UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number: 0-21825
STREICHER MOBILE FUELING, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0707824
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
800 WEST CYPRESS CREEK ROAD, SUITE 580, FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip Code)
(954) 308-4200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates was
$9,785,421. The aggregate market value was computed by reference to the last
sale price of the registrant's Common Stock on the NASDAQ Stock Market on
September 30, 2003.
As of September 30, 2003 there were 7,248,460 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain Portions of Registrant's Proxy Statement relating to the 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Streicher Mobile Fueling, Inc., a Florida corporation (the "Company")
formed in 1996, provides mobile fueling and fuel management out-sourced services
to businesses that operate fleets of vehicles and equipment of various sizes,
including governmental agencies, utilities, trucking companies, bus lines,
hauling and delivery services, courier services, construction companies and
others. The Company's specialized truck fleet delivers fuel to customers'
locations on a regularly scheduled or as needed basis, refueling vehicles and
equipment and/or re-supplying fixed-site storage facilities. The Company's
patented proprietary electronic fuel tracking control system is used to measure,
record and track fuel dispensed to each vehicle and tank fueled at a customer
location, allowing verification of the amount and type of fuel delivered and
providing customers with customized fleet fuel data for management analysis and
tax reporting.
The Company's mobile fueling services provide numerous advantages to its
customers, including lower labor and administrative costs associated with
fueling vehicles, centralized control over fuel inventories and usage, tax
reporting benefits, elimination of costs and the risk of environmental
liabilities associated with on-site fuel storage and dispensing facilities,
lower risk of employee theft of fuel, emergency fuel availability, and the
elimination of security risks associated with off-site fueling by employees.
The Company presently operates over 100 custom mobile fueling trucks from
13 service locations in California, Florida, Georgia, North Carolina, Tennessee
and Texas and is seeking to increase market penetration in its existing service
areas and to develop its operations in new markets.
THE MOBILE FUELING INDUSTRY
Traditionally, businesses and other entities that operate fleets of
vehicles and equipment have met their fueling requirements by either maintaining
their own supply of fuel in on-site storage tanks or fueling vehicles at retail
stations and other third party facilities.
On-site storage tanks and fueling facilities can be expensive to construct
and maintain, and expose the property owner and operator to potential liability
associated with fuel leaks or spills. In addition, increasingly stringent
federal and state environmental regulation of underground storage tanks may
require businesses that maintain their own fuel supplies to spend significant
amounts to remove, retrofit and/or to maintain underground and aboveground
storage tanks to meet regulatory standards. The Company believes that many fleet
operators currently utilizing on-site storage tanks will choose to meet their
fueling requirements by other means, including mobile fueling, instead of
investing in upgrading and/or maintaining existing facilities.
The fueling of vehicles at retail stations and other third party facilities
by fleet operators can result in a higher cost of operations due to inefficient
use of employee time, the creation of significant unnecessary paperwork and
employee fraud. While large users may be able to negotiate favorable fuel
pricing from retail stations or other fuel suppliers, the labor cost incurred in
connection with employee fueling of vehicles and the costs associated with
management and administration of fuel purchases, can exceed the benefits
associated with price discounts.
Specifically, mobile fueling and fuel management out-sourced services offer
numerous benefits over traditional fueling methods:
o Reduces Operating Costs and Increases Labor Productivity. Mobile
fueling enables fleet operators to reduce operating costs, lowering
payroll hours by eliminating the need for their employees to fuel
vehicles either on-site or at local retail stations and other third
party facilities. Overnight fueling prepares fleet vehicles for
operation at the beginning of each workday, increasing labor
productivity by allowing employees to use their vehicles during time
that would otherwise be spent fueling and maximizing vehicle use as
fueling is conducted during non-operating hours. The running fuel
necessary to operate vehicles is reduced as fueling takes place at
customer locations. Mobile fueling
also reduces the administrative burden required to manage fuel
programs and monitor vehicle utilization.
o Provides Centralized Inventory Control and Management. The Company's
fuel management system provides fleet operators with a central
management data source. Web-based comprehensive reports detail, among
other things, the location, description, fuel type and daily and
weekly fuel consumption of each vehicle or piece of equipment fueled
by the Company. This eliminates customers' need to invest working
capital to carry fuel supplies, allow customers to centralize their
fuel inventory controls, track and analyze vehicle movement and fuel
consumption for management and tax reporting purposes.
