**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 
| **(Mark One)**                                                                                                                                        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                  |   |   |
| **ý**                                                                                                                                            |   | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                  |   |   |
| **For the  quarterly period ended September 30, 2004**                                                                                                |
|                                                                                                                                                  |   |   |
| **o**                                                                                                                                                 |   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|                                                                                                                                                  |
| **For the  transition period from            to          ** |
|                                                                                                                                                  |
| **Commission  file number: 0-30185**                                                                                                                  |

 
| **Gasel Transportation Lines, Inc.**                               |
|--------------------------------------------------------------------|
| (Exact name of small  business issuer as specified in its charter) |
|                                                               |   |   |
| **Ohio**                                                           |   | **31-1239328** |
| (State or other  jurisdiction of incorporation or  organization)   |   | (IRS Employer  Identification No.) |
|                                                               |   |   |
| **County  Road 10, Route 4, Box 181A, Marietta,  OH**              |   | **45750** |
| (Address of principal  executive offices)                          |   | (zip code) |
|                                                               |
| **(740)  373-6479**                                                |
| (Issuer’s telephone  number)                                  |

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý  No o.

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: as of November 10, 2004, there were9,877,966 common shares, no par value issued and outstanding, with 7,900 ofthem held in the treasury.

 

TransitionalSmall Business Disclosure Format (Check one): Yes o No ý

 

 

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INDEX

 
| PART I - FINANCIAL INFORMATION                                                                                                                                                   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                             |   |
| Item 1. Financial Statements                                                                                                                                                     |   |
|                                                                                                                                                                             |   |
| Consolidated Balance Sheet at September 30, 2004 (Unaudited)                                                                                                                     | 1      |
|                                                                                                                                                                             |   |
| Statements of Consolidated Operations for  the Three Months Ended September 30, 2004 and 2003 (Unaudited) and for the  Nine Months Ended September 30, 2004 and 2003 (Unaudited) | 3      |
|                                                                                                                                                                             |   |
| Statements of Consolidated Cash Flows for  the Nine Months Ended September 30, 2004 and 2003 (Unaudited)                                                                         | 5      |
|                                                                                                                                                                             |   |
| Notes to Consolidated Financial Statements                                                                                                                                       | 7      |

 

----

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 
| ** **                                                                                           | ** ** | **Sept 30,  2004** | ** **      |
|------------------------------------------------------------------------------------------------------|------------|--------------------|-----------------|
| ** **                                                                                           | ** ** | **(Unaudited)**    | ** **      |
| ASSETS                                                                                               |       | ** **         |            |
|                                                                                                 |       |               |            |
| Current Assets                                                                                       |       |               |            |
| Cash and Cash Equivalents                                                                            |       | $                  | 43,111          |   |
| Accounts Receivable-Trade, Net of Amounts  Sold With Recourse of $1,206,631 and Allowance of $30,000 |       | 349,395            |            |
| Inventory                                                                                            |       | 102,177            |            |
| Prepaid Expenses and Other Current Assets                                                            |       | 190,571            |            |
|                                                                                                 |       |               |            |
| Total Current Assets                                                                                 |       | 685,254            |            |
|                                                                                                 |       |               |            |
| Property and Equipment                                                                               |       |               |            |
| Land and Buildings                                                                                   |       | 770,054            |            |
| Tractors                                                                                             |       | 7,641,748          |            |
| Trailers                                                                                             |       | 2,809,249          |            |
| Shop Equipment                                                                                       |       | 408,962            |            |
| Office Equipment                                                                                     |       | 228,105            |            |
|                                                                                                 |       | 11,858,118         |            |
| Less Accumulated Depreciation                                                                        |       | 8,469,064          |            |
|                                                                                                 |       |               |            |
| Net Property and Equipment                                                                           |       | 3,389,054          |            |
|                                                                                                 |       |               |            |
| Revenue Equipment  – Held for Sale                                                              |       | 1,212,117          |            |
|                                                                                                 |       |               |            |
| Other Assets                                                                                         |       |               |            |
| Other                                                                                                |       | 21,183             |            |
|                                                                                                 |       |               |            |
| Total Other Assets                                                                                   |       | 21,183             |            |
|                                                                                                 |       |               |            |
| TOTAL ASSETS                                                                                         |       | $                  |  5,307,608 |   |

 

1

----

 

GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 
| ** **                                                                                            | ** ** | **Sept 30,  2004** | ** **       |
|-------------------------------------------------------------------------------------------------------|------------|--------------------|------------------|
|                                                                                                  |       | **(Unaudited)**    |             |
| LIABILITIES  AND STOCKHOLDERS’ (DEFICIT)                                                         |       |               |             |
|                                                                                                  |       |               |             |
| Current Liabilities                                                                                   |       |               |             |
| Cash Overdraft                                                                                        |       | $                  | 95,372           |   |
| Notes Payable                                                                                         |       | 56,068             |             |
| Accounts Payable-Trade                                                                                |       | 207,107            |             |
| Accrued Contract Labor and Other Expenses                                                             |       | 297,035            |             |
|                                                                                                  |       |               |             |
| Total Current Liabilities Not Subject to  Compromise                                                  |       | 655,582            |             |
|                                                                                                  |       |               |             |
| Liabilities Subject to Compromise                                                                     |       | 7,660,884          |             |
|                                                                                                  |       |               |             |
| Total Liabilities                                                                                     |       | 8,316,466          |             |
|                                                                                                  |       |               |             |
| Redeemable Warrants                                                                                   |       | 50,000             |             |
|                                                                                                  |       |               |             |
| Stockholders’ (Deficit)                                                                          |       |               |             |
| Common Stock, no par value, 10,000,000  shares authorized, 9,877,966 issued and 9,870,066 outstanding |       | 2,543,481          |             |
| Additional Paid in Capital                                                                            |       | 102,786            |             |
| Accumulated (Deficit)                                                                                 |       | (5,687,292         | )                |
| Less: Treasury Stock, at cost, 7,900 shares                                                           |       | (17,833            | )                |
|                                                                                                  |       |               |             |
| Total Stockholders’ (Deficit)                                                                    |       | (3,058,858         | )                |
|                                                                                                  |       |               |             |
| TOTAL LIABILITIES AND STOCKHOLDERS’  (DEFICIT)                                                   |       | $                  |   5,307,608 |   |

