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 NOVEMBER 30, 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 January 10, 2002, the number of shares outstanding of the registrant's
class of common stock was 15,650,429.
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 November 30, 2001 and May 31, 2001 2
Consolidated Statements of Operations for the Three Months and Six Months
ended November 30, 2001 and 2000 3
Consolidated Statement of Stockholders' Equity (Deficit) for the Six
Months ended November 30, 2001 4
Consolidated Statements of Cash Flows for the Six Months ended
November 30, 2001 and 2000 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</Table>
PART I
ITEM 1. FINANCIAL STATEMENTS.
ELITE LOGISTICS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<Table>
<Caption>
November 30, May 31,
2001 2001
------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 21,263 $ 34,591
Accounts receivable, net of an allowance for doubtful accounts of
$15,429 and $70,294 at November 30, 2001 and May 31, 2001, respectively 51,588 133,542
Inventory 104,943 237,745
Other current assets 3,482 1,193
------------- -------------
TOTAL CURRENT ASSETS 181,276 407,071
PROPERTY AND EQUIPMENT
Computer equipment 140,538 141,539
Software 118,788 118,788
Furniture and equipment 63,978 63,978
Less: accumulated depreciation and amortization (194,972) (169,564)
------------- -------------
TOTAL PROPERTY AND EQUIPMENT, NET 128,332 154,741
PATENTS 82,875 62,592
------------- -------------
TOTAL ASSETS $ 392,483 $ 624,404
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 334,803 $ 266,902
Accrued expenses 126,334 66,342
Leases payable 33,784 35,255
Accrued salaries 88,644 48,356
Accrued preferred stock dividends 53,622 43,729
Convertible promissory notes payable, net of discount 679,646 70,000
Shareholder loans payable 218,854 205,373
Notes payable 5,546 93,736
------------- -------------
TOTAL CURRENT LIABILITIES 1,541,233 829,693
------------- -------------
LONG-TERM LIABILITIES
Leases payable, net of current portion 9,439 24,017
------------- -------------
TOTAL LIABILITIES 1,550,672 853,710
------------- -------------
REDEEMABLE PREFERRED STOCK 244,500 244,500
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $0.01 par value: 50,000,000 shares authorized,
13,171,048 and 13,085,258 issued and outstanding at November 30, 2001
and May 31, 2001, respectively 131,710 130,853
Warrants 892,993 592,063
Additional paid in capital 2,440,457 2,431,314
Accumulated deficit (4,830,724) (3,598,036)
Treasury stock, 18,000 shares and 15,000 shares at November 30, 2001
and May 31, 2001, respectively, at cost (37,125) (30,000)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (1,402,689) (473,806)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 392,483 $ 624,404
------------- -------------
</Table>
See accompanying notes to consolidated financial statements.
2
ELITE LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
Three Months Ended Six Months Ended
November 30, November 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Revenues $ 145,105 $ 499,413 $ 442,074 $ 671,634
Cost of revenues 130,381 401,694 373,613 576,638
-------------- -------------- -------------- --------------
Gross profit 14,724 97,719 68,461 94,996
Expenses
Marketing 84,644 126,601 186,482 247,033
Administrative expenses 439,080 344,247 756,024 540,152
Research and development 109,347 117,610 223,303 225,683
-------------- -------------- -------------- --------------
Total expenses 663,071 588,458 1,165,809 1,012,868
-------------- -------------- -------------- --------------
Operating loss (618,347) (490,739) (1,097,348) (917,872)
-------------- -------------- -------------- --------------
Other income (expense)
Loss on sale of equipment -- -- -- (608)
Loss on exchange of investments -- -- -- (19,400)
Interest income 28 180 74 914
Interest expense (108,266) (1,949) (133,207) (3,448)
-------------- -------------- -------------- --------------
Other income 131 -- 7,686 --
-------------- -------------- -------------- --------------
Total other income (expense) (108,107) (1,769) (125,447) (22,542)
-------------- -------------- -------------- --------------
Loss before income taxes (726,454) (492,508) (1,222,795) (940,414)
Income taxes -- -- -- --
-------------- -------------- -------------- --------------
Net loss $ (726,454) $ (492,508) $ (1,222,795) $ (940,414)
-------------- -------------- -------------- --------------
Basic and diluted loss per common share $ (0.06) $ (0.04) $ (0.09) $ (0.08)
Basic and diluted weighted average number
of common shares outstanding 13,154,538 12,637,533 13,127,684 12,428,043
</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 85,790 shares of
common stock and 550,000
warrants for services, net
of expenses of $111 85,790 857 100,450 77,816 -- -- 179,123
Issuance of 660,000 warrants
in conjunction with the
issuance of convertible -- -- 131,807 -- -- -- 131,807
promissory notes
Issuance of 330,000 warrants
in conjunction with the
repricing of warrants -- -- 68,673 (68,673) -- -- --
Purchase of treasury stock, (7,125) (7,125)
3,000 shares at cost -- -- -- -- --
Preferred cumulative -- -- -- -- (9,893) -- (9,893)
dividends
Net loss -- -- -- -- (1,222,795) -- (1,222,795)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at November 30, 2001 13,171,048 $ 131,710 $ 892,993 $ 2,440,457 $(4,830,724) $ (37,125) $(1,402,689)
----------- ----------- ----------- ----------- ----------- ----------- -----------
</Table>
See accompanying notes to consolidated financial statements.
