UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File Number 000-29825
ELITE LOGISTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Idaho 91-0843203
(State of Incorporation) (I.R.S. Employer Identification No.)
1201 North Avenue H, Freeport, Texas 77541
(Address of Principal Executive Offices) (Zip Code)
(979) 230-0222
(Registrant's Telephone Number)
Check whether the (issuer) (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or such shorter
period that registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of October 12, 2001, the number of shares outstanding of the registrant's
class of common stock was 13,135,258.
Transitional Small Business Disclosure Format (Check one): Yes[ ] No: [X]
ELITE LOGISTICS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<Table>
<Caption>
Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of August 31, 2001 and May 31, 2001 2
Consolidated Statements of Operations for the Three Months ended
August 31, 2001 and August 31, 2000 3
Consolidated Statement of Stockholders' Equity (Deficit) for the Three
Months ended August 31, 2001 4
Consolidated Statements of Cash Flows for the Three Months ended
August 31, 2001 and August 31, 2000 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</Table>
PART I
ITEM 1. FINANCIAL STATEMENTS.
ELITE LOGISTICS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
--------------------------------------------------------------------------------
<Table>
<Caption>
August 31, May 31,
2001 2001
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 48,522 $ 34,591
Accounts receivable, net of an allowance for doubtful accounts of
$9,400 and $70,294 at August 31, 2001 and May 31, 2001, respectively 44,280 133,542
Inventory 122,854 237,745
Other current assets 1,717 1,193
----------- -----------
TOTAL CURRENT ASSETS 217,373 407,071
PROPERTY AND EQUIPMENT
Computer equipment 141,539 141,539
Software 118,788 118,788
Furniture and equipment 63,978 63,978
Less: accumulated depreciation and amortization (182,276) (169,564)
----------- -----------
TOTAL PROPERTY AND EQUIPMENT, NET 142,029 154,741
PATENTS 78,020 62,592
----------- -----------
TOTAL ASSETS $ 437,422 $ 624,404
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 240,447 $ 266,902
Accrued expenses 160,114 66,342
Leases payable 35,339 35,255
Accrued salaries 48,356 48,356
Accrued preferred stock dividends 49,027 43,729
Convertible promissory notes payable, net of discount 268,504 70,000
Shareholder loans payable 211,379 205,373
Notes payable 11,001 93,736
----------- -----------
TOTAL CURRENT LIABILITIES 1,024,167 829,693
----------- -----------
LONG-TERM LIABILITIES
Leases payable, net of current portion 16,063 24,017
----------- -----------
TOTAL LIABILITIES 1,040,230 853,710
----------- -----------
REDEEMABLE PREFERRED STOCK 244,500 244,500
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $0.01 par value: 50,000,000 shares authorized,
13,138,258 and 13,085,258 issued and outstanding at August 31, 2001
and May 31, 2001, respectively 131,383 130,853
Warrants 752,163 592,063
Additional paid in capital 2,405,947 2,431,314
Accumulated deficit (4,099,676) (3,598,036)
Treasury stock, 18,000 shares and 15,000 shares
at August 31, 2001 and May 31, 2001, respectively, at cost (37,125) (30,000)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (847,308) (473,806)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 437,422 $ 624,404
----------- -----------
</Table>
See accompanying notes to consolidated financial statements.
2
ELITE LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
<Table>
<Caption>
Three Months Ended
August 31,
----------------------------
2001 2000
------------ ------------
REVENUES $ 296,969 $ 172,221
COST OF REVENUES 243,232 174,944
------------ ------------
GROSS PROFIT (LOSS) 53,737 (2,723)
EXPENSES
Sales and marketing 101,840 120,433
General and administrative 318,939 196,302
Research and development 113,956 108,073
------------ ------------
TOTAL EXPENSES 534,735 424,808
------------ ------------
OPERATING LOSS (480,998) (427,531)
------------ ------------
OTHER INCOME (EXPENSE)
Loss on sale of equipment -- (608)
Loss on exchange of investments -- (19,400)
Interest income 46 735
Interest expense (22,945) (1,102)
Other income 7,555
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (15,344) (20,375)
LOSS BEFORE INCOME TAXES (496,342) (447,906)
INCOME TAXES -- --
------------ ------------
NET LOSS $ (496,342) $ (447,906)
------------ ------------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.04) $ (0.04)
------------ ------------
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON STOCK SHARES OUTSTANDING 13,117,225 12,231,494
------------ ------------
</Table>
See accompanying notes to consolidated financial statements.