o Provides Tax Reporting Benefits. The ability of the Company's fuel
management system to track fuel consumption to specific vehicles and
fuel tanks provides tax benefits to customers who consume fuel in uses
that are tax-exempt, such as for off-road vehicles, government-owned
vehicles and fuel used to operate refrigerator units on vehicles. For
such uses, the customers receive reports which provide them with the
information required to substantiate such tax exemptions.
o Eliminates Expenses and Liabilities of On-site Storage. Fleet
operators who previously satisfied their fuel requirements using
on-site storage tanks can eliminate the capital and costs relating to
installing, equipping and maintaining fuel storage and dispensing
facilities, including the cost and price volatility associated with
fuel inventories, complying with escalating environmental government
regulations, and carrying increasingly expensive insurance. By
removing on-site storage tanks and relying on mobile fueling,
customers avoid potential liabilities to employees and equipment from
fuel storage and handling. Mobile fueling eliminates customers'
expensive and inefficient use of business space and the diminution of
property values associated with environmental concerns.
o Prevents Fuel Theft. Fleet operators that rely on employees to fuel
vehicles, whether at on-site facilities or at retail stations, often
experience shrinkage of fuel inventories or excess fuel purchases due
to employee fraud. The Company's fuel management system eliminates the
risk of employee theft by dispensing fuel only to authorized vehicles.
Utilizing an independent contractor such as the Company for fueling
services rather than allowing employees to purchase fuel at local
retail stations also eliminates employee fraud due to credit card
abuse.
o Provides Emergency Fuel Supplies and Security. Emergency preparedness,
including fuel availability, is critical to the operation of
utilities, delivery services and other fleet operators. The Company
provides access to emergency fuel supplies at times and locations
chosen by its customers, allowing customers to react more quickly and
effectively to emergency situations, such as severe weather conditions
and related disasters. Fueling by fleet operators at their own on-site
storage facilities, and/or at retail and other third party locations
may be limited due to power interruption, supply outages or access and
other natural limitations. In addition, security concerns of fleet
operators to terrorism, hijacking and sabotage is increasing. The
mobile fueling of vehicles at the customers' facilities eliminates
security risks to the fleet operators' employees and equipment
associated with fueling at retail service stations and other third
party facilities.
MARKETING AND CUSTOMERS
The Company markets its mobile fueling services to customers operating all
size fleets of vehicles and equipment in connection with their business,
including governmental agencies, utilities, trucking companies, bus lines,
hauling and delivery services, courier services, construction companies and
others. While large fleet operators offer immediate market penetration on a
regional basis, small fleet operators are equally important accounts because
they provide geographic density which optimizes fuel delivery efficiency and
minimizes cost. Once engaged to provide mobile fueling services, the Company is
usually the exclusive service provider for the fueling of a customer's entire
fleet or of a particular location of vehicles and equipment in a market.
The Company focuses its marketing efforts on fleet operators within
established service areas. Fleet size and type, fuel requirements, fueling
logistics and credit worthiness are factors in identifying potential new
customers
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for the Company's services. Direct marketing is the primary method of developing
new business. Referrals from existing customers and Company personnel are also
important sources of potential business. In addition, the Company is actively
developing new service markets. A minimum level of business commitments is
required prior to the Company's entry into any new market. The ability to
provide service to an existing customer in a new market and the identification
of local new customers meeting the Company's criteria are strong considerations
in a decision to enter any market. Based on a pre-established customer base and
the identification of significant business opportunities, the Company commenced
operations in Greensboro, North Carolina at the end of fiscal year June 30,
2003.
The Company currently distributes diesel, gasoline and alternative fuels to
approximately 700 customers. Revenue (excluding fuel taxes) from one large
customer, the United States Postal Service, totaled $8.5 million or 16% of total
revenue, and $8.4 million or 19% of total revenue in the fiscal years ended June
30, 2003 and 2002, respectively. However, revenue from this customer was
generated from a total of 9 and 10 separate and non-interdependent written
contracts of varying lengths of service and renewal options for the years ended
June 30, 2003 and 2002, respectively. Revenue from two large customers,
excluding fuel taxes, totaled approximately $5.8 million or 26% of total
revenue, excluding fuel taxes, in the five-month period ended June 30, 2001.