 

2

----

 

GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

STATEMENTS OF CONSOLIDATED OPERATIONS

 
| ** **                                                                                                                                                                                                                      | ** ** | **Three  Months Ended** | ** **      | **Nine  Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-----------------|------------------------|------------|
| ** **                                                                                                                                                                                                                      | ** ** | **Sept 30,  2004**      | ** **      | **Sept 30,  2003**     | ** ** | **Sept 30,  2004** | ** ** | **Sept 30,  2003** | ** ** |
|                                                                                                                                                                                                                            |       | **(Unaudited)**         |            | **(Unaudited)**        |       | **(Unaudited)** |   | **(Unaudited)** |   |
| Revenues                                                                                                                                                                                                                        |       |                    |            |                   |       |   |   |   |   |
| Freight Income                                                                                                                                                                                                                  |       | $                       | 3,045,688  |                   | $          | 3,303,539 |   | $ | 10,002,770 |   | $ | 10,098,847 |   |
| Training School Revenue                                                                                                                                                                                                         |       | 95,399                  |            | 109,750                |       | 332,648 |   | 354,997 |   |
|                                                                                                                                                                                                                            |       | 3,141,087               |            | 3,413,289              |       | 10,335,418 |   | 10,453,844 |   |
| Cost of Revenue                                                                                                                                                                                                                 |       | 2,839,539               |            | 3,206,320              |       | 9,424,898 |   | 10,061,482 |   |
| Gross Profit (Loss)                                                                                                                                                                                                             |       | 301,548                 |            | 206,969                |       | 910,520 |   | 392,362 |   |
|                                                                                                                                                                                                                            |       |                    |            |                   |       |   |   |   |   |
| Operating Expenses                                                                                                                                                                                                              |       |                    |            |                   |       |   |   |   |   |
| Garage Expenses                                                                                                                                                                                                                 |       | 88,549                  |            | 104,462                |       | 301,960 |   | 270,915 |   |
| General and Administrative Expenses                                                                                                                                                                                             |       | 318,213                 |            | 358,272                |       | 1,058,442 |   | 1,304,606 |   |
| Impairment Loss                                                                                                                                                                                                                 |       | —                  |            | —                 |       | — |   | 434,583 |   |
|                                                                                                                                                                                                                            |       | 406,762                 |            | 462,734                |       | 1,360,402 |   | 2,010,104 |   |
|                                                                                                                                                                                                                            |       |                    |            |                   |       |   |   |   |   |
| Operating Income (Deficit)                                                                                                                                                                                                      |       | (105,214                | )               | (255,765               | )          | (449,882 | ) | (1,617,742 | ) |
|                                                                                                                                                                                                                            |       |                    |            |                   |       |   |   |   |   |
| Other Income (Expense)                                                                                                                                                                                                          |       |                    |            |                   |       |   |   |   |   |
| Interest Income                                                                                                                                                                                                                 |       | 13                      |            | 17                     |       | 40 |   | 8,814 |   |
| Other Income                                                                                                                                                                                                                    |       | 4                       |            | 13,421                 |       | 9,467 |   | 31,454 |   |
| Gain(Loss)-Sale of Assets                                                                                                                                                                                                       |       | —                  |            | —                 |       | — |   | (42,957 | ) |
| Interest Expense, Excludes Contractual  Interest of $161,414 and $490,948 for the Three and Nine Months Ended Sept  30, 2004, and $266,481 and $878,103 for the Three Months and Nine Months  Ended Sept 30, 2003, Respectively |       | (22,891                 | )               | (18,988                | )          | (60,061 | ) | (525,014 | ) |
|                                                                                                                                                                                                                            |       | (22,874                 | )               | (5,550                 | )          | (50,554 | ) | (527,703 | ) |
|                                                                                                                                                                                                                            |       |                    |            |                   |       |   |   |   |   |
| (Loss) from Operations Before  Reorganization Items and Tax Provision                                                                                                                                                           |       | (128,088                | )               | (261,315               | )          | (500,436 | ) | (2,145,445 | ) |
|                                                                                                                                                                                                                            |       |                    |            |                   |       |   |   |   |   |
| Reorganization Items-                                                                                                                                                                                                           |       |                    |            |                   |       |   |   |   |   |
| Professional and Bankruptcy Fees                                                                                                                                                                                                |       | (10,500                 | )               | (42,000                | )          | (23,500 | ) | (73,330 | ) |
| Loss on Disposition of Assets-Post Petition                                                                                                                                                                                     |       | —                  |            | (27,304                | )          | — |   | (27,304 | ) |
| Extinguishment of Debt                                                                                                                                                                                                          |       | 172,509                 |            | —                 |       | 658,065 |   | — |   |
|                                                                                                                                                                                                                            |       | 162,009                 |            | (69,304                | )          | 634,565 |   | (100,634 | ) |
|                                                                                                                                                                                                                            |       |                    |            |                   |       |   |   |   |   |
| Income(Loss)from Operations Before Tax  Provision                                                                                                                                                                               |       | 33,921                  |            | (330,619               | )          | 134,129 |   | (2,246,079 | ) |
|                                                                                                                                                                                                                            |       |                    |            |                   |       |   |   |   |   |
| Provision for Income Taxes                                                                                                                                                                                                      |       | —                  |            | —                 |       | — |   | — |   |
|                                                                                                                                                                                                                            |       |                    |            |                   |       |   |   |   |   |
| Net Income (Loss)                                                                                                                                                                                                               |       | $                       | 33,921          |                   | $          | (330,619 | ) | $ | 134,129 |   | $ | (2,246,079 | ) |