3
ELITE LOGISTICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
--------------------------------------------------------------------------------
<Table>
<Caption>
Common Stock
------------------------- Total
Additional Stockholders'
Number of Paid in Accumulated Treasury Equity
Shares Amounts Warrants Capital Deficit Stock (Deficit)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 2001 13,085,258 $ 130,853 $ 592,063 $ 2,431,314 $(3,598,036) $ (30,000) $ (473,806)
Issuance of 53,000 shares of
common stock and 250,000
warrants for services, net
of expenses of $473 53,000 530 42,100 43,306 -- -- 85,936
Issuance of 235,000 warrants
in conjunction with the
issuance of convertible -- -- 49,327 -- -- -- 49,327
notes
Issuance of 330,000 warrants
in conjunction with the
repricing of warrants -- -- 68,673 (68,673) -- -- --
Purchase of treasury stock,
3,000 shares at cost -- -- -- -- -- (7,125) (7,125)
Preferred cumulative -- -- -- -- (5,298) -- (5,298)
dividends
Net loss -- -- -- -- (496,342) -- (496,342)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 2001 13,138,258 $ 131,383 $ 752,163 $ 2,405,947 $(4,099,676) $ (37,125) $ (847,308)
----------- ----------- ----------- ----------- ----------- ----------- -----------
</Table>
See accompanying notes to consolidated financial statements.
4
ELITE LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------
<Table>
<Caption>
Three Months Ended
August 31,
------------------------
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss $ (496,342) $ (447,906)
Adjustments to reconcile net loss
to net cash used by operating activities
Depreciation 12,712 9,911
Amortization of convertible note discount 12,831
Allowance for doubtful accounts (60,894) --
Common stock issued for services 43,836 88,962
Warrants issued for services 42,100 --
Notes payable issued for services -- 41,100
Loss on exchange of investments -- 19,400
Investments exchanged for services -- 5,000
Loss on sale of equipment -- 608
Changes in operating assets and liabilities
Accounts receivable and other current assets 149,632 138,890
Inventory 114,891 (63,484)
Accounts payable (26,455) 90,171
Accrued liabilities 93,772 5,126
---------- ----------
Net cash used in operating activities (113,917) (112,222)
---------- ----------
Cash flows from investing activities:
Purchase of property, equipment, and software -- (159)
Proceeds from sale of property and equipment -- 591
Proceeds from note receivable -- 10,000
Patent costs (15,428) (6,259)
---------- ----------
Net cash (used in) provided by investing
activities (15,428) 4,173
---------- ----------
Cash flows from financing activities:
Issuance of common stock, net of expenses -- 38,335
Exercise of common stock options -- 1,000
Payments on leased equipment (7,870) (1,016)
Payments on notes payable (91,772) (11,090)
Proceeds from notes payable 9,037 --
Proceeds from convertible promissory notes payable 235,000 --
Payments on shareholder notes payable (994) (679)
Proceeds from shareholder notes payable 7,000 51,000
Purchase of treasury stock (7,125) --
---------- ----------
Net cash provided by financing activities 143,276 77,550
---------- ----------
Net increase (decrease) in cash 13,931 (30,499)
Cash, beginning of period 34,591 89,334
---------- ----------
Cash, end of period $ 48,522 $ 58,835
---------- ----------
</Table>
See accompanying notes to consolidated financial statements.
5
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - BUSINESS ORGANIZATION
The financial statements included herein, which have not been audited pursuant
to the rules and regulations of the Securities and Exchange Commission, reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation of financial position, the results of operations and cash flows for
the interim periods on a basis consistent with the annual audited consolidated
financial statements. All such adjustments are of a normal recurring nature. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for a full year. Certain information, accounting
policies and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the Company's audited consolidated financial
statements included in the Company's Annual Report on Form 10-KSB for the year
ended May 31, 2001 filed with the Securities and Exchange Commission on August
29, 2001.
Nature of Operations
Elite Logistics, Inc. (hereinafter "ELI" or the "Company"), an Idaho
corporation, through its wholly owned subsidiary, Elite Logistics Services, Inc.
("Elite"), is in the telematics business. Telematics is the broad term used to
describe products and services enabled by the convergence of communications
(including wireless and the Internet) and Information Technology in the
automotive industry. Elite designs and sells, primarily through a
dealer/distributor channel, the PageTrack(R) range of intelligent vehicle
management hardware. PageTrack(R), which includes a Global Positioning Systems
(GPS) receiver, links a vehicle, or other asset, to Elite's Internet servers via
ReFLEXTM two-way wireless telemetry networks. Elite is also a telematics
services provider (TSP) providing hosted Internet-based telematics services
including asset tracking, access to roadside assistance, automatic collision
notification, stolen vehicle recovery and a variety of remote vehicle management
solutions. The Company's products and services are marketed nationally and in
certain international markets.
Acquisition and Merger
On November 17, 1999, Elite completed an acquisition agreement and plan of
merger with Summit Silver, Inc. ("SSI"). In late November 1999, SSI was renamed
to Elite Logistics, Inc.