4
ELITE LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<Table>
<Caption>
Six Months Ended
November 30,
---------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (1,222,795) $ (940,414)
Adjustments to reconcile net loss
to net cash used by operating activities
Depreciation 25,407 19,820
Amortization of convertible note discount 81,453
Allowance for doubtful accounts (60,894) --
Common stock issued for services 78,673 197,732
Warrants issued for services 100,450 --
Notes payable issued for services -- 62,538
Loss on exchange of investments -- 19,400
Investments exchanged for services -- 5,000
Loss on sale of equipment 1,002 608
Changes in operating assets and liabilities
Accounts receivable and other current assets 140,559 11,211
Inventory 132,802 215,497
Accounts payable 67,901 (504,313)
Accrued liabilities 59,992 115,278
------------ ------------
Accrued salaries 40,288 --
Net cash used in operating activities (555,162) (797,643)
------------ ------------
Cash flows from investing activities:
Purchase of property, equipment, and software -- (9,955)
Proceeds from sale of property and equipment -- 591
Proceeds from note receivable -- 10,000
Patent costs (20,283) (7,009)
------------ ------------
Net cash (used in) provided by investing activities (20,283) (6,373)
------------ ------------
Cash flows from financing activities:
Issuance of common stock, net of expenses -- 834,436
Exercise of common stock options -- 1,000
Payments on leased equipment (16,049) (2,616)
Payments on notes payable (102,474) (101,236)
Proceeds from notes payable 14,284 140,872
Proceeds from convertible promissory notes payable 660,000 --
Payments on shareholder notes payable (994) (12,118)
Proceeds from shareholder loans payable 14,475 51,000
Purchase of treasury stock (7,125) --
------------ ------------
Net cash provided by financing activities 562,117 911,338
------------ ------------
Net increase (decrease) in cash (13,328) 107,322
Cash, beginning of period 34,591 89,334
------------ ------------
Cash, end of period $ 21,263 $ 196,656
------------ ------------
</Table>
See accompanying notes to consolidated financial statements.
5
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 is 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. Elite designs and sells
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 ReFLEX(TM) two-way wireless
telemetry networks. The Company's products and services are marketed nationally
and in certain international markets through a dealer/distributor channel.
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
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain prior period amounts have been reclassified to conform to current period
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 and six month periods ended November 30, 2001 and
November 30, 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.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS 141,
"Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets".
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated or completed after June 30, 2001. SFAS 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. SFAS
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The provisions of SFAS 141 are effective immediately. The provisions of SFAS 142
are effective for fiscal years beginning after December 15, 2001. Earlier
adoption is permitted for entities with fiscal years beginning after March 15,
2001 but not required.
SFAS 141 will require that upon adoption of SFAS 142, the Company evaluate its
existing intangible assets and make any necessary reclassifications in order to
conform with the new criteria in SFAS 141. Upon adoption of SFAS 142, the
Company plans to reassess the useful lives and residual values of all recorded
intangible assets, and make any necessary amortization period adjustments by
December 31, 2001. In addition, to the extent an intangible asset is identified
as having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of SFAS 142 by
December 31, 2002. Any impairment loss will be measured as of the date of
adoption and recognized as the cumulative effect of a change in accounting
principle. Upon adoption of SFAS 141 and SFAS 142, the Company does not
anticipate a material impact to its financial statements.
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 November 30, 2001 were $43,223.
