**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  June 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 businessissuer 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)                                |

 

Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý   No o.

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date: as of August 15, 2004, there were 9,877,966 commonshares, no par value issued and outstanding, with 7,900 of them held in thetreasury.

 

Transitional Small BusinessDisclosure Format (Check one): Yes o  No ý

 

 

----

 

**PART I —FINANCIAL INFORMATION**

 

**Item 1.Financial Statements.**

 

INDEX

 
| Consolidated Balance Sheet at June 30, 2004 (Unaudited)                                                                                                                    |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                            |   |
| Statements of Consolidated Operations for  the Three Months Ended June 30, 2004 and 2003 (Unaudited) and for the  Six Months Ended June 30, 2004 and 2003 (Unaudited) |   |
|                                                                                                                                                                            |   |
| Statements of Consolidated Cash Flows for  the Six Months Ended June 30, 2004 and 2003 (Unaudited)                                                                         |   |
|                                                                                                                                                                            |   |
| Notes to Consolidated Financial Statements                                                                                                                                      |   |

 

GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 
| ** **                                                                                           | ** ** | **June 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                           | ** ** | **(Unaudited)**         | ** ** |
|                                                                                                 |       |                    |       |
| ASSETS                                                                                               |       |                    |       |
|                                                                                                 |       |                    |       |
| Current Assets                                                                                       |       |                    |       |
| Cash and Cash Equivalents                                                                            |       | $                       | 8,772      |   |
| Accounts Receivable-Trade, Net of Amounts  Sold With Recourse of $1,217,770 and Allowance of $50,000 |       | 399,594                 |       |
| Inventory                                                                                            |       | 102,177                 |       |
| Prepaid Expenses and Other Current Assets                                                            |       | 245,285                 |       |
|                                                                                                 |       |                    |       |
| Total Current Assets                                                                                 |       | 755,828                 |       |
|                                                                                                 |       |                    |       |
| Property and Equipment                                                                               |       |                    |       |
| Land and Buildings                                                                                   |       | 770,054                 |       |
| Tractors                                                                                             |       | 7,601,748               |       |
| Trailers                                                                                             |       | 2,798,249               |       |
| Shop Equipment                                                                                       |       | 408,962                 |       |
| Office Equipment                                                                                     |       | 228,105                 |       |
|                                                                                                 |       | 11,807,118              |       |
| Less Accumulated Depreciation                                                                        |       | 8,189,010               |       |
|                                                                                                 |       |                    |       |
| Net Property and Equipment                                                                           |       | 3,618,108               |       |
|                                                                                                 |       |                    |       |
| Revenue Equipment  – Held for Sale                                                              |       |                    |       |
|                                                                                                 |       | 1,212,117               |       |
| Other Assets                                                                                         |       |                    |       |
| Other                                                                                                |       | 7,683                   |       |
|                                                                                                 |       |                    |       |
| Total Other Assets                                                                                   |       | 7,683                   |       |
|                                                                                                 |       |                    |       |
| TOTAL ASSETS                                                                                         |       | $                       | 5,593,736  |   |

 

1

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GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 
| ** **                                                                                            | ** ** | **June 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                            | ** ** | **(Unaudited)**         | ** ** |
|                                                                                                  |       |                    |       |
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT)                                                          |       |                    |       |
|                                                                                                  |       |                    |       |
| Current Liabilities                                                                                   |       |                    |       |
| Cash Overdraft                                                                                        |       | $                       | 137,674    |   |
| Notes Payable                                                                                         |       | 83,256                  |       |
| Accounts Payable-Trade                                                                                |       | 163,733                 |       |
| Accrued Contract Labor and Other Expenses                                                             |       | 258,742                 |       |
|                                                                                                  |       |                    |       |
| Total Current Liabilities Not Subject to  Compromise                                                  |       | 643,405                 |       |
|                                                                                                  |       |                    |       |
| Liabilities Subject to Compromise                                                                     |       | 7,993,110               |       |
|                                                                                                  |       |                    |       |
| Total Liabilities                                                                                     |       | 8,636,515               |       |
|                                                                                                  |       |                    |       |
| 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)                                                                                 |       | (5,721,213              | )          |
| Less: Treasury Stock, at cost, 7,900 shares                                                           |       | (17,833                 | )          |
|                                                                                                  |       |                    |       |
| Total Stockholders’ (Deficit)                                                                    |       | (3,092,779              | )          |
|                                                                                                  |       |                    |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’  (DEFICIT)                                                   |       | $                       | 5,593,736  |   |