SSI was a non-operating shell company with limited assets. Consequently, the
substance of the merger transaction is a capital transaction rather than a
business combination. The transaction is equivalent to the issuance of stock by
Elite for the net assets of SSI, accompanied by a recapitalization. The
accounting is identical to that resulting from a reverse acquisition, except
that no goodwill or other intangibles are recorded.
Under the terms of the acquisition agreement, SSI issued 10,400,000 shares of
common stock in exchange for all of Elite's common stock. Immediately prior to
the agreement and plan of recapitalization, Elite had 10,400,000 shares of
common stock issued and outstanding. In connection with this transaction, all
2,445 shares of Elite's preferred stock were exchanged for an equivalent amount
of SSI preferred stock. The exchange of the preferred stock resulted in no
significant valuation adjustment in the allocation of value in the merger. Also,
1,215,555 outstanding warrants in Elite were exchanged with SSI for warrants of
the same terms and rights.
Subsequent to the merger, Elite continued as a wholly owned subsidiary of ELI.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiary. All significant intercompany balances and transactions have been
eliminated upon consolidation.
6
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation. Such reclassifications had no affect on net loss or equity
(deficit).
Basic and Diluted Loss Per Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share" basic earnings (loss) per share is computed using the
weighted average number of common shares outstanding. Due to the Company having
a net loss during the three month period ended August 31, 2001 and August 31,
2000, diluted net loss per share is the same as basic net loss per share as the
inclusion of common stock equivalents would be antidilutive.
NOTE 3 - DEBT
Capital leases
Elite has capital leases with various leasing companies payable monthly at
$3,473, including interest at rates ranging from 14% to 24%. Capital leases
outstanding as of August 31, 2001 were $51,402.
Shareholder loans payable
The Company has cash loans from its shareholders in the amount of $211,379 at
August 31, 2001. The notes bear interest at an annual rate of 5%, are unsecured
and mature during the fourth quarter of 2002.
Notes payable
Elite has unsecured notes payable with American Express in the amount of $11,001
at August 31, 2001 payable monthly at $6,635, including interest at a rate of
15.9%. Each note payable has a maturity of six months from the date of each
note's origination.
Factoring agreement
On June 21, 2000, the Company entered into a factoring agreement with a national
banking organization. Under the agreement, the bank advances the Company 80% of
each receivable purchased up to a maximum of $750,000, subject to full recourse
to the Company and renewal on an annual basis. Finance charges equal 1.25% per
month of the average daily account balance outstanding and an administrative fee
of 0.25% of each purchased receivable. At August 31, 2001, there is no
outstanding balance owed under the factoring agreement.
Convertible Promissory Notes
During July, 2001, the Company entered into an agreement with an investment
capital group to assist with the placement of an offering of $500,000 of 10%
convertible promissory notes (the "Convertible Notes") including warrants. Each
$10,000 investment provides for the issuance of 10,000 warrants to purchase
common stock of the Company with an exercise price of $0.625 per share, expiring
five years from the date of issuance. During the three months ended August 31,
2001 the Company issued $235,000 of Convertible Notes with unpaid principal and
interest due on December 31, 2001. In conjunction with the issuance of these
Convertible Notes the Company issued 235,000 warrants or total proceeds to the
Company of $146,875 ($0.625 per share) in cash if all of the warrants are
exercised. A debt discount of $49,327 was recorded in conjunction with the
issuance of these warrants, of which $12,831 has been amortized to interest
expense during the three months ended August 31, 2001 (see Note 4). At the
Company's option the maturity date of the Convertible Notes may be extended to
March 31, 2002, under similar terms and will include contingent warrants with an
exercise price of $0.625 per share, upon giving proper written notice.
7
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - DEBT (CONTINUED)
Convertible Promissory Notes (Continued)
If the Company elects to extend the maturity date to March 31, 2002 the Company
will issue 10,000 contingent warrants with an exercise price of $0.625 per share
for each $10,000 investment to note holders of record. At maturity, all unpaid
principal and interest will be convertible into units of an equity private
placement of the Company's common stock, which is contemplated in the near
future. If all the notes were converted using the conversion price on the dates
of issuance ($0.625), the Company will be required to issue 376,000 shares of
common stock.
NOTE 4 - EQUITY
Common Stock
From time to time, in order to fund operating activities of the Company, common
stock is issued for cash or in exchange for goods or services. Generally,
offerings of the Company's common stock includes warrants to acquire common
stock of the Company at fixed exercise prices. Occasionally, depending on the
nature of the offering and restrictions imposed on the shares being acquired,
the exercise price of the warrant may be below the fair market value of the
underlying common stock on the date of issuance.
During the three month period ending August 31, 2001, the Company issued 53,000
shares of common stock in exchange for services valued at $43,836.
