 5,049,147
------------ -----------
OIL AND GAS PROPERTIES , net 34,692 40,676
------------ -----------
PREPAID EXPENSES - net of current portion 101,097 93,128
------------ -----------
TOTAL ASSETS $10,540,812 $6,446,504
- --------------------------------------------------------------------- ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to stockholders $ 70,319 $ 191,202
Accounts payable - trade 375,213 449,061
Bank overdrafts 280,715 261,470
Accrued liabilities 382,962 36,255
Employee savings payable 39,916
Federal income tax payable 54,806
Current portion of long-term debt 1,807,738 926,911
------------ -----------
TOTAL CURRENT LIABILITIES 2,956,863 1,919,705
LONG-TERM DEBT - net of current portion 6,645,188 3,818,498
DEFERRED INCOME TAXES 41,435
COMMITMENTS, (NOTE 6)
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value in 1997; 20,000,000 shares
authorized in 1997 and 2,000,000 in 1996; issued and outstanding -
12,176,760 in 1997 and 1,092,676 in 1996 1,218 1,093
Paid-in capital 863,818 363,943
Retained earnings 77,725 305,830
------------ -----------
942,761 670,866
Less treasury stock, at cost (4,000) (4,000)
- --------------------------------------------------------------------- ------------ -----------
938,761 666,866
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,540,812 $6,446,504
- --------------------------------------------------------------------- ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
ESCO TRANSPORTATION CO.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ -----------
REVENUE
Freight revenue $22,733,933 $17,835,418 $8,340,571
Oil and gas revenue 8,055 15,125 9,737
------------ ------------ -----------
TOTAL REVENUE 22,741,988 17,850,543 8,350,308
------------ ------------ -----------
EXPENSES
Cost of freight revenue 15,916,496 12,804,457 5,666,679
Related party cost of freight revenue 3,990,666 424,153
General administrative expenses 5,146,071 4,058,928 2,117,823
Depreciation and depletion 1,064,098 382,872 86,385
------------ ------------ -----------
TOTAL EXPENSES 22,126,665 17,246,257 8,295,040
- ---------------------------------------------- ------------ ------------ -----------
OPERATING INCOME 615,323 604,286 55,268
OTHER INCOME (EXPENSE)
Interest income 1,713 5,745 6,840
Other income 16,303 1,720 3,986
Interest expense (938,961) (341,061) (51,878)
------------ ------------ -----------
Less on sale of assets (18,724)
(939,669) (333,596) (41,052)
------------ ------------ -----------
NET INCOME (LOSS) BEFORE INCOME TAXES (324,346) 270,690 14,216
- ----------------------------------------------
Provision for income tax benefit(expense):
Deferred (41,435)
Current 96,241 (54,806)
NET INCOME (LOSS) $ (228,105) $ 174,449 $ 14,216
- ---------------------------------------------- ============ ============ ===========
NET INCOME (LOSS) PER COMMON SHARE $ (0.02) $ 0.16 $ 0.01
- ---------------------------------------------- ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 11,938,736 1,092,676 1,091,373
- ----------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
ESCO TRANSPORTATION CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED TREASURY
---------------------------
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------------- ------------ --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 1,089,176 $ 1,089 $353,947 $ 117,165 $(4,000) $468,201
------------- ------------ --------- --------- -------- ---------
Issuance of common stock 3,500 4 9,996 10,000
(3,500 shares)
Net income 14,216 14,216
------------- ------------ --------- --------- -------- ---------
BALANCE AT 1,092,676 1,093 363,943 131,381 (4,000) 492,417
DECEMBER 31, 1995
Net income 174,449 174,449
------------- ------------ --------- --------- -------- ---------
BALANCE AT 1,092,676 1,093 363,943 305,830 (4,000) 666,866
DECEMBER 31, 1996
Ten (10) for one (1) stock split 9,834,084
Issuance of common stock 1,250,000 125 499,875 500,000
Net income (228,105) (228,105)
------------- ------------ --------- --------- -------- ---------
BALANCE AT 12,176,760 $ 1,218 $ 863,818 $ 77,725 $(4,000) $938,761
DECEMBER 31, 1997
============= ============ ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
ESCO TRANSPORTATION CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ (228,105) $ 174,449 $ 14,216
Adjustment to reconcile net income to net cash provided by
operating activities
Depreciation and depletion 1,064,098 382,872 86,385
Allowance for bad debt expense 324,100 115,789 27,736
(Gain) loss on sale of equipment 18,724 (425)
Deferred income taxes 41,435
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (163,523) (541,097) (284,778)
Decrease (increase) in prepaid expenses (7,855) (129,839) 11,800
Decrease (increase) in other assets (224,460)