 

2

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GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

STATEMENTS OF CONSOLIDATED OPERATIONS

 
| ** **                                                                                                                               | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                                                               | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
| ** **                                                                                                                               | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                                                                                                                     |       |                    |       |                    |       |   |   |   |   |
| Revenues                                                                                                                                 |       |                    |       |                    |       |   |   |   |   |
| Freight Income                                                                                                                           |       | $                       | 3,351,353  |                    | $          | 3,301,183 |   | $ | 6,957,082 |   | $ | 6,795,308 |   |
| Training School Revenue                                                                                                                  |       | 74,182                  |       | 104,876                 |       | 237,249 |   | 245,247 |   |
|                                                                                                                                     |       | 3,425,535               |       | 3,406,059               |       | 7,194,331 |   | 7,040,555 |   |
| Cost of Revenue                                                                                                                          |       | 3,059,713               |       | 3,513,045               |       | 6,585,359 |   | 6,855,162 |   |
| Gross Profit (Loss)                                                                                                                      |       | 365,822                 |       | (106,986                | )          | 608,972 |   | 185,393 |   |
|                                                                                                                                     |       |                    |       |                    |       |   |   |   |   |
| Operating Expenses                                                                                                                       |       |                    |       |                    |       |   |   |   |   |
| Garage Expenses                                                                                                                          |       | 104,244                 |       | 87,059                  |       | 213,411 |   | 166,453 |   |
| General and Administrative Expenses                                                                                                      |       | 323,921                 |       | 435,904                 |       | 740,229 |   | 946,334 |   |
| Impairment Loss                                                                                                                          |       | —                  |       | 353,438                 |       | — |   | 434,583 |   |
|                                                                                                                                     |       | 428,165                 |       | 876,401                 |       | 953,640 |   | 1,547,370 |   |
| Operating Income (Deficit)                                                                                                               |       | (62,343                 | )          | (983,387                | )          | (344,668 | ) | (1,361,977 | ) |
|                                                                                                                                     |       |                    |       |                    |       |   |   |   |   |
| Other Income (Expense)                                                                                                                   |       |                    |       |                    |       |   |   |   |   |
| Interest Income                                                                                                                          |       | 10                      |       | 2,921                   |       | 27 |   | 8,797 |   |
| Other Income                                                                                                                             |       | 2,500                   |       | 11,447                  |       | 9,463 |   | 18,033 |   |
| Gain(Loss)-Sale of Assets                                                                                                                |       | —                  |       | —                  |       | — |   | (42,957 | ) |
| Interest Expense, net (Contractual Interest  $162,614 and $329,534 for the three and six months ended June 30, 2004,  respectively) |       | (19,003                 | )          | (195,981                | )          | (37,170 | ) | (506,026 | ) |
|                                                                                                                                     |       | (16,493                 | )          | (181,613                | )          | (27,680 | ) | (522,153 | ) |
| (Loss) from Operations Before  Reorganization Items and Tax Provision                                                                    |       | (78,836                 | )          | (1,165,000              | )          | (372,348 | ) | (1,884,130 | ) |
|                                                                                                                                     |       |                    |       |                    |       |   |   |   |   |
| Reorganization Items-                                                                                                                    |       |                    |       |                    |       |   |   |   |   |
| Professional and Bankruptcy Fees                                                                                                         |       | (5,000                  | )          | (31,330                 | )          | (13,000 | ) | (31,330 | ) |
| Extinguishment of Debt                                                                                                                   |       | 134,027                 |       | —                  |       | 485,556 |   | — |   |
|                                                                                                                                     |       | 129,027                 |       | (31,330                 |       | 472,556 |   | (31,330 | ) |
|                                                                                                                                     |       |                    |       |                    |       |   |   |   |   |
| Income(Loss)from Operations Before Tax  Provision                                                                                        |       | 50,191                  |       | (1,196,330              | )          | 100,208 | ) | (1,915,460 | ) |
|                                                                                                                                     |       |                    |       |                    |       |   |   |   |   |
| Provision for Income Taxes                                                                                                               |       | —                  |       | —                  |       | — |   | — |   |
|                                                                                                                                     |       |                    |       |                    |       |   |   |   |   |
| Net Income (Loss)                                                                                                                        |       | $                       | 50,191     |                    | $          | (1,196,330 | ) | $ | 100,208 |   | $ | (1,915,460 | ) |
| Basic Income(Loss) per Share                                                                                                             |       | $                       | .005       |                    | $          | (.121 | ) | $ | .010 |   | $ | (.221 | ) |
| Diluted Income(Loss) Per Share                                                                                                           |       | $                       | .005       |                    | $          | (.121 | ) | $ | .010 |   | $ | (.221 | ) |
| Weighted Average Common Shares Outstanding:                                                                                              |       |                    |       |                    |       |   |   |   |   |
| Basic                                                                                                                                    |       | 9,870,066               |       | 9,861,420               |       | 9,870,066 |   | 8,665,532 |   |
| Diluted                                                                                                                                  |       | 10,016,270              |       | 9,861,420               |       | 10,016,270 |   | 8,665,532 |   |