Shareholder loans payable
The Company has cash loans from its shareholders in the amount of $218,854 at
November 30, 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 $5,546
at November 30, 2001 payable monthly at $3,221, 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
7
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 November 30, 2001, there is no outstanding balance owed under the
factoring agreement.
Convertible promissory notes
In July, 2001, the Company entered into an agreement with an investment capital
group to raise interim capital for the company through an offering of 10%
convertible promissory notes (the "Convertible Notes"). Each $10,000 investment
also provides for the issuance of 10,000 warrants to purchase common stock of
the Company exercisable at any time within five years from the date of issuance
at a price of $0.625 per share. At maturity, all unpaid principal and interest
may be convertible into units of an equity private placement of the Company's
common stock. Unless converted, principal and interest are due on December 31,
2001. At the Company's option, the maturity date of the Convertible Notes may be
extended under similar terms to March 31, 2002, upon giving proper written
notice. If the Company elects to extend the maturity date to March 31, 2002, the
Company is required to issue to note holders of record at December 31, 2001 an
additional 10,000 warrants for each $10,000 investment exercisable at any time
within five years from the date of issuance at a price of $0.625 per share. The
Company opted not to extend the Convertible Notes. See Note 7, "Subsequent
Events."
8
NOTE 3 - DEBT (CONTINUED)
Convertible promissory notes (Continued)
During the six months ended November 30, 2001 the Company raised $660,000
through the issue of the Convertible Notes. In conjunction with the issuance of
these Convertible Promissory Notes the Company issued 660,000 warrants which
would provide total cash proceeds to the Company of $412,500 ($0.625 per share)
if all of the warrants are exercised. A debt discount of $131,807 was recorded
in conjunction with the issuance of these warrants, of which $81,453 has been
amortized to interest expense during the six months ended November 30, 2001 (see
Note 4).
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 often include 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 six months ended November 30, 2001, the Company issued 85,790 shares
of common stock in exchange for services valued at $78,673.
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 six months ended November 30, 2001, the Company issued 1,210,000
warrants in conjunction with an offering of 10% Convertible Promissory Notes.
This included 660,000 warrants issued to holders of the Convertible Promissory
Notes and a further 550,000 warrants issued to the placement agent and a
consultant who assisted in structuring the Convertible Note offering. A non-cash
charge of $100,450 arising from the issuance of these warrants was recorded
against general and administrative expenses.
During the six months ended November 30, 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 range was 2.09% - 3.82%,
volatility was 30% and the expected life of the warrants is five to seven years.
The fair value of warrants issued during the six months ended November 30, 2001
was estimated to be $300,930.
9
NOTE 4 - EQUITY (CONTINUED)
Treasury Stock
Due to possible 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 determined 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 six months ended November 30,
2001, an additional 3,000 shares were reacquired at a cost of $7,125 or $2.375
per share.
NOTE 5 - SUPPLEMENTAL CASH FLOW DISCLOSURES
For cash flow purposes, various, non-cash transactions have been entered into by
the Company during the six month periods ended November 30, 2001 and 2000. These
items are as follows:
<Table>
<Caption>
Six Months Ended
November 30,
---------------------------
2001 2000
------------ ------------
Supplemental cash flow disclosures:
Cash paid for interest $ 2,725 $ --
Non cash transactions:
Common stock issued for services 78,673 197,732
Common stock issued for equipment -- 10,681
Warrants issued for services 100,450 --
Notes payable issued for services -- 62,538
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
Since November 30, 2001, the Company has received an additional $496,500 of
proceeds from the issue of 10% Convertible Promissory Notes. The Company elected
not to extend the terms of the notes at December 31, 2001, and $1,156,500 of
Convertible Promissory notes were converted into 2,431,381 shares of the common
stock of the Company. In addition the Company issued 1,215,691 warrants in
conjunction with the conversion of these notes as stipulated by the note
agreement.
10
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.
Since inception, the Company has incurred significant losses and as of November
30, 2001 has an accumulated deficit of $(4,830,724). 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, due to 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. The Company will cease operations if it is unable
to raise additional funds until it becomes a viable entity.
RESULTS OF OPERATIONS
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 and current economic conditions 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.
The events of September 11 had a negative impact for the economy in general and
this impacted Elite's existing and prospective customers. In particular, some
promising strategic alliance negotiations were deferred, our ability to raise
capital was adversely impacted and some customers were adversely impacted.