 

3

----

 
| ** **                                  | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **Sept 30,  2004**      | ** ** | **Sept 30,  2003**     | ** ** | **Sept 30,  2004** | ** ** | **Sept 30,  2003** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                        |       |                    |       |                   |       |   |   |   |   |
| Net Income (Loss)                           |       | $                       | 33,921     |                   | $          | (330,619 | ) | $ | 134,129 |   | $ | (2,246,079 | ) |
|                                        |       |                    |       |                   |       |   |   |   |   |
| Basic Income(Loss) per Share                |       | $                       | .003       |                   | $          | (.033 | ) | $ | .014 |   | $ | (.248 | ) |
| Diluted Income(Loss) Per Share              |       | $                       | .003       |                   | $          | (.033 | ) | $ | .014 |   | $ | (.248 | ) |
| Weighted Average Common Shares Outstanding: |       |                    |       |                   |       |   |   |   |   |
| Basic                                       |       | 9,870,066               |       | 9,870,066              |       | 9,870,066 |   | 9,071,455 |   |
| Diluted                                     |       | 9,969,687               |       | 9,870,066              |       | 9,969,778 |   | 9,071,455 |   |

 

4

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GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

 
| ** **                                                                           | ** ** | **Nine  Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                           | ** ** | **Sept 30,  2004**     | ** ** | **Sept 30,  2003** | ** ** |
| ** **                                                                           | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)** | ** ** |
| Cash Flows  From Operating Activities                                                | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net Income (Loss)                                                                    |       | $                      | 134,129    |   | $ | (2,246,079 | ) |
| Adjustments to reconcile net income(loss)  to cash provided by operating activities: |       |                   |       |   |   |
| Reorganization Items                                                                 |       | 23,500                 |       | 73,330 |   |
| Extinguishment of Debt                                                               |       | (685,065               | )          | — |   |
| Depreciation and Amortization                                                        |       | 1,015,199              |       | 1,435,778 |   |
| (Gain) Loss on Disposition of Assets  Pre-Petition                                   |       | —                 |       | 42,957 |   |
| (Gain) Loss on Disposition of Assets  Post-Petition                                  |       | —                 |       | 27,304 |   |
| Impairment Loss                                                                      |       | —                 |       | 434,583 |   |
| Bad Debt                                                                             |       | 19,135                 |       | 56,896 |   |
| (Increase) Decrease in:                                                              |       |                   |       |   |   |
| Accounts Receivable-Trade                                                            |       | 69,712                 |       | 1,457,386 |   |
| Inventory                                                                            |       | —                 |       | — |   |
| Prepaid Expenses and Other Assets                                                    |       | 56,120                 |       | 236,680 |   |
| Increase (Decrease) in:                                                              |       |                   |       |   |   |
| Accounts Payable and Accrued Expenses                                                |       | 97,054                 |       | 105,170 |   |
| Net Cash Provided by Operating Activities  Before Reorganization Items               |       | 729,784                |       | 1,624,005 |   |
| Operating Cash Flows Used in Reorganization  Items:                                  |       |                   |       |   |   |
| Professional Fees Paid in Connection with  Chapter 11 Proceedings                    |       | (23,500                | )          | (65,830 | ) |
| Net Cash Used in Reorganization Items                                                |       | (23,500                | )          | (65,830 | ) |
|                                                                                 |       |                   |       |   |   |
| Net Cash Provided by Operating Activities                                            |       | 706,284                |       | 1,558,175 |   |
|                                                                                 |       |                   |       |   |   |
| Cash Flows From Investing Activities                                                 |       |                   |       |   |   |
| Purchases of Property and Equipment                                                  |       | (225,385               | )          | (49,712 | ) |
| Net Cash (Used) by Investing Activities                                              |       | (225,385               | )          | (49,712 | ) |
|                                                                                 |       |                   |       |   |   |
| Cash Flows From Financing Activities                                                 |       |                   |       |   |   |
| Line of Credit (Net)                                                                 |       | —                 |       | (1,692,873 | ) |
| Proceeds from Issuance of Common Stock                                               |       | —                 |       | 675,507 |   |
| Repayment of Mortgage Receivable                                                     |       | —                 |       | 2,782 |   |
| Proceeds from Borrowings-Related Parties                                             |       | 73,245                 |       | 62,700 |   |
| Payments on Notes Payable-Related Parties                                            |       | (70,808                | )          | (81,627 | ) |
| Principal Payments on Long Term Borrowing                                            |       | (310,598               | )          | (333,614 | ) |
| Principal Payments Under Capital Lease  Agreements                                   |       | —                 |       | (111,377 | ) |
| Net Cash (Used) by Financing Activities                                              |       | (308,161               | )          | (1,478,502 | ) |
| Net Increase (Decrease) in Cash                                                      |       | 172,738                |       | 29,961 |   |
|                                                                                      |            |                        |            |  |  |  |  |