 

3

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GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

 
| ** **                                                                           | ** ** | **Six Months Ended**    | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                           | ** ** | **June 30,  2004** | ** ** | **June 30,  2003** | ** ** |
| ** **                                                                           | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)** | ** ** |
|                                                                                 |       |                    |       |   |   |
| Cash Flows From Operating Activities                                                 |       |                    |       |   |   |
| Net Income (Loss)                                                                    |       | $                       | 100,208    |   | $ | (1,915,460 | ) |
| Adjustments to reconcile net income(loss)  to cash provided by operating activities: |       |                    |       |   |   |
| Reorganization Items                                                                 |       | 13,000                  |       | 31,330 |   |
| Extinguishment of Debt                                                               |       | (485,556                | )          | — |   |
| Depreciation and Amortization                                                        |       | 735,145                 |       | 983,265 |   |
| (Gain) Loss on Disposal of Assets                                                    |       | —                  |       | 42,957 |   |
| Impairment Loss                                                                      |       | —                  |       | 434,583 |   |
| Bad Debt                                                                             |       | 14,362                  |       | 45,392 |   |
| (Increase) Decrease in:                                                              |       |                    |       |   |   |
| Accounts Receivable-Trade                                                            |       | 24,286                  |       | 1,475,325 |   |
| Inventory                                                                            |       | —                  |       | — |   |
| Prepaid Expenses and Other Assets                                                    |       | 14,906                  |       | 48,681 |   |
| Increase (Decrease) in:                                                              |       |                    |       |   |   |
| Accounts Payable and Accrued Expenses                                                |       | 10,346                  |       | 270,104 |   |
| Net Cash Provided by Operating Activities  Before Reorganization Items               |       | 426,697                 |       | 1,416,177 |   |
|                                                                                 |       |                    |       |   |   |
| Operating Cash Flows Used in Reorganization  Items:                                  |       |                    |       |   |   |
| Professional Fees Paid in Connection with  Chapter 11 Proceedings                    |       | (8,000                  | )          | (23,830 | ) |
| Net Cash Used in Reorganization Items                                                |       | (8,000                  | )          | (23,830 | ) |
|                                                                                 |       |                    |       |   |   |
| Net Cash Provided by Operating Activities                                            |       | 418,697                 |       | 1,392,347 |   |
|                                                                                 |       |                    |       |   |   |
| Cash Flows From Investing Activities                                                 |       |                    |       |   |   |
| Proceeds from Sale of Assets                                                         |       | —                  |       | — |   |
| Purchases of Property and Equipment                                                  |       | (174,385                | )          | (1,500 | ) |
| Net Cash (Used) by Investing Activities                                              |       | (174,385                | )          | (1,500 | ) |
|                                                                                 |       |                    |       |   |   |
| 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                                            |       | (43,619                 | )          | (13,558 | ) |
| Principal Payments on Long Term Borrowing                                            |       | (177,841                | )          | (299,088 | ) |
| Principal Payments Under Capital Lease  Agreements                                   |       | —                  |       | (111,377 | ) |
| Net Cash (Used) by Financing Activities                                              |       | (148,215                | )          | (1,375,907 | ) |
|                                                                                 |       |                    |       |   |   |
| Net Increase (Decrease) in Cash                                                      |       | 96,097                  |       | 14,940 |   |
|                                                                                      |            |                         |            |  |  |  |  |

 

 