Revenue from three large customers, excluding fuel taxes, totaled $12.1 million
or 19% in the fiscal year ended January 31, 2001. Although the Company does have
formal, length of service written contracts with certain of its larger
customers, such agreements are not customary in the mobile fueling business and
have not been entered into by the Company with the majority of its customers.
Therefore, most of the Company's customers can terminate the Company's mobile
fueling services at any time and for any reason, and the Company can similarly
discontinue service to any customer. The Company would discontinue service to a
customer if changes in the service conditions or other factors cause the Company
not to meet its minimum level of margins and rates, and the Company is unable to
re-negotiate its arrangement with the customer.
The Company competes with other distributors of fuel, including several
regional distributors and numerous small independent operators who provide
mobile fueling services. The Company also competes with retail marketing where
fleet operators have the option of fueling their own equipment at retail
stations and other third-party service locations. The Company's ability to
compete is dependent on numerous factors, including price, delivery
dependability, credit terms, service locations, as well as the level of
reporting and invoicing services provided. In July 2003, the Company's largest
direct competitor in the markets served by the Company discontinued its
operations. The Company has obtained some customer business previously provided
by this competitor and believes that it has an opportunity to materially
increase its mobile fueling deliveries by successfully competing with the
successors to that business.
TRUCK FLEET AND OPERATIONS
The Company currently operates from 13 service locations in California,
Florida, Georgia, North Carolina, Tennessee, and Texas. The Company delivers
fuel utilizing its own fleet of over 100 custom mobile fueling trucks with
multi-compartmented tanks whose fuel carrying capacities range from 2,800 to
4,400 gallons. These trucks are equipped with the Company's patented proprietary
electronic fuel management system which records and regulates fuel flow into the
customers' vehicles. Generally, each truck services between five and fifteen
customer locations per night or day, on specified delivery routes, depending on
customer size and fueling logistics. The fuel supply to be delivered is acquired
daily at local third-party terminal storage facilities. Each truck is operated
by a driver who also handles the actual fueling of the customers' vehicles
("fueler/operator").
FUEL TRACKING AND REPORTING SYSTEM
The Company utilizes a patented proprietary fuel tracking and reporting
management system in its mobile fueling operations. It owns all patents covering
the system, the rights to which are registered with the United States Patent and
Trademark Office. The Company believes its system to be the first and only one
specifically designed to meet the demands and rigors of mobile fueling, and the
only one certified for accuracy by The National Conference on Weights and
Measures. Data is derived from the Fuel Tracking Controller ("FTC") Computer
which is installed on each truck and is linked to the Company's fueler/operator
by a hand-held radio controlled scanning and transmitting device. The FTC
Computer is programmed to control any variety of truck configurations, including
3
single or multiple products and any number of pumps and hoses attached to the
truck. The FTC fuel management system electronically records date, time,
customer vehicle identification number, product type and volume of fuel
delivered by the Company's trucks into each customer vehicle. For security and
tracking purposes, the FTC Computer will not permit fuel to be dispensed from
the Company's truck unless both the customer's fleet yard and the individual
vehicle or piece of equipment to be fueled are electronically verified by the
FTC Computer registration. All fueling transactions are recorded on the truck's
FTC Computer, downloaded at the Company's service locations and transmitted to
the Company's corporate headquarters where the data is assimilated into detailed
service reports and invoices for the customer. This information can be delivered
to the customer by a number of methods, including the internet, and certain data
may also be delivered to the customer at his vehicle location at the time of
fueling.
As some service applications require both mobile fueling and the use by the
customer of his own on-site storage tanks, the Company has adapted the FTC
Computer to track the use by the customer of its own fixed-site tanks. Upon
installation of an FTC Computer, the Company services and manages fuel delivery
to a customer's on-site storage tank, providing reports detailing fuel dispensed
from the tank into each of the customer's vehicles, either alone or in
combination with the customer's mobile fueling use.