 

5

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| ** **                                                                                                    | ** ** | **Nine  Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                    | ** ** | **Sept 30,  2004**     | ** ** | **Sept 30,  2003** | ** ** |
|                                                                                                          |       | **(Unaudited)**        |       | **(Unaudited)** |   |
| Net Increase (Decrease)in Cash                                                                                |       | $                      | 172,738    |   | $ | 29,961 |   |
|                                                                                                          |       |                   |       |   |   |
| Net Cash & Cash Equivalents- (Overdraft)  Beginning of Period                                             |       | (224,999               | )          | (94,525 | ) |
|                                                                                                          |       |                   |       |   |   |
| Net Cash & Cash Equivalents-  (Overdraft) End of Period                                                   |       | $                      | (52,261    | ) | $ | (64,564 | ) |
|                                                                                                          |       |                   |       |   |   |
| The net cash and cash equivalents  (overdraft) are presented in the balance sheet as follows at September 30: |       |                   |       |   |   |
|                                                                                                          |       |                   |       |   |   |
| Cash and Cash Equivalents                                                                                     |       | $                      | 43,111     |   | $ | 24,371 |   |
| Cash Overdraft                                                                                                |       | (95,372                | )          | (88,935 | ) |
|                                                                                                          |       |                   |       |   |   |
| Net Cash and Cash Equivalents (Overdraft)                                                                     |       | $                      | (52,261    | ) | $ | (64,564 | ) |
|                                                                                                          |       |                   |       |   |   |
| Supplemental Disclosures:                                                                                     |       |                   |       |   |   |
|                                                                                                          |       |                   |       |   |   |
| Interest Paid                                                                                                 |       | $                      | 60,061     |   | $ | 541,362 |   |
|                                                                                                          |       |                   |       |   |   |
| Non-Cash Investing and Financing  Activities:                                                                 |       |                   |       |   |   |
|                                                                                                          |       |                   |       |   |   |
| Payoff of Mortgage Receivable by                                                                              |       |                   |       |   |   |
| Mortgagee and Payoff of Related Mortgage  Payable                                                             |       | $                      | —     |   | $ | 173,711 |   |

 

6

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GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

 

**NOTE 1 – BASIS OF PRESENTATION**

 

The accompanying unaudited consolidatedfinancial statements of Gasel Transportation Lines, Inc., and its subsidiaries(the “Company”) have been prepared in accordance with accounting principlesgenerally accepted in the United States of America and with the instructions toform 10-QSB.  Accordingly, they do notinclude all the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, all adjustmentsconsidered necessary for a fair presentation (consisting of normal recurringaccruals) have been included.  Operatingresults for the nine month period ended September 30, 2004 are not necessarilyindicative of the results that may be expected for the year ending December 31,2004.  For further information, refer tothe consolidated financial statements and footnotes thereto included in the Company’sReport on Form 10-KSB for the year ended December 31, 2003.

 

##### **NOTE 2 – REVENUE EQUIPMENT HELD FOR SALE**

 

The Company returned 47 tractors and 3trailers to secured creditors during 2004. The proceeds from the disposition of the tractors and trailers areexpected to reduce the outstanding obligations to these creditors.  The carrying amounts of these assets andliabilities included in the disposal group at September 30, 2004 are asfollows:

 
| Tractors now held for sale, net of  accumulated depreciation |   | $      | 1,120,412    |   |
|--------------------------------------------------------------|--------|--------|--------------|--------|
|                                                         |   |   |         |
| Notes payable and accrued expenses                           |   | $      | 2,030,272    |   |
|                                                         |   |   |         |
| Trailers now held for sale, net of  accumulated depreciation |   | $      | 91,705       |   |
|                                                         |   |   |         |
| Notes payable and accrued expenses                           |   | $      |  66,351 |   |

 

**NOTE 3 –LIABILITIES SUBJECT TO COMPROMISE**

 

Petition date liabilities that are expectedto be settled as part of a plan of reorganization are separately classified inthe consolidated balance sheet and include the following (all or a portion ofwhich may be disputed by the Debtor):

 
| ** **                           | ** ** | **September 30,  2004** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| Demand Notes Payable                 |       | $                       | 127,236    |   |
| Accounts Payable-Trade               |       | 383,190                 |       |
| Accrued Interest                     |       | 109,410                 |       |
| Accrued Brokerage And Contract Labor |       | 157,880                 |       |
| Accrued Payroll Taxes                |       | 315,740                 |       |
| Mortgages Payable                    |       | 829,859                 |       |
| Notes Payable                        |       | 5,737,569               |       |
|                                 |       | $                       | 7,660,884  |   |
|                                      |            |                         |            |  |  |

 

7

----

 

**NOTE 4 –EXTINGUISHMENT OF DEBT**

 

During the quarter ended March 31, 2004, theCompany returned certain trailers held under operating leases with two securedcreditors, negotiated the reduction of an operating lease with another securedcreditor, and reduced the related accounts payable obligations in the amount of$351,529.

 

During the quarter ended June 30, 2004, theCompany recorded the reduction of other debt with undersecured creditors in theamount of $134,026.

 

During the quarter ended September 30, 2004,the Company recorded the reduction of other debt with undersecured creditors inthe amount of $172,509.