Warrants
During October 2000, provisions for a private placement of the Company's common
stock to an investor provided for the issuance of 555,556 warrants with an
exercise price of $2.70 per share and contingent penalty warrants which are to
be issued in the future in the event that the Company's common stock is not
registered prior to January 13, 2001. Since October 2000, under the provisions
of this offering, 200,000 penalty warrants were issued at an exercise price of
$1.35 per share. At the request of the investor, the issuance of the remaining
400,000 penalty warrants have been waived in lieu of a reduced exercise price of
the original 555,556 warrants previously issued. On August 2, 2001 the Company
agreed to amend the exercise price per share of the $2.70 original warrants and
the $1.35 penalty warrants to $0.625 per share. Additionally, the Company issued
330,000 warrants with an exercise price of $0.625 per share to this investor to
waive their right to veto subsequent issues of the Company's common stock. The
Company recorded an adjustment of $68,673 to the original proceeds of the
October 2000 private placement offering in conjunction with the issuance of
these additional warrants.
During the three months ended August 31, 2001, the Company issued 485,000
warrants in conjunction with the $500,000, 10% Convertible Note offering.
Included were 235,000 warrants issued to holders of the notes. The remaining
250,000 warrants were issued to the investment capital group and a consultant
for assisting in promoting the Convertible Note offering. Accordingly, $42,100
was recorded as general and administrative expenses in conjunction with the
issuance of these warrants.
During the three month period ended August 31, 2001 no warrants were exercised.
The fair value of each warrant granted is estimated on the grant date using the
Black-Scholes Option Price Calculation. The following assumptions were made in
estimating fair value. The risk-free interest rate is 5.5%, volatility is .5%
and the expected life of the warrants is one to three years. The fair value of
warrants issued during the three months ended August 31, 2001 was estimated to
be $160,100.
8
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - EQUITY (CONTINUED)
Treasury Stock
Due to certain violations of Blue Sky laws in certain states in which the
Company's common stock had been offered for possible sale by a broker, the
Company was required to contact shareholders in those states and offer to
reacquire those shares at the original offering price. Accordingly, during the
year ended May 31, 2001, the Company reacquired 15,000 shares of common stock at
a cost of $30,000, or $2.00 per share. During the three month period ending
August 31, 2001, an additional 3,000 shares were reacquired at a cost of $7,125
or $2.375 per share.
NOTE 5 - NON-CASH TRANSACTIONS
For cash flow purposes, various, non-cash transactions have been entered into by
the Company during the three-month periods ended August 31, 2001 and 2000. These
non-cash items are as follows:
<Table>
<Caption>
Three Months Ended
August 31,
-------------------------
2001 2000
----------- -----------
Supplemental disclosures:
Cash paid for interest $ 6,741 $ --
Non cash transactions:
Common stock issued for services 43,836 88,962
Common stock issued for equipment -- 10,681
Warrants issued for services 42,100 --
Notes payable issued for services -- 41,400
Investments exchanged for services -- 5,000
</Table>
NOTE 6 - GOING CONCERN
The Company has a history of net losses and continues to experience negative
cash flows from operations. Management will continue to attempt to raise capital
resources and may do so through a registered offering of securities or through
additional private offerings of debt or common stock of the Company. The Company
is dependent on raising capital resources from outside sources and will continue
to do so until such time as the Company generates revenues and cash flows
sufficient to maintain itself as a viable entity. Management believes that these
actions will assist the Company in reaching the point of profitability from
operations and enable the Company to raise further capital from private
placements or public offerings. If successful, these actions will serve to
mitigate the factors which have raised substantial doubt about the Company's
ability to continue as a going concern and increase the availability of
resources for funding of the Company's current operations and future market
development.
NOTE 7 - SUBSEQUENT EVENTS
On September 19, 2001, the Company was served legal notice that a customer had
filed claims in court regarding facts and circumstances surrounding a purchase
entered into by and between the plaintiff and the Company during August 2000.
The plaintiff is seeking actual and punitive damages, post judgment interest and
reimbursement of court costs. The Company believes that the claims are without
merit and intends to defend this case vigorously. This lawsuit is currently in
the discovery phase.
As of October 12, 2001, the Company has received an additional $200,000 of
funding from its $500,000, 10% Convertible Note offering. The Company expects
the remaining $65,000 to be funded prior to October 31, 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein should be read in conjunction with the unaudited
consolidated financial statements and notes to the consolidated financial
statements of Elite Logistics, Inc. and subsidiary included in Item 1 above and
the Company's Audited Consolidated Financial Statements included in the
Company's Annual Report on Form 10K-SB for the year ended May 31, 2001. All
significant inter-company balances and transactions have been eliminated in
consolidation. The Company's financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America.
The financial information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the continuing operations of the
Company.