FUEL SUPPLY
Diesel fuel and gasoline are commodities which are refined and distributed
by numerous sources. The Company purchases the fuel delivered to its customers
from multiple suppliers at daily market prices and in some cases qualifies for
volume discounts. The Company monitors fuel prices and trends in each of its
service markets on a daily basis and seeks to purchase its supply at the lowest
prices and under the most favorable terms. Commodity price risk is mitigated as
the Company purchases and delivers its fuel supply daily and utilizes cost-plus
pricing to its customers. The Company also handles the delivery of customer and
third-party supplied fuel.
EXECUTIVE OFFICERS
The executive officers of the Company as of September 30, 2003 are as
follows:
Name Age Position and Office
- ---------------------- --- -----------------------------------------------
Richard E. Gathright.. 49 President, Chief Executive Officer and Director
Michael S. Shore...... 35 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Gary G. Williams...... 47 Senior Vice President, Commercial Operations
Paul C. Vinger........ 33 Senior Vice President, Corporate Planning and
Fleet Operations
Timothy W. Koshollek.. 39 Vice President, Marketing and Sales
MR. GATHRIGHT has been Chief Executive Officer and President of the Company
since November 2000 and a Director since March 2001. He is responsible for the
management of all business affairs of the Company, reporting directly to the
Board of Directors. He was an advisor on operational and financial matters to
the senior management of several domestic and international energy companies
from January 2000 through October 2000. From September 1996 to December 1999, he
was President and Chief Operating Officer of TransMontaigne Inc., a Denver-based
publicly owned company providing logistical services to major energy companies
and large industrial customers; a Director from April 1995 to December 1999;
Executive Vice President from April 1995 to September 1996; and from December
1993 to April 1995 was President and Chief Operating Officer of a predecessor of
TransMontaigne. From 1988 to 1993, he was President and Director of North
American Operations for Aberdeen Petroleum PLC, a London-based public company
engaged in international oil and gas operations, also serving on its Board of
4
Directors. Prior to joining Aberdeen, he held a number of positions in the
energy industry in the areas of procurement, operations and management of oil
and gas assets.
MR. SHORE has been Senior Vice President, Chief Financial Officer,
Secretary and Treasurer since February 2002. Prior to joining the Company, he
was CEO and President of Shore Strategic and Financial Consulting, providing
financial, management and information systems technology services to corporate
clients in the United States and Latin America. From 1998 to 2000, he served as
Director of Finance/Controller for the North American Zone Operations of
Paris-based Club Mediterranee. From 1996 to 1998, he was Vice President of
Finance for Interfoods of America, Inc., the largest Popeyes Fried Chicken &
Biscuits franchisee. From 1994 to 1996, he was the Manager of Accounting for
Arby's, Inc. Mr. Shore began his professional career in 1990 with Arthur
Andersen LLP where he became a Senior Auditor.
MR. WILLIAMS has been Senior Vice President, Commercial Operations for the
Company since February 2001, responsible for Marketing and Sales and Product
Procurement. From 1995 to February 2001, he was Vice President of Marketing for
the supply, distribution and marketing subsidiary of TransMontaigne Inc.,
managing wholesale marketing functions in the Mid-Continent, Southeast and
Mid-Atlantic and serving on that company's senior risk management committee.
From 1987 to 1995, he was Regional Manager for Kerr-McGee Refining Corporation,
responsible for unbranded petroleum product sales in its southeastern United
States 11 state marketing region. Prior to 1987, Mr. Williams held various
positions in the product procurement, marketing and sales, and trucking sectors
of the petroleum industry.
MR. VINGER has been Vice President, Corporate Planning and Operations for
the Company since August 2001, managing fleet and field operations and
responsible for corporate planning and analysis; and from December 2000 to
August 2001, he was Director of Corporate Planning. He was Senior Analyst of
Corporate Planning and Finance for TransMontaigne Inc., from September 1998 to
December 2000, responsible for operations and acquisitions analyses and the
management of supply scheduling and product allocations. From 1997 to 1998, he
was a Manager of Terminal Operations for TransMontaigne Inc. responsible for
petroleum product and chemical terminals. From 1994 to 1997, he was a Research
Associate for E. I. Dupont. From 1991 to 2001, Mr. Vinger served to the rank of
Captain in the United States Military.