 

**NOTE 5 – RECLASSIFICATIONS**

 

Certain reclassifications of prior periodamounts have been made to conform to the current period presentation.

 

**NOTE 6 –OPERATING LEASES**

 

In April, 2004, the Company entered into anagreement to lease 21 trailers under an operating lease for a period of 42months.  Monthly payments total $10,920beginning in April, 2004.

 

In September, 2004, the Company entered intoan agreement to lease 5 2001 tractors under an operating lease for a period of36 months, with a termination clause available after 12 months.  Monthly payments total $6,945 beginning inSeptember, 2004.

 

8

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**Item 2. Management’s Discussion and Analysis or Planof Operation.**

 

Overview.

 

Thefollowing discussion should be read in conjunction with the FinancialStatements, including footnotes, contained herein.  The discussion is qualified in its entiretyby the foregoing.  Historical results ofoperations and the percentage relationships among any amounts in the FinancialStatements, and any trends that may appear to be inferable therefrom, shouldnot be taken as necessarily indicative of trends of operations or results ofoperations for any future periods. Further, the Company filed Chapter 11 proceedings during the secondquarter of the year for re-organization under the United States BankruptcyCode, and the effects from filing and operating as a Debtor in Possession havealtered, and will continue to alter, how the Company operates and is expectedto change the financial structure and statements for the Company in the future.

 

Thediscussion contains forward-looking statements. These forward-looking statements involve risks and uncertainties, andthe cautionary statements set forth below identify important factors that couldcause actual results to differ materially from those predicted in theforward-looking statements.  Thesefactors include, but are not limited to, adverse changes in general economicconditions, including adverse conditions to the companies that are theCompany’s core of shippers, fuel prices, driver costs, the ability to haveenough drivers to utilize the Company equipment, the ability to financeequipment, interest rates, the ability to borrow working capital, and otherfactors.  Also, as Debtor in Possession,the Company must have any transactions outside its normal business operations approvedby the Bankruptcy Court, and the outcome of any such proposed transactions isunknown.

 

Theinterim financial information for the quarters and nine months periods endedSeptember 30, 2004, and September 30, 2003, are unaudited.  The statements included reflect alladjustments that the Company considers necessary for a fair presentation of theresults of operations for the interim periods covered and of the financialcondition of the Company at the date of the interim balance sheet.  The results of the interim periods are notnecessarily indicative of the results for the entire year.

 

Three Months Ended September 30, 2004.

 

Freightrevenues for the three months ended September 30, 2004, were $3,045,688, adecrease of $257,951 (7.8%) from the $3,303,539 in revenues for the thirdquarter of 2003.  The decrease in revenuewas primarily due to a decrease (approximately 25 %) in the number of trucksthe Company was operating during this period of 2004 compared to the sameperiod in 2003.  The Company turned inapproximately 50% of its tractors and trailers in the first and third quartersof 2004 to shed excessive operating costs, reduce its debt, and improve driverretention.  In addition, during 2004management has been consistently adding leased owner/operator equipment toreplace some of the Company trucks that were returned to the lenders.  Further, the Company retracted its customerbase to its home base in southeast Ohio, raised its freight rates, and addeddirect inbound business from its produce, flatbed, and automotive divisions,which were established in late 2003 and early 2004, with higher rates and fuelsurcharges.  As a result, the Companyproduced approximately the same revenue in the 3rd quarter of 2004 as in thesame period of 2003, while operating a net of approximately 25 % less revenueequipment.

 

Trainingschool revenues for the third quarter of 2004 were $95,399, a 13.1% decreasefrom the third quarter 2003 revenues of $109,750.  Training school revenue decreases wereprimarily due to a decrease in enrollment from the prior year that was directlyrelated to the lack of available student funding sources.  In addition, the Company operated one lessschool (2 vs. 3) in 2004 compared to 2003.

 

Costof revenue decreased in the third quarter of 2004 to $2,839,539 from $3,206,320for the third quarter of 2003.  The decrease in cost of revenue totals$366,781 (11.4%).  The decline in thecost of revenue was directly related to operating a smaller fleet of companyowned trucks and owner/operators, and to the 

 

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economiesresulting from operating the remaining, after the return of equipment to thelenders, less-aged fleet.  In addition, asignificant shift in the freight pattern away from the northeast U. S. reducedthe equipment and direct freight pick up and delivery operating costs (fuel,tolls, scales, equipment maintenance, loading and unloading expenses).  Further, the amount of deadhead (empty miles)has improved significantly in 2004 compared to 2003, decreasing from the 15+%to 10+% range as a result of concentrating the customer base to the Company’shome terminal in the Ohio Valley.

 

Operatingexpenses were down to $406,762 for the third quarter of 2004 compared to$462,734 for the like period of 2003, a decrease of $55,972 (12.1%), which wasgreater than the percentage decrease in freight revenues, and was the result ofa reduction in the general and administrative expenses compared to the prioryear as the Company down sized its personnel and associated costs as acompensating measure to declining revenues and from a reduction in garageexpenses as the Company was operating fewer of its own tractors and trailersthan in the prior year.

 

Operatingincome (deficit) for the third quarter of 2004 was a loss of ($105,214), adecrease of $155,551 (58.9%) from the loss of ($255,765) for the same period of2003.  This decrease is about equally the result of the increase in thegross profit margin from the prior period, which was the result of a lower costof revenue, and in the decrease in the general and administrativeexpenses.  Operating income as a percentage of total revenues went down toa minus (-3.3%) in the quarterly period ended September 30, 2004, from a minus(-7.5%) for the same period in 2003.

