FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended June 30, 2000 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- -------- Commission file number: 0-2882 ------ ESCO TRANSPORTATION CO. ---------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 55-0257510 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification no.) incorporation or organization) 4301 EAST PARK DRIVE HOUSTON, TEXAS 77028 -------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 635-1008 --------------- Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: Common Stock $ .001 par value per share --------------------------------------- Title of class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ----- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Common Stock, $ .001 Par Value 12,550,497 ------------------------------ ---------- (Class) (Outstanding as of June 30, 2000) The aggregate market value of the voting stock held by nonaffiliates of the Registrant on August 8, 2000 was approximately $1,380,554. TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Balance Sheets for the Six Months Ended June 30, 2000 (unaudited) and for the Year Ended December 31, 1999 3 Statements of Income for the Three and Six Months Ended June 30, 2000 (unaudited) and 1999 (unaudited) 4 Statements of Change in Stockholders' Equity (Deficit) for the Six Months Ended June 30, 2000 (unaudited) 5 Statements of Cash Flows for the Six Months Ended June 30, 2000 (unaudited) and 1999 (unaudited) 6 Notes to the Financial Statements (unaudited) 7 - 18 Item 2. Management's Discussion and Analysis 19 PART II OTHER INFORMATION Item 1. Recent Developments in Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Defaults upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports in Form 8-K 23 Signatures 24 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements

~~TABLE~~ESCO OFTRANSPORTATION ~~CONTENTS~~CO. ~~PART~~Balance ISheets ~~FINANCIAL~~June ~~INFORMATION~~30, ~~Item~~2000 1.December ~~Financial~~31, ~~Statements~~1999 ~~Page~~--------------- ------------------- ~~Balance~~ASSETS ~~Sheets~~(Unaudited) ~~for~~(Audited) ~~the~~CURRENT ~~Three~~ASSETS: ~~Months~~Cash ~~Ended~~and ~~March~~Cash 31Equivalents $ 13,128 ~~2000~~$ ~~(unaudited)~~109,929 ~~and~~Accounts Receivable, Net of Allowance for ~~the~~Bad ~~Year~~Debts ~~Ended~~of ~~December~~$829,280 31in 2000 and $338,000 in 1999 38,873,184 ~~(audited)~~6,172,164 ~~Statements~~Truck ofMaintenance ~~Income~~Supplies ~~for~~144,799 ~~the~~152,557 ~~Three~~Employee ~~Months~~Advances ~~Ended~~and ~~March~~Driver 31Loans 269,719 ~~2000~~117,092 ~~(unaudited)~~Notes ~~and~~Receivable ~~1999~~- ~~(unaudited)~~Employees, 4Current ~~Statements~~90,642 of241,830 ~~Change~~Notes inReceivable - Stockholders' ~~Equity~~383,338 ~~(Deficit)~~217,109 ~~for~~Prepaid ~~the~~Expenses ~~Three~~197,516 ~~Months~~134,046 ~~Ended~~Other ~~March~~Current 31Assets 130,425 ~~2000~~26,085 ~~(unaudited)~~--------------- 5------------------- ~~Statements~~TOTAL ofCURRENT ~~Cash~~ASSETS ~~Flows~~10,102,751 ~~for~~7,170,812 ~~the~~--------------- ~~Three~~------------------- ~~Months~~PROPERTY ~~Ended~~AND ~~March~~EQUIPMENT 31Property and Equipment 12,568,094 ~~2000~~12,516,566 ~~(unaudited)~~Less ~~and~~Accumulated ~~1999~~Depreciation (~~unaudited~~4,701,850) 6(3,980,000) --------------- ------------------- 7,866,244 8,536,566 --------------- ------------------- OTHER ASSETS Intangibles, Net of Accumulated Amortization 430,123 82,871 Notes toReceivable ~~the~~- ~~Financial~~Employees, ~~Statements~~Non ~~(unaudited)~~Current 730,506 0 Other Assets - 13Non ~~Item~~Current 2.19,755 ~~Management~~35,392 --------------- ------------------- 480,384 118,263 --------------- ------------------- TOTAL ASSETS $ 18,449,379 $ 15,825,641 =============== =================== LIABILITIES AND STOCKHOLDERS's ~~Discussion~~EQUITY ~~and~~CURRENT ~~Analysis~~LIABILITIES 14Accounts ~~PART~~Payable II- ~~OTHER~~Trade ~~INFORMATION~~$ ~~Item~~1,262,702 $ 1.,247,094 ~~Recent~~Bank ~~Developments~~Overdrafts in1,111,241 ~~Legal~~436,838 ~~Proceedings~~Accrued 19and ~~Item~~Other Liabilities 1,401,686 980,700 Amounts Due Factor 9,524,542 6,944,085 Current Portion of Long-Term Debt 2.,280,161 ~~Changes~~2,038,470 inCurrent ~~Securities~~Portion 19of ~~Item~~Obligations 3.under ~~Defaults~~Capital ~~upon~~Lease ~~Senior~~279,292 ~~Securities~~235,603 19--------------- ~~Item~~------------------- 4.TOTAL ~~Submission~~CURRENT LIABILITIES 15,859,624 11,882,790 LONG-TERM DEBT Long-Term Debt, Net of ~~Matters~~Current toPortion a2,097,245 ~~Vote~~3,138,735 Obligations under Capital Lease, Net of ~~Security~~Current ~~Holders~~Portion 19730,663 ~~Item~~852,633 5--------------- ------------------- 18,687,532 15,874,158 --------------- ------------------- STOCKHOLDERS' EQUITY Preferred Stock, $.001 ~~Other~~Par ~~Information~~Value; 1915,000,000 ~~Item~~Shares 6Authorized; None Issued Common Stock, $.001 ~~Exhibits~~Par Value; 20,000,000 Authorized; 12,818,017 and ~~Reports~~14,084,017 Issued; 1,576 1,560 12,550,497 and 13,818,997 Outstanding in ~~Form~~2000 8and 1999 Additional Paid-KIn 19Capital ~~Signatures~~1,550,041 201,625,765 Retained Earnings (Deficit) (999,771) (396,385) --------------- ------------------- 551,846 1,230,940 Less Note Receivable from Stockholders (701,427) (1,191,635) Less Treasury Stock, At Cost (88,572) (87,822) --------------- ------------------- TOTAL STOCKHOLDERS' EQUITY (238,153) (48,517) --------------- ------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,449,379 $ 15,825,641 =============== ===================

See Notes to Unaudited Condensed Financial Statements. 3 ITEM 1. Financial Statements (Continued)