(Decrease) increase in accounts payable and accrued expenses 272,859 84,330 203,391
(Decrease) increase in employee savings payable 39,916
Increase (decrease) in federal income tax payable (54,806) 54,806 (12,516)
Increase (decrease) in deferred income taxes payable (41,435)
----------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 999,513 182,320 46,234
CASH FLOWS FROM INVESTING ACTIVITIES
Loans made to contract haulers (notes receivable) (96,178)
Purchases of property and equipment 255,829 (108,490) (153,945)
Payments received on notes receivable 25,015 36,912 34,251
Sale of assets 59,802 7,935
NET CASH USED BY INVESTING ACTIVITIES (171,010) (63,643) (215,872)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing of operations from bank overdraft 19,245 261,470
Proceeds from long-term debt and notes payable to stockholder 251,847 500,000
Payments on long-term debt and notes payable to stockholders 1,345,520 (649,812) (395,195)
Issuance of common stock 500,000 10,000
----------- ----------- ----------
NET CASH FLOWS PROVIDED (USED) (826,275) (136,495) 114,805
BY FINANCING ACTIVITIES
NET INCREASE (DECREASE) IN 2,228 (17,818) (54,833)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents balance at beginning of year 20,450 38,268 93,101
----------- ----------- ----------
CASH AND CASH EQUIVALENTS $ 22,678 $ 20,450 $ 38,268
BALANCE AT END OF PERIOD
Supplemental schedule of non-cash investing and financing activities:
Debt incurred to purchase property and equipment $4,932,154 $4,365,431 $ 480,233
- ---------------------------------------------------------------------- =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
ESCO TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION
ESCO Transportation Co., (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, Inc. a wholly-owned subsidiary of ESCO Transportation Co.,
was incorporated on May 26, 1993 and acquired certain assets, liabilities and
transportation contracts from ESCO Transportation (a Proprietorship) as of May
31, 1993.
On November 17, 1993, the Company's Board of Directors authorized a one-for-ten
reverse stock split for all outstanding shares of its common stock. On December
14, 1993, Power Oil Company acquired all of the outstanding shares of ESCO
Transportation, Inc. (ESCO) in exchange for the issuance of 875,000 shares of
common stock. The stock of ESCO Transportation, Inc. was acquired as described
in the plan and agreement of reorganization dated October 20, 1993 and is held
as a wholly-owned subsidiary. For accounting purposes, ESCO was the acquiror.
Accordingly, the merger was accounted for as a reverse acquisition on the "as
if" pooling of interest basis. On November 14, 1994 the Company's Board of
Directors voted to (1) change the name of the company from Power Oil Company to
ESCO Transportation Co. and (2) institute a one-for-four reverse stock split on
the Company's common stock.
The principal business of the Company is hauling freight on inter-connecting
short hauls of containers shipments. The Company operates out of facilities in
Houston, Texas; Ontario, California; Memphis, Tennessee and Springdale,
Arkansas, with Houston being the home office.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
- ---------------------
Income and expenses are recorded on the accrual method of accounting for
financial and federal income tax reporting purposes.
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.
Revenue Recognition
- --------------------
Revenue and direct costs are recognized when the shipment is completed.
19
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Property and Equipment
- ------------------------
Property, plant 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.
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. Developmental costs, including development
of dry holes, are capitalized when incurred.
Depletion of capitalized costs on producing properties is computed on a
property-by-property basis utilizing the unit-of-production method. Depletion
expense was $5,984 for 1997, $25,524 for 1996 and $16,549 for 1995.
Lease acquisition costs are capitalized when incurred. Leasehold impairment is
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.
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 bases. 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 will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
20
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. All share and per share amounts have been adjusted to reflect
the stock splits.
Concentrations 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.
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 December 31, 1996, 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 a current market exchange.