 

Lossesfrom operations were ($128,088) for the quarter compared to ($261,315) for thesame quarter in 2003.  The improvement was again about equally the resultof an improved profit margin resulting from lower cost of revenue and fromdecreased general and administrative expense. Additionally, the improvement in losses from operations was due to thenon-recognition of contractual interest expense while operating under Chapter11 bankruptcy protection.

 

Thenet results, after taking into account the reorganization items for fees andthe gain on the extinguishment of debt, was that the Company had net income of$33,921 for the third quarter of 2004 compared to a net loss of ($330,619) forthe third quarter of 2003, which is an improvement of $364,540 (110.3%) fromthe prior year.

 

Insummary, the improved results for the three month period ending September 30,2004, were primarily due to the overall improvement in operations resultingfrom lower cost of revenue compared to the amounts of revenue generated, thedecrease in G & A expenses from personnel reductions and general costcutting, lower fee costs relating to the Bankruptcy, and from the gain on theextinguishment of debt.

 

Nine months Ended September 30, 2004.

 

Freightrevenues for the nine months ended September 30, 2004, decreased only slightly($96,077 which amounts to slightly less than 1%) to $10,002,770 from$10,098,847 at the end of the nine months period ending September 30,2003.  Training school revenues for thenine months ended September 30, 2004, decreased $22,349 to $332,648 (6.3%) from$354,997 for the nine months period ended September 30, 2003.  The decrease in freight revenue, as indicatedfor the three-month period ended September 30, 2004, was primarily due to thenet reduction of approximately 25 % in the operating fleet, although in largepart offset by significant increases in inbound and outbound freight rates forthe period.  Training school revenuedecreases were due primarily to the lack of available funding for student tuition— a growing nation-wide industry problem for the past two years – and adecrease in the number of schools operated from three to two.

 

Costof revenue decreased in the nine months period ended September 30, 2004, by$636,584 (6.3%) to $ 9,424,898 from $10,061,482 for the same period in2003.  The decrease in expenses was, as stated for the 3rd quarterresults, primarily due a reduction in the fleet size, from the reduction inexpenses resulting from 

 

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operatingless-aged Company equipment, and from the higher net operating margin(approximately 25 %) provided by using owner/operator tractors.

 

Operatingexpenses decreased $649,702 (32.3%) to $1,360,402 for the nine months endedSeptember 30, 2004, compared to $2,010,104 for the same period of 2003. The decrease was significantly due to the fact that there were no impairmentlosses during 2004 and there were losses of $434,583 in the value of theCompany assets taken as a result of the filing of the Chapter 11 ReorganizationPetition during 2003.  It was also inlarge part due to the reduction in general and administrative expenses from theprior year, which were partially offset by increased garage expenses incurredduring the first part of the year when the Company was operating more of itsown equipment that was older and had more expenses required to keep themoperating.

 

Operatingincome (deficit) for the nine months ended September 30, 2004, was a loss of($449,882), an improvement of $1,167,860 (72.2%) from the loss of ($1,617,742)for the same period in 2003.  Operating deficit as a percentage of totalrevenues went down from a -15.5% for the nine months ending September 30, 2003,to -4.4% for the same period in 2003.  The factors for the decrease forthis period were basically the same as for the three month quarterly period,being a decrease in the cost of revenue and in the general & administrativeexpenses.

 

OtherIncome (expense) for the nine months ended September 30, 2004, was ($50,554)compared to a loss of ($527,703) for the period for 2003.  This is primarily due to the amount ofinterest expense paid during the early part of 2003 before the Company filedits Chapter 11 Petition compared to 2004, when the Company did not have torecognize the full amount of interest while operating under Chapter 11.

 

Theloss from operations before reorganization items and tax provision for the ninemonths ended September 30, 2004, is ($500,436) compared to a loss of($2,145,445) for the nine months ended September 30, 2003. The difference is$1,645,009 (76.7%).  The main factors inthe improvement were the lower interest expense, the lack of an impairmentloss, and the improvement of the gross profit margin from the lower cost ofrevenues.  The improvement in costof revenues, as detailed both in the 3rd quarter results and ninemonths results, above, and the resulting overall improvement in the net resultsfor the Company, are directly related to the corrective actions the Company hastaken since entering Chapter 11 Reorganization to improve its revenues,operating costs, equipment efficiencies, and to reduce its overhead.

 

Reorganizationitems for the nine months period ended September 30, 2004, showed a gain of$634,565 compared to a loss of ($100,634) for the same period of 2003.  This was mostly attributable to the gainresulting from the extinguishment of debt disposed during the period (a gain of$658,065) and in small part from a reduction in the amount of fees associatedwith the Company acting under protection of the Bankruptcy Court and from alack of loss on the disposition of assets, of which the Company had a loss of($27,304) during 2003.

 

Thenet results were that the Company had net income after provision for incometaxes for the nine months period ended September 30, 2004, of $134,129 comparedto a net loss of ($2,246,079) for the same period of 2003, which is animprovement of $2,380,208 (105.6%) from the prior year loss

 

Capital and Liquidity

 

Managementbelieves that it now has the Company operating at a profit and that it will beable to operate at a profit post-Bankruptcy upon approval of its Plan ofReorganization.  Although its interestexpense and cash payments to the secured lenders will increase its cash flowneeds after emerging from Bankruptcy, management believes that the savings fromnot having to operate under Chapter 11 and significant decreases in interestand depreciation expenses from asset and debt write-offs will more than offsetthese increased needs.  Further, theCompany is experiencing increased freight demand with higher rates and overallincreased gross margins through using a mix of owner/operators along withCompany owned 

 

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equipment.During the past few months, the Company has been able to generate extra cashflow beyond its expenses that has resulted in a significant improvement in itscash deficit.