ESCO TRANSPORTATION CO. ~~Balance~~Statements ~~Sheets~~of ~~March~~Income 31For the Three and Six Months Ended June 30, 2000 ~~December~~and ~~31,~~1999 FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 2000 1999 2000 1999 ---------------------- -------------------- ~~ASSETS~~------------ ------------ (Unaudited) (~~Audited~~Unaudited) ~~CURRENT~~(Unaudited) ~~ASSETS~~(Unaudited) REVENUE: ~~Cash~~Freight ~~and~~Revenue ~~Cash Equivalents~~ $ ~~103~~12,~~510~~710,765 $ ~~109~~8,~~929 Accounts Receivable - Trade~~455,025 ~~Net of Allowance for Bad Debts of~~ $~~395~~24,~~000~~510,075 ~~in 2000 and~~ $~~338~~15,~~000 in 1999 7~~577,~~396,771~~866 ~~6,172,164~~Oil ~~Truck Maintenance Supplies 147,649 152,557 Employee Advances~~ and ~~Driver~~Gas ~~Loans~~Revenue ~~243~~1,~~598~~388 ~~117,092~~963 ~~Notes Receivable - Employees~~2,720 ~~Current 132~~2,~~019 241,830 Notes Receivable - Stockholders 314,927 217,109 Prepaid Expenses 200,318~~ 134~~,046~~ ~~Other Current Assets 127,206 26,085~~ --------------- ------- ----------- ~~TOTAL CURRENT ASSETS 8,665,998 7,170,812~~ --------- ------ ------ ------------ ~~PROPERTY~~TOTAL ~~AND~~REVENUE ~~EQUIPMENT Property and Equipment~~ 12,~~652~~712,~~864~~153 128,~~516~~455,~~566~~988 ~~Less Accumulated Depreciation (4~~24,~~381~~512,~~434)~~795 (315,~~980~~580,000) --------------- ------- ----------- ~~8,271,430 8,536,566~~ --------- ------ ------ ------------ ~~OTHER~~EXPENSES: ~~ASSETS~~Cost ~~Intangibles~~of Freight Revenue 9,524,948 ~~Net~~5,914,582 of17,949,266 ~~Accumulated~~10,776,020 ~~Amortization~~General ~~527~~Administrative Expenses 2,~~134~~894,034 821,~~871~~678,890 ~~Other~~5,463,629 ~~Assets~~3,391,490 -Depreciation ~~Non~~and ~~Current~~Depletion 21434,~~248~~020 35368,~~392~~400 895,985 733,313 --------------- ------- ----------- ~~Total Other Assets 548,382 118,263~~ --------- ------ ------ ------------ TOTAL ~~ASSETS~~EXPENSES ~~$ 17~~12,~~485~~853,~~810~~002 ~~$ 15~~7,~~825~~961,~~641~~872 ~~=============== ================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts Payable - Trade $ 901~~24,~~548 $ 1~~308,~~247,094~~880 ~~Bank Overdrafts 812~~14,~~325 436~~900,~~838~~823 ~~Accrued and Other Liabilities 1,228,186 980,700 Amounts Due Factor 8,337,559 6,944,085 Current Portion of Long~~-~~Term~~--------------------- ~~Debt 2,038,470 2,038,470 Current Portion of Obligations under Capital Leases 235,603 235,603~~ -------------------- ------------ ------------ ~~TOTAL~~OPERATING ~~CURRENT~~INCOME ~~LIABILITIES~~(140,849) 13494,~~553~~116 203,~~691~~915 11679,~~882,790~~177 ~~Long-term~~OTHER ~~Debt~~INCOME ~~Long-Term~~(EXPENSE) ~~Debt~~Interest Income 0 9,837 ~~Net~~23,602 of12,990 ~~Current~~Other ~~Portion~~Income 25,~~673~~597 6,~~232~~289 319,~~138~~109 15,~~735~~016 ~~Obligations~~Interest ~~under~~Expense ~~Capital~~(463,977) ~~Leases~~(339,163) ~~Net~~(859,240) (668,858) Gain (Loss) on Sale of ~~Current~~Assets ~~Portion~~11,844 ~~824~~51,~~186~~237 ~~852~~9,~~633~~228 44,244 --------------- ------- ----------- ~~17,051,109 15,874,158~~ --------- ------ ------ ------------ ~~Stockholders' Equity~~ (~~Deficit~~446,536) Preferred Stock, $.001 Par Value: 15,000,000 Shares Authorized: Non Issued Common Stock, $.001 Par Value; 20,000,000 Authorized: 14,243,017 and 14,084,017 Issued; 13,975,497 and 13,818,997 Outstanding in 2000 and 1999 1,719 1,560 Additional Paid-In Capital 2,142,098 1,625,765 Retained Earnings (~~Deficit~~271,800) (~~433~~807,~~875~~301) (~~396~~596,~~385~~608) ---------------------- -------------------- ~~1,709,942~~------------ ~~1,230,940~~------------ ~~Less:~~NET ~~Notes~~INC. ~~Receivable~~(LOSS) ~~from~~BEFORE ~~Stockholder~~TAXES (1587,~~186,669~~385) 222,316 (1603,~~191,635~~386) ~~Less:~~82,569 ~~Treasury~~Income ~~Stock,~~Tax At0 ~~Cost~~0 ~~(88,572)~~0 ~~(87,822)~~0 --------------- ------- ----------- ~~434,701 (48,517)~~ --------- ------ ------ ------------ ~~TOTAL~~NET ~~LIABILITIES~~INCOME ~~AND~~(LOSS) ~~STOCKHOLDERS'~~$ ~~EQUITY~~ (~~DEFICIT~~587,385) $ 17222,~~485~~316 $ (603,~~810~~386) $ 1582,~~825,641~~569 ====================== ==================== ============ ============ Net Income (Loss) Per Share $ (0.047) $ 0.016 $ (0.046) $ 0.006 ====================== ==================== ============ ============ Weighted Average Number of Shares Outstanding 12,550,497 14,179,112 13,247,456 13,682,013

See Notes to Unaudited Condensed Financial Statements. 4 ITEM 1. Financial Statements (Continued)

