Filed On 10/1/02 11:03am ET ˇ SEC File 0-29825 ˇ Accession Number 950134-2-11973
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
10/01/02 Elite Logistics Inc 10KSB/A 5/31/02 3:72 Bowne of Dallas I..01/FA
Amendment to Annual Report -- Small Business ˇ Form 10-KSB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10KSB/A Amendment No. 1 to Form 10-K 43 262K
2: EX-4.15 Management Services Agreement Dated March 4, 2002 15 65K
3: EX-4.16 Mangement Services Agreement Dated July 11, 2002 14 59K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2002
[ ] 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 000-14614
ELITE LOGISTICS, INC.
(Name of small business issuer in its charter)
Idaho 91-0843203
(State of Incorporation) (I.R.S. Employer Identification No.)
1201 North Avenue H
Freeport, Texas 77541
(Address of executive offices, including zip code.)
(979) 230-0222
(Registrant's telephone number)
---------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.01 Per Share
---------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended May 31, 2002 were $771,426.
As of September 10, 2002, the aggregate market value of the voting stock held by
non-affiliates was approximately $810,934. Based on a value of $0.15 per share,
the closing price of common stock as quoted by the Bulletin Board on such date.
The number of common shares outstanding as of September 7, 2002 was 15,557,429,
after deducting 18,000 shares of common stock held in treasury.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
EXPLANATORY NOTE
This Amendment No. 1 to Form 10-KSB on Form 10-KSB/A amends Part II, Item 6 and
Item 7 of our Annual Report on Form 10-KSB for the year ended May 31, 2002 to
change the report as follows:
(1) A word processing error on Page 9 within the last sentence of the
second paragraph under "Cash flows for Year Ended May 31, 2002" was
corrected to include "accrued expenses of $84,386".
(2) A word processing error on Page 19 under the caption "Forte Group
L.L.C. - Consulting Services and Other Transactions" of the first
paragraph last sentence has been corrected to be $49,155. Also on Page
F-11 of Footnote 8 within the last paragraph of the last sentence has
been corrected to be $49,155.
(3) A word processing error on Page 21 of which the reference to Exhibit
No. 11.1 has been deleted.
(4) A word processing error on Page F-3 of the Consolidated Statement of
Operations under the 2002 column was corrected to report a net loss of
$(0.18) per share and the weighted average number of basic and diluted
common shares outstanding was corrected to be 14,183,313.
(5) A word processing error on Page F-9 of Footnote 3 within the Non-Cash
Transactions captioned "Warrants issued for convertible notes discount"
under the 2002 column was corrected to be $231,536.
(6) A word processing error on Page F-13 of Footnote 12 of which the third
paragraph has been inserted.
(7) A word processing error on Page F-14 of Footnote 12 within the first
sentence of the paragraph following the "Fair value of Warrants" data
table was corrected to be $373,349.
(8) A word processing error on Page F-15 of Footnote 12 within the pro
forma disclosures of SFAS No. 123 table under the 2002 column was
corrected to report a loss of $(0.18) per share.
(9) A word processing errors on Page 11 within the second paragraph, on
Page 19 within the first paragraph following the "Accrued Compensation
and Other Loans" table, on Page F-10 within Footnote 6 of the
subparagraph captioned "Shareholder Loans Payable" and on Page F-11 of
Footnote 8 within first paragraph the annual interest rate was
corrected to read "at an annual fixed interest rate ranging from 5%
to 8.25%".
TABLE OF CONTENTS
[Download Table]
Page
----
PART I
Item 1. Description of Business 1
Item 2. Description of Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 7. Financial Statements 13
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 13
Item 10. Executive Compensation 15
Item 11. Security Ownership of Certain Beneficial Owners and Management 17
Item 12. Certain Relationships and Related Transactions 18
Item 13. Exhibits and Reports on Form 8-K 20
Signatures 22
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
All references to the "Company" or "Elite" refer to Elite Logistics, Inc. and
its wholly owned subsidiary, Elite Logistics Services, Inc. ("ELSI").
We are a Telematics Services Provider ("TSP") and a pioneer in the emerging
Telemetry market. We provide hosted telemetry services accessible via the
Internet or any text-enabled wireless device (e.g. PDA, Blackberry, Two-way
Pager, WAP or SMS-enabled cell phone). We have developed software and hardware
platforms for providing a wide variety of telemetric services that could include
home/building security, utility meter reading, home health monitoring, and
vending machine monitoring. We have signed or have pending volume reseller
agreements with several operators of telemetry networks in the United States,
Canada and Mexico.
We believe that the market segment of the Telemetry market with the most initial
potential is the Telematics market. Telematics is the broad term used in the
automotive industry to describe products and services enabled by the convergence
of location technologies (e.g. GPS), communications (including wireless and the
Internet) and information technology.
In the future, we intend to leverage our presence in the Telematics market and
the flexibility of our telemetry platform to enter additional markets adjacent
to the core Telematics space. We are exploring other market opportunities with
major potential strategic partners. These include applications for the
monitoring of strategic assets, material handling equipment, supply chain
applications in the defense industry, inter-modal freight industry, airport
logistics management, oilfield logistics management, and Homeland Security
applications.
Our system integrates GPS technology with wireless communications networks
(currently SkyTel and WebLink's two-way telemetry) and a Web-enabled Geographic
Information System. The PageTrack(R) Intelligent Vehicle Systems ("IVS") can
monitor, track, analyze, and control the movement of vehicles, trailers and
valuable objects that are in transit. Our technology enables users to remotely
locate and manage (disable, door lock/unlock, auto start, windows up/down etc.)
vehicles via an Internet browser or other communications device (e.g. two-way
pager, cell phone or wireless-enabled PDA). Our hosted Internet-based Telematics
services include asset tracking, access to roadside assistance, automatic
collision notification, stolen vehicle recovery and a variety of remote vehicle
management solutions. We have on several occasions successfully supported law
enforcement and vehicle recovery companies by quickly pinpointing the location
of the vehicle for recovery.
We deliver our Telematics services via the worldwide web using an Application
Service Provider ("ASP") delivery model. We believe that our "Internet-centric"
business model based on Machine to Machine ("M2M") communications provides
significant cost and service level advantages over many of our competitors'
business models that are "call center-centric" (e.g. OnStar). Not only do we
save the costs of manning a full call center, but we also provide our users with
direct control over their own assets without the necessity of a human
intermediary. We believe this appeals to the majority of our potential customers
and we intend to incorporate the "you're in control" theme into the values on
which we base our brand.
We have commenced marketing of the PageTrack(R) telematics hardware, Internet
based telematics services and the Logistics Satellite Operating System
("LSOS(R)") logistics management software. We are generating revenues from
hardware sales and telematics services. Currently, the majority of our revenues
comprise sales of the PageTrack(R) hardware. Every unit that is installed also
involves the provision of telematics services. We have structured our business
model to be a value-added reseller of wireless communications services provided
by Network Providers. We currently resell ReFLEX telemetry services from SkyTel,
a WorldCom subsidiary and WebLink. We have packaged the carrier services into a
variety of telematics services plans, which range in cost from $1.25 to $45.95
per month. In addition to the foregoing monthly fees, there is a one-time
activation fee of up to $17.50. The services are delivered via the web
(http://www.elitelog.com). Over time, we expect that monthly recurring revenues
from our telematics services plans will become our primary source of revenues.
1
We market our products and services nationally and in certain international
markets including Canada and Mexico. We have signed a distribution agreement
with Motorola that makes our products and services available in Mexico. We will
soon be marketing our products in other Latin American countries. We currently
have proposals for the system to be installed in certain African nations, in the
U.K. and certain European nations. We have also received expressions of interest
from other countries in Asia.
From ELSI's inception in November 1997 through late 1999, we devoted
substantially all of our efforts to product development. In late 1999, we began
to place greater emphasis on developing the sales and marketing plans for our
technology and securing funding for our pre-launch. The first sales of our
PageTrack(R) hardware products and TSP service revenues occurred in fiscal year
2000. We have the capacity to accommodate production needs, which is outsourced
to third party manufacturers, as sales continue to grow and markets expand. We
intend to raise additional capital and invest these resources to increase our
distribution reach by building a multi-faceted sales channel including OEMs,
distributors, dealers and manufacturer's agents. We are also building a third
party network of certified installers to install the product.
HISTORY OF THE COMPANY
Elite Logistics Services, Inc. was incorporated as an "S" Corporation on August
6, 1997 under the laws of the State of Texas and commenced business operations
on November 19, 1997. On September 1, 1999, the Company became a "C"
Corporation.
On November 17, 1999, ELSI agreed to an exchange of its stock in a merger with
Summit Silver, Inc. (hereinafter "SSI"), a non-operating, publicly traded
company shell company with limited assets. SSI's historical operations were in
exploration and mining of precious metals, primarily in the Northwestern portion
of the United States. As part of the acquisition, ELSI acquired limited assets
from SSI. We accounted for the merger transaction as a capital transaction
comprising a re-capitalization of a non-operating public enterprise (SSI) by a
private operating company (ELSI). SSI subsequently changed its name to Elite
Logistics, Inc. ("ELI"). ELI, an Idaho Corporation, is the holding company of
ELSI, which has continued as a subsidiary of the Company and is consolidated for
financial reporting purposes.
PATENTS
Since our inception we have placed a high priority on building a strong patent
portfolio. We acquired a patent that was issued in 1998 that covers the
transmission from a vehicle or mobile phone of data and location information
over a cellular network to a base station operator, along with simultaneous
voice communication between the base operator and the mobile user. This patent
covers a "call center centric" business model for the provision of Telematics
services including E911, roadside assistance, and concierge services.
We are in discussions with our intellectual property counsel regarding potential
enforcement actions. These could result in license revenues for us or provide us
with leverage to conclude desired strategic alliances with certain notable
competitors. Additional infringement may occur with the advent of E-911 services
utilizing cellular phones that incorporate a geographical positioning system
receiving unit and emergency response or concierge service providers. The
Federal Communications Commission has mandated the general availability of these
services from late 2002.
We also have two patents pending that cover our Internet-centric ASP/M2M
Telematics business model (the "PageTrack Patent") and an end-to-end logistics
management system (the "Logistics Patent"). The International Patent examiner
has advised us that the key claims in the PageTrack Patent will be allowed. This
argues well for the potential allowance of these claims in the United States.
We believe that our patent portfolio will prove to be a significant tool to
enable us to negotiate strategic alliances and to protect our competitive
position. In the event that others challenge us, management believes that our
patents (issued and pending) provide significant defensive cover.
On July 1, 2002, we filed suit in Federal Court against Chapman Technologies,
Inc., for infringement on our existing #899 patent. Due to the bankruptcy of
Chapman we subsequently withdrew this action without prejudice. Although there
can be no assurance that we will be successful in patent litigation, we
anticipate that we may receive royalties from the licensing of our intellectual
property.
2
OUR TELEMATICS SYSTEMS
Our Telematics solution comprises an in-vehicle hardware platform linked to
software applications hosted on our web servers, which are accessible to
customers via a web browser, or two-way pager, or internet capable cell phone,
PDA (e.g. Palm Pilot, BlackBerry, etc). The services are delivered via a TSP
delivery model and do not generally require the customer to download or install
any hardware or equipment other than the PageTrack(R) unit.
The system integrates our proprietary technologies with off-the-shelf software
licensed from MapInfo, Oracle and Microsoft. We license commercially available
technology whenever possible rather than acquiring internally developed systems.
The PageTrack System runs on a Microsoft Windows NT 4.0 Server and stores data
in an Oracle Database. Geographical Information Services and location data are
maintained on MapInfo software also running on a Windows NT 4.0 Server.
The components of our TSP infrastructure are:
o Our PageTrack(R) hardware, which is installed in the monitored vehicle,
integrates off the shelf Global Positioning System ("GPS") units (available
from a variety of sources) with Motorola/Smart Synch's CreataLink ReFlex
telemetry unit to provide a means of determining and reporting the location
and status of a vehicle or other asset at any point in time. We have
designed the PageTrack(R) products to be network and carrier independent.