The Company has a limited operating history upon which investors may evaluate
its business and prospects. Since inception, the Company has incurred
significant losses and as of August 31, 2001 has an accumulated deficit of
$(4,099,676). The Company's auditors issued a going concern opinion in
connection with their audit of the Company's consolidated financial statements
as of May 31, 2001. This means that the Company's auditors believe there is
substantial doubt that the Company can continue as an on-going business for the
next twelve (12) months, unless the Company obtains additional capital to cover
its operating expenses. In order to meet its capital needs, the Company will
have to continue to raise capital from sources other than the sale of its
products and services. The Company has historically raised its cash through
private placements. There is no assurance that the Company will be able to raise
the additional funds it needs to continue in business. If the Company is unable
to raise additional funds until it becomes a viable entity, it will cease
operations.
RESULTS OF OPERATIONS
Revenues for the three months ending August 31, 2001 increased 72% to $296,969
compared to $172,221 for the three months ending August 31, 2000. Revenues
include sales of the Company's PageTrack(R) hardware to distributors, monitoring
and control service contracts and miscellaneous third party hardware sales.
Revenues have increased primarily due to a 138% increase in unit sales from 242
units in the quarter ending August 31, 2000 to 575 units sold in the current
quarter ending August 31, 2001.
A significant amount of management's time during the quarter was devoted to
efforts to secure additional funding for the Company which diverted management
resources from sales and operations. The Company has been constrained by a lack
of funding to effectively undertake the marketing activities necessary to
generate sales growth. The Company anticipates that management will continue to
be required to devote significant resources to raising capital for the immediate
future.
Cost of revenues for the three month period ending August 31, 2001 and August
31, 2000 were $243,232 and $174,944, respectively. Cost of revenues includes the
manufactured cost of our PageTrack(R) products, wireless telemetry network
services provided by SkyTel and the costs of operating Elite's 24-hour Control
Center. The increase in cost of revenues was attributed to the increased number
of units sold and related service costs.
Gross profit for the three months ending August 31, 2001 was $53,737 compared to
gross loss of $(2,723) during the three months ending August 31, 2000. Gross
profit for the three months ended August 31, 2001 included margins on our
PageTrack(R) products and the resale of wireless telemetry network services
provided by SkyTel offset by the costs of operating Elite's 24-hour Control
Center. As a percent of revenues, gross profit for the three months ending
August 31, 2001 was 18% compared to gross loss of (1.58)% during the three
months ended August 31, 2000. The increase in the gross profit margins reflects
increased margins on hardware sales due to lower internal manufactured costs and
the decreasing cost of the Control Center operations, as a percent of revenues,
which are semi-fixed. The cost of control center operations, as a percent of
revenue, will decrease if and when the number of units activated increases.
If the Company is able to increase volumes, this will also lead to reductions in
the manufactured per unit cost of the hardware products. Assuming the Company is
able to maintain its current sales prices, gross profit margin should continue
to increase.
10
Sales and marketing expenses for the three months ending August 31, 2001 and
2000 were $101,840 and $120,433, respectively, representing a 15% decrease
during 2001. Sales expenses consist primarily of compensation for our sales and
marketing personnel, advertising, marketing literature, trade show and other
promotional costs. The decrease results primarily from a 24% reduction in salary
expense due to the re-allocation of salary costs of the COO position, an 89%
reduction in advertising, offset by an increase in sales commission of $9,500
largely due to increases in sales volume. The Company expects that sales and
marketing expenses will increase in absolute dollars in future periods due to
expanded efforts to market and promote its products and services both
domestically and internationally.
General and administrative ("G&A") expenses for the three months ended August
31, 2001 were $318,939 compared to $196,302 in the three months ended August 31,
2000. G&A expenses consist primarily of compensation for personnel and payments
to outside contractors for general corporate functions, including finance, legal
fees, information systems, human resources, facilities, general management, bad
debt expense and the Company's occupancy costs and other overhead. This increase
was primarily due to a $146,048 increase in consulting and professional expenses
along with a 389% increase in annual audit expenses from $6,591 recorded during
the three months ended August 31, 2000 compared to $32,217 recorded during the
same three month period ended August 31, 2001, which were necessary to support
the growth of the Company's business. The Company expects that G&A expenses will
continue to increase as it hires additional personnel and incurs additional
expenses relating to the growth of its business, such as costs associated with
increased infrastructure and maintaining its public company status.
Correspondingly, the Company expects that as revenue continues to increase that
G&A, as a percentage of revenue, will decrease.
Research and development expenses for the three months ending August 31, 2001
and August 31, 2000 were $113,956 and $108,073, respectively. Research and
development expenses consist primarily of compensation for the Company's
research and development personnel, network operations and, to a lesser extent,
depreciation on equipment used for research and development. The Company does
not make an allocation of its occupancy costs. This increase was primarily due
to increases in designing new hardware and software products. The Company
expects that, subject to funding, research and development expenses will
increase in absolute dollars in future periods due to the costs of development
of enhanced and new products and online services to meet a variety of market
opportunities.