ESCO TRANSPORTATION CO. ~~Statements~~Statement of ~~Income~~Stockholders' Equity For the ~~Three~~Six Months Ended ~~March~~June 3130, 2000 ~~and~~(Unaudited) ~~1999~~Note ~~2000~~Retained ~~1999~~Receivable Additional Earnings From Common Stock Paid-In Capital (Deficit) Treasury Stock Shareholder Total ----------- ------------ ~~(Unaudited) (Unaudited) REVENUE: Freight Revenue $11,799,310 $ 7,122,841 Oil and Gas Revenue 1,332 1,171~~ ------------ ---------- -- ~~11,800,642 7,124,012~~ ------------------ ------------ ~~EXPENSES: Cost of Freight Revenue 8,424,318 4,861,439 Operating and Administrative Expenses 2,616,310 1,712,600 Depreciation and Depletion 436,739 364,913~~ ---------- Shares Amount Shares Amount -- --------- --- ~~11,477,367 6,938,952~~ ------- ----- ---- --------- ~~OPERATING~~Balance ~~INCOME~~at ~~323~~December 31,~~275~~ ~~185~~1999 14,~~060~~084,017 ~~OTHER~~$ ~~INCOME~~1,560 $1,625,765 $(~~EXPENSE~~396,385) ~~Interest~~(265,020) ~~Income~~$(87,822) 27$(1,~~708~~191,635) 3$ (48,~~153~~517) ~~Other~~Shares ~~Income~~issued 9in Quantum Acquisition 159,~~406~~000 8159 476,~~729~~841 ~~Interest~~0 ~~Expense~~0 0 0 477,000 Management Incentive Shares Returned (~~395~~1,~~263~~425,000) (~~329~~143) (569,~~695~~857) ~~Gain~~0 0 0 570,000 0 Shareholder Notes Receivable Interest 0 0 17,292 0 0 0 (~~Loss~~17,292) on0 ~~Sale~~Advances to Stockholder - Stock Purchase 0 0 0 0 0 0 (62,500) (62,500) Purchase of ~~Assets~~Treasury Stock 0 0 0 0 (2,~~616~~500) (6750) 0 (750) Net Income (Loss) 0 0 0 (603,~~994~~386) 0 0 0 (603,386) ------------ ---------- -- ~~Total Other Income (360,765) (324,807)~~ --------- --- ------- ----- ~~NET INCOME (LOSS) BEFORE TAXES (37,490) (139,747) Provision for Federal Income Tax 0 0~~ ---- --------- ------------ ~~NET~~---------- ~~INCOME~~Balance at June 30, 2000 12,818,017 $ 1,576 $1,550,041 $(~~LOSS~~999,771) $(267,520) $(3788,~~490~~572) $ (~~139~~701,~~747~~427) $(238,153) ============ ========== == ~~Net Income (Loss) Per Share- Basic and Fully Diluted $ (0.003) $ (0.011)~~ ========= === ======= ===== ~~------------ ------------ Weighted Average Number of Shares Outstanding 13,944,415 13,179,391~~ ==== ========= ============ ==========

See Notes to Unaudited Condensed Financial Statements. 5 ITEM 1. Financial Statements (Continued)

ESCO TRANSPORTATION CO. ~~Statement~~Statements of ~~Changes~~Cash inFlows ~~Stockholders' Equity (Deficit)~~ For the ~~Three~~Six Months Ended ~~March~~June 3130, 2000 ~~Common~~and ~~Stock~~1999 ~~Retained~~2000 ~~Treasury~~1999 ~~Stock~~ ------------~~-------------~~ ~~Additional Earnings~~ ------------~~------~~ ~~Shares~~(Unaudited) ~~Amount Paid-In Capital~~ (~~Deficit~~Unaudited) ~~Shares~~CASH ~~------------~~FLOWS ~~-----------~~FROM ~~----------------~~OPERATING ~~----------------~~ACTIVITIES: ~~------------------~~Net ~~Balance~~Cash -Provided ~~December~~by ~~31,1999~~Operating ~~14,084,017~~Activities $ 1,~~560~~184,088 $ 1,~~625~~093,~~765~~232 $CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Property and Equipment (~~396~~136,~~385~~298) (~~265~~136,~~020~~194) ~~Shares~~Purchase ~~issued~~of in Quantum ~~Acquisition~~Transportation ~~159~~(67,~~000~~874) ~~159 476,841~~ 0 0Proceeds ~~Advances~~from toSale ~~Stockholders~~of -Property ~~Stock~~and ~~Purchase~~Equipment 0 0270,547 0------------ 0------------ 0Net ~~Interest~~Cash onUsed ~~Stockholder~~in ~~notes~~Investing ~~for~~Activities ~~Stock~~(204,172) ~~0 0 39~~(85,~~492~~659) 0CASH 0FLOWS ~~Reductions~~FROM inFINANCING ~~Shareholder~~ACTIVITIES: ~~Notes~~Net ~~Receivable~~Payments 0on 0Long-Term 0Debt 0(969,317) 0(1,093,650) ~~Purchase~~Proceeds ~~Treasury~~from ~~Stock~~Capital 0Leases 0 053,934 0Payments on Capital Leases (292,~~500~~630) ~~Net Income~~ (~~Loss~~12,711) 0Stockholder 0Advance 0(113,042) (37220,~~490~~012) 0Purchase ~~------------~~Treasury ~~-----------~~Stock ~~----------------~~(750) (18,004) ------------~~----~~ ------------~~------~~ ~~Balance~~Net -Cash ~~December~~Provided ~~31,~~(Used) ~~1999~~by ~~14,243,017~~Financing $Activities (1,~~719 $ 2~~175,~~142,098 $ (433,875~~739) $ (~~267~~1,~~520~~070,431) ~~============ =========== ================ ================ ==================~~ --------- ~~Notes Receivable Amount from Stockholders Total~~ ---~~------~~ ------------~~-------~~ ~~---------~~Net ~~Balance~~Increase ~~- December 31,1999 $(87,822) $ (1,191,635) $(48,517) Shares issued~~ in ~~Quantum~~Cash ~~Acquisition~~and 0Cash 0Equivalents ~~477,000 Advances to Stockholders - Stock Purchase 0~~ (31195,~~250~~823) (3162,~~250~~858) ~~Interest~~CASH onAND ~~Stockholder~~CASH ~~notes for Stock 0 (10~~EQUIVALENTS,~~577)~~ ~~28,915~~AT ~~Reductions~~BEGINNING inOF ~~Shareholder~~YEAR ~~Notes Receivable 0 46~~109,~~773~~929 4625,~~773~~833 ~~Purchase Treasury Stock (750) 0 (750) Net Income (Loss) 0 0 (37,490)~~ --------- --- ------------~~----~~ ~~---------~~CASH ~~Balance~~AND -CASH ~~December 31~~EQUIVALENTS, ~~1999~~AT END OF PERIOD $ (8885,~~572~~894) $ (137,~~186,689~~025) ~~$434,681~~ ========= === ============~~====~~ ~~=========~~Non Cash Transactions: Stock issued to acquire business 0 40,000 Stock issued to acquire Quantum Transportation 477,000 0 Stock issued under management incentive agreements (570,001) 570,001 Stock issued to Employees 0 50,600