Our "plug and play" architecture means that the unit can be easily
converted to operate on most types of wireless networks including paging,
cellular, PCS, radio and satellite.
o Our web-enabled Logistics Satellite Operating System ("LSOS"(R)) is
Internet based software. Our web site is designed for fast downloads and
compatibility with most browsers. Pages are deliberately built with minimal
graphics and do not require client-side plug-ins or Java to view.
o Web-enabled Geographic Information Systems ("GIS") technology allows
customers to access the data collected by our system and display the
vehicle's location on a map, via the Internet.
o A Network Operations Center ("NOC") is where the system servers are
maintained and the network elements are monitored 24 hours per day, 7 days
per week.
o Operators are available to assist customers at our Customer Control Center
24 hours per day, 7 days per week and provide communications services to
customers that do not have Internet access.
SERVICES
We have structured our business model to be a reseller of communications
services ("carrier services") provided by Wireless Network Providers. These
services include:
Location Services - Our monitoring service allows our subscribers to locate
their vehicle(s) online or via numerous wireless communications devices in near
real-time and report its location for compliance, security and convenience
purposes. Alternatively, the subscriber could call our Customer Control Center
and receive an automated voice response or live operator indicating the
vehicle's current location and status.
Security Services - Consumers can protect their vehicles against theft, improve
their ability to recover the vehicle in the event that it is stolen, and are
able to summon help quickly in the event of an emergency.
PageTrack(R) can be integrated with a vehicle's keyless entry and alarm system.
If the vehicle alarm is triggered, or the vehicle is moved, PageTrack(R)
automatically emits an alert, notifying the customer and our Customer Control
Center of a potential vehicle theft. If the customer does not respond, our
Customer Control Center will telephone the customer directly.
If the customer believes that the vehicle has been stolen or a driver is in
danger, our Customer Control Center will assist the customer, and local law
enforcement in the recovery or assistance as needed. The PageTrack System when
installed in conjunction with third party hardware connected to the ignition
system can also immobilize the vehicle and/or lock the doors to facilitate
recovery by law enforcement.
3
Other security features allow a customer to establish a "zone of compliance"
that activates our security system when vehicles leave the zone. Customers may
also attach an IVS directly to valuable cargo or to expensive equipment such as
construction equipment.
Information Services/Roadside Assistance - Customers can subscribe to our
Automated Roadside Assistance Program. Our Customer Control Center can direct a
tow truck or other selected services directly to a subscribing customer's
location when the customer presses a roadside assistance button installed in his
or her vehicle.
LSOS(R) FLEET MANAGEMENT SOFTWARE
LSOS(R) is a proprietary fleet management and logistics software application
that provides fleet customers with time and location specific information
regarding every vehicle in the fleet along with the ability to monitor and
control functions on the vehicle. We offer a range of fleet management
solutions, depending on the customer's budget and needs for location and
messaging services. All of our solutions involve the installation of a
PageTrack(R) unit in each vehicle and larger customers may license their own
copy of the LSOS(R) software to support their fleet requirements.
We believe that software solutions that must be customized to the needs of
individual fleet customers are too expensive and time-consuming to be sold
effectively to any but the largest fleets. By emphasizing the operation of the
LSOS(R) software running on hosted servers accessible via the Internet or
various wireless devices, we believe we can attract a wide range of customers,
many of whom would otherwise use less sophisticated logistics systems, if any at
all.
Our potential customers include metropolitan commercial fleets (such as trade
service providers, delivery services, bus and taxi fleets, ambulance companies,
telecommunications companies, utility companies, municipal government vehicles
and law enforcement agencies) and long-haul trucking fleets.
Our products and services allow commercial fleet operators to:
o Increase driver productivity and fleet efficiency by monitoring a driver's
route and assuring that drivers are not deviating from assigned jobs.
o Improve customer service by visually validating that a vehicle is
proceeding in a timely manner.
o Limit unauthorized vehicle use by monitoring the location of a vehicle.
o Reduce driver overtime by furnishing the most direct and efficient route to
a job destination.
o Increase security for fleet drivers, vehicles and cargo by constant
monitoring of vehicles.
SALES & MARKETING
We currently market the PageTrack(R) System to:
o Private motor vehicle owners (via dealers and other indirect channels)
o Shipping and delivery companies
o Rental car companies
o Railroad and transportation companies
o Various other fleet operators
We are establishing a strong multiple class distribution channel to serve both
the commercial, as well as the consumer market. We are pursuing the distribution
of our products to consumers and commercial users as follows:
o Wholesale distributors who will market our products to dealers and value
added resellers.
o Dealers selling directly to consumers. The dealer network comprises
automobile dealers and automobile aftermarket products installers.
o Establishing relationships with Value Added Resellers (VARs). VARs will
sell our products in conjunction with non-Company products and services
marketed by the reseller - primarily software applications that would be
enhanced by the addition of real-time location specific functionality.
o Original equipment manufacturers who would incorporate our products into
their products, such as an automobile manufacturer.
4
We are simultaneously establishing an installation, service and support channel.
We are ensuring delivery of a leadership level of customer satisfaction by
establishing authorization criteria, standards of service, quality monitoring
and training.
MANUFACTURING
We design, integrate, and test The PageTrack System, consisting of software and
hardware components, at our facilities. We have established relationships with
three out-source manufacturers, all of which are capable of meeting our
production needs as we grow and as markets expand.
THE TELEMATICS INDUSTRY
Several studies confirm that the Telematics industry will grow rapidly and
represents a significant market opportunity. According to "Worldwide Telematics
Forecast: Regional Marketings and Forecasts" a 2002 report from the Telematics
Research Group, the automotive telematics service industry could in 20 years be
in similar size as the current cellular industry. The US cellular industry
exceeded $52 billion in 2000. The current number of telematics autos in use will
grow from 3.2 million in 2001 to more than 40 million by 2007 where the US
market penetration would approach 12%. It is estimated that during the 2015-2025
timeframe more than 90% of the new autos would adopt some form of telematics
capabilities. It is estimated that the worldwide industry was 2-3 times that of
the US industry.
COMPETITION
The market for our services is competitive and is expected to become even more
competitive in the future. We face competition from existing and potential
competitors, which could reduce our market share and revenues. Our customers
choose our services primarily on the basis of the functionality, price, ease of
use, quality and geographic coverage of our services. If we are unable to
compete successfully in these areas, competitive pressures may harm our
business. Our current competitors provide telematics services similar to ours
utilizing various wireless communication systems and GPS to transmit location
information to a dispatcher (remote location). By comparison, our software is
Internet based and is accessed directly by our customers through most commonly
used Internet browsers or through a dispatcher operating out of our 24 hour a
day, seven days a week Customer Control Center. We believe that there is no
single competitor that offers the diversity of services and software
functionalities that is offered by the PageTrack(R) System. Our core product
market comprises both the commercial and consumer vehicle markets as well as
those industries that provide shipping and delivery services and have fleet
operations such as rental car companies and railroad and transportation
companies.
Major competitors include:
Commercial Vehicle Market - Qualcomm (NM:QCOM), MinorPlanet USA
(NM:MNPL), @Road (NM:ARDI).
Consumer Vehicle Market - LoJack(R) (NM:LOJN), Onstar(TM) (NYSE:GM)
The advantages of our products and services relative to its competition are
that:
o The costs of the TSP services are approximately 50% less than
competitor services because our carrier service costs are generally
lower than conventional near real-time, two-way communication
services, such as satellite, cellular, and Specialized Mobile Radio
(SMR) services.
o Unlike some competitors (e.g. OnStar) that only deliver services via
contact with a customer service representative (CSR), we utilize an
ASP services delivery model that automates substantially all of the
services delivery. We can provide our users with their own direct
control over their asset, while eliminating the need for expensive
CSRs. Apart from service delivery cost advantages our model can
accommodate growth without being constrained by our ability to hire
CSRs or build out CSR positions in our call center.
Our services also compete with alternative means of communication between
vehicles and their managers, including wireless telephones, two-way radios and
pagers. In addition, we expect that new competitors will
5
enter the market for location-relevant wireless information as businesses and
consumers increasingly demand information when they are mobile. Furthermore, the
widespread adoption of industry standards may make it easier for new market
entrants or existing competitors to offer the services we offer or may offer in
the future.
Many of our existing and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we do.
Additionally, many of these companies have greater name recognition and more
established relationships with our target customers. Furthermore, these
competitors may be able to adopt more aggressive pricing policies and offer
customers more attractive terms than we can.
GOVERNMENTAL REGULATION
We are not aware of any existing governmental regulations that affect the
manufacture, development or sale of our systems. However, we are monitoring a
bill introduced by North Carolina Senator John Edwards aimed at stopping new
mobile gadgets being turned into 'digital dog-tags,' enabling marketers to track
people wherever they go and sell details, without permission. The proposed law
would make a wireless services provider inform its subscribers when it is
tracking their location. The purported objective of the legislation is to stop
service providers revealing or selling data without customer consent. We do not
believe that we would be affected by this legislation in its current form, as
our system is only activated on the instructions of our customer or by some
pre-determined event (e.g. if the vehicle crashes, causing the airbag to
inflate).
E911 MANDATE
In June of 1996, the Federal Communications Commission ("FCC") proposed the
Enhanced 911 ("E911") Mandate 94-102. This will enable a new and explosive,
multi-billion-dollar market opportunity. The E911 Mandate was motivated by a
simple observation - cell phone usage was rapidly rising, and people were using
them to make more and more 911 calls. Emergency operators had difficulty in
locating these phone calls since the exact position was not available - like it
was accessible with landline calls. The E911 mandate was divided into two
phases. During phase I, service providers had to provide emergency operators
with the caller's telephone number as well as the base station - a rough
indicator of location. Phase II mandated that exact co-ordinates of the user had
to be available (within 125 meters) in 67% of 911 calls by October 1, 2001.
There are two competing methods to compute location: network-based methods and
handset-based methods.
NETWORK METHODS
There are three competing network-based methods:
(1) Angle of Arrival ("AOA") which uses special antenna arrays at two base
stations to determine the direction of the cellular phone .
(2) Time Difference of Arrival ("TDOA") which uses three base stations and
computes the exact time delta between signal arrival at the base
stations, and
(3) Multipath Fingerprinting ("MF") which looks at the precise way in
which the radio signal is received at one base station using special
antennas, and then compares that fingerprint with a database of
fingerprints for various locations.
The advantage of network-based methods is that existing cell phones can be made
E911 compliant. The downsides are many - the most critical of which are the huge
infrastructure investment required of providers, and the lack of privacy for
users. A network-based service can always track a cell phone if it is on. This
will be a serious impediment for users as they consider various options.
Handsets Integrating GPS: The idea for handset-based location computation is
simple: use the infrastructure that is already present in the Global Positioning
System (GPS). For years, GPS has been a specialty item for customers, and mainly
used by the military. Using GPS in cellular phones solves the
6
above-mentioned problems of infrastructure and privacy. Customers are tracked
only if they specifically authorize it.
We believe that technology covered by our issued patent has applications in the
provision of E911 services and we intend to explore the potential for license
revenues.
EMPLOYEES
We have 15 full-time employees. Our officers provide their services on a
full-time basis.
ITEM 2. DESCRIPTION OF PROPERTIES
Our facilities comprise our principal office located at 1201 North Avenue H,
Freeport, Texas 77541. We lease 4,610 square feet of space at $7,469 per month
with utilities paid and offices furnished on a lease that expires December 31,
2002. Our offices are currently adequate and suitable for our operations
although, we are considering relocating the administrative and sales offices to
Houston, Texas.
ITEM 3. LEGAL PROCEEDINGS
We are presently involved in two legal proceedings:
VIP Finance vs. Elite Logistics, Inc. - On November 21, 2001, VIP Finance, one
of our customers, filed a complaint in the 141st Judicial District Court of
Tarrant County, Texas in which VIP alleged breach of contract, fraud, and
deceptive trade practices based on plaintiff's purchase of 1,000 PageTrack 2(TM)
units claiming that the units were defective. The plaintiff is seeking actual
and punitive damages, post judgment interest and reimbursement of court costs.
We believe that the claims are without merit and we intend to vigorously defend
this case. This lawsuit remains in the discovery phase.
Richard Andros vs. Elite Logistics Services, Inc. - On July 2, 2002, Mr. Andros,
an independent contractor, filed a complaint in County Civil Court at Law #4 in
Harris County, Texas alleging that he is owed $32,017. We are reviewing these
claims with our legal counsel.
