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
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6505 Homestead Road
Houston, Texas 77028
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(Address of principal executive offices)
Registrant's telephone number_________(713) 635-1008____
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.001 par value per share
(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 definitive 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. $27,236,456
-----------
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was $3,633,007 as of September 20, 1999. Such aggregate market value
was computed by reference to the average bid and asked prices of the common
stock, as of September 17, 1999.
The number of shares outstanding of the common Stock, .001 par value, as of
December 31, 1998 was 12,527,612.
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 properties, which constitute an immaterial portion of the
Company's assets and generate an immaterial portion of the Company's revenues.
The Company was incorporated in 1916 under the laws of the West Virginia.
Effective May 20, 1992, the Company was reincorporated as a Delaware
corporation. Until December 1993, the Company was engaged primarily in the
business of exploration for, production 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 in November 1996.
(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 shipments. 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 70% to 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
corporate offices are located in Houston, Texas. The Company's freight
brokerage operations pursue a cost plus strategy in dispatching loads for
various shippers in the southeastern United States.
The Company is operating in an industry that is highly competitive. 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, due to 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 155 employees, all of whom are full time. In
addition, the Company has approximately 183 owner/operators as independent
contractors of the trucks used in the Company's operations.
2
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases the following land and buildings now being used to in its
operations.
1. A facility consisting of 5,000 square feet of office space and eight
acres of paved truck parking space in Houston, Texas. The facility is used to
house the Houston drayage operations and the corporate offices.
2. Land and building located in Memphis, Tennessee consisting of
approximately 3,000 square feet of office space and fifteen acres of truck
parking and container storage space. These facilities are used to operate the
Memphis drayage facilities and the Memphis container yard facilities.
3. A facility consisting of approximately 2,000 square feet of office space
located in Ontario, California. These facilities are used to house the
Company's Ontario, California drayage operations.
4. A facility totaling approximately 5,000 square feet of office space and
eight acres of truck parking in Springdale, Arkansas. These facilities are used
to house the over-the-road division located in Springdale, Arkansas.
The Company also has a note payable on approximately five acres of undeveloped
land in Springdale, Arkansas, which it currently has for sale and a note payable
on approximately 4,000 square feet of office space and two acres of truck
parking in Memphis, Tennessee. In addition, the Company has a note payable on
ten acres of Houston, Texas property originally purchased to be used as the new
site for the Houston, Texas operations and corporate offices. The Company has
been attempting to sell this property and closed on the sale in September 1999
at a profit to the Company.
The Company also owns producing and non-producing oil and gas leases in the
United States, which are located in Louisiana, New Mexico, Texas, and Wyoming.
3
<PAGE>
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.
As of the date of filing hereof, October 18, 1999, ESCO Transportation is
involved in the following litigation:
Case No. EDVC 98-22ORT (VAPx); Intercargo Insurance Co. v. Burlington Northern
Santa Fe Railroad, it al.; In the U.S. District Court, Central District of
California.
Intercargo Insurance Company is suing multiple defendants because a load it
insured was misdelivered at the railyard to persons who stole the merchandise.
Defendant Burlington Northern & Santa Fe Railway has cross-claimed against
multiple other defendants, including ESCO Transportation, for indemnity. ESCO
Transportation never had custody or control of the stolen merchandise. ESCO
Transportation has answered both Intercargo's claim and Burlington's
cross-claim. ESCO Transportation seeks its reasonable and necessary defense
costs by asserting that the actions were not brought with reasonable cause and
in the good faith belief that there is a justifiable controversy under the facts
and law. ESCO Transportation is seeking a dismissal of the claims against it.
There is currently a mandatory settlement conference scheduled for October 18,
1999 at which Company management will be present.
The Company's management does not believe that this litigation will have any
material impact on the Company's business.
Case No. 98-0840-1; Pacific Business Capital Corp v. ESCO Transportation Co.
and Michael Till, Individually; in the Chancery Court of Shelby, Tennessee.
Pacific Business sued ESCO Transportation and Mike Till in an attempt to enforce
a security interest it holds in some property of Intermodal Logistics Co. ESCO
Transportation took over the operations of Intermodal, which is more fully
described in the 1997 10K previously filed with the SEC. The security interest
granted Pacific Business by Intermodal concerns chattel paper, mainly
receivables and right to receivables. The agreement between ESCO Transportation
and Intermodal specifically excludes receivables due and owing prior to the date
of the agreement, and Intermodal retained all rights to those funds. It is ESCO
Transportation's and Mike Till's position that they have not violated any
security interest Pacific Business may have; ESCO Transportation and Mike Till
seek dismissal as expeditiously as possible.
The Company's management does not believe that this litigation will have any
material impact on the Company's business.
4
<PAGE>
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, 1998.
5
<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 for
the common stock for the periods indicated, as quoted by NASDAQ:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1997: HIGH LOW
<S> <C> <C>
First Quarter $ 3.00 $.3125
Second Quarter 2.75 1.50
Third Quarter 2.755 .5625
Fourth Quarter 1.18 .375
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1998: HIGH LOW
<S> <C> <C>
First Quarter $ .53 $.27
Second Quarter .62 .34
Third Quarter .90 .37
Fourth Quarter .52 .32
</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, 1998, there were 1111 holders of record of the Company's
common stock.
