UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| For the Quarterly Period ended February 28, 2002
Or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM December 1, 2001 TO February 28, 2002
Commission File Number: 0-17597
ELITE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0252296
(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
3340 Peachtree Place
Suite 1800
Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)
404-812-5312
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |x | No | |
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of
each of the issuer's classes of common equity, as of the latest practicable
date: February 28, 2002, 99,350,000 shares of Common Stock.
- --------------------------------------------------------------------------------
ELITE TECHNOLOGIES, INC.
Index to Quarterly Report on Form 10-QSB
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets- February 28, 2002 and May 31, 2001 3
Condensed Consolidated Statements of Operations-Three and Nine-Months Ended
February 28, 2002 and February 28, 2001. (Unaudited) 4
Condensed Consolidated Statements of Cash Flows- Nine-Months Ended
February 28, 2002 and February 28, 2001. (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Report on Review by Independent Accountants 10
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports 20
Signature 20
ELITE TECHNOLOGIES, INC, AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
February 28, May 31,
------------ -------
2002 2001
---- ----
(Unaudited) (Note)
----------- ------
Assets
Current assets:
Cash on hand and in banks $159,328 $80,450
Accounts receivable - net 544,649 639,979
Inventory 432,107 690,012
Receivable from officer 921,252 707,624
-----------------------------------------
Total current assets 2,057,336 2,118,065
Property and equipment, net 524,268 561,330
Excess of cost over net assets of businesses acquired,
less accumulated amortization of $1,904,418 and
$1,259,876 at February 28, 2002 and May 31, 2001, 3,818,324 5,523,017
respectively.
Other assets 12,596 10,000
-----------------------------------------
Total Assets $6,412,524 $8,212,412
=========================================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable $242,395 $213,537
Accounts payable 2,110,351 926,905
Accrued expenses 222,032 163,475
Federal payroll taxes payable 928,888 928,888
State payroll taxes payable 321,614 321,614
Reserve for acquisition 1,662,400 1,662,400
Income taxes 18,870 12,000
-----------------------------------------
Total current liabilities 5,506,550 4,228,819
-----------------------------------------
Long-term liabilities:
Convertible note payable 1,013,360 1,117,801
-----------------------------------------
Total liabilities 6,519,910 5,346,620
-----------------------------------------
Stockholders' Equity (Deficit):
Common stock, $.0001 par value; 500,000,000 shares authorized; 99,350,000 and
61,812,434 issued and outstanding at February 28, 2002 and May 31, 2001,
respectively 9,935 6,181
Additional paid-in capital 47,817,429 43,963,877
Accumulated deficit (47,934,750) (41,104,266)
-----------------------------------------
Stockholders' Equity (Deficit) (107,386) 2,865,792
-----------------------------------------
Total Liabilities and Stockholder's Equity (Deficit) $6,412,524 $8,212,412
=========================================
Note: The consolidated balance sheet at May 31, 2001 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
See notes to condensed consolidated financial statements.
3
ELITE TECHNOLOGIES, INC, AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
February 28, February 28,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues-net $2,301,035 $3,299,484 $9,065,641 $10,633,880
Cost of Sales 2,474,767 2,924,623 8,556,110 9,622,258
----------------------------------------------------------------------------
Gross Profit (173,732) 374,861 509,531 1,011,622
Operating Expenses:
Salaries, wages and benefits 278,034 166,740 803,575 405,966
Depreciation and amortization 285,874 410,314 965,080 1,177,302
Other operating expenses 375,674 (165,736) 1,386,502 703,899
Stock based compensation 527,001 - 998,801 -
Investment banking fees - - - 1,584,031
Write down of non-performing assets - - 799,051 -
----------------------------------------------------------------------------
Total operating expenses 1,466,583 411,318 4,953,009 3,871,198
----------------------------------------------------------------------------
Loss from Operations 1,640,315 36,457 4,443,478 2,859,576
Other Income And Expenses:
Interest expense 23,356 1,777 73,568 13,877
Other expenses(income) - net 29,924 (10,342) 30,206 6,917
----------------------------------------------------------------------------
Total other income and expenses 53,280 (8,565) 103,774 20,794
----------------------------------------------------------------------------
Loss before income taxes 1,693,595 27,892 4,547,252 2,880,370
Provision for income taxes 3,870 - 18,870 -
----------------------------------------------------------------------------
Net Loss $1,697,465 $27,892 $4,566,122 $2,880,370
============================================================================
Net Loss Per Share of Common Stock:
Basic and Diluted ($0.02) ($0.01) ($0.05) ($0.05)
============================================================================
Weighted Average Number of Common
Shares Used In Calculating
Net Loss Per Share of Common Stock:
Basic and Diluted 88,909,865 45,782,025 88,909,865 54,000,600
============================================================================
See notes to condensed consolidated financial statements.