4

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| ** **                                                                                                    | ** ** | **Six Months Ended**    | ** **     |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------|----------------|
| ** **                                                                                                    | ** ** | **June 30,  2004** | ** **     | **June 30,  2003** | ** ** |
| ** **                                                                                                    | ** ** | **(Unaudited)**         | ** **     | **(Unaudited)** | ** ** |
| ** **                                                                                                    | ** ** | ** **              | ** **     | ** ** | ** ** |
| Net Increase (Decrease)in Cash                                                                                |       | $                       | 96,097         |   | $ | 14,940 |   |
|                                                                                                          |       |                    |           |   |   |
| Net Cash & Cash Equivalents-(Overdraft)  Beginning of Period                                              |       | (224,999                | )              | (94,525 | ) |
|                                                                                                          |       |                    |           |   |   |
| Net Cash & Cash Equivalents-(Overdraft)  End of Period                                                    |       | $                       | (128,902  | ) | $ | (79,585 | ) |
|                                                                                                          |       |                    |           |   |   |
| The net cash and cash equivalents  (overdraft) are presented in the balance sheet as follows at June 30: |       |                    |           |   |   |
|                                                                                                          |       |                    |           |   |   |
| Cash and Cash Equivalents                                                                                     |       | $                       | 8,772          |   | $ | 39,781 |   |
| Cash Overdraft                                                                                                |       | (137,674                | )              | (119,366 | ) |
|                                                                                                          |       |                    |           |   |   |
| Net Cash and Cash Equivalents (Overdraft)                                                                     |       | $                       | (128,902  | ) | $ | (79,585 | ) |
|                                                                                                          |       |                    |           |   |   |
| Supplemental Disclosures:                                                                                     |       |                    |           |   |   |
|                                                                                                          |       |                    |           |   |   |
| Interest Paid                                                                                                 |       | $                       | 37,170         |   | $ | 522,374 |   |
|                                                                                                          |       |                    |           |   |   |
| Non-Cash Investing and Financing  Activities:                                                                 |       |                    |           |   |   |
|                                                                                                          |       |                    |           |   |   |
| Payoff of Mortgage Receivable by Mortgagee  and Payoff of Related Mortgage Payable                            |       | $                       | —         |   | $ | 173,711 |   |
|                                                                                                          |       |                    |           |   |   |
| Purchase of Property and Equipment with  Direct Financing                                                     |       | $                       | —         |   | $ | 451,500 |   |

 

5

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GASEL TRANSPORTATION LINES, INC.

(Debtor in Possession)

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

 

**NOTE 1 – BASIS OF PRESENTATION**

 

The accompanying unaudited consolidated financial statements of GaselTransportation Lines, Inc., and its subsidiaries (the “Company”) have beenprepared in accordance with accounting principles generally accepted in theUnited States of America and with the instructions to form 10-QSB.  Accordingly, they do not include all the informationand footnotes required by generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation(consisting of normal recurring accruals) have been included.  Operating results for the three month periodended March 31, 2004 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2004.  For further information, refer to theconsolidated financial statements and footnotes thereto included in theCompany’s Report on Form 10-KSB for the year ended December 31, 2003.

 

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

#####  

The Company returned 47 tractors and 3 trailers to secured creditorsduring 2004.  The proceeds from thedisposition of the tractors and trailers are expected to reduce the outstandingobligations to these creditors.  Thecarrying amounts of these assets and liabilities included in the disposal groupat June 30, 2004 are as follows:

 
| Tractors now held for sale, net of  accumulated depreciation |   | $      | 1,120,412 |   |
|--------------------------------------------------------------|--------|--------|-----------|--------|
|                                                         |   |   |      |
| Notes payable and accrued expenses                           |   | $      | 2,031,059 |   |
|                                                         |   |   |      |
| 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 expected to be settled as part of aplan of reorganization are separately classified in the consolidated balancesheet and include the following (all or a portion of which may be disputed bythe Debtor):

 
| ** **                           | ** ** | **June 30,****2004** | ** ** |
|--------------------------------------|------------|---------------------------|------------|
|                                 |       |                      |       |
| Demand Notes Payable                 |       | $                         | 127,236    |   |
| Accounts Payable-Trade               |       | 580,063                   |       |
| Accrued Interest                     |       | 109,410                   |       |
| Accrued Brokerage And Contract Labor |       | 160,476                   |       |
| Accrued Payroll Taxes                |       | 315,740                   |       |
| Mortgages Payable                    |       | 850,102                   |       |
| Notes Payable                        |       | 5,850,083                 |       |
|                                 |       | $                         | 7,993,110  |   |

 

6

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#### **NOTE 4 – EXTINGUISHMENT OF DEBT**

####  

During the quarter ended March 31, 2004, the Company returnedcertain trailers held under operating leases with two secured creditors, negotiatedthe reduction of an operating lease with another secured creditor, and reducedthe related accounts payable obligations in the amount of $351,529.