 

However,the Company still has a cash deficit that it would like to eliminate and is inneed of working capital to pay for unforeseen contingencies and expenses, aswell as to fund replacement equipment, additional equipment to meet freightdemands, and its future growth plans.

 

Althoughthe Company believes that it can continue to generate cash flow to pay off thecash deficit and to provide a cash position for ongoing operations, includingafter emerging from Chapter 11 (assuming the Plan of Reorganization will beaccepted), the Company has been working on a plan to raise additional cashafter it gets out of Bankruptcy.  Thisplan includes the possible offering of preferred shares or common shares in theCompany that would be sold pursuant to exemptions from the registrationrequirements of the Securities Act of 1933, as amended.  The offering may take place under RegulationS to foreign investors in the overseas markets, or it may take place through aprivate placement of its equity securities under Regulation D.  There can be no assurances that the Companywill be able to raise any additional equity capital, although it has been incontact with investment bankers that expressed an interest in such an offeringpost-bankruptcy.

 

Asstated below in **Part II, Item 1, Legal Proceedings,**upon an approval of the Plan of Reorganization and confirmation by theBankruptcy Court, the Company will be merged into a new corporation formed bythe Company, a corporation organized under the laws of Delaware by the samename, Gasel Transportation Lines, Inc. (hereinafter “New Gasel”). Upon themerger, each common share, no par value, of the Company will be exchanged forone common share, par value $.001, of New Gasel; all of the assets of theCompany will become the assets of New Gasel, as will all of the liabilities,contracts, and obligations of the Company. The officers and directors of New Gasel will be the same as the Company.

 

Eachexisting shareholder would continue to own a like amount of common shares inNew Gasel as he/it owned in the Company. The exchange of shares in the Company for shares in New Gasel would beexempt from registration under the Securities Act of 1933, as amended, andwould continue to have the same resale rights as the shares held in the Company(restricted shares would continue to be restricted.)

 

Themajor difference will be that New Gasel will have 100,000,000 common shares,par value $.001, as well as 10,000,000 preferred shares, par value $.001,authorized for issuance compared to the 10,000,000 common shares, no par value,authorized for the Company.  By havingthese additional authorized shares, New Gasel will be able to seek theadditional equity capital that it plans to raise and have authorized sharesavailable for issuance.

 

ThePlan of Reorganization contemplates that after it emerges from Chapter 11, NewGasel will seek to raise up to an additional $1,500,000 in equity to fund theaccelerated payoff of certain priority claims for withholding and payrolltaxes, an aggressive growth plan, and adequate working capital.

 

Sincefiling Chapter 11 in May 2003, management has changed the Company’s sales mixto increase its revenue and reduce its empty miles simultaneously by limitingits freight volume with its top twenty customers and one major customer inparticular.  This adjustment has improvedequipment productivity and reduced driver turnover (through better driver pay),and as a result the Company has shown measured improved financial performanceduring 2004.

 

Managementcut administrative costs by closing the Columbus terminal and centralizingoperations (dispatch) at the Company headquarters in Marietta, Ohio, resultingin reduced staff, decreased lease costs, and better operational control.

 

Toimprove service capabilities and foster lender cooperation, the Companycompleted a trailer replacement transaction with the largest trailer dealer andfinance company, Dayton Leasing, upgrading the trailer pool with more 53’ unitsand significantly reducing the monthly equipment lease costs.

 

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Effortsto reduce the Company’s equipment maintenance costs to a normal cost curve weresignificantly increased.  The Companybegan upgrading and adding to the maintenance crew with the goal of eliminatingcostly outside services and returning all equipment back into service, andtransitioning back to a “preventive” maintenance profile (from an excessivelycostly “demand” maintenance condition).

 

TheCompany has maintained its insurance coverage since filing Chapter 11 at modestrate increases, and as of October 1, 2004, renewed its vehicle physical damageand cargo coverage at no increase in premium rates.

 

Inaddition, the Company has implemented an enhanced driver and owner/operatorrecruiting effort led by one of its senior managers.  As a result, driver turnover has been reducedby 10 %.  Likewise, the operationsdepartment has been reorganized to a central dispatch format and supported bycustomer service personnel to improve service performance levels back to aboveindustry norm (98+ %) and push equipment/driver productivity to profitablelevels.

 

Inearly May 2003, the Company entered into a new receivables-based line of creditagreement with Systran Financial Services, a division of Textron FinancialCorporation, which significantly increased its cash flow through higher advancerates with lower financing costs, and expanded its available credit by $1.5million.  This credit facility hascontinued after the filing of the Chapter 11 petition with only a slightincrease in the rate paid by the Company, and with the Company retaining theadditional credit capacity of $1.5 million.

 

InApril 2003, the Company returned to the cost advantages of outsourcing itspayroll and related tax processing.  Thisemployee leasing plan continued after the Company filed for creditor protectionunder Chapter 11.

 

Managementcontinues to seek growth opportunities to expand the number of power units andtrailers it is operating in order to reach a revenue level that will generatesufficient margins to support its fixed costs and generate a net profit.  The Company was near completing an asset acquisitionin late April 2003 that would have increased the number of power units byapproximately 65 (65% increase in fleet size), but the problems with cash flowthat surfaced at that time caused that transaction to be put off at leasttemporarily until the sellers could see how the Company performs inreorganization.