The Company has not paid dividends on its common stock during the last five
years. The Company presently intends to retain earnings as working capital and
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.
6
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION
OVERVIEW
- --------
ESCO Transportation continued to show growth of nearly 20% in its overall
revenues and a net margin from operations of 2.6%. Its cost of freight as a
percentage of revenue declined from 1997 primarily due to reductions in fuel
costs and improved efficiencies in its over-the-road division. Administrative
costs increased by 31% over 1997, with most of the growth coming from increased
personnel at all locations necessary to handle the increased volumes of
business. Part of this increase was necessary as an overall infrastructure
increase; however, the Company's management anticipates the present
infrastructure will handle additional business increases without a proportionate
additional increase in personnel and related costs.
The most significant increase in costs is directly related to the Company's
financing costs, with a substantial amount of that relating to the total balance
outstanding to its factor under the factoring arrangement with Commercial
Billing Services (Compass Bank). During the year the Company found the need to
increase its outstanding balance in factored receivables partially due to a need
to generate the cash required to maintain current on the Company's long-term
debt. Net income before depreciation increased from $739,000 in 1997 to
$1,019,000 in 1998 but did not increase in sufficient amounts to handle the
annual debt service on its long-term debt, which is approximately $1,800,000.
The cost of financing through the factoring arrangement is substantially higher
than the cost of its long-term debt, resulting in the increase in the total
interest costs for the year.
Since 1993, the Company's revenues have grown from a little over $3,000,000 to
$27,000,000 in 1998. This level of growth has required financing which is
typically considered riskier, and accordingly, resulted in higher financing
costs for the Company in spite of the improved factoring arrangement with
Commercial Building Services.
In addition, the Company determined in 1998 that its billing systems were
resulting in excessive write-offs due to billing errors that cost the Company
over $600,000 in write-offs for the year.
STRATEGY FOR 1999
- -------------------
In early 1999, the Company formulated a new management team to return the
company to profitability and move the Company forward to place it in a position
to show substantial growth in 1999, 2000, and beyond. The Company has taken the
following steps to accomplish these objectives:
Effective March 1, 1999, the Company implemented a new management team with
Robert Weaver as President and Robert Darilek, CPA, as Chief Financial Officer,
and has expanded the management team to incorporate a new Corporate Controller
and a new Vice President of Operations. The new team's goals are to return the
Company to a fully reporting status with the SEC and to use the business
relationships of Mr. Weaver to expand Company business in all of its existing
locations. The Company is also actively pursuing candidates for acquisition or
merger with the Company to facilitate future growth. In addition, the Company
is actively pursuing capital funds to improve its working capital in 1999 and
future years for such acquisition or merger plans.
7
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION (CONTINUED)
STRATEGY FOR 1999 (CONTINUED)
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The Company has also taken an active approach to bring trade receivables
within terms of all of its customers and has hired a manager in charge of
accounts receivable collections to oversee this operation and to pursue
collections on a day-to-day basis.
The Company has also implemented processes during 1999 to identify
processing and billing problems and has implemented procedures to eliminate the
high write-offs that existed in 1998. This should add substantial additional
profits to the net income of the Company and improve cash flow.
The Company has established a budget for 1999 and has outlined an
organizational chart that more clearly defines roles of authority and
responsibility to the terminal managers at all locations of the Company. This
processing has placed a higher level of accountability for all terminal managers
and should facilitate the Company's efforts to turn a profitable year in 1999.
OTHER MAJOR DEVELOPMENTS
- --------------------------
Effective September 10, 1999, the Company signed a letter of intent to acquire
the assets and business operations of Panther Lines, Inc. and Value
Distribution, located in Los Angeles and Stockton, California. These companies
represent a revenue stream of approximately $6,000,000 consisting of regional
line hauls, warehousing activity, and shuttle operations for major customers in
the Stockton and Los Angeles, California areas. The purchase price consists of
$300,000 in cash and 1,000,000 shares of common stock of the Company contributed
by a major stockholder. The Panther/Value purchase should contribute in excess
of $500,000 of net annual income to the Company based on historical performance
and projected future operations.
The Company is actively discussing potential mergers with four other
intermodal/drayage companies located throughout the United States.
In August 1999, the Company completed financing of fifteen new Peterbilt Power
Units for the over-the-road Springdale operations totaling $1,616,291. In
addition, in June and July 1999, the Company executed two leases to acquire
thirty-two (32) new trailers under a capital lease arrangement totaling
$632,350. All units are for use in its Springdale over-the-road division. The
fifteen new power units primarily represent replacement units of existing
vehicles and the trailers add to the existing fleet of trailers to provide
opportunities to new customers and new markets in the lanes established by the
Company.
8
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION (CONTINUED)
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 1999 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.
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.
The Company capitalized $29,310 with respect to new software purchases and
installations which are Year 2000 compliant. The total estimated remaining 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.
9
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION (CONTINUED)
YEAR 2000 ISSUE (CONTINUED)
- ------------------------------
The Company continues 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 1999. 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.