Other income (expense) for the three months ending August 31, 2001 was $(15,344)
compared to $(20,375) for the three months ended August 31, 2000. The majority
of the decrease resulted from the an exchange of certain marketable securities
held by the Company for goods and services resulting in a net loss of $19,400 in
2000 offset by an increase in interest expense. Interest expense consists of
expenses related to the Company's financing obligations, which include
borrowings under equipment loans, short-term loans from American Express, a
factoring agreement, capital lease obligations and convertible promissory notes,
inclusive of the amortization of debt discount.
CASH FLOW FOR THREE MONTHS ENDING AUGUST 31, 2001
Net cash used in operating activities was $113,917 for the three months ending
August 31, 2001. Net cash used for operating activities was primarily the result
of the net loss before changes in operating assets and liabilities of
$(445,757), as well as a reduction in accounts payable of $(26,455), offset by
increases resulting from reductions in accounts receivable and inventory of
$264,523 and an increase in accrued liabilities of $93,772. The reduction in
accounts receivable and inventory was due to better cash collections from its
largest customer and improved credit terms on customer accounts as well as
better inventory management to conserve cash flow. The increase in accrued
liabilities is primarily due to professional services incurred to promote the
$500,000 Convertible Promissory Note offering.
Net cash used in investing activities of $15,428 is comprised solely of patent
application and acquisition costs.
Net cash provided by financing activities was $143,276 and principally consisted
of net proceeds from the issuance of Convertible Promissory Notes of $235,000
offset by net payments on prior borrowings of $100,636 and the acquisition of
treasury stock in the amount of $7,125. As described below, cash from financing
activities may be significantly constrained in the immediate future.
11
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through the
private placement of its common stock, loans from shareholders, equipment
financing, lines of credit, short-term loans and deferral of employee
compensation (of which $244,500 was converted to Preferred Stock during fiscal
year 2000). The Company does not anticipate positive cash flow from operations
until it achieves an installed base of around 25,000 units (the current
installed base is approximately 4,256 units) or monthly sales of 2,250 units
(current monthly volume is approximately 200 units). The Company expects to
achieve positive cash flow within the 2002 fiscal year, but there can be no
assurance that the Company will achieve this target.
The Company's business plan is based on building a nationwide and international
distribution channel of PageTrack(R) dealers and distributors. The plan requires
hiring additional personnel for sales, marketing, customer support and technical
support. The Company estimates a minimum of $3,000,000 in additional capital is
required to fund its current business plan to the point of positive cash flow
from operations. There can be no assurance that the Company will be successful
in obtaining any such funds on terms acceptable to it, if at all. In the event
that the Company is unable to secure such additional funding, management would
attempt to downsize the business so as to enable the Company to survive and grow
at a slower pace. Failure to capitalize on current market opportunities could
allow competitors to overtake the Company and significantly impair the long-term
growth and value of the Company.
The Company is currently significantly constrained by its lack of capital. It
has historically raised capital through the private placement of its common
stock. It is also possible that the Company may register its common stock or
preferred stock for sale to the public; however, turmoil in the equity markets
has greatly impaired the Company's access to such funding opportunities. If the
Company were to register its common stock or preferred stock for sale, there can
be no assurance that market conditions would facilitate a successful sale. The
Company has commenced negotiations with several strategic partners to determine
if funding will be possible. The Company has also retained a financial advisor
to assist in evaluating funding options available.
The Company will continue to utilize its factoring agreement for eligible
receivables, to accelerate cash flow from sales. The Company, through its
principal shareholders, has borrowed funds to operate the Company. The Company
is also exploring opportunities to obtain a working capital debt facility,
including eligibility for access to US Government programs that provide working
capital assistance to exporters and debt facilities offered by Small Business
Investment Companies. Management is also exploring avenues to increase sales in
order to fund operations from cash flow earlier than projected.
During July 2001, the Company entered into an agreement with an investment
capital group to assist with the placement of an offering of $500,000 of 10%
convertible promissory notes (the "Convertible Notes") including warrants. Each
$10,000 investment provides for the issuance of 10,000 warrants to purchase
common stock of the Company with an exercise price of $0.625 per share, expiring
five years from the date of issuance. During the three months ended August 31,
2001 the Company issued $235,000 of Convertible Notes with unpaid principal and
interest due on December 31, 2001. In conjunction with the issuance of these
Convertible Notes the Company issued 235,000 warrants or total proceeds to the
Company of $146,875 ($0.625 per share) in cash if all of the warrants are
exercised. A debt discount of $49,327 was recorded in conjunction with the
issuance of these warrants of which $12,831 has been amortized to interest
expenses during the three months ended August 31, 2001. At the Company's option
the maturity date of the Convertible Notes may be extended to March 31, 2002,
under similar terms and will include contingent warrants with an exercise price
of $0.625 per share, upon giving proper written notice. If the Company elects to
extend the maturity date to March 31, 2002 the Company will issue 10,000
contingent warrants with an exercise price of $0.625 per share for each $10,000
investment to note holders of record. At maturity, all unpaid principal and
interest will be convertible into units of an equity private placement of the
Company's common stock, which is contemplated for the near-term. If all the
notes were converted using the conversion price on the dates of issuance
($0.625), the Company will be required to issue 376,000 shares of common stock.