Other than those referred to above, we are not a party to any material legal
proceedings nor are we aware of any which are pending or are known to be
contemplated. Furthermore, we know of no legal proceedings pending or
threatened, or judgments entered against, any of our directors or officers in
their capacity as such. From time to time we are involved in lawsuits that occur
in the normal conduct of our business and are not material to us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTC Bulletin Board operated by the National
Association of Securities Dealers, Inc. (the " OTCBB") under the trading symbol
"ELOG." The following table sets forth, for the periods indicated, the high and
low closing sales prices for common stock of the Company as listed on the OTCBB.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not represent actual transactions.
[Download Table]
Common Stock
----------------------
Fiscal Year 2002 High Low
------------------------- ------ ------
Quarter:
Fourth $ 0.37 $ 0.15
Third 0.90 0.28
Second 0.89 0.60
First 1.45 0.60
[Download Table]
Fiscal Year 2001
-------------------------
Quarter:
Fourth $ 2.125 $ 0.344
Third 3.125 1.50
Second 4.00 2.25
First 5.25 2.25
As of May 31, 2002, we had 1,246 holders of record of our common stock.
While we are currently accruing dividends on our preferred stock and will pay
such dividends when declared, we have not and do not in the future, intend to
pay dividends on our common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included herein should be read in conjunction with the
Financial Statements of Elite Logistics, Inc. and subsidiaries, for the years
ended May 31, 2002 and 2001, and the related notes to the Consolidated Financial
Statements that appear elsewhere in this Form 10-KSB.
The financial information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the continuing operations of the
Company.
RESULTS OF OPERATIONS
Revenues for the year ended May 31, 2002 decreased by $1,000,174, or 56%, to
$771,426 as compared to $1,771,600 for the year ended May 31, 2001. Revenues
include sales of the Company's PageTrack(R) products to distributors, monitoring
and control service contracts and miscellaneous third party hardware sales. The
decreased revenues resulted primarily from a sales volume decrease of 64% of
PageTrack(R) units in fiscal 2002, slightly offset by a 2.7% increase in service
revenue and other revenue resulting from restocking fees.
Cost of revenues for the year ended May 31, 2002 decreased $779,662, or 54%, to
$661,782 as compared to $1,441,444 for the year ended May 31, 2001. Cost of
revenues for the year ended May 31, 2002 included the manufactured cost of our
PageTrack(R) products, wireless telemetry network services provided by SkyTel,
an MCI Worldcom Company, and Weblink Wireless, Inc., and the costs of operating
our 24-hour Control Center. The decrease in cost of revenues for the year ended
May 31, 2002 is attributable to the corresponding decrease in revenues.
Gross profit margin for the year ended May 31, 2002 decreased by $220,512, or
67%, to $109,644 as compared to $330,156 for the year ended May 31, 2001. Gross
profit margin for fiscal year 2002 consisted of margins on our PageTrack(R)
products, activations and resale of wireless telemetry network services provided
by SkyTel and Weblink, offset by the costs of operating Our 24-hour Control
Center. The
8
decreased gross profit margin in 2002 is directly attributable to lower sales
volume of PageTrack(R) products which have higher overall margins.
Correspondingly, this made our overall average profit margin for the current
year less than the prior year.
Sales and marketing expense for the year ended May 31, 2002 decreased $151,365,
or 29%, to $379,178 as compared to $530,543 for the year ended May 31, 2001.
Sales and marketing expenses consist primarily of compensation for our marketing
and business development personnel, advertising, trade show and other
promotional costs, design and creation expenses for marketing literature and our
website. This decrease was primarily due to reductions in the number of sales
and marketing personnel and voluntary reductions in the salaries of senior
marketing personnel toward the end of fiscal year 2002. We expect that sales and
marketing expenses will increase both in absolute dollars and as a percentage of
total net revenues in future periods due to expanded efforts to market and
promote our products and services both domestically and internationally.
General and administrative expenses ("G&A") for the year ended May 31, 2002
increased $168,980, or 13% to $1,450,247 as compared to $1,281,267 for the year
ended May 31, 2001. G&A expenses consist primarily of compensation for personnel
and payments to outside contractors for general corporate functions, including
finance, information systems, human resources, facilities, general management,
bad debt expense and our occupancy costs and other overhead. This increase was
primarily due to increases in outside contractors needed to support the
anticipated growth of our business and was slightly offset by staff reductions
occurring late in the fiscal year. We expect that G&A expenses will increase in
absolute dollars as we hire additional personnel and incur additional expenses
relating to the anticipated growth of our business, such as costs associated
with increased infrastructure and the cost of maintaining our public company
status.
Research and development expenses ("R&D") for the year ended May 31, 2002 were
$470,942, which compared to $470,563 that was incurred in the previous year
ending May 31, 2001. R&D consists 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. We expect that,
subject to available capital funding, R&D will increase in absolute dollars in
future periods due to the costs of development of enhanced and new products and
online services as we attempt to exploit a variety of market opportunities.
Other income and (expense) for the year ended May 31, 2002 increased $258,325,
or 639%, to $(298,721) as compared to $(40,396) for the year ended May 31, 2001.
The majority of the increase was due to interest expense associated with
fundraising efforts as well as capital lease obligations. A majority of the
increase in interest expense, was due to warrants issued in conjunction with
convertible debt instruments issued during the first half of fiscal year 2002
which contributed $231,536 to total interest expense.
CASH FLOW FOR YEAR ENDED MAY 31, 2002
We had cash and cash equivalents of $739 at May 31, 2002 as compared to $34,591
at May 31, 2001. Our working capital deficit was $(1,387,531) at May 31, 2002 as
compared to a deficit of $(422,622) at May 31, 2001.
Net cash used in operating activities was $1,139,764 for the year ended May 31,
2002. Net cash used in operating activities was primarily the result of the net
loss before changes in operating assets and liabilities of $2,032,317, combined
with increases in accounts payable of $553,481, accrued salaries of $114,646,
accrued expenses of $84,386 offset by reductions of accounts receivable $106,597
and inventory of $33,443.
Net cash used in investing activities of $92,150 is comprised of patent
application costs of $89,752 and fixed asset purchases of $2,398. During 2002,
we continued to incur costs to defend our existing patents.
Net cash provided by financing activities was $1,198,062 and principally
consisted of proceeds from the sale of our convertible notes of $1,169,500 and
proceeds from shareholder notes of $154,475, offset by scheduled principal
payments on various term loans. During the year ended May 31, 2002, we continued
to invest our capital resources in sustaining our existing marketing and
distribution channels and to improve upon our existing hardware and service
products. We have no material commitments for capital expenditures. Subject to
the funding constraints described within "Liquidity and Capital Resources," we
anticipate that if we can acquire capital, there will be an increase in the rate
of capital expenditures
9
consistent with our anticipated growth in operations, infrastructure and
personnel. We would add web-based servers and telecommunications equipment to
service increases in our customer base. If, as, and when the number of personnel
increases, we foresee that we would add computer hardware resources and expand
our primary office facility. If sales increase, the Company will need to fund
higher inventory levels to support any growth in sales. We may also use capital
resources to acquire or license technology, products or businesses related to
our current business. In addition, we anticipate that we will continue to
experience growth in our operating expenses commensurate with growth in sales
and that our operating expenses will require material capital resources for the
foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
As shown in the accompanying consolidated financial statements, we incurred a
net loss of $2,489,444 for the year ended May 31, 2002 and continues to
experience negative cash flows from operations. We will be required to raise
additional capital through an offering of securities to fund our operations, and
will attempt to continue raising capital resources until such time as we
generate revenues sufficient to maintain ourselves as a viable entity.
Management believes that these actions will assist us in reaching the point of
profitability from operations and enable us 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 our ability to
continue as a going concern and increase the availability of resources for
funding of our current operations and future market development.
We have retained a financial advisor to assist in evaluating funding options
available. There is no assurance, however, that we will be able to raise the
additional funds we needs to continue in business. If we are unable to raise
sufficient capital resources we may have to cease operations.
Since inception, we have financed our operations primarily through the private
placement of our 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 Redeemable Preferred Stock during fiscal year
2000). We do not anticipate positive cash flow from operations until we achieve
an installed base of around 25,000 units (current installed base is
approximately 5,000 units) or monthly sales of 1,000 units. We believe that if
we can obtain the capital required to fund our business plan that we will
achieve positive cash flow within the 2003 fiscal year, but there can be no
assurance that we will achieve this target.
Our business plan is based on building a nationwide and international
distribution channel of PageTrack(R) dealers and distributors. The plan requires
hiring additional personnel for sales, marketing, customer support and technical
support. We estimate that a minimum of $1,200,000 of additional capital will be
required to fund our current business plan to the point of positive cash flow
from operations. There can be no assurance that we will be successful in
obtaining any such funds on terms acceptable to us, if at all.
In the event that we are unable to secure such additional funding, management
would attempt to downsize the business so as to enable us to survive and grow at
a slower pace. Failure to capitalize on current market opportunities could allow
competitors to overtake us and significantly impair our long-term growth and
value.
It is possible that we may register our common stock or preferred stock for sale
to the public; however, turmoil in the equity markets has greatly impaired our
access to such funding opportunities. If we were to register our common stock or
preferred stock for sale, there can be no assurance that market conditions would
facilitate a successful sale. We will continue to utilize our factoring
agreement for eligible receivables, to accelerate cash flow from sales.
Management is also exploring avenues to increase sales in order to fund
operations from cash flow sooner than projected.
Until such time as we have successfully completed additional funding
arrangements and are cash flow positive from operations, we remain at
significant risk of closing our operations from our 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.
10
CREDIT FACILITIES
During June 2000, we entered into a factoring agreement with a national banking
organization. The bank will advance us 80% of each receivable purchased up to a
maximum of $750,000, subject to full recourse to us. 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 May 31, 2002, we had no contingent
amounts owed under this agreement.
From time to time, we have obtained short-term loans from our primary
shareholders, who were also officers and management of the Company. As of May
31, 2002, shareholder loans totaled $359,743. The loans bear interest at an
annual fixed interest rate ranging from 5% to 8.25%, are unsecured and mature
during the fourth quarter of 2002. We anticipate that as these amounts mature,
the terms will be extended or may be converted to our common stock including the
possibility of issuing additional warrants. We may continue to borrow funds from
these shareholders in the future but there is no assurance that funds will be
made available or under similar terms.
RELATED PARTY DISCLOSURE
As referred to above, we have loans with certain of our shareholders, directors,
and officers. During the year ended May 31, 2002 we borrowed $154,475 under
these loan agreements and repaid $105. During the year ended May 31, 2001 we
borrowed $205,373 and repaid $10,000. Total interest expense incurred for the
years ended May 31, 2002 and 2001 under these loan arrangements was $31,818 and
$2,967, respectively. At May 31, 2002 and 2001, accrued but unpaid interest on
these shareholder notes was $34,786 and $2,967, respectively. The total of
shareholder loans outstanding at May 31, 2002 and 2001 was $359,743 and
$205,373, respectively.
From time to time, when cash flow is not sufficient to fund payroll, certain
officers and employees of the company forego receipt of payment of certain
salaries earned. As of May 31, 2002, $163,002 of salaries have been accrued and
will be paid as cash resources become available.
During the year ended May 31, 2000, we entered into agreements with certain
officers to convert amounts owing to them for deferred compensation into equity
in the form of Series A Redeemable Preferred Stock. The preferred stock carries
an annual dividend of prime plus 2% per share and was redeemable on or before
May 15, 2002, with Board of Directors approval. We are currently negotiating
with the shareholders to convert their preferred shares to common shares.
ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ('FASB') issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated or completed after June 30, 2001. SFAS No. 141 also specifies criteria
that intangible assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill. SFAS No. 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 No. 142. SFAS No. 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 No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of".
The provisions of SFAS No. 141 are effective immediately. The provisions of SFAS
No. 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 No. 141 will require that upon adoption of SFAS No. 142, we evaluate our
existing intangible assets and make any necessary reclassifications in order to
conform to the new criteria in SFAS No. 141. Upon adoption of SFAS No. 142, we
plan to reassess the useful lives and residual values of all recorded intangible
assets, and make any necessary amortization period adjustments by June 1, 2002.
In addition, to the extent an intangible asset is identified as having an
indefinite useful life, we will be required to test the intangible asset for
impairment in accordance with the provisions of SFAS No. 142 by August 31, 2002.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of
11
a change in accounting principle. We do not expect the provisions of SFAS No.
141 and SFAS No. 142 to have a significant effect on our financial position or
operating results.