4
ELITE TECHNOLOGIES, INC, AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended Nine Months Ended
February 28, February 28,
2002 2001
---- ----
Cash flows from (to) operating activities:
Net loss ($4,566,122) ($2,880,370)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,741,755 1,177,302
Write-down of non-performing assets - -
Account receivable direct write off - -
Stock based compensation 998,801 -
Commitment to issue stock for investment
banking services - 1,584,031
Decrease (increase) in:
Accounts receivable 95,330 (1,436,566)
Inventory 257,905 -
Note receivable - 527,470
Other assets (2,596) (830,696)
Increase (decrease) in:
Accounts payable 1,183,446 687,276
Payroll taxes payable - (2,420)
Accrued expenses and other current liabilities 87,415 (52,900)
Income tax - -
----------------------------------------------
Net cash used in operating activities 204,006 (1,226,873)
----------------------------------------------
Cash flows from (to) investing activities:
Purchases of property and equipment (5,156) (140,490)
Acquisition of businesses - (175,000)
Receivable from officers (213,628) (499,162)
----------------------------------------------
Net cash used in investing activities (218,784) (814,652)
----------------------------------------------
Cash flows from (to) financing activities:
Proceeds from issuance of common stock - 666,578
Proceeds from issuance of long-term debt 225,000 1,302,185
Proceeds from (payment on) short-term notes - -
Contributed capital - 251,567
----------------------------------------------
Net cash provided by financing activities 225,000 2,220,330
----------------------------------------------
Net increase (decrease) in cash 239,778 178,805
Cash and cash equivalents at beginning of period 80,450 (35,106)
----------------------------------------------
Cash and cash equivalents at end of period $159,328 $143,699
==============================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest - $13,877
----------------------------------------------
Income taxes - -
----------------------------------------------
Acquision of businesses:
Fair value of assets acquired, including goodwill - $3,150,563
Fair value of liabilities assumed - (425,000)
Promissory note issued - (2,550,563)
Fair value of common stock issued - -
----------------------------------------------
Net cash paid for acquisitions - $175,000
==============================================
See notes to condensed consolidated financial statements
6
Elite Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
February 28, 2002
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying un-audited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America or interim information consistent with instructions of
Form 10-QSB. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments consisting of a normal and recurring nature
considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended February 28, 2002
respectively may not necessarily be indicative of the results that may be
expected for the year ended May 31, 2002.
For further information, refer to Elite Technologies Inc, (the Company)
consolidated financial statements and footnotes thereto included on the Form
10-K for the year ended May 31, 2001.
Adoption of Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition in Financial Statements", which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management believes that Elite has complied with the
guidance of SAB 101.
In January 2001, Elite adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended. The adoption of SFAS No. 133 did not have a
material effect on the Company's financial position or results of operations
because Elite is not currently using derivatives.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". Statement 141 eliminated the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. Statement
142, which includes the requirements to test goodwill and indefinite-lived
intangible assets for impairment, rather than amortize them, will be effective
for fiscal years beginning after December 15, 2001.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement requires entities to record the fair value of an
asset retirement obligation in the period in which it is incurred. This
statement is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged.
In September 2001, the FASB issued SFAS No. 144 on asset impairment that is
applicable to financial statements issued for fiscal years beginning after
December 31, 2001. The FASB's new rules on asset impairment supercede SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", and provides a single accounting model for the
disposal of long-lived assets.
7
Management does not believe the adoption of these statements will have a
significant impact on the Company's financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant inter-company transactions and
balances have been eliminated.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the condensed consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Basic and Diluted Loss Per Share
The Company has adopted FASB Statement No. 128, "Earnings Per Share", which
requires a dual presentation of basic and diluted earnings per share. However,
because of the Company's net losses, the effect of stock options and warrants,
if applicable, would be anti-dilutive. Accordingly, stock options and warrants
are excluded from the computation of loss per share totaling approximately
88,909,865 at February 28, 2002.