As of October 12, 2001, the Company has received an additional $200,000 of
funding from its $500,000, 10% Convertible Note offering. The Company expects
the remaining $65,000 to be funded prior to October 31, 2001.
12
Until such time as the Company has successfully completed additional funding
arrangements, and is cash flow positive from operations, it remains at
significant risk from its lack of capitalization. It is highly likely that our
shareholders will incur additional dilution as a result of future fundings
involving issuance of common stock or common stock derivatives.
During June 2000, the Company entered into a factoring agreement with a national
banking organization. The bank will advance the Company 80% of each receivable
purchased up to a maximum of $750,000, full recourse to the Company, subject to
renewal on an annual basis. Finance charges equal 1.25% per month of the average
daily account balance outstanding and an administrative fee of 0.25% of each
purchased receivable. At August 31, 2001, the Company has no contingent amounts
owed under this factoring agreement.
The Company has no material commitments for capital expenditures. Subject to the
funding constraints described above, the Company anticipates that if it can
acquire capital, there will be an increase in the rate of capital expenditures
consistent with its anticipated growth in operations, infrastructure and
personnel. The Company would add web-based servers and telecommunications
equipment to service increases in the customer base. If, as, and when the number
of personnel increases, the Company foresees that it would add computer hardware
resources and expand its primary office facility. If sales increase, the Company
will need to fund higher inventory levels to support any growth in sales. The
Company may also use cash to acquire or license technology, products or
businesses related to its current business. In addition, the Company anticipates
that it will continue to experience growth in its operating expenses
commensurate with growth in sales and that its operating expenses will be a
material use of its cash resources for the foreseeable future.
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, certain other matters
discussed herein are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, that address future
activities, events or developments, including such things as future revenues,
projected break-even points, ability to raise capital through private or public
offerings, product development, market acceptance, responses from competitors,
capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of Elite Logistics, Inc., and its subsidiaries' business
and operations, plans, references to future success and other such matters, are
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "plans," "intends," "should," "seek," "will," and similar expressions
are intended to identify these forward-looking statements, but are not the
exclusive means of identifying them. These statements are based on certain
historical trends, current conditions and expected future developments as well
as other factors we believe are appropriate in the circumstances. However,
whether actual results will conform to our expectations and predictions is
subject to a number of risks and uncertainties that may cause actual results to
differ materially, our success or failure to implement our business strategy,
our ability to successfully market our on-line location, tracking and logistics
management concept, changes in consumer demand, changes in general economic
conditions, the opportunities (or lack thereof) that may be presented to and
pursued by us, changes in laws or regulations, changes in technology, the rate
of acceptance of the Internet as a commercial vehicle, competition in the online
logistics management business and other factors, many of which are beyond our
control.
Consequently, all of the forward-looking statements made in this Report are
qualified by these cautionary statements and there can be no assurance that the
actual results we anticipate will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on us or
our business or operations.
13
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
VIP Finance vs. Elite Logistics, Inc. - On September 19, 2001, the Company was
served legal notice that a customer had filed claims in court regarding facts
and circumstances surrounding a purchase entered into by and between the
plaintiff and the Company during August 2000. The plaintiff is seeking actual
and punitive damages, post judgment interest and reimbursement of court costs.
The Company believes that the claims are without merit and intends to defend
this case vigorously. This lawsuit is currently in the discovery phase.
ITEM 2. CHANGES IN SECURITIES
The following shares were sold pursuant to Section 4(6) of the
Securities Act of 1933 (the "Act"). All purchasers were accredited investors as
that term is defined in Rule 501 of the Securities Act of 1933.
<Table>
<Caption>
Shares of
Date Common Stock $ Price Consideration Services Warrants $ Price Expiration
------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
6/01/01 19,000 0.87 $ -- $ 16,530 -- -- --
7/01/01 19,000 0.87 -- 16,530 -- -- --
7/11/01 -- -- -- -- 75,000 0.625 7/11/06
7/17/01 -- -- -- -- 10,000 0.625 7/17/06
7/18/01 -- -- -- -- 20,000 0.625 7/18/06
7/20/01 -- -- -- -- 20,000 0.625 7/20/06
7/25/01 -- -- -- -- 80,000 0.625 7/25/06
7/26/01 -- -- -- -- 10,000 0.625 7/26/01
7/30/01 -- -- -- -- 10,000 0.625 7/30/06
8/1/01 -- -- -- -- 200,000 1.00 8/1/06
8/1/01 -- -- -- -- 50,000 1.00 8/1/06
8/2/02 -- -- -- -- 330,000 0.625 8/2/06
8/3/01 -- -- -- -- 10,000 0.625 8/3/06
8/31/01 15,000 0.75 -- 11,250 -- -- --
</Table>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See the Index to Exhibits
(b) REPORTS ON FORM 8-K
During the three months ended August 31, 2001 there were no reports
filed on Form 8-K.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons, in the capacities and on the dates indicated below, have
signed this report.