See Notes to Unaudited Condensed Financial Statements. 6 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 1 - Interim Financial Statements ------------------------------------------ The accompanying unaudited financial statements of ESCO Transportation Co., (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. However, the Company believes the disclosures contained herein are adequate to make the information presented not misleading. The financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's financial position and results of operations. Note 2 - Organization ------------------------ The Company was incorporated under the name of Power Oil Company in 1916 in West Virginia. In 1992, the Company was reincorporated as a Delaware corporation. The Company changed its name from "Power Oil Company" to "ESCO Transportation Co." in 1994. In January 2000, the Company incorporated ESCO Acquisition Corp. to facilitate in the acquisition of newly acquired corporations. In January of 2000, ESCO acquired Quantum Transportation Company through ESCO Acquisition Corp. and immediately subsequent to acquisition, has transferred all assets and liabilities of Quantum to ESCO Transportation Company. Accordingly, the accompanying financial statements include the activity of Quantum Transportation subsequent to the date of acquisition. ESCO Transportation maintains two divisions representing three business segments with distinct transportation services offered by each. The Company's Intermodal division primarily hauls container and piggyback shipments between shipping locations, railroads, and ports (the intermodal segment) plus it operates a container yard in Memphis, Tennessee (the storage segment). This division operates out of facilities in Houston, Texas; Ontario, California; Memphis, Tennessee; Dallas, Texas; Minneapolis, Minnesota; Fort Smith, Arkansas; and Stockton, California. The Company also maintains an Over-The-Road division (OTR segment) that performs long haul services for numerous customers within the United States. The main office for this division is located in Springdale, Arkansas with expansion offices in Selma, Alabama which opened in May 2000, and Gulfport, Mississippi. The Company's corporate office is located in Houston, Texas. Note 3 - Summary of Significant Accounting Policies ---------------------------------------------------------- A. Basis of Accounting ----------------- Income and expenses are recorded on the accrual method of accounting for financial and federal income tax reporting purposes. 7 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 3 - Summary of Significant Accounting Policies (Continued) ----------------------------------------------------------------------- B. Use of Estimates ------------------ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from these estimates. Management believes that the estimates are reasonable. C. Revenue Recognition -------------------- Revenue and direct costs are recognized when the shipment is completed. D. Cash and Cash Equivalents ---------------------------- For purposes of the statements of cash flows, the Company considers all cash on hand, cash in bank (demand deposits), savings accounts, cash held in brokerage accounts and highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents. E. Property and Equipment ------------------------ Property and equipment are carried at cost. Depreciation for financial reporting purposes has been computed on the straight-line method over the estimated useful lives of the assets which range from three to twenty years. Accelerated methods of depreciation are used for computation of depreciation expense for income tax reporting purposes. Lease acquisition costs are capitalized when incurred. Leasehold improvements are recognized through a charge to operations if the lease expires or management decides to abandon the Company's interest. When assets are retired, abandoned or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts, and gain or loss is included in income. 8 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 3 - Summary of Significant Accounting Policies (Continued) ----------------------------------------------------------------------- F. Oil and Gas Properties ------------------------- The Company accounts for its oil and gas exploration and development activities using the successful efforts method. Under this method of accounting, exploratory drilling costs which result in the discovery of proved reserves are capitalized. All other exploratory costs, including geological and geophysical costs, are expensed when incurred. Development costs, including development of dry holes, are capitalized when incurred. The Company incurred no exploration and development costs during the six months ended June 30, 2000. Depletion of capitalized costs on producing properties is computed on a property-by-property basis utilizing the unit-of-production method. Depletion expense was $2,988 and $2,992 for the six months ended June 30, 2000 and 1999 respectively. The Company's total capitalized costs as of June 30, 2000 and 1999 were $19,754 and $28,717 respectively. G. Income Taxes ------------- The Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for deductible temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. For the six months ended June 30, 2000, net operating loss benefits were offset by a valuation allowance. The valuation allowance did not change materially from the balance at December 31, 1999. H. Net Income Per Share ----------------------- Net income per common share is based on the weighted average number of shares outstanding during the year. The Company declared a one-for-four reverse stock split in 1994. The Company declared a one-for-ten forward stock split in 1996. All share and per share amounts have been adjusted to reflect the stock splits. 9 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 3 - Summary of Significant Accounting Policies (Continued) ----------------------------------------------------------------------- H. Net Income Per Share (Continued) ------------------------------------ The Company acquired Quantum Transportation in January 2000 as disclosed in Note 12. The purchase price includes the options for the seller to receive additional shares of stock with an expiration of six years from the acquisition date if the shares of stock do not reach a benchmark price of $3.00 per share. If these shares were converted as of June 30, 2000, an additional 2,822,250 shares would be issued under this agreement. The dilution effect on earnings per share for the additional shares issued is not disclosed in the accompanying financial statements because they would be anti-dilutive if reported. I. Concentration of Credit Risk ------------------------------- Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. In the normal course of business the Company grants credit without collateral to customers. Consequently, the Company's ability to collect the amounts due from customers is affected by economic conditions. J. Fair Value of Financial Instruments --------------------------------------- The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at June 30, 2000 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in the current market exchange. At June 30, 2000, the Company had $1,084,765 in notes receivable from stockholders. Management believes the fair value of the notes receivable from the stockholders is less than its carrying value; however, the fair value is not estimable. 10 ------ ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 4 - Property and Equipment ------------------------------------ Property and equipment consists of the following:

~~ESCO~~Description ~~TRANSPORTATION~~6/30/00 ~~CO. Statements of Cash Flows For the Three Months Ended March~~ 12/31,/99 ~~2000 and 1999 2000 1999~~ ------------ ---------------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Cash Provided by Operating Activities $ 785,501 $ 644,711 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Property and Equipment (136,295) 0 Purchase of Quantum Transportation (67,874) 0 Proceeds from Sale of Property and Equipment 0 43,542 Stockholder Advances (93,050) (102,981) ------------ ------------ ~~Net~~Land ~~Cash~~$ ~~Provided~~175,975 ~~(Used)~~$ in175,975 ~~Investing~~Buildings ~~Activities~~and ~~(297~~Improvements 13,~~219)~~554 ~~(59~~13,~~439)~~554 ~~CASH~~Office ~~FLOWS~~Equipment ~~FROM~~675,075 ~~FINANCING~~571,061 ~~ACTIVITIES:~~Communications ~~Payments~~Equipment ~~on Long-Term Debt (493~~223,~~951)~~216 ~~(503~~183,~~145)~~584 ~~Purchase~~Furniture ofand ~~Treasury~~Fixtures ~~Stock~~46,216 ~~(750) (18~~32,~~004)~~699 ~~------------~~Leasehold ~~----------~~Improvements ~~Net~~38,853 ~~Cash~~0 ~~Provided~~Trucks, ~~(Used)~~Tractors, inand ~~Financing~~Trailers ~~Activities (494~~9,~~701)~~683,594 ~~(521~~9,~~149)~~827,467 ~~------------~~Property ~~----------~~Held ~~Net~~Under ~~Increase~~Capital ~~(Decrease)~~Leases ~~in Cash and Cash Equivalents (6~~1,~~419) 64~~512,~~123~~716 ~~CASH AND CASH EQUIVALENTS~~1,476,881 ATYard ~~BEGINNING~~Equipment ~~OF YEAR 109~~200,~~929~~085 25235,~~833~~345 ------------ ------------ ~~CASH AND CASH EQUIVALENTS~~12, ~~AT END OF PERIOD $ 103~~568,~~510~~094 ~~$ 89~~12,~~956 ============ ========== Non - Cash Transactions: Stock Issued to Acquire Quantum Transportation $ 477~~516,~~000~~566 $Less 0Accumulated ~~Stock~~Depreciation ~~Issued to Acquire Business 0 40~~(4,~~000 Stock Issued Under Management Incentive Agreement 0 570~~701,~~001~~850) ~~Stock Issued to Employees 0 50~~(3,~~600~~980,000) ------------ ---------- ~~Total Non~~-~~Cash~~- ~~Transactions~~ $ ~~477~~7,~~000~~866,244 $ ~~660~~8,~~601~~536,566 ============ ============