 

During the quarter ended June 30, 2004, the Company recorded thereduction of other debt with undersecured creditors in the amount of $134,026.

 

**NOTE 5 – RECLASSIFICATIONS**

 

Certain reclassifications of prior period amounts have been made toconform to the current period presentation.

 

#### **NOTE 6 – OPERATING LEASES**

####  

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

 

7

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

 

Overview.

 

The followingdiscussion should be read in conjunction with the Financial Statements,including footnotes, contained herein.  The discussion is qualified in itsentirety by the foregoing.  Historical results of operations and thepercentage relationships among any amounts in the Financial Statements, and anytrends that may appear to be inferable therefrom, should not be taken asnecessarily indicative of trends of operations or results of operations for anyfuture periods.  Further, the Company has been operating as a Debtor inPossession since filing Chapter 11 proceedings for re-organization under theUnited States Bankruptcy Code on May 19, 2003, and the effects from filing andoperating as a Debtor in Possession have altered, and will continue to alter,how the Company operates and is expected to change the financial structure andstatements for the Company in the future.

 

Except forcertain historical information contained herein, the following discussioncontains forward-looking statements that involve risks, assumptions anduncertainties which are difficult to predict. All statements, other thanstatements of historical fact, are statements that could be deemedforward-looking statements, including any projections of earnings, revenues, orother financial items, any statement of plans, strategies, and objectives ofmanagement for future operations; any statements concerning proposed newservices or developments; any statements regarding future economic conditionsor performance; and any statements of belief and any statement of assumptionsunderlying any of the foregoing.  Words such as “believe,” “may,” “could,”“expects,” “hopes,” “anticipates,” and “likely,” and variations of these words,or similar expressions, are intended to identify such forward-lookingstatements.  The Company’s actual results could differ materially fromthose discussed here. Factors that could cause or contribute to suchdifferences include, but are not limited to, adverse changes in generaleconomic conditions, including adverse conditions to the companies that are theCompany’s core of shippers, fuel prices, driver costs, the ability to financeequipment, interest rates, the ability to borrow working capital, the amount offreight available for hauling, particularly in the areas where the Companyterminal is located and in the areas where the Company is looking forbackhauls, and other factors.  The Company does not assume, andspecifically disclaims, any obligation to update any forward-looking statementcontained in this discussion.

 

Also, asDebtor in Possession, the Company must have any transactions outside its normalbusiness operations approved by the Bankruptcy Court, and the outcome of anysuch proposed transactions is unknown.

 

The interimfinancial information for the quarters and six months periods endedJune 30, 2004, and June 30, 2003, are unaudited.  The statementsincluded reflect all adjustments that the Company considers necessary for afair presentation of the results of operations for the interim periods coveredand of the financial condition of the Company at the date of the interimbalance sheet.  The results of the interim periods are not necessarilyindicative of the results for the entire year.

 

Three Months EndedJune 30, 2004.

 

Freight revenues for thethree months ended June 30, 2004, were $3,351,353, an increase of $50,170(1.5%) from the $3,301,183 in revenues for the second quarter of 2003. The increase in freight revenues was primarily attributable to an increasedfreight demand, higher freight rates, which was partially the result of fuelsurcharges and largely due to the change in the customer mix to higher marginaccounts, and the use of owner/operators that contributed to the increase fromthe previous year in the number of

 

8

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available power units inservice for hauling freight, although partially tempered by the decrease ofCompany owned equipment as the result of the Company during the quarterreturning to a lender 11 power units.

 

Training school revenues forthe second quarter of 2004 were $74,182, a decrease of $30,694 (29.3%) from thesecond quarter 2003 revenues of $104,876.  Training school revenuedecreases were primarily due to enrollment in the schools being down from theprior year as a result of the lack of readily available funding sources andfrom the discontinuance of the school that it had been operating in the Lima,Ohio area.

 

Equipment operating expensesdecreased in the second quarter of 2004 to $3,059,713 from $3,513,045 for thesecond quarter of 2003.   This was a decrease of $453,332 (12.9%)from the prior year.   The decrease in expenses was primarily due tothe Company operating less of its owned equipment and utilizing moreowner-operators for hauling freight. Additionally, their was a decrease in the number of deadhead miles beingdriven, and overall less miles being driven relative to freight income as theresult of the Company having increased its revenue per mile.