Inventories
Inventories are stated at the lower of cost or market. Production costs are
applied to ending inventories at a rate based on production capacity and any
excess production costs are charged to cost of products sold.
Accounting Policies
In the opinion of management, the accompanying un-audited consolidated financial
statements reflect all normal adjustments, exclusive of any adjustments that may
be required as a result of going concern issues discussed further within the
enclosed financial information. Management also believes that the enclosed
information presents fairly the financial position of Elite Technologies, Inc.,
and Subsidiaries at February 28, 2002 and the results of operations for the
three and nine months ended February 28, 2002 and February 28, 2001 and cash
flows for nine months ended February 28, 2002 and February 28, 2001. The results
of operations for the three and nine month periods ended February 28 should not
necessarily be taken as indicative of the results of operations that may be
expected for the entire year ending May 31, 2002.
The financial information as of November 30, 2001 should be read in conjunction
with the financial statements contained in Elite Technologies, Inc. Form 10-K
Annual Report for May 31, 2001.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash overdrafts are classified as
current liabilities.
8
Property and Equipment
Property and equipment are carried at cost. Expenditures for maintenance and
repairs that do not significantly extend the useful lives of the assets are
expensed as incurred, while major replacements and betterments are capitalized.
Depreciation is computed principally using the straight-line method over the
estimated useful lives of the assets, generally five years for computer
equipment and furniture and fixtures, and three to five years for purchased
software.
Cost of property sold or otherwise disposed of and the related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized currently as income.
Excess of Cost Over Net Assets of Businesses Acquired
On goodwill established prior to 2002, the excess of cost over net assets of
businesses acquired (goodwill) is being amortized using the straight-line method
over five years. All goodwill transactions were effective previous to the
adoption of FASB issued Statement of Financial Accounting Standards No. 141,
"Business Combinations", and No. 142. The amortization period is based on, among
other things, the nature of the products and markets, the competitive position
of the acquired companies, and the adaptability of changing market conditions of
the acquired companies. At each balance sheet date, the Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation.
The amount of goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate equal to the rate
of return that would be required by the Company for a similar investment with
like risks. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Actual and expected income tax expense can differ due to
non-deductible expenses and different income tax jurisdictions.
Payroll Taxes Payable
Payroll Taxes payable include separate line items for both federal and state tax
liabilities. The assumption of these liabilities was part of the agreement to
acquire Intuitive Technology Consultants, Inc. The respective state and federal
tax liabilities have not been paid during previous periods due to cash flow
matters. Management has worked with the appropriate tax authorities and such
authorities have agreed not to impute any further interest or penalties on these
accounts.
9
Pro-Forma Financial Information
Generally accepted accounting principles in the United States of America call
for the comparative presentation and the relative pro forma effects on that of
the preceding year. This was not illustrated here since World Touch
Communications, Inc. maintains the status of a start-up company and was not
operational in previous periods.
Management's Plans
The Company has incurred significant recurring operating losses during past
reporting periods and carries a working capital and a retained earnings deficit
that raises uncertainty about the Company's ability to continue as a going
concern. Management's business philosophy is to increase market share by virtue
of acquiring companies with inherent symmetry, autonomy and profitability.
Management is actively pursuing new debt and equity financing arrangements. In
addition, controls on operating efficiency and effectiveness are being
considered. Management is continually evaluating capital budgeting opportunities
and the Company's overall profitability. However, any results of their plans and
actions cannot be assured. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
REPORT ON REVIEW BY INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Elite Technologies, Inc., and Subsidiaries
We have reviewed the accompanying consolidated balance sheets of Elite
Technologies, Inc., and Subsidiaries (the "Company") as of February 28, 2002 and
May 31, 2001 and the related consolidated statements of operations for the three
months and nine months ended February 28, 2002 and February 29, 2001, and the
related consolidated statements of cash flows for the nine months ended February
28, 2002 and February 29, 2001. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, with the exception of the matter described in the following
paragraph, we are not aware of any material modifications that should be made to
the aforementioned financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of May 31,
2001, and the related consolidated statements of operations, of stockholders'
equity, and of cash flows for the year then ended (not presented herein), and in
our report dated August 17, 2001, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information as set forth
in the accompanying consolidated balance sheet information as of May 31, 2001,
10
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
Our report dated August 17, 2001 on the consolidated financial statements of
Elite Technologies, Inc., and subsidiaries as of and for the year ended May 31,
2001 contains an explanatory paragraph that states that the Company's recurring
losses from operations raise substantial doubt about the entity's ability to
continue as a going concern. The consolidated balance sheet as of May 31, 2001,
does not include any adjustments that might result from the outcome of that
uncertainty.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed further in the
financial information, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Israel & Ricardo Blanco, C.P.A.