FUTURE PLANS
- -------------
The Company anticipates a profitable year for the fiscal year ended December 31,
1999 based on its operations through the second quarter of 1999. Its new
management team is actively pursuing opportunities to improve working capital
and is developing a five year plan to improve processes, expand existing
markets, and evaluate future acquisitions. During 1999, the Company implemented
a budgeting process and a financial accountability procedure for all divisions
of the Company. The Company's management anticipates this accountability and
desegregation of responsibility will provide more direct incentives for the
managers to increase revenues and profits at each location and also provide a
tool to monitor progress according to plan on a monthly and quarterly basis.
Management is presently conducting discussions with financing companies to
establish an equipment line of credit to finance future power units of the
Company. Management anticipates during the latter part of 1999 and into the
year 2000 that its existing fleet will need major repairs or replacement and is
establishing the required line of credit to handle this growth and finance the
new equipment. The Company's management anticipates the financing arrangements
will improve the current financing interest rates and payments of its existing
fleet.
Management is actively pursuing several financing companies to assist with a
mezzanine financing to provide the Company additional working capital in 1999
and future years. Management anticipates this working capital will be utilized
to improve cash flow on the short-term and provide additional cash to finance
the potential mergers and Company expansion sought by management.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION (CONTINUED)
FUTURE PLANS (CONTINUED)
- --------------------------
Management is also attempting to sell nonperforming assets and has closed on the
sale of its land in Houston, Texas in September 1999.
SAFE HARBOR
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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.
INFLATION AND CHANGES IN PRICES
- -----------------------------------
The Company does not anticipate future changes in prices or inflation levels to
have a significant impact on the operations of the Company.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION (CONTINUED)
SUMMATION
- ---------
The Company's management believes that is has taken a positive turn in 1999 with
new efforts and a new direction to improve increased financial position and its
financial growth over the upcoming years. The new management team sees
opportunities for substantial profits and improved margins in the latter part of
1999 and into the year 2000 and beyond. The Company intends to become a major
force within the intermodal transportation industry, as well as the trucking
industry as a whole.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and supplementary disclosures are included
herein on pages 18 through 38.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In 1995, the Company filed Form 15 with the SEC to become non-reporting. In
1998, the Company returned to reporting status when it hired Null & Lairson
P.C., (formerly Lairson, Stephens and Reimer, P.C.) to perform audits of the
1995 and 1996 financial statements. During 1998, the Company hired Fitts,
Roberts and Company to complete the audit of its 1998 financial statements to
again become fully reporting. Effective through the reporting period of June
30, 1999, the Company has completed all filings and has implemented procedures
to ensure future filings are maintained timely.
During the period that Null & Lairson, P.C. was the Company's auditor, there
were no disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure or any reportable
events. Null & Lairson, P.C.'s report on the financial statements for the
Company contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope, or accounting principles.
The Company has requested Null & Lairson, P.C. to furnish it with a letter
addressed to the Securities and Exchange Commission stating whether or not it
agrees with the statements made by the Company herein and, if not, stating the
respects in which it does not agree. Any copy of this letter will be attached
as an exhibit to a later report of Form 8-K/A.
12
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
<TABLE>
<CAPTION>
Name Position with Registrant
<S> <C>
Edwis L. Selph, Sr. Chief Executive Officer and Chairman of the Board
Robert Weaver President and Chief Operating Officer and Director (Effective 03/01/99)
Robert F. Darilek Chief Financial Officer and Director (Effective 03/01/99)
Edwis L. Selph, Jr. Vice President and Director
</TABLE>
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, Sr. 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,
President and Chief Executive Officer on December 31, 1990. Mr. Selph has other
business interests. His investments include real estate holdings and small
business interests. Mr. Selph owned ESCO Transportation Inc. prior to its
acquisition by the Company on December 14, 1993.
Robert J. Weaver comes to ESCO from the position of President of HUB City Texas
- -----------------
based in Houston, Texas. Mr. Weaver began his career in Houston in 1993 and
brought the operations of HUB City Texas (originally HUB City Houston) from a
heavily debt position to a profitable operation with revenues in excess of
$100,000,000. Mr. Weaver has been in the transportation industry for over of
twenty-two years and brings a tremendous level of stability and opportunity to
ESCO through his relationships with the Hub Group and other companies in the
transportation industry.
Robert F. Darilek, C.P.A was hired by the Company as Chief Financial Officer
- ---------------------------
because of his experience in with working with Mr. Robert Weaver at HUB City
Texas and his ability to in resolving operational problems. Mr. Darilek manages
a profitable accounting practice in San Antonio, Texas and continues to maintain
that responsibility while operating as Chief Financial Officer for ESCO. Mr.
Darilek has been in the transportation industry since 1984 through various
relationships through the HUB Group, and brings a high level of financial
reporting and internal control expertise to the Company. Mr. Darilek is
responsible for overseeing all financial operations, financial reporting, and is
assisting in evaluating refinancing and merger opportunities for the Company.
13
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT (CONTINUED)
Edwis L. Selph, Jr. has served as Secretary/Treasurer and Director of the
- ----------------------
Company since September 21, 1994. Mr. Selph has continually worked for the
Company in various capacities. Edwis L. Selph, Jr. is the son of Edwis L.