MR. KOSHOLLEK has been Vice President, Marketing for the Company since
March 1998. From October 1996 to March 1998, he was Vice President of Marketing
and Operations for the Company and from 1994 to October 1996 served in the same
position for Streicher Enterprises, Inc., the Company's predecessor. From 1992
to 1993, he was an owner and the General Manager of Premier Wholesale Seafood
Exchange, Inc. From 1989 to 1992, he was the Operations Manager of Streicher
Enterprises, Inc. responsible for its Southeast division fuel delivery
operations. From 1986 to 1988, Mr. Koshollek was Sales and Maintenance Manager
of Kay Yacht Management, Inc., responsible for new customer sales, set-up and
maintenance programs.
EMPLOYEES
At June 30, 2003, the Company had 148 full-time employees.
GOVERNMENTAL REGULATION
The Company's operations are affected by numerous federal, state and local
laws, regulations and ordinances, including those relating to protection of the
environment and worker safety. Various federal, state and local agencies have
broad powers under these laws, regulations and ordinances. In particular, the
operation of the Company's mobile fueling fleet and its transportation of diesel
fuel and gasoline are subject to extensive regulation by the U.S. Department of
Transportation ("DOT") under the Federal Motor Carrier Safety Act ("FMCSA") and
the Hazardous Materials Transportation Act ("HMTA"). The Company is subject to
regulatory and legislative changes that can affect the economics of the industry
by requiring changes in operating practices or influencing the demand for, and
the cost of providing, its services. In addition, the Company depends on the
supply of diesel fuel and gasoline from the oil and gas industry and, therefore,
is affected by changing taxes, price controls and other laws and regulations
generally relating to the oil and gas industry. The Company cannot determine the
extent to which its
5
future operations and earnings may be affected by new legislation, new
regulations or changes in existing regulations.
The technical requirements of these laws and regulations are becoming
increasingly expensive, complex and stringent. These laws may impose penalties
or sanctions for damages to natural resources or threats to public health and
safety. Such laws and regulations may also expose the Company to liability for
the conduct of or conditions caused by others, or for acts of the Company that
were in compliance with all applicable laws at the time such acts were
performed. Sanctions for noncompliance may include revocation of permits,
corrective action orders, administrative or civil penalties and criminal
prosecution. Certain environmental laws provide for joint and several liability
for remediation of spills and releases of hazardous substances. In addition, the
Company may be subject to claims alleging personal injury or property damage as
a result of alleged exposure to hazardous substances, as well as damage to
natural resources.
Although the Company believes that it is in substantial compliance with
existing laws and regulations, there can be no assurance that substantial costs
for compliance will not be incurred in the future. There could be an adverse
affect upon the Company's operations if there were any substantial violations of
these rules and regulations. Moreover, it is possible that other developments,
such as stricter environmental laws, regulations and enforcement policies
thereunder, could result in additional, presently unquantifiable, costs or
liabilities to the Company.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors have affected, and may in the future
continue to affect, the Company's business, results of operations and financial
condition, and could cause the Company's operating results to differ materially
from those expressed in any forward-looking statements made by or on behalf of
the Company elsewhere in this report.
NO ASSURANCES OF FUTURE PROFITABILITY; LOSSES FROM OPERATIONS; NEED FOR
CAPITAL. The Company incurred net losses for the fiscal years ended June 30,
2003 and 2002 as well as the transition period ended June 30, 2001. The Company
earned a profit in the fiscal year ended January 31, 2000, the fourth quarter
ended June 30, 2002 and the first quarter ended September 30, 2002. In order for
the Company to earn profits in the future, it needs to increase volumes at
profitable margins, control costs and generate sufficient cash flow to support
its working capital and debt service requirements. There is no assurance that
management will be able to accomplish its business plan, or that it will be able
to continue to raise capital to support a working capital or debt service
shortfall during any business downturns.