Atlanta, Georgia
April 8, 2002 Temporary Permit No. 694
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The following should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Form 10-K, as filed with the SEC, for the fiscal year ended May 31,
2001. Other than historical and factual statements, the matters and items
discussed in this Quarterly Report on Form 10-QSB are forward-looking statements
that involve risks and uncertainties. Actual results and timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth under Risk Factors in the Company's Annual Form 10-K as well as this
filing Form 10-QSB and other documents filed by the Company with the Securities
and Exchange Commission. In evaluating the Company's business, prospective
investors should carefully consider the information set forth below under the
caption Risk Factors in addition to the other information set forth herein. The
Company cautions investors that its business and financial performance are
subject to substantial risks and uncertainties.
General
Elite is a technology company primarily focused on the hardware distribution and
communications sector of the technology industry. Through its subsidiaries,
Elite offers information technology ("IT") products, services, and solutions to
small, medium and large enterprises. Elite seeks to generate growth through
strategic acquisitions, increased sales, and operational efficiencies achieved
through centralization and standardization of its subsidiaries' business
procedures.
Elite was founded as a Georgia corporation in 1996 under the name Intuitive
Technology Consultants, Inc. ("ITC"). In July 1998, ITC Acquisition Group, LLP,
consisting of management of ITC, acquired a majority interest, through a reverse
merger, in CONCAP, Inc. On April 22, 1999, the Company changed its name to Elite
Technologies, Inc. Elite has transferred most of its operations following the
acquisition of ACE Manufacturing Group, Ltd, (AMG), on March 15, 2000.
11
From 1998 until 2000, Elite offered a variety of IT services, including IT
staffing, custom software development and integration, Internet hosting, content
and technical development, hardware sales and service, and content delivery
platforms. Elite also served as an authorized solution provider and application
developer for leading enterprise-level software products. During this period,
Elite expanded its products and services through targeted acquisitions and
internal growth.
As part of its acquisition strategy, Elite acquired AMG in April 2000. Following
this acquisition, Elite suspended most of its other operations to focus on
developing and marketing AMG's Internet "pay-by-minute" browser (kiosk)
products. As a result, revenues in fiscal year 2000 decreased to $298,230 from
$1,937,317 in Fiscal Year 1999. Despite this decrease, Elite positioned itself
to acquire additional companies to augment AMG's kiosk products, including
companies providing content, hardware and related IT services.
In line with its stated strategy, Elite acquired International Electronic
Technology of Georgia, Inc. ("IET"), AC Travel, Inc. ("AC Travel"), and Icon
Computer Parts Corp. ("Icon") in June 2000, June 2000, and February 2001,
respectively. IET and Icon distribute hardware through small, mid-sized, and
large resellers, including Sam's Club in Puerto Rico, a division of Wal-Mart
Stores, Inc. All three businesses were acquired to create synergy with AMG's
kiosk products and expand Elite's overall products and services base. By virtue
of Elite's aggressive acquisition pattern, revenues in fiscal year 2001
increased to $13,268,877, an increase of 4,300% over fiscal year 2000.
Since July 2001, Elite has acquired World Touch Communications, Inc. ("World
Touch"), a provider of telecommunications products and services including
voice-over IP ("VoIP"), and has incorporated Intelligent Software Solutions of
Georgia, Inc. ("ISS"). Through World Touch, Elite has expanded into the
telecommunications sector. Through ISS, a Microsoft OEM distributor for the
Caribbean, Elite has developed a software distribution outlet.
Elite's objective is to become a leader in hardware and software distribution
and VoIP telecommunications delivery. Elite intends to grow through strategic
acquisitions that create added value for its existing subsidiaries, increased
sales that target burgeoning markets in Puerto Rico, the Caribbean, and Latin
America, and increased operational efficiencies that reduce costs and increase
productivity across its core businesses.
Elite has suspended operations of Scanlan Music, Inc., Temporary Help
Connection, Inc., and AC Travel, Inc. due to decreased product and service
demand and changed economic conditions. Additionally, Elite has integrated the
products and services of Elevation Strategic Partners, Inc. and Virtual
Enterprises, Inc. into its other subsidiaries.