Management believes that increased focus on vehicular security, security of
sensitive cargoes (including hazardous materials and munitions transportation)
and homeland defense may create opportunities for the Company's systems.
Net revenues for the three and six month periods ending November 30, 2001 were
$145,105 and $442,074, respectively, compared to $499,413 and $671,634 for the
three months and six months ending November 30, 2000, respectively. Revenues
include sales of the Company's PageTrack(R) hardware to distributors, monitoring
and control service contracts and miscellaneous third party hardware sales. The
Company continues to have a lack of working capital to fund sales and marketing
activities and inventory purchases. This and the condition of the economy has
constrained the company's ability to generate revenues. Revenues declined 70.9%
during the three months ended November 30, 2001 compared to the same quarter
last year and 34.2% for the six month period ended November 30, 2001 compared to
the same period last year. Cost of revenues for the quarter ending November 30,
2001 were $130,381 compared to $401,694 for the quarter ending November 30, 2000
a decrease of 67.5% . The cost of revenues for the six month period ending
November 30, 2001 were $373,613 compared to $576,638 for the period ending
November 30, 2000,a decrease of 35.2%. Cost of revenues includes the
manufactured cost of our PageTrack(R) products, wireless telemetry network
services, internet connectivity and the costs of operating Elite's 24-hour
Control Center. The decrease in cost of revenues for the three months and six
months periods reflects the decline in sales for the year.
Gross profit for the three months ending November 30, 2001 was $14,724 compared
to $97,719 during the three months ending November 30, 2000 while gross profit
for the six month period ending November 30, 2001 and 2000 was $68,461 and
$94,996, respectively. Gross profit includes margins on our PageTrack(R)
products and the telematics services fees offset by the costs of Internet
connectivity and operating Elite's 24-hour Control Center. The significant
decline in gross profit margin for the quarter ending November 30, 2001 (10.1%)
compared to the same quarter in 2000 (19.6%) was due to one-time firmware
changes to the communications module provided by the module manufacturer and
installed by Elite. As a percent of revenues, gross profit for the six month
period ended November 30, 2001 was 15.5% compared to 14.1% during the six month
period ended November 30, 2000. The slight increase in
11
the gross profit margin reflects the higher proportion of telematics services
revenues compared to hardware revenue in the overall sales mix, offset by the
increased cost due to firmware changes in the current quarter.
The control center operations costs are semi-fixed and will therefore tend to
decrease as a percent of revenue if and when the number of subscribers to our
service increases. If the Company is able to increase volumes, this will also
lead to significant reductions in the manufactured cost per hardware unit.
Assuming the Company is able to maintain its current sales prices, gross profit
margins could increase.
Sales and marketing expenses for the three and six month periods ending November
30, 2001 were $84,644 and $186,482, respectively compared to $126,601 and
$247,033, respectively during the three and six month periods ended November 30,
2000. Sales expenses consist primarily of compensation for our sales and
marketing personnel, advertising, marketing literature, trade show and other
promotional costs. Costs decreased 33.1% for the quarter and 24.5% for the six
months compared to the same periods last year due primarily to a decrease in
salary expense resulting from staff reductions and voluntary reductions in
management compensation. 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 and six month periods
ended November 30, 2001 were $439,080 and $756,024, respectively compared to
$344,247 and $540,152, respectively for the three and six month periods ended
November 30, 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. The increase of 27.5%for the quarter and 40% for the six months ending
November 30, 2001 was primarily due to an increase of $84,336 and $228,584 in
offering fees and consulting and professional expenses primarily related to
capital sourcing activities. 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 status as a publicly traded company. However,
the Company seeks to hold such increases to less than the rate of revenue growth
and expects that G&A will decrease as a percentage of revenue.
Research and development expenses for the three and six month periods ending
November 30, 2001 were $109,347 and $223,303, respectively compared to $117,610
and $225,683 for the three and six month periods ending November 30, 2000,
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.
Costs decreased 7% for the quarter and 1% for the six months ending November 30,
2001 compared to the same periods last year due primarily to lower purchases of
components for testing and development. The Company expects that, subject to
funding, research and development expenses will increase in absolute dollars in
future periods as the Company develops new and enhanced telematics products and
services to meet a variety of market opportunities.
Other income (expense) for the three and six month periods ending November 30,
2001 were $(108,107) and $(125,447), respectively compared to $(1,769) and
($22,542) for the three and six month periods ended November 30, 2000,
respectively. The increase is primarily due to increased interest expense
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, shareholder loans, and convertible promissory notes,
inclusive of the amortization of debt discount.