 

Operating expenses were alsodown, going to $428,165 for the second quarter of 2004 compared to $876,401forthe like period of 2003, a decrease of $448,236 (51.1%).  The decrease wasmostly attributable to the fact that during the quarter for 2003 the Companyhad a loss of $353,438 resulting from an accounting entry for impairment ofassets resulting from the filing of the Chapter 11 proceedings and it had nosuch entry during 2004.  General and Administrative expense for thequarter also went down $111,983 from $435,904 for 2003 to $ 323,921 for thelike period in 2004. Garage expense (Company in-house labor only) went up onlyslightly, $17,085, for the comparable periods.

 

Operating income for thesecond quarter of 2004 was nearly a break even, showing a loss of only($62,343), a decrease (improvement) of $921,044 (93.7%) from the loss of($983,397) for the second quarter of 2003.   Operating income as apercentage of total revenues went down to a minus –1.8% in the quarterly periodended June 30, 2004, compared to minus -28.9% for the same period in2003.  This was due primarily to the decrease in cost of revenues while atthe same time there was a slight increase in the freight revenues, from areduction in the general and administrative costs and from not having anyimpairment losses in the current quarter.

 

Other income (expense)improved during the quarter compared to the same quarter in 2003. Interestexpense was reduced from an expense of $195,981 to only $19,003, a reduction of$176,978 from the prior year.   The majorreason is that the Company was not paying interest on its equipment debt in2004 because of being in Chapter 11 Reorganization.

 

The results were that theCompany had a net loss after provision for income taxes and beforereorganization items of  ($78,836) forthe second quarter of 2004 compared to a net loss of ($1,165,000) for thesecond quarter of 2003, which is a decrease in the loss of ($1,086,164) (93.2%)from the prior year.

 

Reorganization items for the2004 quarter added to the income of the Company by $129,027 compared toincreasing the loss by ($31,330) in 2003. This was primarily the result of having extinguished debt of $134,027.

 

Thus, the Company had incomeafter provision for taxes of $50,191 for the 2004 quarter compared to a loss of($1,196,330) for the same period in 2003, a very significant improvement.

 

Six months EndedJune 30, 2004.

 

Freight revenues for the sixmonths ended June 30, 2004, increased slightly (2.4%) by $161,744 to $6,957,082 from $6,795,308 at the end of the six months period ending June 30,2003.   Training school revenues for the six months endedJune 30, 2004, decreased by $7,998 (3.3%) to $237,249 (6.8%) from $245,247for the six months period ended June 30, 2003.   The increase infreight revenues was, as stated

 

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for the quarterly results,basically attributable to higher freight demand, higher freight rates(partially from fuel surcharges and partially from improving the customer baseto higher margin shippers), and the use of more owner/operators.  Thetraining school revenue decrease was due primarily to the closing of a schoolin the second quarter that reduced the revenues for that quarter.

 

Cost of revenue (equipmentoperating costs and school operating costs) decreased in the six months periodended June 30, 2004, by $269,803 (4.0%) to $6,585,359 from $6,855,162 forthe same period in 2003.  The decrease in expenses was, as stated for the2nd quarter results,primarily due to the net increase in revenue per mile and in the reduction ofthe number of deadhead miles being driven. The results were that the gross profit for the six months endedJune 30, 2004 increased by $423,579 (228.5%) to $608,972 from $185,393 forthe prior year period.

 

Operating expenses decreased$593,730 (38.4%) to $953,640 for the six months ended June 30, 2004,compared to $1,547,370 for the same period of 2003.   The decreasewas primarily due to elimination of the impairment losses, which in 2003 was aloss of ($484,583) in the value of the Company assets taken as a result of thefiling of the Chapter 11 reorganization petition, a decrease in thegeneral and administrative expenses of $206,105, and the fact that these wereoffset by only an increase of $46,958 in garage expenses (Company in-house laboronly) for this year.

 

Operating income for the sixmonths ended June 30, 2004, was a deficit of ($344,668), a decrease of$1,017,309 (74.9%) in the deficit from the prior year deficit of $1,361,977 forthe same period.   Operating income as a percentage of total revenueswent down from minus -19.3% for the same period in 2003 to minus -4.8% for thesix months ending June 30, 2004. The factors for the decrease for this period were basically the same asfor the three month quarterly period, being the improvement in the reduction inthe cost of revenues, the reduction in the impairment loss and the reduction inthe general and administrative expenses.