3. ACCOUNTS AND NOTES RECEIVABLE
Accounts receivable are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
----------- -----------
<S> <C> <C>
Receivables assigned to factor $1,473,656 $1,496,572
Less advances from factor 1,262,094 1,289,413
----------- -----------
Due from Factor 211,562 207,163
Unfactored accounts receivable 1,063,617 797,332
Accrued unbilled revenue 226,128 318,729
Employee advances 18,719
Allowances for doubtful accounts (481,108) (160,514)
----------- -----------
$1,020,199 $1,181,377
=========== ===========
</TABLE>
21
<PAGE>
3. ACCOUNTS AND NOTES RECEIVABLE (continued)
Pursuant to a factoring agreement, the Company's factoring agent acts as its
factor for the majority of its receivables, which are assigned on a pre-approved
basis subject to recourse. Interest is charged at the prime lending rate plus
5% per annum.
4. PROPERTY AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
------------ -----------
<S> <C> <C>
Land $ 385,019 $ 217,500
Buildings 323,228 323,228
Office equipment 210,338 162,983
Communications equipment 353,281 49,200
Furniture and fixtures 29,483 20,355
Trucks, tractors and trailers 9,310,188 4,787,608
- ----------------------------- ------------ -----------
10,611,537 5,560,874
Less accumulated depreciation (1,511,048) (511,727)
$ 9,100,489 $5,049,147
============ ===========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
$1,058,114, $352,341 and $69,836 respectively.
22
<PAGE>
5. LONG-TERM DEBT
The Company's long-term debt was acquired to purchase property and equipment.
The Company's long-term debt consists of the following major classes:
Stockholder Notes Payables
- ----------------------------
Loans from stockholders were obtained to meet short-term needs. At present,
these notes are non-interest bearing and unsecured.
Notes Payables
- ---------------
Loans from banks and finance companies for the purchase of equipment. Most of
these notes bear interest rates between 9.5% to 11.5% and are secured by the
equipment purchased with them.
Capital Leases Payable
- ------------------------
The Company has entered into several lease agreements for equipment. These
leases are classified as capital leases and the equipment is recognized under
property and equipment and depreciated by the Company in accordance with its
depreciation policy. The interest rate under these leases are between 7% to
12.3%. The leases are secured by the equipment acquired by them.
Mortgages Payable
- ------------------
The Company has acquired three (3) pieces of property in Memphis, Tennessee;
Springdale, Arkansas; and Houston, Texas. The mortgage to two of these
properties are held by banks and the third by a limited partnership. The
interest rates for these properties are between 8.0% to 9.5%. Each mortgage is
secured by the property.
The following schedule summarizes the Company's long-term debt:
<TABLE>
<CAPTION>
<S> <C>
Stockholder notes payable $ 70,319
Notes payable 7,320,290
Capital leases payable (net present value) 639,664
Mortgages payable 492,972
- ------------------------------------------ ----------
$8,523,245
==========
</TABLE>
23
<PAGE>
5. LONG-TERM DEBT (continued)
Maturities of long term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $1,878,057
1999 1,858,342
2000 2,078,726
2001 1,910,508
2002 645,014
Thereafter 182,598
----------
$8,523,245
==========
</TABLE>
6. CONTRACTS AND COMMITMENTS
The Company leases equipment under noncancelable operating leases. The
Company's minimum rental commitments under this noncancelable operating lease as
of December 31, 1997, were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 86,532
1999 65,141
2000 65,141
2001 65,141
$281,955
========
</TABLE>
7. FEDERAL INCOME TAXES
At December 31, 1997 and 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $201,000, which expire in years
2000 through 2009. The Company believes that as a result of previous changes in
stock ownership, it underwent an ownership change as defined in Section 382 of
the Internal Revenue Code, as amended. The net operating loss carryforwards
were generated in the years prior to the ownership change. Therefore, the
Company believes the net operating loss carryforwards available to offset
taxable income of the Company each year following the change will be limited,
but will not be lost. The amount of such a limitation is expected to be
approximately $35,000 each year. However, because of uncertainties concerning
allowableness of the loss carryforwards, a valuation allowance has been provided
for the full amount of the deferred tax asset arising from such net operating
loss carryforwards. The effective income tax rate varies from the statutory
federal income tax rate due to certain expenses which primarily are not
deductible for tax purposes.