In October 2001, the FASB also issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," applicable to financial statements
issued for fiscal years beginning after December 15, 2001. The FASB's new rules
on asset impairment supersede SFAS No. 121 and portions of Accounting Principles
Bulletin Opinion 30, "Reporting the Results of Operations." SFAS No. 144
provides a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date, as
presently required. We do not expect the provisions of SFAS No. 144 to have a
significant effect on our financial position or operating results.
GOING CONCERN
We have a history of net losses and continue 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 our debt or common stock. We are dependent on raising
capital resources from outside sources and will continue to do so until such
time as we generate revenues and cash flows sufficient to maintain ourselves as
a viable entity. Management believes that these actions will assist us in
reaching the point of profitability from operations and enable us 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 our ability to continue as a going concern and increase the
availability of resources for funding of our current operations and future
market development.
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,
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 our 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. We assume no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
12
ITEM 7. FINANCIAL STATEMENTS
See the Consolidated Financial Statements listed in the accompanying Index to
Consolidated Financial Statements contained herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with Accountants on Accounting
and Financial Disclosure
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT:
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires our directors, executive officers and persons who beneficially
own 10% or more of our common stock to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock. Based solely on a
review of the copies of such reports furnished to us and written representations
that no other reports were required, we believe that during the year ended May
31, 2002 all of our directors and executive officers and 10% or greater holders
complied on a timely basis with all applicable filing requirements under Section
16(a) of the Exchange Act.
As of September 13, 2002, our executive officers and directors are as follows:
[Enlarge/Download Table]
Name Age Position with Company
----------------------------- --------------- -----------------------------------------------------
Matthew Hutchins Sr. 47 Chairman of the Board
Stephen Harris 47 Chief Executive Officer, President and a Member of
the Board of Directors
Steven Bathgate 47 Director
Richard Huebner 45 Director
Joseph D. Smith 58 Member of the Board of Directors
Richard L. Hansen 58 Chief Operations Officer and a Member of the Board
of Directors
Hanh H. Nguyen 39 Member of the Board of Directors
Thien K. Nguyen 39 Chief Technical Officer
DeEtte Harrington 39 Board Secretary
All directors hold office until the next annual meeting of shareholders and
until their successors have been elected and qualified. Our officers are elected
by the Board of Directors after each annual meeting of our shareholders.
EXECUTIVE OFFICERS AND DIRECTORS
MATTHEW HUTCHINS became the Chairman of our Board of Directors on June 25, 2002.
He is the President and CEO of T-Speed Broadband Communications, Inc. He was
formerly President & CEO of BroadbandNOW, Inc., a leading provider of broadband
data services to the multi-family residential and single-family markets
principally in partnership with residential multi-tenant unit property owners
and emerging telecommunications providers, such as electric utilities,
nationwide. Prior to becoming President & CEO of T-Speed Broadband
Communications, Inc., Mr. Hutchins was Vice President, Business Development &
Corporate Affairs since 1998. Prior to joining BroadbandNOW he was one of the
13
founding principals and Chief Executive Officer of The Tiger Group, L.L.C., a
privately-held international and strategic business development consultancy
specializing in the multimedia, interactive telecommunications and information
technology industries. Prior to his association with The Tiger Group, he was the
Vice President, International & Chief Legal Officer of SpectraVision, Inc., a
publicly held company providing video entertainment programming and interactive
services for the lodging and hospitality industry, worldwide. Prior to his
association with SpectraVision, he was a senior associate with the law firm of
Andrews & Kurth. He received a BA from the University of Maine, a Master of
Public Administration degree from Texas Tech University in 1979, and a JD degree
from Texas Tech University.
STEPHEN M. HARRIS became our President, Chief Executive Officer and a member of
the Board of Directors in March 2002. Mr. Harris was a founding partner at Forte
Group, a mid-market venture catalyst and change management consulting practice,
based in Houston, Texas. While at Forte, Mr. Harris provided consulting services
to us from August 1999 to August 2000. From 1986 to 1999, Mr. Harris was
employed by Compaq Computers GMBH in Germany. He has more than 25 years of
leadership experience from a successful career that was launched at Texas
Instruments, where he held key financial planning and marketing positions in the
Terminals Division, Geophysical Products Division and the PC Products Division.
While at Compaq Computer, he was instrumental in establishing 14 separate sales
subsidiaries in Europe, the Middle East, Africa and Asia. As a General Manager
responsible for developing foreign markets, he expanded distribution and drove
revenue growth in excess of 80% annually for four years. As Europe, Middle East
& Africa Business Development Marketing and Business Unit Director, he was
responsible for all marketing and product activities implemented through a
network of 12 subsidiaries with more than 3,000 distribution partners in 70
countries for a $1.0 billion division. Mr. Harris has a BS in Physics and an MBA
from Northern Arizona University.
STEPHEN M. BATHGATE was appointed to the Board of Directors on January 10, 2002.
Mr. Bathgate currently serves as the managing director of corporate finance and
chairman of the commitment committee for Bathgate Capital Partners LLC (BCP), a
company that he founded in 1995. He has had 26 years of experience in the
securities industry. Prior to starting BCP, he was the Chairman and Chief
Executive Officer of Cohig & Associates, Inc., a NASD member firm specializing
in public and private financing for emerging growth companies. His other
previous experience includes employment by Wall Street West, Dain Bosworth,
Inc., and the National Association of Securities Dealers, Inc.
RICHARD HUEBNER was appointed to the board of directors on January 10, 2002. Mr.
Huebner is Executive Director of Growth and Development and a member of the
Commitment Committee of Bathgate Capital Partners. He joined BCP in October of
2001 in a management capacity to plan and facilitate its growth. He has been in
the securities industry for over 22 years. His experience includes General
Counsel for Hanifen, Imhoff, Inc. from January 1984 through September 1995.
While at the firm, he served in numerous positions including E.V.P. and member
of the Executive Committee of Hanifen, Imhoff Holdings, Inc. He also served as
Director of Hanifen, Imhoff, Inc., and also for its holdings and investments
divisions. In September 1995, Dick became an E.V.P., Director and member of the
Executive Committee of Hanifen, Imhoff Clearing Corporation, which was sold to
Fiserv in December 1999. He continued in those capacities for Fiserv
Correspondent Services until May 2000. From May 2000 until he joined BCP, Mr.
Huebner was a private investor. He received a B.A. in Economics and Business
Administration from Hastings College.
JOSEPH D. SMITH has been a member of the Board of Directors since November 1999.
Mr. Smith was President, Chief Executive Officer and a board member from
November 1999 until March 2002 when he resigned. Mr. Smith was Chairman of the
Board of Directors from November 1999 until June 2002. From August 1997 to
November 1999, Mr. Smith was President of Elite Logistics Services, Inc., the
Company's wholly owned subsidiary corporation. From 1996 to August 1997, Mr.
Smith was Director of Logistics for Baker Energy located in Houston, Texas.
Baker Energy is in the business of oil and gas logistics. Mr. Smith was
responsible for all logistics planning, logistics software development,
budgeting, and company development. From March 1988 to January 1999, Mr. Smith
was a part owner and Chief Technical Officer of Southern Instrument Company
located in Freeport, Texas. Southern Instrument Company was engaged in the
business of selling science and laboratory equipment. From October 1995 to May
1996 Mr. Smith was an independent logistics consultant. Mr. Smith is the husband
of Diana Smith, the Company's Executive Administrator and member of the Board of
Directors.
RICHARD L. HANSEN has been Chief Operating Officer and a member of the Board of
Directors of the Company since November 1999. Mr. Hansen's duties include the
daily operations of the Company
14
ensuring customer support, investor relations, marketing and all operations in
the absence of the President. From 1995 to 1998, Mr. Hansen was the corporate
logistics manager and new business manager for Call Henry, Inc., Cocoa, Florida.
Call Henry, Inc. was engaged in the business of distributing logistics software.
Mr. Hansen was responsible for new business contacts, including marketing,
proposal development and integration, and logistic policies.
HANH H. NGUYEN has been a member of the Board of Directors since November 1999.
Since November 1997, Ms. Nguyen has been a director of Elite Logistics Services,
Inc., the Company's wholly owned subsidiary corporation. Since 1989, Ms. Nguyen
has been employed by Dow Chemical Company as Senior Lead Engineer. Ms. Nguyen is
the wife of Thien Nguyen, a member of the Board of Directors.
THIEN K. NGUYEN resigned as a member of the Board of Directors on April 1, 2002
having served since November 1999. From August 1997 to November 1999. Mr. Nguyen
continues to serve as Chief Technical Officer. Mr. Nguyen was Senior Vice
President and a member of the Board of Directors of Elite Logistics Services,
Inc., the Company's wholly owned subsidiary corporation. From August 1996 to
August 1997, Mr. Nguyen was pursuing higher education. From February 1993 to
August 1996, Mr. Nguyen was Vice President of Operations for Tree Fresh of
Texas, Inc. Tree Fresh of Texas, Inc. is located in Houston, Texas and is
engaged in the business of producing and distributing fruit juices to hotels.
Mr. Nguyen is the husband of Hanh Hoang Nguyen, a member of the Board of
Directors.
DEETTE HARRINGTON has been Secretary of the Board of Directors since June 1,
2001. Ms. Harrington serves as our Controller and has been employed with our
Company since August 7, 2000. From December 1997 to August 2000 she was the
Director of Finance for Angleton Danbury Medical Center and prior to that she
was the Business Manager for a local medical clinic and was assistant cashier
for First Prosperity Bank.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation paid or
accrued by the Company to the Company's named executive officers for the last
three completed fiscal years:
[Enlarge/Download Table]
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation(2)
------------------- ---- -------- ----- ------------ ---------- ------------- ------- ---------------
Steven M. Harris 2002 42,959 -- 1,722 -- 17,500(3) -- --
President and CEO
Joseph Smith 2002 100,004 -- -- -- -- -- --
President and CEO 2001 120,000 -- -- -- -- -- 3,600
2000 120,000 -- -- -- -- -- --
Richard L 2002 108,202 -- -- -- -- -- --
Hansen, COO 2001 108,000 -- -- -- -- -- 3,240
2000 108,000 -- -- -- -- -- --
Thien K. Nguyen 2002 108,000 -- -- -- -- -- --
CTO 2001 108,000 -- -- -- -- -- --
2000 108,000 -- -- -- -- -- --
Diana M. Smith 2002 37,780 -- -- -- -- -- --
Exec Admin 2001 66,000 -- -- -- -- -- 1,980
2000 66,000 -- -- -- -- -- --
Russell A. Naisbitt 2002 -- -- -- -- -- -- --
Treasurer and 2001 -- -- -- -- -- -- --
and CFO (1) 2000 -- -- -- -- -- -- --
(1) Mr. Naisbitt is a Director of Forte Group L.L.C. ("Forte"). Forte had a
consulting agreement, which expired December 31, 2000, with us that
provided for payments of up to $20,000 per month for services provided by
Forte consultants. Thus, Mr. Naisbitt is not deemed to be a direct employee
of the
15
Company and has subsequently resigned his position as CFO and Treasurer.
See Item 12. Certain Relationships and Related Transactions.
(2) Other compensation for the named individuals represents our contribution
under our 401(k) employee savings plan.
(3) Fair value of options to purchase 250,000 shares of common stock,
exercisable at $0.30 per share.
All compensation received by the officers and directors has been disclosed.
There are no stock option, retirement, pension, or profit sharing plans
designated entirely for the benefit of our officers and directors.
OPTION/SAR GRANTS
Incentive stock option grants have been made to executive officers in accordance
with our 2000 Stock Option Plan. As of May 31, 2002, Stephen M. Harris has been
granted 250,000 options to purchase common stock of the Company, vesting upon
signing of Mr. Harris' employment agreement, with an exercise price of $0.30 per
share. Richard L. Hansen, COO, has been granted 15,000 option to purchase common
stock of the Company with 1/3 vesting on September 1, 2001 with 1/24th vesting
each month over the two succeeding years, with an exercise price of $0.75 per
share.