 

Other income (expense) forthe six months period saw a large decrease in the expenses mostly because ofthe reduction in interest expense resulting from the Company being in Chapter11 Reorganization.  The difference in theother expense from 2003 to the same period for 2004 was $494,473 (94.7%).  (Loss) from operations before reorganizationitems and the provision for taxes was ($372,348) for the 2004 period comparedto ($1,884,130) for the 2003 period, an improvement of $1,511,782 (80.2%).  Reorganization items provided a profit of$472,556 for the 2004 period compared to a loss of ($31,330) for 2003; thedifference was primarily the result of the Company recognizing income of$485,556 from the extinguishment of debt during 2004.

 

The net results were thatthe Company had a profit from operations after the cost of reorganization itemsand provision for income taxes of $100,208 for the six months period endedJune 30, 2004, compared to a net loss of ($1,915,460) for the same periodof 2003, which is an improvement of $2, 015,668 from the prior year.

 

**Capital andLiquidity**

 

Management believes thatonce the Company completes its reorganization and gets a Plan of Reorganizationapproved by its creditors and the Bankruptcy Court that the Company’s operatingexpenses will be in line with operating revenues so that the Company will beable to manage its cash flow and, hopefully, with the other changes that havebeen implement, continue its trend to operating profitably.  However,until the Company completes arrangements in the Bankruptcy Court with itssecured lenders, there can be no assurances that it will be able to operateprofitably or be able to remain in business. The Company is under a Bankruptcy Court schedule where it ispossible for the Company to have its Plan of Reorganization, which wassubmitted on May 24, 2004, and amended and resubmitted on August 13, 2004,to be approved and confirmed by the end of 2004.  The Plan is subject to objections from theCompany’s major creditors, although the Company believes that most of theobjections previously raised have been satisfied in the amended Plan.

 

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As a part of the Plan ofReorganization, the Company has proposed a number of major changes to thecapitalization of the Company.  Amongthem are that the Company be merged into a new company to be formed under the lawsof the State of Delaware that would have authorized capital stock of100,000,000 common shares, an authorized class of preferred shares, and aproposed raising of additional equity capital through the sale of common sharesin a private placement.  Approval of thePlan of Reorganization in the manner proposed is likely to be required for theCompany to continue its operations and to stay in business.  The Company does have an expression ofinterest from a couple of funding sources to accomplish the equity injectiononce the Plan of Reorganization is approved and confirmed.

 

Meanwhile, managementcontinues to adjust its corrective actions to bring profits and cash flowpositive.  There are ongoing and continuing efforts to improve grossrevenues and rates with additional Ohio Valley outbound customers, andreplacing discounted inbound brokered freight with direct freightbusiness.  Significant improvement inthese areas has been recently made with the acquisition of both outbound andinbound freight from DuPont Chemical.

 

There is also a focus tokeep the Company’s full fleet of equipment operable.  During the first 6 months of this year, theCompany returned 36 power units to one of its creditors and 11 power units toanother creditor, so keeping the balance of the fleet operable is morecritical.   It has been costly forthe Company to maintain its equipment as it reaches the mid to upper portion ofits life cycle, and while it has gotten rid of a portion of the equipment thatwas most costly to maintain, it will experience increased costs as the retainedequipment ages.  Also, the Company hasbeen focusing its efforts to add owner/operators to provide incrementalrevenues and margins without the cash outlay and long-term debt obligationsassociated with adding company-owned equipment.

 

Because of the increasedfreight demand that the Company has been recently experiencing, the Company isendeavoring to acquire some additional power units, perhaps as many as 10 to15.  The difficulty with doing so primarilyinvolves the fact that the Company is in Chapter 11 and it does not have anycapital or credit capacity with which to invest in acquisition o additionalrevenue equipment.  However, the Companycurrently has commitments from a couple of sources to lease at least 10 to 15used late model power units.

 

Management started in theautumn of 2003 changing the Company’s sales mix to increase its revenue andreduce its empty miles simultaneously by limiting its freight volume with itstop twenty customers and one major customer in particular.  This plan wasalso designed to improve equipment productivity and reduce driver turnover(through better driver pay) and as part of an aggressive and detailed recoveryplan that management expects to show continued and measurable improvedfinancial performance.  First quarterresults for 2004 started to show that such measures were resulting in animprovement, and the trend continued in the second quarter of 2004.

 

Management continued in 2004to cut its administrative costs by reducing staff, taking payroll decreases,and maintaining better operational control through changes made in personnel.