The Company's principal executive offices are located at 3340 Peachtree Rd N.E,
Suite 1800 Atlanta, Georgia 30326. Telephone: (404)-812-5312. The Company's
Internet address is http://www.elitetechinc.com.
RECENT DEVELOPMENTS
The Company is continuing to invest internal resources into such practices of
finding, then acquiring, plausible acquisitions targets in hopes of promoting
shareholder value. As of the report date of this filing, the Company has no
active "Letters of Intent" in place.
Effective February 18, 2002 Elite incorporated an entity named Icon USA, Inc.
("Icon USA). This company will act as a domestic U.S. partner to Icon Computer
Parts, Corp, as located in San Juan, Puerto Rico.
12
Within this reporting period, Elite has consummated a contractual relationship
with a company to provide purchase order and accounts receivable financing. This
relationship was procured to assist in the financing of various mass merchant
accounts. Initially, this financing relationship has been provided to several of
Elite's subsidiaries, namely, Icon Computer Parts, Corp. and Icon USA.
Management is currently contemplating extending the same financing options to
Intelligent Software of Georgia, Inc.
As a matter of significant subsequent events Elite has filed Form SB-2
Registration Statement as dated April 10, 2002. This document, in its final
form, will register an additional 92,287,663 shares of Elite's common stock. As
of the date of this filing, Elite has not received any letters of comments
specific to Form SB-2 from the Securities Exchange Commission.
Results of Operations
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 28, 2002 AS COMPARED TO
THE NINE MONTHS ENDED FEBRUARY 28, 2001.
The following table sets forth the amount of increase or decrease represented by
certain items reflected in the Company's statements of operations in comparing
the nine months ended February 28, 2002 (the 2002 period) to the nine months
ended February 28, 2001 (the 2001 period):
Nine Months Ended
February 28,
Increase
2002 2001 (Decrease)
---- ---- ----------
Revenues-net $9,065,641 $10,633,880 ($1,568,239)
Cost of Sales 8,556,110 9,622,258 (1,066,148)
--------------------------------------------------------
Gross Profit 509,531 1,011,622 (502,091)
Operating Expenses:
Salaries, wages and benefits 803,575 405,966 397,609
Depreciation and amortization 965,080 1,177,302 (212,222)
Other operating expenses 1,386,502 703,899 682,603
Stock based compensation 998,801 - 998,801
Investment banking fees - 1,584,031 (1,584,031)
Write down of non-performing assets 799,051 - 799,051
--------------------------------------------------------
Total operating expenses 4,953,009 3,871,198 1,081,811
--------------------------------------------------------
Loss from Operations 4,443,478 2,859,576 1,583,902
Other Income And Expenses:
Interest expense 73,568 13,877 59,691
Other expenses (income)-net 30,206 6,917 23,289
--------------------------------------------------------
Total other income and expenses 103,774 20,794 82,980
--------------------------------------------------------
Loss before income taxes 4,547,252 2,880,370 1,666,882
Provision for income taxes 18,870 - 18,870
--------------------------------------------------------
Net loss $4,566,122 2,880,370 $1,685,752
========================================================
Revenues: Revenues from operations for the first nine months ended February 28,
2002 decreased by $1,568,239 over the same period of the previous year. This
decrease is largely due to the economic effect of the terrorist attack of
September 11, 2001.
Cost of Sales: Cost of sales for the first nine months ended February 28, 2002
decreased by $1,066,148 as a function of sales falling approximately fifteen
percent between compared periods.
Salaries, Wages and Benefits: Salaries, wages and benefits increased by $397,609
due to the Company's strategy of internalizing professional staff to help defray
consulting costs and increased staff requirements at Icon Computer Parts, Corp.
Depreciation and Amortization: The Company depreciates its assets, including
goodwill, on a straight-line basis over three to five years. This account
decreased by $212,222 as a result of the write off on non-performing assets.
Other Operating Expenses: For the nine months ended February 28, 2002, other
operating expenses increased by $682,603 over the same period of the previous
year. This difference stems, in part, from the operations of new companies World
Touch Communications, Inc. and Intelligent Software Solutions of Georgia, Inc.
and Icon USA, Inc. as well as increased staff requirements at Icon Computer
Parts, Corp.
Stock based compensation: The increase of $998,801 between periods stems from
the issuance of restricted stock for services rendered during the nine-month
period ended February 28, 2002.
Investment banking fees: The decrease of $1,584,031 between periods resulted
from the non-issuance of restricted stock to investment bankers during the
nine-month period ended February 28, 2002.