CASH FLOW FOR SIX MONTHS ENDING NOVEMBER 30, 2001
Net cash used in operating activities was $555,162 for the six months ending
November 30, 2001. Net cash used for operating activities was primarily the
result of the net loss before changes in operating assets and liabilities of
$(996,704), offset by an increase in accounts payable of $67,901, an increase in
accrued liabilities and salaries of $100,280 and reductions in accounts
receivable and inventory of $273,361. The reduction in accounts receivable and
inventory reflects the lower levels of operations as
12
well as tighter credit control and inventory management to conserve cash flow.
The increase in accrued liabilities is primarily a result of professional
services fees related to the Convertible Note offering.
Net cash used in investing activities of $20,283 consists of patent application
and acquisition costs. The Company recently acquired a patent (#5,712,899),
issued in 1998, covering the transmission over a cellular network of location
information from a vehicle to a base station operator and the communication of
information to the mobile user via voice circuit. This patent covers a "call
center centric" business model for the provision of telematics services. This
patent also covers cell phone handsets that incorporate a GPS unit for the
provision of E-911 services, emergency response, roadside assistance or
concierge services. The FCC has mandated the general availability of E-911
services commencing late 2001. These may or may not be based on the Elite's
technology, and it is therefore not possible to say if license revenue will
accrue to the Company. Elite remains alert for the potential to acquire
additional patents in the telemetry and telematics arenas.
Elite also has two patents pending that cover its Internet-centric
machine-to-machine telematics business model ("the PageTrack Patent") and an
end-to-end logistics management system ("the logistics patent"). The
International Patent examiner has advised Elite that key claims made in our
PageTrack patent will be allowed. As a result, management is optimistic
regarding the potential for allowance of these claims in the USA. Elite is
currently negotiating with the patent office regarding the logistics patent and
Elite cannot be sure at this stage which claims will be allowed or whether this
patent will be issued at all. Elite intends to file additional patent
applications in the telemetry and telematics arenas in order to protect
proprietary technology development.
Net cash provided by financing activities during the six month period ending
November 30, 2001 was $562,117, which comprised net proceeds from the issuance
of Convertible Promissory Notes of $660,000 offset by repayments on prior
borrowings of $119,517 and the acquisition of treasury stock in the amount of
$7,125. The Company currently depends on cash from financing activities to
sustain its business operations and this is subject to significant constraints
as described below.
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 4,147 unit) or monthly sales of 2,250 units
(current monthly volume is approximately 200 units). Subject to availability of
the necessary capital funding, the Company expects to achieve volumes in excess
of 2,000 units per month and a 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 marketing its telematics products and
services through a national 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
13
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
has also explored 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 a greater amount of operations from cash flow.
In July 2001, the Company entered into an agreement with an investment capital
group to raise interim capital for the company through an offering of 10%
convertible promissory notes (the "Convertible Notes"). Each $10,000 investment
also provides for the issuance of 10,000 warrants to purchase common stock of
the Company at a price of $0.625 per share exercisable at any time within five
years from the date of issuance. Unless converted, principal and interest are
due on December 31, 2001. At maturity, all unpaid principal and interest may be
convertible into units of an equity private placement of the Company's common
stock. At the Company's option the maturity date of the Convertible Notes may be
extended under similar terms to March 31, 2002, upon giving proper written
notice. If the Company elects to extend the maturity date to March 31, 2002 the
Company is required to issue to note holders of record at December 31, 2001 an
additional 10,000 warrants for each $10,000 investment exercisable at any time
within five years from the date of issuance at a price of $0.625 per share. The
Company opted not to extend the Convertible Notes. See Note 7, "Subsequent
Events."
During the six months ended November 30, 2001 the Company raised $660,000
through the issue of the Convertible Promissory Notes. In conjunction with the
issuance of these Convertible Promissory Notes the Company issued 660,000
warrants which would provide total cash proceeds to the Company of $412,500
($0.625 per share) if all of the warrants are exercised. A debt discount of
$131,807 was recorded in conjunction with the issuance of these warrants, of
which $81,453 has been amortized to interest expense during the six months ended
November 30, 2001.