Selph, Sr., 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.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its Chief
Executive Officers for the fiscal years ended December 31, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Other
Principal Annual All Other
Position Year Salary Bonus Compensation Options Compensation
<S> <C> <C> <C> <C> <C> <C>
Edwis L. Selph, Sr., CEO 1998 $205,000 $ 0 $ 9,375 (1) $ 0 $ 0
1997 $150,000 $ 0 $ 0 $ 0 $ 0
Edwis L. Selph, Jr. 1998 $ 97,000 $ 0 $ 9,375 (1) $ 0 $ 0
1997 $ 66,350 $ 0 $ 0 $ 0 $ 0_
<FN>
(1) This compensation consists of 25,000 shares of stock issued as a bonus on 01/01/98
each to Edwis Selph, Sr. and Edwis Selph, Jr. valued at $0.375 per share.
</TABLE>
The Company has no defined benefit or actuarial plan.
Directors of the Company currently serve without any compensation for their
service as directors.
Subsequent to December 31, 1998, 1,200,000 shares of common stock were issued to
a new executive pursuant to an employment agreement subject to a three year
vesting arrangement. The vesting causes the executive to forfeit a portion of
the stock previously issued in the event of termination of employment for
reasons stated in the contract.
Subsequent to December 31, 1998, the Company agreed to grant a key officer
225,000 shares of stock which is earned at management's discretion through a
series of five milestones relating to restructuring debt operations and
profitability.
14
<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, 1998 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, 1998.
<TABLE>
<CAPTION>
# of Shares and Nature of
Name and address of Beneficial Owner Beneficial Owner Percent of Outstanding Shares
<S> <C> <C>
Edwis L. Selph, Sr. 9,077,310 72.50%
6505 Homestead Rd
Houston, Texas 77028
- ------------------------------------
Edwis L. Selph, Jr. 30,000 2.40%
6505 Homestead Rd.
Houston, Texas 77028
- ------------------------------------
Total 9,107,310 74.90%
- ------------------------------------ ------------------------- ------------------------------
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Edwis L. Selph, Sr., 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.
The Company advanced funds and issued stock to a shareholder and his family
members as discussed below. At December 31, 1998, $464,867 remained owed to the
Company evidenced by two notes. The notes receivable signed December 31, 1998,
including 7% interest, are payable in full on or before December 31, 1999 and
are secured by ESCO common stock. No interest was paid or accrued on these
notes in 1998.
In May 1998, the Company purchased 4,000,000 shares of the Company's common
stock for $1,198,000 or 29.95 cents per share, from a related party, in exchange
for a note, including interest, to be paid over eight years. On December 31,
1998, the chief executive officer and majority stockholder of the Company
assumed the promissory note, which then had a balance due of $960,000, in
exchange for 3,200,000 shares of the Company's common stock. An additional
800,000 shares was also issued to the same individual at the same time in
exchange for a note receivable back to the Company for $265,991. Additional
loans from the Company to this shareholder and his immediate family members
totaled $469,156, less $70,319 owed to the shareholder of which $200,150 was
repaid during 1998, resulting in an ending balance receivable by the Company of
$464,678 at December 31, 1998. $413,385, which is related to the stock purchase
is shown as a reduction in shareholders' equity.
15
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
1. Material contracts
2. Letter on change in certifying accountant
b. Reports on Forms 8-K - NONE
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ESCO TRANSPORTATION, CO.
-----------------------------
Edwis L. Selph, Sr.,
Chief Executive Officer
and Chairman of the Board
Date: ________________
In accordance with the Exchange 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:
- ---------------------------- --------
Edwis L. Selph, Sr.
(Chief Executive Officer and
Chairman of the Board)
Date:
- ---------------------------- --------
Edwis L. Selph, Jr.
(Secretary/Treasurer)
17
<PAGE>
INDEX TO FINANICALS
Page
Independent Auditor's Report 20
Balance Sheets 21-22
Statements of Income 23
Statement of Changes in Stockholders' Equity 24
Statements of Cash Flows 25-26
Notes to Financial Statements 26-38
18
<PAGE>
AUDITED FINANCIAL STATEMENTS
ESCO TRANSPORTATION CO.
DECEMBER 31, 1998 AND 1997
19
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
ESCO Transportation Co.
Houston, Texas
We have audited the accompanying balance sheet of ESCO Transportation Co. as of
December 31, 1998, and the related statements of income, retained earnings, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of ESCO Transportation Co. for the year ended December 31, 1997 were
audited by other auditors whose report, dated May 15, 1998, on those financial
statements included an explanatory paragraph that expressed substantial doubt
about the Company's ability to continue as a going concern.
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 1998 financial statements referred to above present fairly,
in all material respects, the financial position of ESCO Transportation Co. as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
As discussed in Note B to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 131, Disclosure about Segments
of an Enterprise and Related Information, in 1998. We audited the adjustments
necessary to restate the 1997 segment information provided in Note P. In our
opinion, such adjustments are appropriate and have been properly applied.
"Fitts, Roberts & Co."