 

Initially after filing forChapter 11 Reorganization, the Company retained its insurance coverage atexisting premium rates, which met the risk requirements necessary to operateunder judicial protection.  On October 1, 2003, the Company renewedits annual equipment insurance with a six-month extension of its liabilitycoverage with the existing insurance carrier, Clarendon National Insurance Company,and a twelve-month renewal of its physical damage, cargo, and general liabilitythrough other major national insurance carriers.  The premiums wereincreased a modest amount compared to industry standards, increasing by 9 % forthe current coverage year (2003 / 2004) in contrast to the prior policy period.

 

The Company renewed its autoliability insurance for a period of twelve months, effective April 1, 2004with a new insurance carrier, Lincoln General Insurance Company, replacing thedefunct Clarendon National Insurance program. Premiums on the new policy coverage were slightly reduced compared tothe prior year and the related premium financing is being provided by BaytreeFinance Company.

 

In addition, during the midpart of 2003, the Company implemented an enhanced driver and owner/operatorrecruiting effort led by one of its senior managers.  It was designed tostaff all trucks and reduce the

 

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turnover to below industrystandards.  Likewise, the operations department was reorganized to acentral dispatch format supported by customer service personnel to improveservice performance levels back to above industry norm (98+ %) and pushequipment/driver productivity to profitable levels.  Staffing was still a problem in the firstquarter of 2004 as the Company continued to have equipment idle because of alack of drivers.  With the decrease inthe amount of Company owned equipment resulting from the return of the 47tractors, it is hopeful that it can retain what appears to be a core base ofdrivers that is adequate to keep the reduced number of owned tractors fullymanned.

 

In early May 2003, theCompany entered into a new receivables-based line of credit agreement withSystran Financial Services, a division of Textron Financial Corporation, whichsignificantly increased its cash flow through higher advance rates with lowerfinancing costs, and expanded its available credit to $2.5 million.   This credit facility continued after thefiling of the Chapter 11 petition with only a slight increase in the rate paidby the Company, and with the Company retaining the additional creditcapacity.  This credit facility remainsin place, and the Company expects that the arrangement will continue.

 

In April 2003, theCompany returned to the cost advantages of outsourcing its payroll and relatedtax processing.  This employee leasing plan continued after the Companyfiled for creditor protection under Chapter 11. This service facility also continues in place and the Company expects tocontinue the arrangement.

 

Although being in Chapter 11Reorganization has aided the Company in reducing its capital needs, operatinglosses from last year while in Chapter 11 have left the Company with a shortageof cash and working capital.  As statedabove, the Company continues to seek means of solving such shortage,particularly through seeking additional equity and quasi-equity funding as partof the Plan of Reorganization that it has submitted.  There can be no assurances that the Companywill be able to solve the problem from such outside sources.

 

**Item 3.Controls and Procedures.**

 

At the end of the periodcovered by this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theCompany’s disclosure controls and procedures pursuant to Exchange Act Rule13a-15(e).  Based upon that evaluation, the Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures are effective. During the second quarter of 2004, there were nochanges in the Company’s internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.Legal Proceedings.**

 

On May 19, 2003, the Companyfiled a Petition for Reorganization under Chapter 11of the United States BankruptcyCode in the United States Bankruptcy Court, Southern District of Ohio, EasternDivision.  Only Gasel Transportation Lines, Inc. filed the Petition; itssubsidiaries, Gasel Driver Training Schools, Inc. and GTL Logistics, Inc. arenot a part of the filing.  The Company was appointed as Debtor inPossession by the Bankruptcy Court.  In accordance with the BankruptcyCode, all lawsuits that had been previously filed against the Company werestayed and any creditors are prohibited from commencing any suits against theCompany except in the Bankruptcy Court, and then not to seek judgment againstthe Company for debts owing by the Company.

 

During the second quarter of2004, one of the Company creditors, Volvo Commercial Finance LLC, sought relieffrom the stay and such relief was granted. As a result of the granting of such relief, the Company was forced toreturn the 11 power units to such creditor.

 

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

 

(a) Exhibits:

 

31.1- Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of theCompany.

31.2- Rule 13a-15(a)/15d-14(a) Certification of Chief Financial Officer of theCompany.

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

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

 

(b) Reports on Form 8-K.

 

(1) On June 10, 2004, the Company filed a Form 8-K with anattachment of a press release disclosing first quarter financial informationand results for the Company.

 

 

**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

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

 

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