Since November 30, 2001, the Company has received an additional $496,500 of
proceeds from the issue of 10% Convertible Promissory Notes. The Company elected
not to extend the terms of the notes at December 31, 2001, and $1,156,500 of
Convertible Promissory notes were converted into 2,431,381 shares of the common
stock of the Company. In addition, the Company issued 1,215,691 warrants in
conjunction with the conversion of these notes as stipulated by the note
agreement.
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, 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 November 30, 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 expects to 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 this growth. The Company
may also use cash to acquire or license technology, products or businesses
related to its current business. In addition,
14
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.
15
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
- ---------- ------------ ---------- ---------------- ---------- ------------ --------- -----------
9/30/01 15,000 0.73 $ -- $ 10,950 -- -- --
10/31/01 15,000 0.60 -- 9,000 -- -- --
10/31/01 2,790 5.38 -- 14,996 -- -- --
9/07/01 -- -- -- -- 15,000 0.625 9/07/06
9/24/01 -- -- -- -- 30,000 0.625 9/24/06
9/25/01 -- -- -- -- 50,000 0.625 9/25/06
9/26/01 -- -- -- -- 10,000 0.625 9/26/06
9/28/01 -- -- -- -- 5,000 0.625 9/28/06
10/01/01 -- -- -- -- 100,000 0.625 10/01/08
10/01/01 -- -- -- -- 100,000 1.00 10/01/05
10/01/01 -- -- -- -- 100,000 1.25 10/01/05
10/04/01 -- -- -- -- 20,000 0.625 10/04/06
10/08/01 -- -- -- -- 35,000 0.625 10/08/06
10/09/01 -- -- -- -- 10,000 0.625 10/09/06
10/10/01 -- -- -- -- 25,000 0.625 10/10/06
10/15/01 -- -- -- -- 30,000 0.625 10/15/06
10/17/01 -- -- -- -- 45,000 0.625 10/17/06
10/25/01 -- -- -- -- 10,000 0.625 10/25/06
10/26/01 -- -- -- -- 30,000 0.625 10/26/06
11/05/01 -- -- -- -- 10,000 0.625 11/05/06
11/26/01 -- -- -- -- 40,000 0.625 11/26/06
11/30/01 -- -- -- -- 60,000 0.625 11/30/06
</Table>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held December 13, 2001 in
Freeport, Texas. The purposes of the Annual Meeting were the election of the
Board of Directors and the ratification of the Board of Director's selection of
independent auditors. Joseph D. Smith, Hanh Nguyen, Richard Hansen, Thien Nguyen
and Russell A. Naisbitt were elected to the Board of Directors. There were
present at the Meeting, in person or by proxy, stockholders of the Company who
were holders of record on November 15, 2001 of 11,550,512 shares of Common Stock
or 87.8133% of the total shares of the outstanding Common Stock of the Company,
which constituted a quorum.
16
The tabulation of votes for each nominee was as follows:
<Table>
<Caption>
FOR AGAINST WITHHELD ABSTAIN BROKER NON_VOTE
Joseph D. Smith 10,719,460 0 153 0 830,899 0
Hanh Nguyen 10,719,460 0 153 0 830,899 0
Richard Hansen 10,719,460 0 153 0 830,899 0
Thien Nguyen 10,719,460 0 153 0 830,899 0
Russell A Naisbitt 10,719,460 0 153 0 830,899 0
</Table>
Additionally, the shareholders voted to ratify the Board of Director's selection
of Pannell Kerr Forster of Texas P.C. as the Company's independent auditors for
the fiscal year ended May 31, 2002.
<Table>
<Caption>
The tabulation of votes for the proposal to ratify the selection of Pannell Kerr Forster of Texas P.C. was as
follows: FOR AGAINST WITHHELD ABSTAIN BROKER NON-VOTE
10,719,460 0 146 0 830,864 0
</Table>
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 November 30, 2001 there were no reports
filed on Form 8-K.
17
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 January 14, 2002
- ------------------------------------
Joseph D. Smith
/s/ Russell A. Naisbitt CFO January 14, 2002
- ------------------------------------
Russell A. Naisbitt
18
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>
19
<Table>
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. (incorporated by reference to Exhibit
4.11 of Registrant's Form 10QSB as filed on April 11, 2001.
4.12* Termination of Investment Banking Agreement - Schneider Securities.
(incorporated by reference to Exhibit 4.12 of Registrant's
Form 10KSB as filed on August 29, 2001.
4.13 Promissory Note
4.14 Class A Warrant Agreement
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.
20