Houston, Texas
June 17, 1999
20
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
ESCO TRANSPORTATION CO.
December 31, 1998 and 1997
ASSETS
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (pledged - Note C) $ 25,833 $ 22,678
Accounts receivable - net (Note C) 5,755,857 2,282,893
Truck maintenance supplies 106,058 -
Employee advances and driver loans 122,697 53,680
Notes receivable - shareholders (Note D) 51,293 20,000
Prepaid license fees 28,307 -
Prepaid use taxes 22,825 -
Other prepaid expenses 70,608 -
Prepaid insurance 36,597 36,597
Deposits 6,000 6,000
Surety bonds - 20,000
Escrow - treasury stock - 124,780
------------ ------------
TOTAL CURRENT ASSETS 6,226,075 2,566,628
------------ ------------
PROPERTY AND EQUIPMENT
Land 706,370 385,019
Buildings 13,554 323,228
Office equipment 300,007 210,338
Communications equipment 356,869 353,281
Furniture and fixtures 30,133 29,483
Trucks, tractors and trailers 9,099,802 9,145,654
Yard equipment 397,539 164,534
------------ ------------
10,904,274 10,611,537
Less accumulated depreciation (2,785,694) (1,511,048)
------------ ------------
8,118,580 9,100,489
------------ ------------
OTHER ASSETS
Oil and gas properties - net (Note B) 28,717 34,692
Prepaid insurance - net of current portion 64,500 101,097
Covenant not to compete, net (Note E) 104,373 -
------------ ------------
197,590 135,789
------------ ------------
TOTAL ASSETS $14,542,245 $11,802,906
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to stockholders (Note F) $ - $ 70,319
Accounts payable - trade 756,895 375,213
Bank overdrafts - 280,715
Accrued payroll and other 263,960 382,962
Driver escrow 49,933 39,916
Amounts due factor (Note C) 6,434,481 1,262,094
Current portion of long-term debt (Note F) 1,860,814 1,807,738
------------ ------------
TOTAL CURRENT LIABILITIES 9,366,083 4,218,957
------------ ------------
LONG-TERM DEBT - net of current
portion (Note F) 4,978,916 6,645,188
------------ ------------
DEFERRED INCOME TAXES (Note H)
COMMITMENTS (Note G)
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value;
20,000,000 shares authorized; issued and
outstanding - 12,527,612 in 1998 and
12,176,760 in 1997 1,569 1,218
Additional paid in capital 931,906 863,818
Retained earnings (deficit) (318,844) 77,725
------------ ------------
614,631 942,761
Less treasury stock, at cost (4,000) (4,000)
------------ ------------
610,631 938,761
Less note receivable from shareholder (Note M) (413,385) -
------------ ------------
197,246 938,761
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $14,542,245 $11,802,906
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
ESCO TRANSPORTATION CO.
Years ended December 31,
1998 1997
------------ ------------
<S> <C> <C>
REVENUE
Freight revenue $27,231,313 $22,733,933
Oil and gas revenue 5,143 8,055
------------ ------------
TOTAL REVENUE 27,236,456 22,741,988
------------ ------------
EXPENSES
Cost of freight revenue 18,405,735 15,916,496
General administrative expenses 6,719,839 5,146,071
Depreciation and depletion 1,415,866 1,064,098
------------ ------------
TOTAL EXPENSES 26,541,440 22,126,665
------------ ------------
OPERATING INCOME 695,016 615,323
OTHER INCOME (EXPENSE)
Interest income 8,350 1,713
Other income 11,700 16,303
Interest expense (1,265,704) (938,961)
Gain (loss) on sale of assets 154,069 (18,724)
------------ ------------
(1,091,585) (939,669)
------------ ------------
NET INCOME (LOSS) BEFORE
INCOME TAXES (396,569) (324,346)
Income tax benefit (expenses) 0 0
Deferred Current 0 96,241
------------ ------------
NET (LOSS) $ (396,569) $ (228,105)
============ ============
Net (loss) per common share $ (0.03) $ (0.02)
============ ============
Weighted average number of shares
outstanding 12,495,694 11,938,736
</TABLE>
The accompanying notes are an integral part
of these financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
ESCO TRANSPORTATION CO.
Year ended December 31, 1998 and 1997
Note
Common Stock Additional Retained Receivable
---------------------- Paid-In Earnings Treasury from
Shares Amount Capital (Deficit) Stock Shareholder Total
------------ -------- ------------ ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1996 1,092,676 $ 1,093 $ 363,943 $ 305,830 $(4,000) $ 666,866
Ten (10) for one (1)
stock split 9,834,084
Issuance of common
stock 1,250,000 125 499,875 500,000
Net (loss) (228,105) (228,105)
------------ -------- ------------ ---------- -------- ----------
BALANCE AT
DECEMBER 31,
1997 12,176,760 1,218 863,818 77,725 (4,000) 938,761
Correction 174,352 174 (174)
Issuance of common
stock 176,500 177 68,262 68,439
Issuance of note
receivable from
shareholder $ (413,385) (413,385)
Net (loss) (396,569) (396,569)
------------ -------- ------------ ---------- -------- ------------- ----------
BALANCE AT
DECEMBER 31,
1998 12,527,612 $ 1,569 $ 931,906 $(318,844) $(4,000) $ (413,385) $ 197,246
============ ======== ============ ========== ======== ============= ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
ESCO TRANSPORTATION CO.