TRADING MARKET FOR THE COMPANY'S COMMON STOCK. The Company's common stock
is thinly traded which could make it difficult for shareholders to sell shares
at a predictable price or at all. In addition, there may be volatility in the
market price of the Company's common stock due to factors beyond the Company's
control. The Company's quarterly operating results, changes in general
conditions in the economy, the financial markets or other developments affecting
the Company could cause the market price of the Company's common stock to
fluctuate, making it difficult for shareholders to sell shares at predictable
prices or times.
GROWTH DEPENDENT UPON EXPANSION; RISKS ASSOCIATED WITH EXPANSION INTO NEW
MARKETS. A significant component of the Company's future growth strategy will be
to expand the Company's business into new service locations. The Company intends
to expand into additional major and secondary metropolitan areas. Expansion will
largely be dependent on the Company's ability to demonstrate the benefits of
mobile fueling to potential new customers; successfully establish and operate
new locations; hire, train and retain qualified management, operating, marketing
and sales personnel; finance capital expenditures and working capital
requirements; secure reliable sources of product supply on a timely basis and on
commercially acceptable credit terms; and successfully manage growth by
effectively supervising operations, controlling costs and maintaining
appropriate quality controls. The Company's growth will depend upon its ability
to achieve greater penetration in existing markets and to successfully penetrate
new markets. The Company may also seek to expand through the acquisition of
existing companies or their customer bases. During the fiscal year ended June
30, 2003, the Company commenced operations in the
6
Greensboro, North Carolina market. However, there can be no assurance that the
Company will be able to successfully expand its operations.
ACQUISITION AVAILABILITY; INTEGRATING ACQUISITIONS. The Company's future
growth strategy may involve the acquisition of mobile fueling companies,
wholesale fuel or petroleum lubricant distributors or other related entities and
businesses in existing and new markets. There can be no assurance that the
Company will be able to locate or make suitable acquisitions on acceptable terms
or that future acquisitions will be effectively and profitably integrated into
the Company. Acquisitions involve risks that could adversely affect the
Company's operating results, including management commitment; integration of the
operations and personnel of the acquired operations; write downs of acquired
intangible assets; and possible loss of key employees of the acquired
operations.
DEPENDENCE ON KEY PERSONNEL. The future success of the Company will be
largely dependent on the continued services and efforts of Richard E. Gathright,
the Company's President and Chief Executive Officer, and other key personnel.
The loss of the services of Mr. Gathright or other key personnel could have a
material adverse effect on the Company's business and prospects. The Company's
success and plans for future growth will also depend on its ability to attract
and retain additional qualified management, operating, marketing, sales and
financial personnel. There can be no assurance that the Company will be able to
hire or retain such personnel on terms satisfactory to the Company. Mr.
Gathright and the Company have entered into an employment agreement which
expires October 31, 2004. The Company has also entered into written employment
agreements with certain other company officers.
FUEL PRICING; EFFECT ON PROFITABILITY. Diesel fuel and gasoline are
commodities which are refined and distributed by numerous sources. The Company
purchases the fuel delivered to its customers from multiple suppliers at daily
market prices and in some cases qualifies for volume discounts. The Company
monitors fuel prices and trends in each of its service markets on a daily basis
and seeks to purchase its supply at the lowest prices and under the most
favorable terms. Commodity price risk is mitigated since the Company purchases
and delivers its fuel supply daily and utilizes cost-plus pricing to its
customers. If the Company cannot pass on the cost-plus pricing to its customers,
margins would decrease and a loss could be incurred. The Company has not engaged
in derivatives or futures trading to hedge fuel price movements.
RISKS ASSOCIATED WITH CUSTOMER CONCENTRATION; ABSENCE OF WRITTEN
AGREEMENTS. Although the Company provides services to an extensive number of
customers, a significant portion of its revenue is generated from a few of its
larger customers. While the Company does have formal, length of service written
contracts with some of these larger customers, such agreements are not customary
in the mobile fueling business and have not been entered into by the Company
with the majority of its customers. As a result, most of the Company's customers
can terminate the Company's mobile fueling services at any time and for any
reason, and the Company can similarly discontinue service to any customer. The
Company may discontinue service to a customer if changes in the service
conditions or other factors cause the Company not to meet its minimum level of
margins and rates, and the pricing or delivery arrangements cannot be
re-negotiated. As a result of this customer concentration and absence of written
agreements, the Company's business, results of operations and financial
condition could be materially adversely affected if one or more of its large
customers were lost or if the Company were to experience a high rate of contract
terminations.