Note 5 - Long-Term Debt and Loans --------------------------------------- The Company has loans from various banks and finance companies for the purchase of transportation equipment including trucks and trailers, communication equipment, leasehold improvements, and portable buildings. The Company's long-term debt was issued to purchase property and equipment. The following is a summary of the loan balances outstanding at June 30, 2000 and December 31, 1999.

~~Description~~June ~~3/31/00~~30, ~~12/~~2000 December 31~~/99~~, ~~----------------------------------~~1999 ~~------------~~=============== ~~------------~~=================== ~~Land~~Notes payable to various banks and finance companies; $ ~~175~~4,~~975~~377,406 $ ~~175~~5,~~975~~177,205 ~~Buildings~~payable ~~and~~in ~~Improvements~~monthly ~~13,554~~installments 13totaling $202,~~554~~141 ~~Office~~including ~~Equipment~~principal ~~632,703~~and ~~571,061~~interest; ~~Communications~~bearing ~~Equipment~~interest ~~186,195~~at ~~183,584~~rates ~~Furniture~~ranging ~~and~~from ~~Fixtures~~9.5% ~~46,216~~to ~~32,699~~11.5%; ~~Leasehold~~secured ~~Improvements~~by ~~44,690~~transportation 0equipment ~~Trucks,~~purchased ~~Tractors,~~in ~~and~~conjunction ~~Trailers~~with ~~9,841,305~~the ~~9,827,467~~financing; ~~Property~~guaranteed ~~Held~~by ~~Under~~a ~~Capital~~major ~~Leases~~stockholder. ~~1,476,881~~The notes mature at varying dates from 2001 through 2004; a mortgage note payable to a partnership; bearing interest at 8%; payable in monthly installments of $1,~~476,881~~722 ~~Yard~~including ~~Equipment~~principal ~~235,345~~and ~~235,345~~interest; secured by real estate; guaranteed by a major stockholder. The note matures in 2002. --------------- ------------------- ~~12,652,864 12,516,566~~ Less: ~~Accumulated~~Current ~~Depreciation~~Maturities (42,~~381~~280,~~434~~161) (32,~~980~~038,~~000~~470) --------------- ------------------- Long Term Debt, Net of Current $ 82,~~271~~097,~~430~~245 $ 83,~~536~~138,~~566~~735 =============== ===================

11 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 6 - Obligations Under Capital Leases ----------------------------------------------- The Company is lessee of trailers and communication equipment which are held under capital leases expiring in various years. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. Assets are amortized (or depreciated) over the longer of the lease terms or their estimated productive lives. Amortization (or depreciation) of assets under capital leases is included in depreciation expense for 2000 and 1999. Following is a summary of property held under capital leases.

~~March~~6/30/00 12/31,/99 ~~2000 December 31, 1999~~ ----------~~------~~ ----------~~---------~~ ~~Notes~~Transportation ~~payable~~Equipment/Trailers ~~to various banks and finance companies; payable in~~ $ 41,~~711~~383,~~702~~532 $ 51,~~177~~347,~~205~~697 ~~monthly~~Communications ~~installments~~Equipment ~~totaling $202~~75,~~312~~250 including principal and interest; bearing interest at rates ranging from 9.5% to 11.5%; secured by transportation equipment purchased in conjunction with the financing; guaranteed by a major stockholder. The notes mature at varying dates from 2001 through 2004 and also a mortgage note payable to a partnership; bearing interest at 8%; payable in monthly installments of $175,~~722~~250 ~~including~~Office ~~principal~~Equipment ~~and interest; secured by real estate; guaranteed by a major stockholder. The note matures in 2002. ---------------- ------------------- Less: Current Maturities (2~~53,~~038,470)~~934 (253,~~038,470)~~934 ----------~~------~~ ----------~~---------~~ ~~Long Term Debt, Net of Current~~ $ 21,~~673~~512,~~232~~716 $ 31,~~138~~476,~~735~~881 ==========~~======~~ ==========~~=========~~

Interest rates on capitalized leases vary from 8.7% to 12.2% and are imputed based upon the lower of the Company's incremental borrowing rate at the inception of the lease or the lessor's implicit rate of return. The monthly installments on these capital leases total $27,925 per month including principal and interest. Note 7 - Amounts Due to Factor ------------------------------------ Pursuant to a factoring agreement, the Company factors all of its accounts receivable under an agreement with Compass Bank doing business as Commercial Billing Service. Interest is paid on the total outstanding balance at a rate of 12.5% per annum. As of April 20, 2000, the Company renegotiated its agreement with the factoring company (see Note P in the year-end audited financial statements for a description of the revised agreement with the factoring company.) The revised agreement is also accounted for as a secured borrowing rather than a sale of receivables. Note 8 - Segment Information -------------------------------- The Company's operations are divided into three segments by type of operations which are intermodal operations, over-the-road operations, and storage operations. Intermodal operations consist of short-haul, drayage shipments primarily from railroad ramps to customer docks and is operated out of various company locations. Over-the-road operations represent long haul, door-to-door deliveries for customers. Storage operations represent the Company's container yard operated in Memphis, Tennessee. The following table presents 2000 segment information: 12 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 8 - Segment Information (Continued) ---------------------------------------------