LONG-TERM INCENTIVE PLAN AWARDS
We have generally relied on grants of stock options and, to a lesser extent,
grants of restricted stock and stock purchase rights, under our Incentive Plan,
to provide long-term incentive-based compensation. The objectives of the
Incentive Plan are to (i) attract and retain the services of key employees,
qualified independent directors and qualified consultants and other independent
contractors and (ii) encourage the sense of proprietorship and stimulate the
active interest of those persons in our development and financial success. At
May 31, 2002, 1,445,000 options and stock purchase rights under the Incentive
Plan had been Reserved for Granting to seven current employees at exercise
prices ranging from $0.30 per share to $6.00 per share. Grants of Incentive Plan
Awards are determined (number of awards and their terms) by the Chief Executive
Officer and are contingent upon continued employment.
Stock options are granted with an exercise price equal to the fair market value
on the date of grant and expire 10 years from the date of grant. Vesting terms
of each grant is left to the discretion of management but they generally vest
beginning on the date of grant. The first 250,000 options granted to Stephen M.
Harris vested upon the signing of his employment agreement. The remaining
750,000 options vest 1/3 each year upon the anniversary date of his employment
agreement.
Stock purchase rights are granted with an exercise price equal to the fair
market value on the date of grant. Vesting terms of each grant is left to the
discretion of management but generally vest immediately upon being granted and
expire within one year.
We had not granted any restricted stock awards under the Incentive Plan as of
May 31, 2002.
401(k) EMPLOYEE SAVINGS PLAN
We have a tax qualified 401(k) Employee Savings Plan ("401(k) Plan") for our
employees in which the executive officers also participate. Under the 401(k)
Plan, eligible employees are permitted to defer receipt of up to 15% of their
compensation (subject to certain limitations imposed under the Internal Revenue
Code of 1986, as amended). The 401(k) Plan provides that a discretionary match
of employee deferrals may be made by the Company in cash. Pursuant to the 401(k)
Plan, we elect to match 50% of the first 6% of employee deferral, with our
contribution subject to limitations imposed by the Internal Revenue Service. The
amounts held under the 401(k) Plan are invested among various investment funds
maintained under the 401(k) Plan in accordance with the directions of each
participant. Salary deferral contributions under the 401(k) Plan are 100%
vested. Our contributions vest ratably over five years. Participants or their
beneficiaries are entitled to payment of vested benefits upon termination of
employment.
16
COMPENSATION TO DIRECTORS
We reimburse members of the Board of Directors for their expenses incurred in
connection with their services as directors. Matthew Hutchins and Stephen M
Harris have management services agreements with us. There are no other
compensation arrangements with any directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the common stock ownership as of May 31, 2002 of
each person known by us to be the beneficial owner of five percent or more of
our common stock, each of our directors individually, and all of our officers
and directors as a group. Each person has sole voting and investment power with
respect to the shares of common stock shown, unless otherwise noted in the
footnote to the table, and all ownership is of record and beneficial.
[Enlarge/Download Table]
Number of Percentage of
Shares of Shares of
Common Stock Common Stock
Beneficially Beneficially
Name of Owner Owned Position Owned (1)
--------------------------- ---------------- ------------------------------------ ----------------
Joseph D. Smith 1,104,400 Former President, Chief Executive 7.09%
Officer and remaining member of
the Board of Directors
Diana Smith 4,016,000 Former Executive Administrator 25.78%
Richard L. Hansen (2) 517,000 Chief Operating Officer and 3.32%
member of the Board of Directors
Thien Nguyen 1,104,400 Chief Technical Officer 7.09%
Hanh H. Nguyen 3,112,400 Member of the Board of Directors 19.98%
Stephen M. Harris (3) 1,365,555 President, Chief Executive Officer 8.77%
and member of the Board of Directors
Stephen M. Bathgate (4) 690,000 Member of the Board of Directors 4.43%
Richard Huebner (5) 300,000 Member of the Board of Directors 1.93%
All officers and
directors as a group 12,209,755 78.39%
(1) Percentages are based on 15,575,429 shares of common stock outstanding as
of September 13, 2002. Warrants and options which are exercisable have been
excluded from the computation of the percentages of shares beneficially owned.
(2) Shares shown include 10,417 of common stock that could be acquired pursuant
to a stock option award made on September 1, 2000 that are immediately
exercisable, and 833 shares of common stock that could be acquired pursuant to
stock options exercisable within 60 days of September 1, 2002.
(3) Mr. Harris had a 30% interest in Forte through December 31, 2001 and
resigned upon accepting employment with the Company. Shares shown include
1,115,555 shares of common stock that are immediately exercisable that are held
by Forte. Shares shown also include 250,000 of common stock pursuant to options
awarded on March 1, 2002 that are immediately exercisable.
(4) Shares shown include 230,000 shares of common stock that could be acquired
pursuant to stock purchase warrants exercisable on January 1, 2002 and 230,000
shares of common stock that could be
17
acquired pursuant to stock purchase warrants awarded on November 30, 2001 that
are immediately exercisable.
(5) Shares shown include 100,000 shares of common stock that could be acquired
pursuant to stock purchase warrants awarded January 1, 2002 that are immediately
exercisable and 100,000 shares of common stock that could be acquired pursuant
to stock purchase warrants awarded on November 30, 2001 that are immediately
exercisable.
The following table contains information about securities that have been issued
or are issuable under equity compensation plans, as of May 31, 2002.
[Enlarge/Download Table]
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
Plan category warrants, and rights warrants, and rights equity compensation plans
--------------------------- ------------------------- ------------------------- --------------------------
Equity compensation plans
approved by security
holders 410,000 $0.59 790,000
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, we have has entered into transactions with parties related to
the Company. We believe that all transactions with related parties were entered
into on terms no more or less favorable to us than could have been obtained from
unrelated third parties.
In April 2001, Joseph Smith, a director and our former President and CEO, and
Diana Smith, his wife, borrowed $125,000 from an institutional lender. The
Smiths loaned the proceeds of the loan to us. The loans bear interest at a rate
of 18%. The Smiths pledged 4,810,400 shares of our common stock owned by them to
secure the loan with the institutional lender.
Steven Bathgate has loaned us a total of $30,000 as of May 31, 2002. Subsequent
to May 31, 2002, Mr. Bathgate agreed to convert these loans into the notes.
On June 25, 2002 we entered into an employment agreement with Matthew Hutchins.
Pursuant to that agreement, we have agreed to pay him a base salary of $100,000
per annum and an additional $711 per day until he begins working for us full
time. His base salary will then increase to $144,000 per annum until we raise
additional capital of $1,000,000 at which time his salary will increase to
$250,000 per annum. He will also be paid a bonus of a minimum of $250,000 a year
if we meet certain performance criteria that will be set by the Board of
Directors. We also granted him stock options to purchase shares of common stock
in an amount of not less than 8% of our fully diluted capital stock of the
company. Of the options granted to him, 50% vest immediately; the remaining 50%
vest one year from the date of the Agreement. He will also receive a bonus of
2 1/2% of the first $400,000 of this capital raised, and 5% of funds raised in
excess of $400,000 of capital raised.
Our principal shareholders, Mr. and Mrs. Smith and Mr. and Mrs. Nguyen, are
negotiating an agreement that will provide Mr. Hutchins the right to vote a
number of their shares equivalent to 51% of the shares outstanding prior to any
capital being raised.
In March 2002, Stephen Harris provided a loan to the company of $110,000. We are
negotiating conversion of this note to common stock.
18
PREFERRED STOCK
We entered into an agreement with certain officers that provided for those
officers to convert deferred compensation into equity in the form of Series A
Redeemable Preferred Stock. The preferred stock carries an annual dividend of
prime plus 2% per share and was redeemable on or before May 15, 2002, with Board
of Directors approval. We are currently negotiating with the former officers to
extend the terms or convert the preferred shares to common stock.
FORTE GROUP L.L.C. - CONSULTING SERVICES AND OTHER TRANSACTIONS
Russell Naisbitt, formerly one of our directors, was also a director of Forte
Group L.L.C.. ("Forte") a Houston, Texas based venture catalyst specializing in
accelerating the development of emerging technology companies. On August 23,
1999, we entered into a consulting agreement with Forte. Total fees paid or
accrued (in the form of cash and common stock) to Forte during the years ended
May 31, 2002 and 2001 were $49,155 and $110,047, respectively.
We also issued Forte a warrant to purchase 1,115,555 shares of our common stock
at $1.25 per share. The exercise price of the warrant was the fair market value
of our common stock on the date of the grant. The Board of Directors have agreed
to extend Forte's warrants to March 30, 2004 and reduce the strike price from
$1.25 to $0.90 per share in return for Forte's agreement to convert the
consulting fees we owed them to common stock at $0.25 per share.
Following the termination of consulting arrangements with Forte we entered into
a direct consulting arrangement with Mr. Naisbitt. As of May 31, 2002, fees and
expenses of $75,000 were accrued as owing directly to Mr. Naisbitt pursuant to
this consulting agreement.
OFFICERS LOANS AND DEFERRED COMPENSATION
On May 31, 2002 we owed accrued compensation and other outstanding loans as
follows:
[Download Table]
Accrued
Name Compensation Loans Total
--------------------- ------------ --------- ---------
Joseph D. Smith $ 56,530 $ 153,243 $ 209,773
Thien K. Nguyen 55,676 59,500 115,176
Diana M. Smith 3,165 -- 3,165
Stephen M. Harris 36,228 110,000 146,228
Richard L. Hansen 11,403 7,000 18,403
Steve Bathgate -- 30,000 30,000
------------ --------- ---------
Total $ 163,002 $ 359,743 $ 522,745
------------ --------- ---------
The loans bear interest at an annual fixed interest rate ranging from 5% to
8.25%, are unsecured and mature during the fourth quarter of 2002. We are in the
process of converting the shareholder loans to equity in lieu of extending the
maturity dates of the notes.
We have not entered into any other obligations regarding deferred compensation
with our officers and consultants.
MANAGEMENT SERVICE AGREEMENTS
During the years ended May 31, 2002 and 2001, we entered into management service
agreements with various members of management. These agreements are for
unspecified terms and contain non-compete clauses ranging form 12 to 18 months
in the event that their job tenure with us is severed. The agreements also
provide for the granting of up to 1,445,000 options to acquire our common stock
over the next three years, contingent upon their continued employment.
19
INVESTMENT BANKING AND FINANCIAL ADVISORY SERVICES
Richard Huebner and Steven Bathgate are principals in the investment banking
firm of Bathgate Capital Partners ("BCP"). During the year ended May 31, 2002,
we entered into various consulting and placement agent agreements with BCP and
associates. We paid BCP fees and commissions in a 2002 convertible debt
offering, and issued BCP and persons associated with BCP warrants to purchase
shares of our common stock. Total compensation under these agreements included
consulting fees of $35,000 paid in cash and or common stock and warrants,
commissions on capital raised of $156,963, non accountable expense allowance of
$3,108 and warrants to purchase 350,850 shares of common stock at $0.50 per
share and warrants to purchase 175,425 shares of common stock at $1.00 per
share, both exercisable through December 31, 2006.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
INDEX TO EXHIBITS
[Enlarge/Download Table]
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).
20
[Enlarge/Download Table]
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).
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 (incorporated by reference to Exhibit 4.13 of Registrant's Form 10QSB as filed
on January 14, 2002).
4.14 * Class A Warrant Agreement (incorporated by reference to Exhibit 4.14 of Registrant's Form 10QSB
as filed on January 14, 2002).
4.15 Management Services Agreement dated March 4, 2002 by and between Elite Logistics, Inc. and
Stephen M. Harris.
4.16 Management Services Agreement dated July 11, 2002 by and between Elite Logistics, Inc. and
Matthew Hutchins, Sr.
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).
99.1 * Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
Sarbanes - Oxley Act of 2002.
99.2 * Office Lease (incorporated by reference to Exhibit 99.1 of Registrant's Form 10SB as filed on
March 7, 2000).
99.3 * Agreement between the Company and Vollmer Public Relations (incorporated by reference to
Registrant's Form 10SB12G/A as filed on June 15, 2000).
*Incorporated by reference as indicated.
(b) REPORTS ON FORM 8-K:
MARCH 28, 2002 - Form 8K filed announcing Stephen M. Harris appointed
as President and CEO
21
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ELITE LOGISTICS, INC.