Years ended December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (396,569) $ (228,105)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation, and depletion 1,415,866 1,064,098
Allowance for bad debt expense (8,855) 324,100
(Gain) loss on sale of equipment (154,069) 18,724
Deferred Income Taxes 0 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 251,338 (163,523)
(Increase) in supplies inventory (106,057) -
Decrease (increase) in prepaid expenses (84,314) (7,855)
Decrease (increase) in other assets 144,780 (224,460)
(Decrease) increase in accounts payable and
accrued expenses 271,868 312,775
(Decrease) in federal income tax payable - (54,806)
(Decrease) in deferred income taxes payable - (41,435)
--------------- ---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,333,988 999,513
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to contract haulers (69,017) -
Loans made to shareholders (735,147) -
Payments received from shareholders 220,150 25,015
Covenant not to compete (156,560) -
Purchases of property and equipment (920,817) (255,827)
Sale of property and equipment 699,090 59,802
--------------- ---------------
NET CASH (USED) BY INVESTING
ACTIVITIES $ (962,301) $ (171,010)
--------------- ---------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS - continued
ESCO TRANSPORTATION CO.
Years ended December 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Financing of operations from bank overdraft
(repayment) (280,715) 19,245
Advances from factor, net of collections 1,456,940 -
Proceeds from long-term debt and notes payable
to stockholder 490,000 0
Payments on long-term debt and notes payable
to stockholders (2,103,196) (1,345,520)
Issuance of common stock 68,439 500,000
------------ ------------
NET CASH FLOWS (USED) BY
FINANCING ACTIVITIES (368,532) (826,275)
------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 3,155 2,228
Cash and cash equivalents balance at beginning
of year 22,678 20,450
------------ ------------
CASH AND CASH EQUIVALENTS
BALANCE AT END OF PERIOD $ 25,833 $ 22,678
============ ============
Supplemental schedule of non-cash investing and
financing activities:
Debt incurred to purchase property and
equipment $ 4,932,154
============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ESCO TRANSPORTATION CO.
NOTE A. 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 Trans- portation 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 October 20, 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 was 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 Company maintains two divisions with distinct transportation services
offered by each. The Company's Intermodal division primarily hauls container
and piggyback shipments between shipping locations and railroads or ports. This
division operates out of facilities in Houston, Texas; Ontario, California;
Memphis, Tennessee and Dallas, Texas. The company also maintains an
Over-The-Road division that performs long haul services for numerous customers
within the United States. The main office for this division is located in
Springdale, Arkansas. The Company's corporate office is located in Houston,
Texas.
NOTE B. 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.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
Depreciation expense for the years ended December 31, 1998 and 1997 was
$1,409,891 and $1,058,114, respectively.
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.
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - 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 $5,975 for 1998 and $5,984 for 1997.
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.
Net Income Per Share
- -----------------------
Net income per common share is based on the weighted average number of shares
outstanding during the year. 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, 1998 does not differ materially from the aggregate
carrying values of its financial instruments recorded in the accompanying
balance sheet. The estimated fair value amounts have been determined by the
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Company using available market information and appropriate valuation
methodologies. Consid- erable judgment 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.
Restatements
- ------------
Certain reclassifications of amounts reported in the prior year have been made
to conform to the current year presentation.
New Accounting Standard
- -------------------------
Effective January 1, 1998, the Company adopted FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. Statement
No. 131 superseded FASB Statement No. 14, Financial Reporting for Segments of a
Business Enterprise. Statement No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Statement
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of Statement No.
131 did not affect results of operations or financial position.
NOTE C. ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Receivables assigned to factor $5,423,273 $1,473,656
Unfactored accounts receivable 670,165 1,063,617
Accrued unbilled revenue 132,167 226,128
Other 2,505 600
Allowances for doubtful accounts (472,253) (481,108)
----------- -----------
$5,755,857 $2,282,893
=========== ===========
Amounts due factor $6,434,481 $1,262,094
=========== ===========
</TABLE>
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE C. ACCOUNTS RECEIVABLE - CONTINUED
Pursuant to a factoring agreement, the Company factors all of its accounts
receivables. The Company repurchases all factored accounts receivable over 90
days old. The factor withholds a reserve of 10% of the uncollected and
unrepurchased accounts. Some payments are made directly to the Company rather
than the factor which become an obligation due the factor. Included in amounts
due factor are payments received directly by ESCO from customers amounting to
$1,456,940 at December 31, 1998. The factor has a security interest in accounts
receivable purchased by the factor. The Company's obligation to the factor is
guaranteed by the majority shareholder, who is also an officer, and another
officer of the Company. Approximately $294,729 in cash deposits with the factor
at December 31, 1998 were also subject to the security interest of the factor.
Due primarily to the repurchase feature of the factoring agreement, the Company
accounts for the factored accounts receivable as a secured borrowing rather than
a sale. Many receivables are not collected within 90 days and have to be
repurchased by the Company.