Three Months Ended ~~March~~June 3130, 2000 -------------------------------------------------- Depreciation Cost of and Interest Sales Sales Amortization Expense ----------- ----------- ----------- -- --------- Intermodal $ 7,~~753~~718,~~192~~032 $5,~~694~~836,~~155~~944 $ 3695,~~683~~679 $ ~~250~~330,~~236~~299 Over-the-Road 34,~~679~~591,~~758~~993 23,~~730~~688,~~163~~004 ~~373~~342,~~439~~784 ~~145~~133,~~027~~678 Storage ~~366~~400,~~360~~740 0 2613,~~617~~557 0 Other 1,~~337~~388 0 0 0 ----------- ----------- ----------- -- --------- $1112,~~800~~712,~~647~~153 $89,~~424~~524,~~318~~948 $ ~~436~~434,~~739~~020 $ ~~395~~463,~~263~~977 =========== =========== =========== == =========

Three Months Ended ~~March~~June 3130, 2000 ----------------~~------------------------------------~~ ~~Additions to~~ Earnings ~~Long-Term Long-Lived~~ (Loss) ~~Assets Assets Total Assets~~ ---------- ------~~----~~ ~~------------- -------------~~ Intermodal $ 15(573,~~351~~527) ~~$ 792,360 $ 85,625 $ 7,470,273~~ Over-the-Road (~~260~~278,~~145~~679) ~~7,321,108 50,073 9,482,575~~ Storage ~~205~~263,~~972~~433 ~~157,962 0 532,962~~ Other 1,~~332~~388 ~~0 0 0~~ ---------- ------~~----~~ ~~------------- -------------~~ $ (37587,~~490~~385) ~~$8,271,430 $ 135,698 $ 17,485,810~~ ========== ======~~==== ============= =============~~

~~Three~~Six Months Ended ~~March~~June 3130, ~~1999~~2000 -------------------------------------------------------- Depreciation Cost of ~~and~~And Interest Sales Sales Amortization Expense -------------- ----------- ------------- ------------ Intermodal $4 15,~~261~~471,~~419~~224 $311,~~094~~531,~~907~~099 $ 49157,~~779~~588 $ ~~175~~(580,~~878~~536) Over-the-Road 28,~~730~~271,~~992~~751 16,~~766~~418,~~532~~167 ~~308~~698,~~852~~223 ~~153~~(278,~~817~~704) Storage ~~130~~767,~~430~~100 0 640,~~282~~174 0 Other 12,~~171~~720 0 0 0 -------------- ----------- ------------- ------------ $7 24,~~124~~512,~~012~~795 $417,~~861~~949,~~439~~266 $ ~~364~~895,~~913~~985 $ ~~329~~(859,~~695~~240) ============== =========== ============= ============ Six Months Ended June 30, 2000 -------------------------------------------------------- Additions to Earnings Long-Term Long-Lived (Loss) Assets Assets Total Assets -------------- ----------- ------------- ------------ Intermodal $ (536,687) $ 1,178,154 $ 85,625 $ 8,306,185 Over-the-Road (538,827) 6,530,128 50,673 9,135,232 Storage 469,408 157,962 0 1,007,962 Other 2,720 0 0 0 -------------- ----------- ------------- ------------ $ (603,386) $ 7,866,244 $ 136,298 $18,449,379 ============== =========== ============= ============

13 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 8 - Segment Information (Continued) ---------------------------------------------

Three Months Ended ~~March~~June 3130, 1999 --------------------------------------------------- ~~Additions~~Depreciation toCost ~~Earnings~~of ~~Long-Term~~And ~~Long-Lived~~Interest ~~(Loss)~~Sales ~~Assets~~Sales ~~Assets~~Amortization ~~Total~~Expense ~~Assets~~ ---------- --- ------ ---- --------- ---- --------- Intermodal $ ~~(24~~4,~~163)~~990,782 ~~952~~$3,~~348~~797,990 $ ~~107~~53,~~111~~246 $ 4184,~~865,555~~729 Over-the-Road ~~(143~~3,~~988)~~332,055 62,~~537~~116,~~671~~592 11308,~~886~~872 7154,~~980,771~~434 Storage 27132,~~233~~188 ~~272,684~~ 0 ~~403~~6,~~113~~282 0 Other ~~1,171~~963 0 0 0 ---------- --- ------ ---- --------- ---- --------- $~~(139~~ 8,~~747)~~455,988 7$5,~~762~~914,~~703~~582 $ ~~118~~368,~~997~~400 $ 13339,~~249,439~~663 ========== === ====== ==== ========= ==== =========

The segmented information is prepared under generally accepted accounting principles. The amounts also incorporate the allocation of overhead costs based on the number of loads on the various segments operated within the Company. For the period ended June 30, 2000, all of the Company's operations are conducted within the United States. 14 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 9 - Going Concern -------------------------- The financial statements have been prepared assuming that ESCO Transportation Co. will continue as a going concern. The Company incurred net losses in 1999 and 1998, had a working capital deficit of approximately $4.7 million and had a deficit in stockholders' equity at December 31, 1999. On April 20, 2000, Compass Bank acknowledged that the Company was in default on its factoring agreement. Compass Bank agreed to forbear this default subject to the conditions described in Note P to the December 31, 1999 financial statements. There is no certainty that the Company will be able to meet these conditions. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. (Also see Note 13.) Management has implemented plans to address the following issues over the upcoming year. Management is addressing its historical losses with the preparation and implementation of a revised operational plan and budget which includes profitability for each division during 2000 and a reduction of the Company's over-the-road fleet. The plan includes the continued implementation of budgetary controls and cost control measures in all areas of operation. Management has begun to update its accounting and dispatch system to a new platform which should further reduce billing errors, increase cost control in the over-the-road division, and provide better profitability in the intermodal division. Management is also pursuing outside capital sources to provide additional working capital for the Company. Management is working with Compass Bank to ensure they continue to provide needed working capital for Company operations through December 31, 2000. Continued funding is subject to the conditions explained in Note P to the December 31, 1999 financial statements. Note 10 - Recent Pronouncements ----------------------------------- In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulleting No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. In June 2000, the SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), Amendment: Revenue Recognition in Financial Statements. SAB 101B delays the implementation date of SAB 101 for registrants with fiscal years that begin between December 16, 1999 and March 15, 2000. The Company will adopt SAB 101 as required in the fourth quarter of 2000 and is evaluating the effect that such adoption may have on its consolidated results of operations and financial position. Note 11 - Related Party Transactions ----------------------------------------- During the quarter ended June 30, 2000, the Company paid $31,208 to a former spouse of the Chief Executive Officer and majority stockholder of the Company in conjunction with a stock purchase agreement between the former spouse and the majority stockholder of the Company. 15 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 11 - Related Party Transactions (Continued) ------------------------------------------------------ During the quarter ended June 30, 2000, the shares previously issued under a management incentive agreement for the former president and chief financial officer were returned to the Company and canceled. The accompanying financial statements reflect the reduction of the notes receivable and reduction of the additional paid-in capital and common stock resulting from this transaction. At June 30, 2000, the Company had pledged $100,000 of cash accounts as security for a personal note payable to a majority stockholder. Subsequent to June 30, 2000, the cash security was offset against a personal loan of the stockholder and is reported as a cash advance in the accompanying financial statements. Note 12 - Acquisitions ------------------------- QUANTUM On January 19, 2000, the Company acquired 100% of the outstanding stock of Quantum Transportation, Inc., a Minnesota corporation, in a purchase transaction valued at $530,000. The acquisition was completed through a combination of 159,000 shares of stock at a $3.00 per share benchmark price and $53,000 in cash in a merger transaction. This merger was completed through a newly formed, wholly owned subsidiary named ESCO Acquisition Corp. The accompanying financial statements include the results of operations of Quantum Transportation from January 19, 2000, the date of acquisition. The merger agreement provides for the issuance of additional cash or Company stock if the market price of ESCO stock does not reach the $3.00 benchmark price during a three-year period from the date of acquisition. If the stock were to be converted as of June 30, 2000, the additional shares of stock to be issued total 2,822,250 shares. The purchase transaction resulted in the recording of goodwill totaling $368,659 which is amortized over a sixty month period and a covenant not to compete valued at $53,000 which is amortized over the life of the non-compete period, which is thirty-six (36) months. The following represents 1999 proforma information for the three month period ended June 30, 1999 as if the Quantum transaction had occurred at that date.