BY: /s/ Stephen M. Harris
------------------------------------------------
Stephen M. Harris, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
[Download Table]
Signature Title Date
------------------------------- ----------------------------- -----------------
/s/ Stephen M. Harris President September 24, 2002
------------------------ and Chief Executive Officer
Stephen M. Harris
/s/ Richard L. Hansen Director September 24, 2002
------------------------
Richard L. Hansen
/s/ Hanh H. Nguyen Director September 24, 2002
---------------------
Hanh H. Nguyen
/s/ Steve Bathgate Director September 24, 2002
---------------------
Steve Bathgate
/s/ Richard Huebner Director September 24, 2002
----------------------
Richard Huebner
/s/ Joseph D. Smith Director September 24, 2002
----------------------
Joseph D. Smith
/s/ Matthew Hutchins Director September 24, 2002
-----------------------
Matthew Hutchins
22
ELITE LOGISTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets as of May 31, 2002 and 2001 F-2
Statements of Operations for the Years Ended
May 31, 2002 and 2001 F-3
Statements of Stockholders' Equity (Deficit)
for the Years Ended May 31, 2002 and 2001 F-4
Statements of Cash Flows for the Years Ended
May 31, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Elite Logistics, Inc.
We have audited the accompanying consolidated balance sheets of Elite Logistics,
Inc., (the "Company") as of May 31, 2002 and 2001, and the related consolidated
statements of operations, cash flows, and stockholders' equity (deficit) for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elite Logistics,
Inc. as of May 31, 2002 and 2001, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's significant losses raise
substantial doubt about its ability to continue as a going concern. Managements'
plans regarding the resolution of this issue are also discussed in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Pannell Kerr Forster of Texas, P.C.
---------------------------------------
Pannell Kerr Forster of Texas, P.C.
Houston, Texas
August 28, 2002
ELITE LOGISTICS, INC.
CONSOLIDATED BALANCE SHEETS
================================================================================
[Enlarge/Download Table]
May 31,
------------------------------
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 739 $ 34,591
Accounts receivable, net of an allowance of $33,141 and $70,294
as of May 31, 2002 and 2001, respectively 62,809 133,542
Inventory 204,302 237,745
Other receivables 2,482 1,193
------------ ------------
TOTAL CURRENT ASSETS 270,332 407,071
------------ ------------
PROPERTY AND EQUIPMENT
Computer equipment 142,811 141,539
Software 118,788 118,788
Furniture and equipment 63,978 63,978
Less: accumulated depreciation and amortization (226,581) (169,564)
------------ ------------
TOTAL PROPERTY AND EQUIPMENT, NET 98,996 154,741
------------ ------------
PATENTS, NET 145,696 62,592
------------ ------------
TOTAL ASSETS $ 515,024 $ 624,404
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 890,383 $ 336,902
Accrued expenses 150,728 66,342
Leases payable 25,110 35,255
Accrued salaries 163,002 48,356
Accrued preferred stock dividends 61,873 43,729
Shareholder loans payable 359,743 205,373
Notes payable 7,024 93,736
------------ ------------
TOTAL CURRENT LIABILITIES 1,657,863 829,693
------------ ------------
LEASES PAYABLE, NET OF CURRENT PORTION 2,190 24,017
------------ ------------
TOTAL LIABILITIES 1,660,053 853,710
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK 244,500 244,500
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $0.01 par value; 50,000,000 shares authorized,
15,575,429 and 13,085,258 shares issued and outstanding
as of May 31, 2002 and 2001, respectively 155,755 130,853
Warrants 937,581 592,063
Additional paid-in capital 3,659,883 2,431,314
Accumulated deficit (6,105,623) (3,598,036)
Treasury stock - 18,000 and 15,000 shares as of
May 31, 2002 and 2001, respectively, at cost (37,125) (30,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,389,529) (473,806)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 515,024 $ 624,404
============ ============
See accompanying notes to consolidated financial statements
F-2
ELITE LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
[Download Table]
Year Ended May 31,
------------------------------
2002 2001
------------ ------------
REVENUES $ 771,426 $ 1,771,600
COST OF REVENUES 661,782 1,441,444
------------ ------------
GROSS PROFIT 109,644 330,156
------------ ------------
EXPENSES
Sales and marketing 379,178 530,543
General and administrative 1,450,247 1,281,267
Research and development 470,942 470,563
------------ ------------
TOTAL EXPENSES 2,300,367 2,282,373
------------ ------------
OPERATING LOSS (2,190,723) (1,952,217)
------------ ------------
OTHER INCOME (EXPENSE)
Loss on sale of equipment -- (1,207)
Loss on exchange of investments -- (19,400)
Interest income 114 1,812
Other income 8,356 --
Interest expense (307,191) (21,601)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (298,721) (40,396)
------------ ------------
LOSS BEFORE INCOME TAXES (2,489,444) (1,992,613)
INCOME TAXES -- --
------------ ------------
NET LOSS $ (2,489,444) $ (1,992,613)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.18) $ (0.16)
============ ============
WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED
COMMON SHARES OUTSTANDING 14,148,313 12,712,670
============ ============
F-3
ELITE LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
================================================================================
[Enlarge/Download Table]
Common Stock
------------------------- Additional Stockholders'
Paid-in Accumulated Treasury Equity
Shares Amounts Warrants Capital Deficit Stock (Deficit)
----------- --------- --------- ---------- ----------- ---------- -------------
Balance at May 31, 2000 12,186,139 $ 121,862 $ 230,210 $1,479,968 $(1,579,446) $ -- $ 252,594
Issuance of 897,819 shares of
common stock and 836,641
warrants, net of expenses
of $27,416 897,819 8,978 361,853 948,759 -- -- 1,319,590
Exercise of options 1,300 13 -- 2,587 -- -- 2,600
Purchase of treasury stock,
15,000 shares, at cost -- -- -- -- -- (30,000) (30,000)
Preferred cumulative dividends
-- -- -- -- (25,977) -- (25,977)
Net loss -- -- -- -- (1,992,613) -- (1,992,613)
----------- --------- --------- ---------- ----------- ---------- -------------
Balance at May 31, 2001 13,085,258 130,853 592,063 2,431,314 (3,598,036) (30,000) (473,806)
Issuance of 118,790 shares of
common stock and
1,076,275 warrants, net of
expenses of $2,158 118,790 1,188 73,140 103,390 -- -- 177,718
Issuance of 2,371,381 shares
of common stock upon
conversion of debt and
accrued interest and
issuance of 1,169,500
class B warrants 2,371,381 23,714 -- 1,166,021 -- -- 1,189,735
Issuance of 1,169,500
warrants in conjunction
with the issuance of
convertible promissory
notes -- -- 231,536 -- -- -- 231,536
Issuance of 330,000 warrants
in conjunction with the
repricing of warrants -- -- 68,673 (68,673) -- -- --
Expiration of warrants -- -- (27,831) 27,831 -- -- --
Purchase of treasury stock,
3,000 shares, at cost -- -- -- -- -- (7,125) (7,125)
Preferred cumulative
dividends -- -- -- -- (18,143) -- (18,143)
Net loss -- -- -- -- (2,489,444) -- (2,489,444)
----------- --------- --------- ---------- ----------- ---------- -------------
Balance at May 31, 2002 15,575,429 $ 155,755 $ 937,581 $3,659,883 $(6,105,623) $ (37,125) $ (1,389,529)
=========== ========= ========= ========== =========== ========== =============
See accompanying notes to consolidated financial statements.
F-4
ELITE LOGISTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
[Enlarge/Download Table]
Year Ended May 31,
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,489,444) $ (1,992,613)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 63,665 63,001
Allowance for doubtful accounts (37,153) 70,294
Common stock issued for professional services 104,578 414,725
Warrants issued for professional services 73,140 24,354
Common stock issued for interest on convertible debt 20,235 --
Notes payable issued for services -- 65,980
Amortization of convertible note discount 231,536 --
Loss on exchange of investments -- 19,400
Investments exchanged for services -- 5,000
Loss on sale of equipment 1,126 1,207
Changes in operating assets and liabilities:
Accounts and other receivables 106,597 49,873
Inventory 33,443 506,981
Accounts payable 553,481 (262,924)
Accrued expenses 84,386 (29,252)
Accrued salaries 114,646 --
------------ ------------
Net cash used in operating activities (1,139,764) (1,063,974)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,398) (20,778)
Proceeds from sales of property and equipment -- 591
Proceeds from note receivable -- 10,000
Patent costs (89,752) (21,094)
------------ ------------
Net cash used in investing activities (92,150) (31,281)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock net of expenses -- 869,791
Exercise of options -- 2,600
Proceeds from convertible notes payable 1,169,500 --
Payments on leased equipment (31,971) (24,616)
Payments on notes payable (123,112) (186,186)
Proceeds from notes payable 36,400 213,550
Payments on shareholders loans (105) (10,000)
Proceeds from shareholders loans 154,475 205,373
Purchase of treasury stock (7,125) (30,000)
------------ ------------
Net cash provided by financing activities 1,198,062 1,040,512
------------ ------------
Net decrease in cash and cash equivalents (33,852) (54,743)
Cash and cash equivalents, beginning of period 34,591 89,334
------------ ------------
Cash and cash equivalents, end of period $ 739 $ 34,591
============ ============
See accompanying notes to consolidated financial statements.
F-5
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS ORGANIZATION
Nature of Operations
Elite Logistics, Inc. (hereinafter the "Company" or "Elite"), an Idaho
corporation, through its wholly owned subsidiary, Elite Logistics Services, Inc.
("ELSI"), is in the telematics business. Telematics is the broad term used to
describe products and services enabled by the convergence of communications
(including wireless and the Internet) and information technology in the
automotive industry. Elite designs and sells, primarily through a
dealer/distributor channel, the PageTrack(R) range of intelligent vehicle
management hardware. PageTrack(R), which includes a Global Positioning Systems
("GPS") receiver, links a vehicle, or other asset, to our Internet servers via
ReFLEX(TM) two-way wireless telemetry networks. Elite is also a telematics
services provider ("TSP") providing hosted Internet-based telematics services
including asset tracking, access to roadside assistance, automatic collision
notification, stolen vehicle recovery and a variety of remote vehicle management
solutions. The Company's products and services are marketed nationally and in
certain international markets.
Going Concern Considerations
As shown in the accompanying consolidated financial statements, the Company
incurred a net loss of $2,489,444 for the year ended May 31, 2002 and continues
to experience negative cash flows from operations. Management will be required
to raise additional capital through an offering of securities to fund the
Company's operations, and will attempt to continue raising capital resources
until such time as the Company generates revenues sufficient to maintain itself
as a viable entity. Additionally, the Company and its principle shareholders are
exploring the possibility of obtaining loans from other third party sources.
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 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in
understanding the Company's consolidated financial statements. The consolidated
financial statements and accompanying notes are representations of the Company's
management, who are responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the
United States of America and have been consistently applied in the preparation
of the consolidated financial statements for the years presented.
Basis of Accounting
The Company uses the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany transactions and
balances have been eliminated in consolidation.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform to
current year presentation. These reclassifications had no effect on fiscal year
2001 net loss or stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-6
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising
Advertising costs are charged to operations in the period incurred.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives of three to ten years.
Expenditures for repairs and maintenance which do not extend the useful life of
the related asset are expensed as incurred. Depreciation expense for the years
ended May 31, 2002 and 2001 was $57,017 and $63,001, respectively.
Impairment of Long-lived Assets
The Company evaluates the recoverability of long-lived assets when events and
circumstances indicate that such assets might be impaired. The Company
determines impairment by comparing the undiscounted future cash flows estimated
to be generated by these assets to their respective carrying amounts.
Impairments are charged to operations in the period to which events and
circumstances indicate that such assets might be impaired.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109 - "Accounting for Income Taxes",
which provides for an asset and liability approach in accounting for income
taxes. Under this approach, deferred tax assets and liabilities are recognized
based on anticipated future tax consequences, using currently enacted tax laws,
attributable to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases.
Stock-Based Compensation
The Company accounts for Stock Based Compensation in accordance with SFAS No.
123 - "Accounting for Stock Based Compensation." Under SFAS No. 123, the Company
is permitted to either record expenses for stock options and other employee
compensation plans based on their fair value at the date of grant or to continue
to apply its current accounting policy under Accounting Principles Board Opinion
("APB") No. 25 and recognize compensation expense, if any, based on the
intrinsic value of the equity instrument at the measurement date. The Company
elected to continue following APB No. 25 (See Note 12).
Basic and Diluted Loss Per Share
In accordance with SFAS No. 128 basic earnings per share is computed using the
weighted average number of common shares outstanding. Due to the Company having
a net loss during the years ended May 31, 2002, 2001, diluted net loss per share
is the same as basic net loss per share as the inclusion of common stock
equivalents would be antidilutive.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents.