Write down of non-performing assets: This amount reflects the net write down of
goodwill as it relates to AC Travel, Inc.
Income taxes: This is a result from profitable operations as located in other
income tax jurisdictions.
Net Loss: Net loss increased by $1,685,752 for the above nine-month period due
to the above aforementioned reasons.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2002 AS COMPARED
TO THE THREE MONTHS ENDED FEBRUARY 28, 2001
The following table sets forth the amount of increase or decrease represented by
certain items reflected in the Company's statements of operations in comparing
the three months ended February 28, 2002 (the 2002 period) to the three months
ended February 28, 2001 (the 2001 period):
13
Three Months Ended
February 28,
Increase
2002 2001 (Decrease)
---- ---- ----------
Revenues-net $2,301,035 $3,299,484 ($998,449)
Cost of Sales 2,474,767 2,924,623 (449,856)
------------------------------------------------------------
Gross Profit (173,732) 374,861 (548,593)
Operating Expenses:
Salaries, wages and benefits 278,034 166,740 111,294
Depreciation and amortization 285,874 410,314 (124,440)
Other operating expenses 375,674 (165,736) 541,410
Stock based compensation 527,001 - 527,001
------------------------------------------------------------
Total operating expenses 1,466,583 411,318 1,055,265
------------------------------------------------------------
Loss from Operations 1,640,315 36,457 1,603,858
Other Income And Expenses:
Interest expense 23,356 1,777 21,579
Other expenses (income)-net 29,924 (10,342) 40,266
------------------------------------------------------------
Total other income and expenses 53,280 (8,565) 61,845
------------------------------------------------------------
Loss before income taxes 1,693,595 27,892 1,665,703
Provision for income taxes 3,870 - 3,870
------------------------------------------------------------
Net loss $1,697,465 $27,892 $1,669,573
============================================================
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Revenues: Revenues from operations for the third quarter ended February 28, 2002
decreased by $998,449 from $3,299,484 for the same period February 28, 2001.
This decrease is largely due to the economic effect of the terrorist attack of
September 11, 2001.
Cost of Sales: Cost of sales for the third quarter ended February 28, 2002
decreased by $449,856 from $2,924,623 for the same period February 28, 2001. The
decrease between periods is a function of a decline in sales volume of
approximately thirty percent between periods.
Salaries, Wages and Benefits: Salaries, Wages and Benefits increased by $111,294
from $166,740 for the same period February 28, 2001. The increase between
periods is due to the Company's strategy of internalizing professional staff to
help defray consulting costs as well as increased staff requirements in Icon
Computer Parts, Corp.
Depreciation and Amortization: The Company depreciates its assets, including
goodwill, on a straight-line basis over three to five years. Depreciation and
amortization expense decreased $124,440 from $410,314 over the previous quarter
then ended February 28, 2001 due to write down of non-performing intangible
assets.
15
Other Operating Expenses: For the third quarter ended February 28, 2001 other
operating expenses increased by $541,410 from $(165,736) for the same period
February 28, 2001. This increase reflects significant net adjustments as made to
the reporting period then ended February 28, 2001.
Stock based compensation: The increase of $527,001 between periods is due to the
issuance of Company stock to consulting personnel.
Net Loss: Net losses increased by $1,669,573 from $27,892 for the same period
ended February 28, 2001. The net change between periods is the cumulative
function of all described changes as noted above.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 1 to our to
our consolidated financial statements. However, certain of our accounting
policies are particularly important to the portrayal of our financial position
and results of operations and require the application of significant judgment by
our management; as a result they are subject to an inherent degree of
uncertainty. In applying those policies, our management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain
estimates. Those estimates are based on our historical experience, terms of
existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources.
Our significant accounting policies include:
Excess of Cost Over Net Assets of Businesses Acquired.
On goodwill established prior to 2002, the excess of cost over net assets of
businesses acquired (goodwill) is being amortized using the straight-line method
over five years. All goodwill transactions were effective previous to the
adoption of FASB issued Statement of Financial Accounting Standards No. 141,
"Business Combinations", and No. 142 "Goodwill and Other Intangible Assets". The
amortization period is based on, among other things, the nature of the products
and markets, the competitive position of the acquired companies, and the
adaptability of changing market conditions of the acquired companies. At each
balance sheet date, the Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate equal to the rate of return that would be required by the Company
for a similar investment with like risks. The assessment of the recoverability
of goodwill will be impacted if estimated future operating cash flows are not
achieved.