 

During2004, the Company has succeeded in hiring approximately 30 owner/operators toexpand its existing van division and to build its automotive and flatbeddivisions, which the Company established earlier this year at a new terminal inMillwood, West Virginia.

 

Thereare now plans to expand the Company’s produce division (established in October2003) which has contributed in 2004 in significantly increasing the net inboundand outbound freight rates.

 

Sincehaving its Disclosure Statement approved by the Bankruptcy Court on November 9,2004, the Company is now in the final stage of its reorganization, and expectsto emerge from the judicial reorganization by year end with a stronger balance sheet,increased liquidity, and a scale of operations that will foster sustainedearnings and growth.

 

TheDisclosure Statement and Plan of Reorganization along with ballots to approveor reject the Plan were mailed on November 12, 2004 to all creditors.  A hearing is set for December 14, 2004 todetermine if there are sufficient affirmative votes to approve the Plan.  Management has been in contact with a numberof creditors to solicit support of the Plan, and based upon initialindications, management expects the Company to have the Plan confirmed.

 

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**Item 3. Controls and Procedures.**

 

At the end of the period covered by this report, theCompany carried out an evaluation, under the supervision and with the participationof the Company’s management, including the Company’s Chief Executive Officerand Chief Financial Officer, of the Company’s disclosure controls andprocedures pursuant to Exchange Act Rule 13a-15(e).  Based upon that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures are effective. During the third quarter of 2004, therewere no changes in the Company’s internal control over financial reporting thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

** **

**PART II -OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

TheCompany is entering the final phases of the pending Chapter 11 Proceeding thatit commenced in May 2003 in the United States Bankruptcy Court in the SouthernDistrict of Ohio.  On November 9, 2004,the Company submitted to the Court its third amended Disclosure Statement ofits Plan of Reorganization.  TheDisclosure Statement was accepted by the Court without any objections from thecreditors, and the Disclosure Statement together with the proposed Plan ofReorganization are to be disseminated to all of the creditors to vote to eitheraccept or reject the Plan.  The Plan andballots were mailed to all of the creditors on November 12, 2004.

 

Afinal hearing to count the ballots and determine if the Plan of Reorganizationis accepted is scheduled for December 14, 2004. Prior to submitting the original Disclosure Statement to the court andcreditors, the Company’s management reached an agreement in principle with itssecured creditors to adjust the principal balances to the underlying collateralcurrent fair market value and revise the payment terms favorable to the Companyupon approval of the Plan.  These samecreditors will have the majority of the unsecured claims as the result of thedeficiencies created between the pre-petition principal and the revisedpost-Chapter 11 note balances.  Further,the Company has been in contact with a number of the other large unsecuredcreditors who have indicated their intent to cast their vote to approve thePlan.

 

Animportant aspect of the Plan is that upon its approval, if that should happen,the Company will be merged into a new corporation formed by the Company, acorporation organized under the laws of Delaware by the same name, GaselTransportation Lines, Inc. (hereinafter “New Gasel”). Upon the merger, eachcommon share, no par value, of the Company will be exchanged for one commonshare, par value $.001, of New Gasel; all of the assets of the Company willbecome the assets of New Gasel, as will all of the liabilities, contracts, andobligations of the Company.  The officersand directors of New Gasel will be the same as the Company.  The result will be that each existingshareholder would continue to own a like amount of common shares in New Gaselas he/it owned in the Company before the merger.

 

Themajor difference between the Company and New Gasel will be that New Gasel willhave authorized 100,000,000 common shares, no par value $.001, as well as10,000,000 preferred shares, par value $0.001. There will still only be the 9,877,966 common shares outstanding, whichis the same number outstanding for the Company. By having these additional shares authorized, New Gasel will be able toseek the additional equity capital contemplated by the Plan of Reorganizationand will have shares available for issuance.

 

ThePlan of Reorganization contemplates that New Gasel will seek to raise up to anadditional $1,500,000 in equity for it to fund the accelerated payoff ofcertain priority claims for withholding and payroll taxes,  to fund the anticipated need for additionaland/or replacement tractors and trailers, to fund a growth plan,  and for working capital.  While the Company is hopeful that New Gaselwill be able to enter into an arrangement with an underwriter to raiseadditional equity capital, there can be no assurances that it will be able todo so; further, although contemplated by the Plan, if no such arrangement canbe made, the Plan will not be affected.

 

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**Item 6. Exhibits and Reports on Form 8-K.**

 

(a)Exhibits:

31.1 - Rule13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company.

31.2 - Rule13a-15(a)/15d-14(a) Certification of Chief Financial Officer of the Company.

32.1 - Section 1350Certification by Chief Executive Officer of the Company.

32.2 - Section 1350Certification by Chief Financial Officer of the Company.

 

(b)Reports on Form 8-K.

Therewere no reports on Form 8-K filed during the quarter for which this report isfiled.

 

**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                    |   | Gasel  Transportation Lines, Inc.                                            |   |
|-------------------------|--------|------------------------------------------------------------------------------|--------|
|                    |   | (Registrant)                                                                 |   |
| Date  November 19, 2004 |   | /s/   Michael  J. Post                                        |   |
|                    |   | (Signature)*Michael  J. Post, President                                      |   |
|                    |   |                                                                         |   |
| Date  November 19, 2004 |   | /s/   S.  Gene Thompson                                       |   |
|                    |   | (Signature)*  S. Gene Thompson, Vice   President and Chief Financial Officer |   |

 

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