Patents
Patents cost consists of patents pending and is amortized using a straight-line
method over 10 years upon receipt of patent appeals.
Research and Development Costs
Costs of research and development are expensed as incurred.
Revenue Recognition
Revenues and cost of revenues are recognized when services and products are
furnished or delivered. Product is directly shipped to consumers from the
Company's contract manufacturer if ten or more units are ordered. Orders of less
than ten units are shipped by the Company from a limited inventory of finished
goods.
F-7
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Compensated Absences
Employees of the Company are entitled to paid vacation, paid sick days and
personal days off depending on job classification, length of service, and other
factors. As of May 31, 2002 and 2001, $26,645 and $21,683, respectively, has
been accrued and recorded as compensated absences.
Concentration of Credit Risk
The Company maintains its cash with a major U.S. bank and, from time to time,
these amounts exceed the Federally insured limit of $100,000. The terms of these
deposits are on demand to minimize risk. The Company has not incurred losses
related to these deposits.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") 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 that 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, we evaluate our existing
intangible assets and make any necessary reclassifications in order to conform
to the new criteria in SFAS 141. Upon adoption of SFAS 142, we plan to reassess
the useful lives and residual values of all recorded intangible assets, and make
any necessary amortization period adjustments by June 1, 2002. In addition, to
the extent an intangible asset is identified as having an indefinite useful
life, we will be required to test the intangible asset for impairment in
accordance with the provisions of SFAS 142 by August 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. We do not expect the
provisions of SFAS 141 and SFAS 142 to have a significant effect on our
financial position or operating results.
In October 2001, the FASB also issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," applicable to financial statements
issued for fiscal years beginning after December 15, 2001. The FASB's new rules
on asset impairment supersede SFAS No. 121 and portions of Accounting Principles
Bulletin Opinion 30, "Reporting the Results of Operations." SFAS No. 144
provides a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date, as
presently required. We do not expect the provisions of SFAS No. 144 to have a
significant effect on our financial position or operating results.
F-8
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUPPLEMENTAL CASH FLOW DISCLOSURE INFORMATION
Following is a summary of supplemental cash flow disclosure information:
[Enlarge/Download Table]
Year Ended May 31,
-------------------------
2002 2001
---------- ----------
Cash paid for interest $ 23,602 $ 18,634
NON-CASH TRANSACTIONS:
Issuance of common stock for professional services $ 104,578 $ 414,725
Issuance of common stock for interest on convertible debt $ 20,235 $ --
Issuance of common stock for equipment $ -- $ 10,681
Issuance of common stock in conversion of debt and interest $1,189,735 $ --
Warrants issued for professional services $ 73,140 $ 24,354
Warrants issued for convertible notes discount $ 231,536 $ --
Equipment financed by capital lease $ -- $ 76,037
Notes payable issued for services $ -- $ 65,980
Investments exchanged for services $ -- $ 5,000
NOTE 4 - PATENTS
We currently have one issued domestic patent and two foreign patent applications
pending. Our patent applications relate to internet-enabled, global positioning
system technology for the commanding, controlling, identification and routing of
items in transit. The costs of patent applications and any cost incurred
defending patents are capitalized as incurred. The costs of patents are expected
to be amortized over their statutory lives of 10 years upon receipt of patent
approvals. As of May 31, 2002, we have accumulated amortization of $6,648.
NOTE 5 - INVENTORY
Inventory is stated at the lower of cost or market, with cost being determined
on a weighted average basis and consists of the following:
[Download Table]
May 31,
------------------------
2002 2001
---------- ----------
Finished goods $ 31,856 $ 50,572
Raw materials 172,446 187,173
---------- ----------
Share Total $ 204,302 $ 237,745
---------- ----------
NOTE 6 - DEBT
Capital leases
Elite has capital leases with various leasing companies for office equipment and
computer hardware and software with monthly installments of $3,013, including
interest at rates ranging from 14% to 24%. Capital leases outstanding as of May
31, 2002 and 2001 were $27,300 and $59,272, respectively.
Following is a summary of office equipment and computer hardware and software
under capital lease:
[Download Table]
May 31,
--------------------
2002 2001
-------- --------
Office equipment $ 50,739 $ 50,739
Computer hardware and software 37,624 37,624
Less accumulated depreciation (48,022) (28,503)
-------- --------
Capitalized cost, net $ 40,341 $ 59,860
-------- --------
F-9
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense of office equipment and computer hardware and software
under capital leases amounted to $19,519 and $24,616 for the years ended May 31,
2002 and 2001, respectively, and is included in total depreciation expense in
the consolidated statements of operations.
Future minimum payments, including interest, under capital leases as of May 31,
2002 are as follows:
[Download Table]
Year Ending
May 31,
-------------
2003 $ 27,655
2004 2,352
---------
Total $ 30,007
---------
Future minimum payments under capital leases consist of the following:
[Download Table]
May 31,
----------------------
2002 2001
-------- --------
Future minimum lease payment $ 30,007 $ 67,128
Less amount representing interest (2,707) (7,856)
-------- --------
Present value of net minimum
capital lease payments $ 27,300 $ 59,272
-------- --------
Shareholder Loans Payable
The Company has loans from its shareholders, who are also officers and
management of the Company, in the amounts of $359,743 and $205,373 at May 31,
2002 and 2001, respectively. The notes bear interest at an annual fixed interest
rate ranging from 5% to 8.25%, are unsecured and mature during the fourth
quarter of 2002. The Company's President and CEO is negotiating conversion of
the shareholder loans to common stock in lieu of restating the maturity dates.
All shareholders have verbally agreed to this transaction and it is anticipated
to be complete before the first quarter of the 2003 fiscal year.
Notes Payable
At May 31, 2002 and 2001, the Company had various individual unsecured notes
payable with American Express in the amount of $7,024 and $21,058, respectively.
At May 31, 2002 and 2001 monthly payments totaled $2,911 and $7,979,
respectively, including interest at an annual rate of approximately 15.9%. Each
note payable has a maturity of six months from the date of its origination.
Factoring Agreement
During June 2000, the Company entered into a factoring agreement with a national
banking organization. Under the agreement, the bank advances the Company 80% of
each receivable purchased up to a maximum of $750,000, subject to full recourse
to the Company. 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 May 31, 2001, we had $72,678 outstanding under this factoring
agreement. At May 31, 2002, there is no outstanding balance owed under the
factoring agreement, but it remains available for future advances.
Convertible Promissory Notes
In July, 2001, the Company entered into an agreement with an investment bank to
raise interim capital through an offering of 10% convertible promissory notes
(the "Convertible Notes"). Each $10,000 investment provided 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.
During the year ended May 31, 2002 the Company raised $1,169,500 through the
issuance of the Convertible Notes. In conjunction with the issuance of these
Convertible Notes the Company issued
F-10
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1,169,500 warrants which would provide total cash proceeds to the Company of
$730,938 ($0.625 per share) if all of the warrants are exercised. A debt
discount of $231,536 was recorded in conjunction with the issuance of these
warrants, all of which has been amortized to interest expense during the year
ended May 31, 2002. On December 31, 2001, 100% of the holders of these notes
converted the amounts outstanding plus accrued interest of $20,235 into
2,371,381 shares of common stock of the Company using a conversion price of
$0.50 per share for principal and $0.625 per share for accrued interest. This
offering expired on December 31, 2001.
NOTE 7 - INCOME TAXES
As of May 31, 2002, net operating losses ("NOLs"), accumulated since its
November 1999 merger with Summit Silver, Inc. ("SSI"), total $6,043,751 and
begin to expire in 2020. Additionally, SSI had a NOL carryforward of
approximately $1,450,000, which may be offset against future taxable income
through 2013. It is currently unknown if the NOL carryforwards will expire
unused. With the significant change in ownership during November 1999, our
ability to utilize these NOLs will be substantially minimized for future periods
in accordance with Internal Revenue Service Code Section 382. Due to the
uncertainty as to whether we will be profitable in the future, an allowance has
been provided to offset the tax benefit of this deferred tax asset relating to
the NOL carryforward.
The Company has no other significant book to tax differences in its assets and
liabilities, which would give rise to other material deferred tax assets or
liabilities.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company has loans from its shareholders in the amounts of $359,743 and
$205,373 at May 31, 2002 and 2001, respectively. The notes bear at an annual
fixed interest rate ranging from 5% to 8.25% annually, are unsecured, and mature
during the fourth quarter of 2002. Accrued salaries due to shareholders amounted
to $163,002 and $48,356 at May 31, 2002 and 2001, respectively.
In September 1999, the shareholders exchanged $244,500 of accrued salaries for
2,445 shares of redeemable preferred stock at $100 per share (See Note 9).
On August 23, 1999, Elite Logistics Services, Inc. entered into a consulting
agreement with Forte Group L.L.C. ("Forte") that provided for cash compensation
of $20,000 per month for services provided by Forte over an initial period of
twelve (12) months. Compensation (if any) and consulting services to be provided
(if any) beyond the initial period are to be mutually agreed upon. In addition
to the consulting fees detailed above, Forte earns certain success related
contingency fees in the event that it introduces investors who fund the Company
or executives who are employed by the Company. This agreement was subsequently
extended through May 31, 2002. Total fees paid or accrued (in the form of cash
and common stock) to Forte during the years ended May 31, 2002 and 2001 were
$49,155 and $110,047, respectively.
NOTE 9 - REDEEMABLE PREFERRED STOCK
On September 15, 1999, ELSI issued 2,445 shares of Series A Redeemable Preferred
Stock ("Preferred Stock") with $100 par value as payment to existing
stockholders for deferred compensation. As part of the acquisition of SSI, these
shares were exchanged for 2,445 shares of SSI's Preferred Stock at $0.01 par
value with a $100 redemption price per share having the same rights and
privileges as the original shares of our preferred stock.
Total authorized shares of Preferred Stock is 10,000,000 and have preferences as
to dividends and upon liquidation. The cumulative dividends are payable at prime
plus 2% (prime was 4.75% at May 31, 2002). As of May 31, 2002, cumulative
dividends accrued, but not declared or paid, amount to $61,873 and are recorded
as accrued preferred stock dividends.
F-11
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company was originally required to redeem all issued and outstanding shares
of Preferred Stock on September 15, 2000 at a redemption price of $100 per
share. On September 15, 2000, the Company failed to redeem the outstanding
shares of Preferred Stock as required, and subsequently negotiated with the
preferred stockholders to extend the term to May 15, 2002. The Company is
currently in the process of negotiating conversion of the Preferred Stock to
common stock and expects to finalize the documents to complete the transaction
in the near term. All shareholders have verbally agreed to the conversion in
lieu of extending the maturity dates. Prior to such time, at the option of the
board of directors, the Company may redeem in whole or in part the outstanding
Preferred Stock. At May 31, 2002, no shares of Preferred Stock had been
redeemed.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Legal Matters
VIP Finance vs. Elite Logistics, Inc. - On November 21, 2001, VIP Finance, one
of our customers, filed a complaint in the 141st Judicial District Court of
Tarrant County, Texas in which VIP alleged breach of contract, fraud, and
deceptive trade practices based on plaintiff's purchase of 1,000 PageTrack 2(TM)
units claiming that the units were defective. The plaintiff is seeking actual
and punitive damages, post judgment interest and reimbursement of court costs.
We believe that the claims are without merit and we intend to vigorously defend
this case. This lawsuit remains in the discovery phase.
Richard Andros vs. Elite Logistics Services, Inc. - On July 2, 2002, Mr. Andros,
an independent contractor, filed a complaint in County Civil Court at Law #4 in
Harris County, Texas alleging that he is owed $32,017. We are reviewing these
claims with our legal counsel.
Other than those referred to above, we are not a party to any material legal
proceedings nor are we aware of any which are pending or are known to be
contemplated. Furthermore, we know of no legal proceedings pending or
threatened, or judgments entered against, any of our directors or officers in
their capacity as such. From time to time we are involved in lawsuits that occur
in the normal conduct of our business and are not material to us.
Operating Leases
The Company leases office space in Freeport, Texas under a three-year term
ending December 31, 2002 with monthly lease payments of $4,069. The Company
anticipates moving to new office space when the lease matures. Total future
expected minimum lease payments on the above lease at May 31, 2002 are $28,483.