Inventories.
Inventories are stated at the lower of cost or market, cost being determined on
the first-in, first-out method. Reserves for slow moving and obsolete
inventories are provided based on historical experience. We evaluate the
adequacy of these reserves on a quarterly basis.
Revenue Recognition and Accounts Receivable.
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, the price is fixed and final, delivery has occurred and
there is a reasonable assurance of collection of the sales proceeds. We
16
generally obtain oral or written purchase authorizations from our customers for
a specified price and consider delivery to have occurred at the time of
shipment. Revenue is recognized at shipment and a reserve for sales returns is
recorded. Revenues from service sales are recognized when the service procedures
have been completed or applicable milestones have been attained, as specified by
each contract and as costs related to the contracts are incurred.
LIQUIDITY AND CAPITAL RESOURCES
Elite's capital requirements have principally related to the acquisition of
businesses, working capital needs and capital expenditures for growth. These
requirements have been met through a combination of private placements and
internally generated funds. Although Elite has incurred direct costs for
acquisitions, Elite has completed past acquisitions primarily with stock.
Elite currently lacks the working capital required to continue as a going
concern and to achieve its acquisition program and internal growth objectives.
Management expects to enter into agreements for debt or equity funding in the
future in order to meet the needs of internal growth and acquisitions.
Management believes that such agreements for debt or equity funding will be
sufficient to enable Elite to continue operating as a going concern. However,
there is no assurance that an agreement for such additional funding will be
consummated.
Inter-company Funding. All of the unsecured liquidity of Elite Technologies Inc.
and Subsidiaries is raised by the parent company Elite Technologies Inc.,
(Elite). Elite then lends the necessary funds to its subsidiaries on an as
needed basis. Elite's management regulates this inter-company exposure by
generally requiring inter-company loans to have maturities equal to or shorter
than the maturities of the borrowings of Elite. This ensures that the
subsidiaries' obligations to Elite will generally mature in advance of Elite's
third-party long-term borrowings. Elite generally funds the investments in
subsidiaries with debt or equity capital.
CONTRACTUAL OBLIGATIONS
Elite has contractual obligations to make future minimum payments under
short-term non-cancelable lease agreements for a period of five months ending
July 1, 2002. This minimum monthly obligation equates to $5,037.97. Elite also
has interest payment commitments related to convertible debt agreements.
Substantially all of our long-term borrowings are unsecured and consist
principally of convertible debt obligations.
Risk Factors
Impact Of Terrorist Attacks
The terrorist attacks in New York and Washington D.C. in September of 2001 have
disrupted commerce throughout the United States and other parts of the world.
The continued threat of terrorism within the United States and abroad and the
potential for military action and heightened security measures in response to
such threat may cause significant disruption to commerce throughout the world.
We are unable to predict whether the threat of terrorism or the response thereto
will result in any long-term commercial disruptions or if such activities or
responses will have a long-term material effect on our business, results of
operations, or financial condition. To the extent that such disruptions result
in delays or cancellations of customer orders, a general decrease in corporate
spending, or our inability to effectively market and sell our products, our
business and results of operations could be adversely affected.
17
Quarterly Fluctuations
The company's operating results may fluctuate significantly from period to
period as a result of a variety of factors, including product returns,
purchasing patterns of consumers, the length of the company's sales cycle to key
customers and distributors, the timing of the introduction of new products and
product enhancements by the Company, technological factors, variations in sales
by product and distribution channels, and competitive pricing and general
economic conditions throughout the industrialized world. Due to the factors
noted above and other risks discussed in this section, management believes that
quarter-to-quarter comparisons of our operating results may not be meaningful.
You should not rely on our results for one quarter as any indication of our
future performance. Quarterly variations in our operations could result in
significant volatility in our stock price and the market price for our common
stock might fall. It is likely, in the future quarters, our operating results
may be below the expectations of securities analysts or investors. If this
occurs, the price of our common stock is likely to decrease.
Our Ability To Raise Funds To Subsidize Operations Is Limited
Our operating results to date have been net losses and have required cash from
investors and loans from third parties and from related parties. Our ability to
raise capital to fund future operations is limited and cannot be relied upon if
present working capital funds are depleted. Additional capital may not be
available on terms favorable to us, or at all. If we are unable to raise
additional capital when we require it, our business could be harmed. In
addition, any additional issuance of equity or equity-related securities to
raise capital will be dilutive to our stockholders.