MANAGEMENT OF GROWTH. The Company's future growth strategy is dependent on
effective operational, financial and other internal systems, and the ability to
attract, train, motivate, manage and retain its employees. If the Company is
unable to manage growth effectively, the Company's results of operations will be
adversely affected.
COMPETITION. The Company competes with other mobile fueling service
providers, including several regional, and numerous small, independent operators
who provide these services. The Company also competes with retail marketing
where fleet operators have the option of fueling their own equipment at retail
stations and other third-party service locations. The Company's ability to
compete is dependent on numerous factors, including price, delivery
dependability, credit terms, service locations, and reporting and invoicing
services. There can be no assurance that the Company will be able to continue to
compete successfully as a result of these or other factors.
7
OPERATING RISKS MAY NOT BE COVERED BY INSURANCE. The Company's operations
are subject to all of the operating hazards and risks normally incidental to
handling, storing and transporting diesel fuel and gasoline, which are
classified as hazardous materials. The Company maintains insurance policies in
such amounts and with such coverages and deductibles as the Company believes are
reasonable and prudent. However, there can be no assurance that such insurance
will be adequate to protect the Company from liabilities and expenses that may
arise from claims for personal and property damage arising in the ordinary
course of business or that such levels of insurance will be maintained by the
Company or will be available at economical prices.
GOVERNMENTAL REGULATION. See the discussion of governmental regulations and
their impact on the Company in the "Governmental Regulation" section above.
CHANGES IN ENVIRONMENTAL REQUIREMENTS. The Company expects to derive future
business by converting fleet operators currently utilizing underground fuel
storage tanks for their fueling needs to mobile fueling. The owners of
underground storage tanks have been required to remove or retrofit those tanks
to comply with technical regulatory requirements pertaining to their
construction and operation. If other more economical means of compliance are
developed or adopted by owners of underground storage tanks, the opportunity for
the Company to market its services to such owners may be adversely affected.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information concerning the property
and facilities that are owned or leased by the Company for use in its
operations:
Lease
Expiration
Description Location With All Options Notes
----------- -------- ---------------- -----
Office Gardena, California 1/15/04 (1)
Truck yard/parking Gardena, California 3/31/04 (1)
Corporate offices Ft. Lauderdale, Florida 3/1/04 (1)
Truck yard and office Ft. Myers, Florida 90 days to 90 days (1)
Truck yard and office Port Everglades, Florida 3/1/04 (1)
Truck yard and office Jacksonville, Florida 8/31/15 (1)
Truck yard and office Melbourne, Florida Month to Month (1)
Truck yard and office Orlando, Florida 6/1/05 (1)
Truck yard and office Tampa, Florida N/A (2)
Truck yard and office Doraville, Georgia 11/1/04 (1)
Truck yard/parking Greensboro, North Carolina Month to Month (1)
Truck yard and office Kingsport, Tennessee Month to Month (1)
Truck yard and office Chattanooga, Tennessee Month to Month (1)
Truck yard and office Houston, Texas 3/31/04 (1)
Truck yard and office Ft. Worth, Texas 12/31/04 (1)
- ---------------
(1) Leased.
(2) Property owned by the Company.
8
ITEM 3. LEGAL PROCEEDINGS
The Company has no material legal proceedings pending. From time to time,
the Company may become a party to litigation incidental to its business. There
can be no assurance that any future legal proceedings will not have a material
adverse effect on the Company's business, reputation, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the three months ended June 30,
2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock, par value $.01 ("common stock") and Redeemable
Common Stock Purchase Warrants ("warrants") have traded in the National
Association of Securities Dealers Automated Quotation System ("NASDAQ")
Small-Cap Market under the symbols "FUEL" and "FUELW", respectively, since
December 11, 1996, the date of the Company's initial public offering. The
following table sets forth, for the periods indicated, the high and low bid
prices for the common stock and warrants, as reported by NASDAQ.