Rent expense for the years ended May 31, 2002 and May 31, 2001 was $89,628 and
$83,359, respectively.
Management Service Agreements
During the years ended May 31, 2002 and 2001, the Company entered into
management service agreements with various members of management. These
agreements are for unspecified terms and contain non-compete clauses ranging
from 12 to 18 months for employees in the event that their job tenure with the
Company is severed. The agreements also provide for the granting of up to
1,445,000 options to acquire common stock of the Company over the next three
years, contingent upon their continued employment.
NOTE 11 - 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 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 warrants may be below the fair market value of the
underlying common stock on the date of issuance (See Note 12).
During the year ended May 31, 2001, the Company completed various private
offerings of its common stock for cash and in exchange for various goods and
services. The Company issued 619,281 shares of common stock generating cash
proceeds of $869,830 (net of offering expenses of $27,416). In addition,
F-12
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company issued 258,654 shares of common stock in exchange for goods and
services that had a total value of $378,725 and 3,884 shares of common stock in
exchange for equipment that had a total value of $10,681. During December 2000,
the Company issued 16,000 shares of common stock to employees of the Company as
compensation for prior services. Correspondingly, the Company recorded
compensation expense of $36,000. Additionally, an employee of the Company
exercised options in which the Company issued 1,300 shares of common stock at an
exercise price of $2.00 per share generating cash proceeds of $2,600.
During the year ended May 31, 2002, the Company issued 118,790 shares of common
stock in exchange for services valued at $104,578. In addition, the Company
raised $1,169,500 through the issue of the Convertible Notes. In conjunction
with the issuance of these Convertible Notes the Company issued 1,169,500
warrants which would provide total cash proceeds to the Company of $730,938
($0.625 per share) if all of the warrants are exercised. On December 31, 2001,
100% of the holders of these notes converted the amounts outstanding plus
accrued interest of $20,235 into 2,371,381 shares of common stock of the Company
using a conversion price of $0.50 per share for principal and $0.625 per share
for accrued interest. This offering expired on December 31, 2001.
NOTE 12 - WARRANTS AND OPTIONS
Warrants
On September 20, 1999, the Board of Directors approved the issuance of a warrant
to Vernor Investments to purchase up to 100,000 shares of the Company's common
stock at 5% below the current market value at the time of exercise, exercisable
from the date of issuance until September 30, 2000. These warrants expired
unexercised during fiscal year 2001.
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 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 has 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 original $2.70 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 year ended May 2001, as referred to in Note 11, the Company completed
various private offerings of its common stock for cash and for goods and
services. In conjunction with these offerings, the Company also issued warrants
to acquire an additional 581,641 shares of common stock with an exercise price
ranging from $1.35 - $2.75 per share, expiring 18 months to three years from the
date of issuance. Additionally, 255,000 warrants were issued for goods and
services having a total value of $24,354. These warrants have an exercise price
of $1.35 - $2.75 per share, expiring three years from the date of issuance.
During the fiscal year ended May 31, 2002, the Company issued 2,889,000 warrants
in conjunction with an offering of 10% Convertible Notes. This included
1,169,500 warrants issued to holders of the Convertible Notes, 1,169,500 of
warrants issued upon conversion of these notes to common stock of the Company
and 1,076,275 warrants issued to the placement agent and a consultant who
assisted in structuring the Convertible Note offering. A non-cash charge of
$73,140 arising from the issuance of the 1,076,275 warrants was recorded within
general and administrative expenses.
During the year ended May 31, 2002, a total of 50,610 warrants expired
unexercised having an original fair value of $27,831.
The fair value of each warrant granted is estimated on the grant date using the
Black-Scholes Option Price Calculation. Warrants issued during the years ended
May 31, 2002 and 2001 were estimated to have a fair value of $373,349 and
$361,853, respectively.
F-13
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of information regarding warrants is as follows:
[Enlarge/Download Table]
Year Ended May 31,
-----------------------------------------------------------------
2002 2001
------------------------------ ------------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
----------- -------------- ----------- --------------
Outstanding at beginning of year 1,952,196 $ 1.60 1,215,555 $ 1.25
Granted 3,745,275 0.80 836,641 2.10
Exercised -- -- -- --
Forfeited or expired (50,610) 2.75 (100,000) --
----------- ----------
Outstanding at end of year 5,646,861 1.06 1,952,196 1.60
----------- ----------
Weighted average fair value of
warrants granted during the year $ 0.10 $ 0.43
----------- ----------
The fair value of warrants at the dates of grant were estimated using the
Black-Scholes Option Price Calculation model using the following assumptions:
[Download Table]
Year Ended May 31,
-------------------------------------
2002 2001
----------------- ----------------
Expected life (years) 3 - 5 1.5 - 3
Risk free interest rates 1.8% - 3.7% 4.7% - 5.5%
Volatility 30% 30% - 75%
Dividend yield 0% 0%
During the years ended May 31, 2002 and 2001, the fair market value of these
warrants were determined to be $373,349 and $361,853, respectively. Of these
amounts, warrants issued for goods and services during the years ended May 31,
2002 and 2001 resulted in the Company recording expenses of $73,140 and $24,354,
respectively, pursuant to SFAS No. 123.
Employee Stock Option Plan
In 2000, the Company adopted the Elite Logistics, Inc. 2000 Equity Incentive
Plan, under which 500,000 shares of common stock were available for issuance
with respect to awards (which may comprise options and/or stock purchase rights)
granted to officers, management and other key employees of the Company. During
2001, the Board of Directors voted and approved the increase of shares available
under the equity incentive plan to 1,000,000. The plan also includes a provision
for an annual increase in the number of shares available for issuance to 200,000
shares or 1.5% of the outstanding shares or a lesser amount determined by the
Board. During the year ended May 31, 2002, the Company increased the number of
shares available to 1,200,000. At the time the option is granted, the
administrator shall fix the period within which the option may be exercised,
fixing the exercise price at no less than 100% of the fair market value per
share on the date of grant and will determine the acceptable form of
consideration for exercising the option.
During the years ended May 31, 2002 and 2001, the Company entered into
management service agreements with various employees that provide for the
granting of options to purchase common stock of the Company over a three year
period with the first grant commencing on or about the one year anniversary of
the date of their agreement, contingent upon continued employment. These options
vest 1/3 upon the completion of one year of service following the date of grant
and thereafter 1/24 vests each subsequent month of service and are exercisable
at the fair market value on the date of grant. Options reserved for granting by
such agreements totaled 1,445,000 and 445,000, at May 31, 2002 and 2001,
respectively. During the years ended May 31, 2002 and 2001, 370,000 and 40,000,
respectively, of options have been granted under the provisions of the
management service agreements.
F-14
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the 2000 Equity Incentive Plan is as follows:
[Enlarge/Download Table]
Year Ended May 31,
-------------------------------------------------------
2002 2001
-------------------------- -------------------------
Number of Exercise Number of Exercise
Options Price Options Price
------------ ---------- ----------- ----------
Outstanding, beginning of year 60,000 $ 2.22 1,300 $ 2.00
Granted 770,000 0.32 140,000 2.63
Exercised -- -- (1,300) 2.00
Expired (420,000) 0.33 (80,000) 2.94
Forfeited -- -- -- --
------------ -----------
Outstanding, end of year 410,000 0.59 60,000 2.22
------------ -----------
Exercisable, end of year 345,417 0.47 36,667 2.15
------------ -----------
Available for grant, end of year 790,000 940,000
------------ -----------
A summary of the Company's stock options categorized by class of grant at May
31, 2002 is as follows:
[Enlarge/Download Table]
All Options Exercisable Options
------------------------------------------------------------------ ---------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Range of Average
Exercise Price Options Contractual Exercise Exercise Options Exercise
Outstanding Life Price Price Exercisable Price
------------------ ------------- ------------- ----------- ------------- ----------- ---------
$0.30 - $0.44 295,000 9.71 $0.31 $0.30 - $0.44 282,083 $0.31
$0.72 - $0.75 75,000 9.77 $0.74 $0.72 - $0.75 46,667 $0.74
$2.13 - $2.97 40,000 8.71 $2.35 $2.13 - $2.97 16,667 $2.35
During the year ended May 31, 2001, 1,300 options were exercised by employees of
the Company generating cash proceeds of $2,600.
The weighted average fair value at date of grant for options granted during 2002
and 2001 was $0.08 and $0.88 per option, respectively.
The fair value of options at the dates of grant were estimated using the
Black-Scholes Option Price Calculation model using the following assumptions:
[Download Table]
Year Ended May 31,
-------------------------------------
2002 2001
----------------- ----------------
Expected life 10 yrs. 10 yrs.
Risk-free interest rate 1.7% - 3.7% 4.0 - 6.5%
Volatility 30% 30% - 75%
Dividend yield 0% 0%
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant dates for the years ended May 31, 2002 and 2001,
consistent with the provisions of SFAS No. 123, the Company's net loss and basic
and diluted loss per share would have been increased to the pro forma net loss
and basic and diluted loss per share amounts indicated below:
[Download Table]
Year Ended May 31,
----------------------------
2002 2001
------------ ------------
Net loss - as reported $ (2,489,444) $ (1,992,613)
Net loss - pro forma $ (2,519,717) $ (2,115,945)
Basic and diluted loss per share - as reported $ (0.18) $ (0.16)
Basic and diluted loss per share - pro forma $ (0.18) $ (0.17)
F-15
ELITE LOGISTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 401(k) EMPLOYEE SAVINGS PLAN
During May 2000, the Company adopted the Elite Logistics Services, Inc. 401(k)
Plan (the "Plan"), a tax-deferred incentive savings and profit sharing plan to
provide retirement benefits to its employees. The Company's contribution to the
Plan is determined by the Board of Directors but in no event will exceed 50% of
the first 6% of employee deferral. The Employees' salary deferral contributions
are 100% vested and the Company's employee matching contributions vests ratably
over five years. The Company's employee matching contribution to the Plan during
the years ended May 31, 2002 and 2001, was $20,116 and $19,519, respectively.
NOTE 14 - SIGNIFICANT CUSTOMERS AND VENDORS
During the year ended May 31, 2002, the Company had sales as a percentage of
total sales to one customer that totaled 24%. During the year ended May 31,
2001, the Company had sales, as a percentage of total sales, to two customers
that totaled 20% and 12%, respectively.
The Company uses several vendors to provide goods and services. During the year
ended May 31, 2002, the Company had three vendors that provided goods and
services as a percentage of total cost of goods sold of 21%, 18% and 15%,
respectively. During the year ended May 31, 2001 the Company had two vendors
that provided goods and services as a percentage of total cost of goods sold of
19% and 13%, respectively. Operations of the Company would not be materially
impacted by the loss of these vendors as management believes there are
alternative vendors. There is no assurance that these vendors can be replaced at
competitive prices.
F-16
EXHIBIT 11.1
Statement re: Computation of Per Share Earnings
For the following periods the registrant had no securities, which were dilutive
for the calculation of earnings per share.
[Enlarge/Download Table]
Weighted average number of basic and
Summary from year-end audited Basic and diluted loss per diluted common stock shares
financial statements common share outstanding
------------------------------------- -------------------------- ------------------------------------
Year ended 5/31/2002 $(0.17) 14,506,559
Year ended 5/31/2001 $(0.16) 12,712,670
F-17
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Elite Logistics, Inc. (the
"Company") on Form 10-KSB/A for the year ending May 31, 2002 and 2001 (the
"Report"), as filed with the Securities and Exchange Commission on the date
hereof, I, Stephen M. Harris, President and Chief Executive Officer of the
Company, I hereby certify pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to
Sec.906 of the Sarbanes-Oxley Act of 2002, that:
1. The Amended Annual Report on Form 10-KSB/A fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended; and
2. The information contained in the Amended Annual Report on Form 10KSB/A
fairly presents, in all material respects, the financial condition and result of
operations of the Company.
By: /s/ Stephen M. Harris September 24, 2002
--------------------------
Stephen M. Harris
President, Chief Executive Officer
and Interim Chief Financial Officer
F-18
Dates Referenced Herein and Documents Incorporated By Reference
Filing Submission - Alternative Formats (Word / Rich Text, HTML, Plain Text, SGML, XML, et al.)
Copyright © 2009 Fran Finnegan & Company. All Rights Reserved.
About – Privacy – Redactions – Help —
Sat, 4 Jul 06:32:08.7 GMT 