16 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 12 - Acquisitions (Continued) -------------------------------------- FISHER TRUCKING During the quarter ended June 30, 2000, the Company entered into an informal management agreement with Fisher Trucking (Fisher) in Selma, Alabama, for the Company to assist Fisher in managing its operations with the intent of acquisition during 2000. Effective May 1, 2000, management has entered into an informal agreement with Fisher to acquire its operations. The agreement provides for ESCO to lease equipment from Fisher through the term of the outstanding debt held by Fisher against the equipment. Upon the completion of the lease, the equipment will transfer to ESCO. ESCO assumed all operations of Fisher from May 1, 2000 forward. All assets and liabilities of Fisher prior to May 1, 2000 remain with Fisher Trucking, Inc. A major stockholder of ESCO has also agreed to contribute 100,000 shares of personal ESCO stock as additional compensation to consummate this transaction. As of June 30, 2000, these shares have not been transferred to Fisher. ESCO has paid no cash to Fisher as part of the purchase price for this transaction. KISER, INC. The Company entered into a management agreement with Kiser, Inc. and related entities for the purpose of managing Kiser with the intent of evaluating the feasibility of acquiring Kiser in an agreement and plan of merger transaction. Management determined the acquisition was not practical for the Company at this time and on May 23, 2000, terminated the Kiser management agreement. As part of the original management agreement with Kiser, ESCO agreed to finance $457,256 of Kiser net trade accounts receivable which were transferred to ESCO. The cash collected for a portion of these receivables was not forwarded to ESCO as agreed and during the quarter ended June 30, 2000, Kiser filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Company is attempting to collect the amounts due from Kiser. During the quarter ended June 30, 2000, ESCO provided an allowance of $354,627 for possible losses related to this transaction. 17 ITEM 1. Financial Statements (Continued) ESCO TRANSPORTATION CO. Notes to the Unaudited Condensed Financial Statements June 30, 2000 (Unaudited) Note 13 - Subsequent Events ------------------------------- As described in Note P in the December 31, 1999 financial statements, the Company was to have signed confidentiality agreements with at least five serious or potential investors or signed a letter of intent to propose investment of an additional $5,000,000 in equity or subordinated debt by July 1, 2000, and and other conditions imposed by Compass Bank pursuant to the terms of the April 20, 2000 Agreement. A number of these terms have not been met by the Company and the Company is presently working with Compass Bank to resolve any outstanding issues to its satisfaction. Compass has extended the deadline referred to in the agreement until September 1, 2000. 18 ITEM 2. MANAGEMENT'S DISCUSSION, ANALYSIS, AND PLAN OF OPERATION OVERVIEW -------- The quarter ended June 30, 2000 was a period of repositioning for ESCO and management of the Company. During this period, ESCO's president, Robert J. Weaver, and its Chief Financial Officer, Robert F. Darilek, resigned to pursue other interests. In addition, a board member Bernard Vlahakis also resigned effective July 6, 2000. ESCO's management has used these resignations as an opportunity to revise its operating plan for the second half of the 2000 fiscal year. The revised plan includes additional reductions of top management staff which equates to a total cost savings of approximately $600,000 on an annualized basis. Management has also taken steps during the second quarter and the months of July and August to revise its 2000 budget and implement changes which are needed in the over-the-road division to make it a profitable operation. ESCO has historically operated profitably in the intermodal business but it has also shown losses historically in the over-the-road division. Management's short-term plan is to reduce the over-the-road fleet, replace outdated and deteriorating equipment and redirect its over-the-road division into traffic lanes which only produce revenues per mile which can generate profitable operations in this division. Management has continued to evaluate and improve its intermodal operations and its storage and container yard operations. These divisions continued to show strong profits and are expected to continue with profitability through the end of 2000. The Company finished the second quarter with a loss of $(587,385) or 4.7. cents per share and a year-to-date loss of $(603,386). The profitable operations of the Company's intermodal division were offset by losses of the Springdale division as detailed in the segment reporting in our quarterly financial statements. In this quarter, management has also elected to record substantial one-time accounts receivable write-offs related to potentially uncollectable receivables which were outstanding at June 30, 2000. The most significant portion of this write-off relates to the Kiser, Inc. adjustment as discussed in Note 12 to the financial statements. In addition, the Company has provided for potential write-offs for advances made to former employees or existing employees which may be deemed uncollectable and has accrued for the assessment of prior-year property taxes assessed against the Company during the three-month period ended June 30, 2000, but relates to prior years. In addition, in the second quarter of 2000, management has continued to work with Compass Bank in its agreement to provide working capital for ESCO on an ongoing basis. Both ESCO and Compass are generating a team effort to provide short-term capital to ESCO during this period of repositioning. During the second quarter of 2000, management continues to actively pursue potential investors to re-capitalize the Company. Management continues to seek additional equity and/or subordinated debt to help improve the working capital ratio and debt-to-equity ratio. 19 ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued) OPERATIONS ---------- As stated above, the Company operated at a loss of $(587,385) for the second quarter which is substantially below budget but is an improvement over the 1999 operations when the one-time adjustments are removed. Freight revenue has exceeded budget by approximately $1,103,000 or 4.7% of budget and reflects a 67% increase over the 1999 revenue. A substantial part of the increase relates to revenues generated from the new Minneapolis, Minnesota and Ripon, California offices acquired through Quantum plus the operation of the Company's Fort Smith location which operated for a full quarter during the three months ended June 30, 2000. In addition, revenues for the quarter were increased resulting from the Selma, Alabama operation. The Company's intermodal operations also experienced strong internal growth through increased business in all regions and divisions of the Company. The Company's cash flow during the second quarter continued to be limited and 100% of the Company's receivables were factored through Commercial Billing Services and Compass Bank. During the second quarter of 2000, the Company continued to operate under its renegotiated factoring agreement with the bank as referred to in our annual audited financial statement. Subsequent to June 30, 2000, management and the bank have agreed to reduce the cap on the line to $9.5 million and the Company has been able to operate within the limits of the line of credit provided by the bank. The Company's operating profits decreased from $494,116 in 1999 to $(140,849) in 2000 before interest expense. Interest expense increased by approximately 37% over the same period in 1999 primarily due to the