24
<PAGE>
8. MAJOR CUSTOMERS
Sales to major customers were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CUSTOMER 1997 1996 1995
- -------- ----- ----- -----
A 17% 17% 31%
B 12% 8% 14%
C 9% 7% 0%
D 17% 6% 0%
E 2% 3% 10%
F 6% 5% 8%
----- ----- -----
TOTAL 63% 46% 63%
- -------- ===== ===== =====
</TABLE>
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental cash flow information:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996 1995
------------- -------- -------
<S> <C> <C> <C>
Interest Paid $ 870,836 $341,061 $51,878
- -------------- ============= ======== =======
</TABLE>
10. CONTINGENT LIABILITIES
Due to the nature of the Company's business, it is defendant in various
lawsuits. As of December 31, 1996 the Company had only one case pending against
it. This matter involved personal injury to a driver. Though the outcome of
this case could not be determined by the Company's attorneys, it is their belief
that the Company could sustain losses in excess of $10,000 should the judgment
favor the plaintiff.
11. GOING CONCERN
As shown in the accompanying financial statements, the Company has incurred a
loss from operations, and has deficits in working capital, combined with a
significant increase in debt associated with asset purchases. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
As discussed in Note 12, management has replaced its factoring company on terms
more favorable to the Company. In addition, management has negotiated reductions
in its operating expenses during the first quarter of 1998, including
significant reductions in insurance costs. Management is also attempting to sell
nonperforming assets, it has restructured its administrative staffing needs by
centralizing certain administrative duties eliminating a number of
administrative positions at its satellite offices, and it anticipates positive
cash flow performance from its acquisition of Intermodal Logistics Corporation
(as discussed in Note 12). Management believes that each of these changes which
have been implemented, or are planning to be implemented, will provide for
operating profits in the coming year and provide additional working capital
allowing for it to continue as a going concern.
25
<PAGE>
12. SUBSEQUENT EVENTS
The following subsequent events have occurred since December 31, 1997:
On April 22, 1998 the Company assumed the operations of Intermodal Logistics
Corporation ("ILC"). ILC was an intermodal carrier in the Memphis area. ILC
also operated a container storage yard in Memphis. At the time of the takeover,
ILC was generating approximately $6,000,000 per year in revenue.
Some of the terms of the agreement were as follows:
The company assumed ownership of a container lift as well as the
corresponding debt of $96,000, both the title to the lift as well as the
note were reassigned to the Company. Other than the railroad, the Company
now owns the only container lift capable of lifting loaded containers in
Memphis.
In exchange for a non-compete agreement from the owner of ILC, the Company
paid $100,000 and 200,000 shares in the Company's Section 144 stock.
The Company covered ILC's bank overdraft of approximately $71,000.
The Company assumed certain property leases previously held by ILC.
The Company assumed ownership of a mobile office structure, as well as the
corresponding note payable.
In late January, 1998, the Company opened a Dallas, Texas office. The Company
is leasing a lot, and office space.
On March 5, 1998 the Company changed its accounts receivable factoring agent to
achieve more favorable terms.
Other than the assets related to the assumption of ILC's operations, no major
equipment purchases have taken place in 1998.
Effective January 1, 1998, 115,000 shares of Section 144 stock was issued to
employees of the Company.
26
<PAGE>
On May 11, 1998, 4,000,000 shares of the Company's common stock were purchased
by the Company for $1,198,000 or 29.95 cents per share, from a related party.
This amount, including interest, will be paid over eight (8) years. As of May
14, 1998, the Company has paid a total of $113,000 toward this debt, bringing
the balance to $1,085,000.
The Company has leased, for its over the road operation, a new facility in
Springdale, Arkansas. The facility includes 3,500 square feet of office space,
a 20,000 square foot shop with twelve (12) bays and a truck wash, and five (5)
acres of truck and trailer parking. The lease is for a term of six (6) years
with an option to buy at any time.
27
<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22678
<SECURITIES> 0
<RECEIVABLES> 1020799
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1304534
<PP&E> 10611537
<DEPRECIATION> 1511048
<TOTAL-ASSETS> 10540812
<CURRENT-LIABILITIES> 2956863
<BONDS> 0
<COMMON> 1218
0
0
<OTHER-SE> 941543
<TOTAL-LIABILITY-AND-EQUITY> 10540812
<SALES> 22733933
<TOTAL-REVENUES> 22741988
<CGS> 0
<TOTAL-COSTS> 15916496
<OTHER-EXPENSES> 6210169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 938961
<INCOME-PRETAX> (324346)
<INCOME-TAX> 96241
<INCOME-CONTINUING> (228105)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (228105)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