We Have Incurred Significant Losses, And Our Failure To Increase Our Revenues
Could Prevent Us From Achieving Profitability
We have incurred significant losses since our inception in 1996 and expect to
incur losses in the future. We have not achieved profitability on a quarterly
basis. We will need to generate significantly greater revenues while containing
costs and operating expenses to achieve profitability. Our revenues may not
continue to grow, and we may never generate sufficient revenues to achieve
profitability.
Risk Related To Our Common Stock
There may be sales of a substantial amount of our common stock, as permitted
under Rule 144, by our existing stockholders and these sales could cause our
stock price to decline. These issued shares, originally restricted shares, may
be sold in the future without registration under the Securities Act to the
extent permitted under Rule 144, Rule 701, or another exemption under the
Securities Act.
Insiders Will Continue To Have Substantial Control Over This Company And Could
Delay A Change In Corporate Control, Which May Negatively Affect Your Investment
As a result, these insiders and/or entities acting together will be able to
substantially influence the outcome of all matters requiring approval by
stockholders, including the election of and approval of significant corporate
transactions. This ability may have the effect of delaying a change, which may
be favored by other stockholders.
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If We Fail To Effectively Manage Our Operations, Including Any Reductions Or
Increases In The Number Of Our Employees, Our Operating Results Could Be Harmed.
Primarily as a result of the economic downturn and slowdown in capital spending,
particularly in the computer and communications industry, we recently
implemented a number of cost-cutting measures, including reductions in our
workforce. The impact of these cost-cutting measures, combined with the
challenges of managing our geographically dispersed operations, has placed, and
will continue to place, a significant strain on our management systems and
resources. In addition, our ability to effectively manage our operations will be
challenged to the extent that we begin expanding our workforce. We expect that
we will need to continue to improve our financial and managerial controls,
reporting systems and procedures, and will need to continue to train and manage
our workforce worldwide. Any failure to effectively manage our operations could
harm our operating results.
Our Markets Are Highly Competitive, And If We Are Unable To Compete Successfully
Our Revenues Could Decline, Which Would Harm Our Operating Results.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, purchasing, manufacturing and other resources
than we do. As a result, these competitors may be able to respond more quickly
to new or emerging technologies and to changes in customer requirements, to
devote greater resources to the development, promotion and sale of products, or
to deliver competitive products at lower prices.
We Depend On Key Personnel To Manage Our Business Effectively In A Rapidly
Changing Market.
Our future success depends, in part, upon the continued services of our
executive officers and other key finance, sales, and support personnel. In
addition, we depend substantially upon the continued services of key management
personnel at our corporate office in Atlanta, Georgia. These officers or key
employees are bound by employment agreements for a specific term.
Our ability to continue to attract and retain highly skilled personnel will be a
critical factor in determining whether we will be successful in the future.
Competition for highly skilled personnel is intense, especially in the Atlanta
area. We may not be successful in attracting, assimilating or retaining
qualified personnel to fulfill our current or future needs. Our future success
depends upon the continued services of our executive officers, particularly Mr.
Scott Schuster, our Chief Executive Officer and President, who has been with the
Company since inception, Mr. Frank Noori, our Chief Operating Officer, who
joined us in June 2000, and Mr. David Peacos, our Chief Financial Officer, who
joined the firm in June 2001. Concerning matters of risk management, Elite
Technologies Inc. does not have replacement policies covering these key
personnel.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is currently not exposed to any significant financial market risks
from changes in foreign currency exchange rates or changes in interest rates and
does not use derivative financial instruments. A substantial majority of our
revenue and capital spending is transacted in U.S. dollars. However, in the
future, we may enter into transactions in other currencies. An adverse change in
exchange rates would result in a decline in income before taxes, assuming that
each exchange rate would change in the same direction relative to the U.S.
dollar. In addition to the direct effects of changes in exchange rates, such
changes typically could affect the volume of sales or foreign currency sales
price as competitors' products become more or less attractive.
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Certain litigation involving the Company is described in the Company's Form 10-K
for the year ended May 31, 2001. Subsequent to the filing of Form 10-K May 31,
2001, no individual material developments have occurred with respect to such
litigation
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports
a) Exhibits:
None
b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: April 22, 2002 Elite Technologies, Inc.
By:
/s/ Scott A. Schuster
---------------------
Scott A. Schuster
Director and Chief Executive Officer
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