NOTE D. NOTES RECEIVABLE - SHAREHOLDERS
The Company advanced funds and issued stock to a shareholder and his family
members as discussed in Note M, Related Party Transactions. At December 31,
1998, $464,678 remained owed to the Company evidenced by two notes. The notes
receivable signed December 31, 1998, including 7% interest, are payable in full
on or before December 31, 1999 and are secured by ESCO common stock. No
interest was paid or accrued on these notes in 1998.
NOTE E. COVENANT NOT TO COMPETE
On April 22, 1998, the Company acquired most of the assets of Intermodal
Logistics Company, Inc. ("ILC") for approximately $337,900, of which $156,560
was payment for a two year agreement not to compete to ILC's majority
shareholder. Amortization expense for 1998 was $52,187 on the straight-line
basis for 24 months prorated for 1998. The remainder of the purchase cost was
for equipment and supplies.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE F. LONG-TERM DEBT
The Company's long-term debt was acquired to purchase property and equipment and
consists of the following major classes:
Stockholder Notes Payables
- ----------------------------
In 1997 loans from stockholders were obtained to meet short-term needs. These
notes were 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 Payables
- -------------------------
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 two (2) pieces of property in Springdale, Arkansas and
Houston, Texas. The interest rates for these properties are between 8.0% to
10.5%. Each mortgage is secured by the property.
The following schedule summarizes the Company's long-term debt:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Stockholder notes payable $ - $ 70,319
Notes payable 5,748,826 7,320,290
Capital leases payable (net present value) 513,680 639,664
Mortgages payable 577,224 492,972
---------- ----------
$6,839,730 $8,523,245
========== ==========
</TABLE>
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE F. LONG-TERM DEBT - CONTINUED
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $1,860,814
2000 2,056,029
2001 1,880,777
2002 618,134
2003 11,563
Thereafter 412,413
----------
$6,839,730
==========
</TABLE>
NOTE G. CONTRACTS AND COMMITMENTS
The Company leases equipment under noncancelable operating leases. Lease
expense incurred for 1998 and 1997 was $380,234 and $404,525, respectively. The
Company's minimum rental commitments under this noncancelable operating lease as
of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $453,377
2000 391,474
2001 202,028
2002 185,742
2003 140,742
Later 63,828
</TABLE>
NOTE H. FEDERAL INCOME TAXES
At December 31, 1998 and 1997, the Company had net operating loss (NOL)
carryforwards for federal income tax purposes of approximately $2,987,000 and
$2,084,000, which expire in years 2001 through 2018.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE H. FEDERAL INCOME TAXES - CONTINUED
Management believes that previous changes in stock ownership resulted in an
ownership change as defined in Section 382 of the Internal Revenue Code (IRC),
as amended. The net operating loss carryforwards generated in the years prior
to the ownership change which are subject to Section 382 limitations total
$195,000. Management believes these operating loss carryforwards are available
to offset future taxable income of the Company in each year following the
change, but the offsets will be limited under the provisions of Section 382 of
the IRC. The amount of such limitation is expected to be approximately $35,000
each year. The Company's NOL carryforwards generated after the ownership change
in the amount of $2,792,000 are available to offset future taxable income
through the dates of expiration without the limitations of Section 382.
The Company has not reported benefits from NOL carryforwards because of
uncertainties concerning realization 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.
NOTE I. MAJOR CUSTOMERS
Sales to major customers were as follows:
<TABLE>
<CAPTION>
Customer 1998 1997
- -------------------- ---- ----
<S> <C> <C>
A 17% 17%
B 11% 12%
C 10% 9%
D 6% 17%
E 5% 2%
F 5% 6%
---- ----
TOTAL 54% 63%
==== ====
</TABLE>
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE J. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental cash flow information:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
---------- --------
<S> <C> <C>
Interest paid $1,294,323 $870,836
</TABLE>
NOTE K. CONTINGENT LIABILITIES
Due to the nature of the Company's business, it is a defendant in various
lawsuits. Some of the matters discussed below are covered by insurance.
Pacific Business Capital Corporation, a secured creditor of Intermodal Logistics
Co. ("ILC") (Note E), has sued the Company and an employee of the Company in the
Chancery Court of Shelby County, Tennessee, asserting a violation of the
security interest in certain accounts receivable of ILC.
Intercargo Insurance Company is suing numerous defendants, including the
Company, over misdelivering a load it insured. The Company is also subject to
cross-claims by some of the other defendants. The suit and counter-claims were
filed in United States District Court, Central District of California.
A former cleaning person for the Company's leased premises in California has
sued the Company and others in the Superior Court of the State of California for
the County of San Bernadino for alleged injuries on the Company's premises.
While it is not possible to predict with certainty the outcome of these cases,
it is the opinion of management that these lawsuits, claims and proceedings
which are pending against the Company are without merit or will not have a
material adverse effect on the Company's operating results, liquidity or
financial position.
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE L. FINANCIAL RESULTS AND LIQUIDITY
The Company has incurred net losses and working capital deficits in 1997 and
1998. To address these problems, management plans to increase profitability by
implementing budgetary controls, accountability procedures, and improving
billing. Management also plans to improve cash flows through better collections
of accounts receivable and reduce short-term debt. In addition, management has
obtained written assurance from its factoring source to continue to provide
working capital financing through December 31, 1999.