ELITE LOGISTICS SERVICES, INC.
Name Title Date
------------------------------------ --------- --------------------
/s/ Joseph D. Smith CEO October 15, 2001
------------------------------------
Joseph D. Smith
/s/ Russell A. Naisbitt CFO October 15, 2001
------------------------------------
Russell A. Naisbitt
15
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT DESCRIPTION
------- -----------
3.1* Articles of Incorporation (incorporated by reference to Exhibit 3.1 of
Registrant's Form 10SB as filed on March 7, 2000).
3.2* Amended (No. 1) Articles of Incorporation (incorporated by reference
to Exhibit 3.2 of Registrant's Form 10SB as filed on March 7, 2000).
3.3* Amended (No. 2) Articles of Incorporation (incorporated by reference
to Exhibit 3.3 of Registrant's Form 10SB as filed on March 7, 2000).
3.4* Amended (No. 3) Articles of Incorporation (incorporated by reference
to Exhibit 3.4 of Registrant's Form 10SB as filed on March 7, 2000).
3.5* Amended (No. 4) Articles of Incorporation (incorporated by reference
to Exhibit 3.5 of Registrant's Form 10SB as filed on March 7, 2000).
3.6* Bylaws (incorporated by reference to Exhibit 3.6 of Registrant's Form
10SB as filed on March 7, 2000).
4.1* Specimen Stock Certificate (incorporated by reference to Exhibit 4.1
of Registrant's Form 10SB as filed on March 7, 2000).
4.2* Management Services Agreement dated September 1, 2000 by and between
Elite Logistics, Inc. and Joseph D. Smith (incorporated by reference
to Exhibit 4.2 of Registrant's Form 10QSB as filed on October 16,
2000).
4.3* Management Services Agreement dated September 1, 2000 by and between
Elite Logistics, Inc. and Diana M. Smith. (incorporated by reference
to Exhibit 4.3 of Registrant's Form 10QSB as filed on October 16,
2000).
4.4* Management Services Agreement dated September 1, 2000 by and between
Elite Logistics, Inc. and Richard L. Hansen (incorporated by reference
to Exhibit 4.4 of Registrant's Form 10QSB as filed on October 16,
2000).
4.5* Management Services Agreement dated September 1, 2000 by and between
Elite Logistics, Inc. and Thien K. Nguyen (incorporated by reference
to Exhibit 4.5 of Registrant's Form 10QSB as filed on October 16,
2000).
4.6* Elite Logistics 2001 Equity Incentive Plan dated March 2, 2000
(incorporated by reference to Exhibit 4.6 of Registrant's Form 10QSB
as filed on October 16, 2000).
4.7* Elite Logistics Services, Inc. 401K Plan dated May 24, 2000
(incorporated by reference to Exhibit 4.7 of Registrant's Form 10QSB
as filed on October 16, 2000).
</Table>
16
<Table>
<Caption>
EXHIBIT DESCRIPTION
------- -----------
4.8* Common Stock Purchase Agreement - Koyah. (incorporated by reference to
Exhibit 4.8 of Registrant's Form 10QSB as filed on January 5, 2001).
4.9* Investor Rights Agreement - Koyah. (incorporated by reference to
Exhibit 4.9 of Registrant's Form 10QSB as filed on January 5, 2001).
4.10* Warrant Agreement - Koyah. (incorporated by reference to Exhibit 4.10
of Registrant's Form 10QSB as filed on January 5, 2001).
4.11* Investment Banking Agreement - Schneider Securities.
10.1* Acquisition Agreement (incorporated by reference to Exhibit 10.1 of
Registrant's Form 10SB as filed on March 7, 2000).
10.2* Agreement between the Company and Motorola, Inc. (incorporated by
reference to Exhibit 10.2 of Registrant's Form 10SB12G/A as filed on
June 15, 2000).
10.3* Agreement between the Company and Motorola, Inc. (incorporated by
reference to Exhibit 10.3 of Registrant's Form 10SB12G/A as filed on
June 15, 2000).
10.4* Distribution Agreement (incorporated by reference to Exhibit 10.4 of
Registrant's Form 10SB12G/A as filed on July 11, 2000).
11.1 Computation of Per Share Earnings
99.1* Office Lease (incorporated by reference to Exhibit 99.1 of
Registrant's Form 10SB as filed on March 7, 2000).
99.2* Agreement between the Company and Vollmer Public Relations
(incorporated by reference to Registrant's Form 10SB12G/A as filed on
June 15, 2000).
</Table>
* Incorporated by reference as indicated.