increase in the factoring line, reduction of long-term debt at lower interest rates, and the cost of bank fees associated with the Company's forbearance agreement. Operating and administrative expenses increased by 72% from 1999 primarily attributable to the new locations in Minneapolis, Minnesota; Ripon, California; and Fort Smith, Arkansas and Selma, Alabama added during the first and second quarters. As a percentage of revenue, operating and administrative costs increased from 20% in 1999 to 23% in 2000. During the quarter, collections improved substantially as management began operating under its revised collection procedures which included decentralizing collection efforts from the corporate office to individual terminal offices. This change has facilitated the Company's collections process and has improve the processing of paperwork and the support needed by the customers prior to payment. These collection efforts are part of the steps which have attributed to the Company's ability to operate under its reduced credit line at Compass Bank. YEAR 2000 ISSUE ----------------- During the quarter ended June 30, 2000, the Company continued to implement its Year 2000 plan which addresses the issues associated with Year 2000 processing problems and the Company's computer programs. The progress made was in accordance with the plan, including progress on implementation of a new system which has gone online for one division in June 2000 and is expected to go online in all other divisions on or before December 2000. There is 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. 20 ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued) YEAR 2000 ISSUE (CONTINUED) ------------------------------ 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. SAFE HARBOR ------------ This report on Form 10-Q or 10-QSB (the Report) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements necessarily involve risks and uncertainty, including, without limitation, the risk of a significant natural disaster, the expansion or contraction in its various lines of business, the impact of inflation, the impact of Year 2000 issues, the ability of the Company to meet its debt obligation, changing licensing requirements and regulations in the United States pertinent to its business, the ability of the Company to expand its businesses, the effect of pending or future acquisitions as well as acquisitions which have recently been consummated, general market conditions, competition, licensing and pricing. All statements, other than statements of historical facts, included or incorporated by reference in the Report that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including, without limitation, such things as future capital expenditures (including the amount and nature thereof), business strategy and measures to implement such strategy, competitive strengths, goals, expansion, and growth of the Company's businesses and operations, plans, references to future success, as well as other statements which includes words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and other similar expressions, constitute forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could over time prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report will themselves prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. 21 ITEM 2. Management's Discussion, Analysis, and Plan of Operation (Continued) CORPORATE FILINGS ------------------ The Company filed an amendment to its Articles of Incorporation in January 2000 to clarify the authorized capital stock in the Articles; 20,000,000 shares of common and 15,000,000 of preferred. SIGNIFICANT EVENTS ------------------- As stated in the overview, during the quarter ended June 30, 2000, the Company's President/Chief Operating Officer and Chief Financial Officer resigned to pursue other interests. This significant management change has been accepted by the remaining management of ESCO as a substantial opportunity to improve on the changes that have been made during the past year and a half and use those efforts as a means of turning ESCO's operations into profitable operations. The substantial changes in administrative costs will allow ESCO additional flexibility to go forward with its remaining management team. The responsibilities of the President and Chief Executive Officer were resumed by Edwis Selph, Sr. and he continues to work with prior management to ensure a smooth transition and improved operations for the company as a whole. Management sees this significant change as a positive step towards improved Company operations. In addition, the Executive Vice President and Corporate Secretary also resigned in June, 2000. RELATED PARTY TRANSACTIONS ---------------------------- During the quarter ended June 30, 2000, the Company paid $31,208 to a former spouse of the Chief Executive Officer and majority stockholder of the Company in conjunction with a stock purchase agreement between the family member and the majority stockholder of the Company. During the quarter ended June 30, 2000, the shares previously issued under a management incentive agreement for the President/Chief Operating Office and Chief Financial Officer were returned to the Company and canceled. The accompanying financial statements reflect the reduction of the notes receivable and reduction of the additional paid-in capital and common stock resulting from this transaction. Subsequent to the quarter ended June 30, 2000, the Company offset cash which had been pledged as security for a personal note payable to a bank by a majority stockholder. The transaction was reported as a cash advance in the accompanying financial statements. 22 PART II. OTHER INFORMATION ITEM 1. Recent Developments in Legal Proceedings The Company's three litigation matters were previously referenced in the Form 10-KSB dated December 31, 1999 and its statements are incorporated herein by reference. Subsequent to the issuance of the 10-KSB, ESCO Transportation and ESCO Acquisition Corporation were involved in the following litigation: Case No. A2401-200185; First Continental Leasing, a Division of BancorpSouth vs. Kiser, Inc., ESCO Transportation Co. and ESCO Transportation Acquisition Corp.; In the Circuit Court of Harrison County, Mississippi, First Judicial District. First Continental Leasing is suing Kiser, Inc., ESCO Transportation Co., and ESCO Acquisition Corporation as a result of the management agreement signed in March 2000. Management does not anticipate any liability related to this litigation and expects a summary disposition on this case. Case No. USDC LR-C-99-807; Jackie Brown, individually and as administrator of the estate of Katrina Brown, deceased, and as husband of Nancy K. Brown, individually, and Chris Brown, individually versus ESCO Transportation Co. and Joe W. Jones. This case results from a motor vehicle accident which occurred in 1999. The case resulted in injuries and a fatality. Management is consulting with counsel but is of the opinion that it can be concluded satisfactorily. The incident falls within the insurance coverage maintained by the Company. ITEM 2. Changes in Securities - NONE ITEM 3. Defaults Upon Senior Securities - NONE ITEM 4. Submission of Matters to a Vote of Security Holders - NONE ITEM 5. Other Information - NONE ITEM 6. Exhibits and Reports of Form 8-K - Filed July 6, 2000 regarding the resignation of Robert J. Weaver, President and Chief Operating Officer; Robert F. Darilek, Chief Financial Officer; and Bernard Vlahakis, Board Member. 23 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: _____________________________ _____________________________ Edwis L. Selph, Sr. Date Chairman of the Board ______________________________ _____________________________ Becky Clamp, CPA Date Controller 24

Filing Compare · ESCO TRANSPORTATION CO