NOTE M. RELATED PARTY TRANSACTIONS
In May 1998, the Company purchased 4,000,000 shares of the Company's common
stock for $1,198,000 or 29.95 cents per share, from a related party, in exchange
for a note, including interest, to be paid over eight years. On December 31,
1998, the chief executive officer and majority stockholder of the Company
assumed the promissory note, which then had a balance due of $960,000, in
exchange for 3,200,000 shares of the Company's common stock. An additional
800,000 shares was also issued to the same individual at the same time in
exchange for a note receivable back to the Company for $265,991. Additional
loans from the Company to this shareholder and his immediate family members
totaled $469,156, less $70,319 owed to the shareholder of which $200,150 was
repaid during 1998, resulting in an ending balance receivable by the Company of
$464,678 at December 31, 1998. $413,385, which is related to the stock purchase
is shown as a reduction in shareholders' equity.
A manager of the Company provided computer consulting services to the Company in
1998 and was paid approximately $102,000 for these services, which included
sales of hardware to the Company.
NOTE N. EMPLOYEE BENEFITS PLAN
The Company established a defined contribution profit sharing plan for the
benefit of its employees in 1998. There were no Company contributions, which
are voluntary, in 1998.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE O. SUBSEQUENT EVENTS
Subsequent to year end, the Company agreed to grant to a key employee a series
of five stock options ranging from 25,000 shares to 50,000 shares at $.25 per
share contingent on the accomplishment of certain milestones relating to
restructuring debt and profitability. Each option will be granted within 30
days of the accomplishment of the event and exercisable within one year of the
issuance date. Options for 225,000 shares could be granted under this
agreement.
At management's discretion, a stock bonus was awarded on January 1, 1999 of
126,500 shares to employees with two years of service based on their position
with the Company. Individual awards ranged from 25,000 shares to 500 shares.
In January 1999, the Board of Directors of the Company authorized changes to
bylaws which, among other things, increased the authorized capital stock of the
Company to $35,000 consisting of 20 million shares of common stock and 15
million shares of preferred stock at a par value of $.001 per share.
In February 1999, 1,200,000 shares of common stock were issued to a new
executive pursuant to an employment agreement subject to a three year vesting
arrangement which causes the executive to forfeit a portion of the stock
previously issued in the event of termination of employment for certain reasons.
The agreement also obligates the Company to pay the executive's base salary for
three years as long as the agreement is in effect.
NOTE P. SEGMENT INFORMATION - ENTERPRISE WIDE DISCLOSURES
The following table presents 1998 revenue from external customers for each of
the Company's groups of services. In 1997, the Company did not maintain
summarized internal records of revenue by service to external customers and it
would be impractical to reconstruct this information.
<TABLE>
<CAPTION>
<S> <C>
Intermodal $14,031,980
Over-The-Road 11,325,768
Other 1,878,708
-----------
$27,236,456
===========
</TABLE>
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
ESCO TRANSPORTATION CO.
NOTE P. SEGMENT INFORMATION - ENTERPRISE WIDE DISCLOSURES - CONTINUED
The following table presents information about the Company's revenue (attributed
to countries based on the location of the customer) and long-lived assets by
geographic area:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Long-Lived Long-Lived
Revenue Assets Revenue Assets
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States $27,236,456 $ 8,586,565 $22,741,988 $ 9,298,875
=========== =========== =========== ===========
</TABLE>
Customers providing revenue of 10 percent or more were:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Customer A $5,087,384 $3,870,000
Customer B 3,099,813 3,870,000
Customer C 2,817,415 2,729,000
</TABLE>
38
<PAGE>
NULL-LAIRSON
Securities and Exchanges Commission
Washington, D.C. 20549
Gentlemen:
We were previously principal accountants for ESCO Transportation, Co. and we
have reviewed the disclosure contained in Form 10-KSB for year ended December
31, 1998 including Item 8, regarding changes in and disagreements with
accountants on accounting and financial disclosure regarding the Registrant's
certifying accountant and we agree with the statements made therein.
Very truly yours,
/S/ Null-Lairson, P.C.
- ------------------------
Null-Lairson, P.C.
Certified Public Accountants
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Yearend Audited Financial Information
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 25833
<SECURITIES> 0
<RECEIVABLES> 5878554
<ALLOWANCES> (472253)
<INVENTORY> 106058
<CURRENT-ASSETS> 6226075
<PP&E> 10904274
<DEPRECIATION> (2785694)
<TOTAL-ASSETS> 14542245
<CURRENT-LIABILITIES> 9366083
<BONDS> 4978916
0
0
<COMMON> 1569
<OTHER-SE> 195677
<TOTAL-LIABILITY-AND-EQUITY> 14542245
<SALES> 27231313
<TOTAL-REVENUES> 27236456
<CGS> 0
<TOTAL-COSTS> 26541440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (8855)
<INTEREST-EXPENSE> 1265704
<INCOME-PRETAX> (396569)
<INCOME-TAX> 0
<INCOME-CONTINUING> (396569)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (396569)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