Common Stock Warrants
------------ --------
High Low High Low
---- --- ---- ---
Year Ended June 30, 2003
------------------------
1st quarter $1.33 $0.80 $0.08 $0.06
2nd quarter $1.40 $0.72 $0.13 $0.01
3rd quarter $1.09 $0.73 $0.11 $0.02
4th quarter $1.07 $0.62 $0.27 $0.04
Year Ended June 30, 2002
------------------------
1st quarter $1.63 $1.10 $0.14 $0.06
2nd quarter $1.40 $0.96 $0.08 $0.03
3rd quarter $1.30 $0.98 $0.11 $0.06
4th quarter $1.37 $1.00 $0.11 $0.07
Transition Period Ended June 30, 2001
-------------------------------------
1st quarter $2.13 $1.00 $0.38 $0.12
2 month $1.78 $1.25 $0.20 $0.06
Year Ended January 31, 2001
---------------------------
1st quarter $7.13 $4.00 $1.16 $0.50
2nd quarter $4.25 $2.03 $0.50 $0.16
3rd quarter $3.88 $1.00 $0.44 $0.13
4th quarter $3.00 $1.00 $0.38 $0.06
On June 30, 2003, the closing bid price of the common stock was $1.05 per
share and the closing bid price of the warrants was $0.10 per warrant. As of
June 30, 2003, there were approximately 44 holders of record of the Company's
common stock and approximately 490 beneficial owners of the Company's common
stock.
To date, the Company has not declared or paid any dividends on its common
stock. The payment of dividends, if any, is within the discretion of the Board
of Directors and will depend upon the Company's earnings, its capital
requirements and financial condition and other relevant factors. The Board of
Directors does not intend to declare any dividends in the foreseeable future,
but instead intends to retain future earnings for use in the Company's business
operations.
9
ISSUANCES OF UNREGISTERED SECURITIES
On January 15, 2002, certain holders of convertible subordinated promissory
notes converted an aggregate of $2,616,800 to unregistered shares of the
Company's common stock at a conversion price of $1.24 per share, for a total of
2,110,322 shares. The holders of the remaining $283,600 of convertible
promissory notes issued by the Company in 2001 (the "2001 Notes") who did not
convert their notes in January 2002 waived any conversion price adjustment. The
accrued quarterly interest earned on the 2001 Notes can be paid with shares of
the Company's common stock instead of cash, however two of these notes require
the prior written consent of the payee for such payment in shares.
On December 23, 2002, the Company issued a $150,000 short-term promissory
note to a shareholder. The note was due on January 31, 2003, with interest at 5%
over the prime interest rate. On January 21, 2003 the Company and the holder of
the note substituted the note for a $150,000 subordinated promissory note due on
January 31, 2005, bearing interest at an annual rate of 9%. On January 21, 2003,
the Company issued $300,000 of subordinated promissory notes to two
shareholders. The notes are also due on January 31, 2005 and bear interest at an
annual rate of 9%. With the consent of the holders, interest on the notes may be
paid in the unregistered shares of Company's common stock, with the stock value
based on the closing bid price of the stock for the five trading days before the
last day of the quarter in which the interest is due but in no event less than
the closing bid price at the time of issuance or the average of the closing bid
prices for the five trading days prior to such time, whichever is lower
(collectively, the "January 2003 Notes").
During the fiscal year ended June 30, 2003, the Company issued 22,417
shares of common stock to the holders of the 2001 and January 2003 Notes for
interest earned at prices ranging from $.99 to $1.35 per share. The offer and
sale of the 2001 and January 2003 Note, and the underlying shares into which the
notes are convertible or which are issued as payment of interest, were exempt
from registration under the Act as private offerings to "accredited investors"
under Section 4(2) and 4(6) of the Act and Rules 505 and 506 of Regulation D
thereunder.
On May 12, 2003, the Company issued $300,000 of promissory notes to certain
shareholders (the "Shareholder Notes"). The notes bear interest at an annual
rate of 14% and are payable on demand. The offer and sale of the notes were
exempt from registration as private offerings to "accredited investors" under
Section 4(2) and 4(6) of the Act and Rules 505 and 506 of Regulation D
thereunder. The Company repaid $235,500 of those Shareholder Notes with the
proceeds of the May 20, 2003 private placement issuance of subordinated
promissory notes and common stock purchase warrants. (See below)
On May 20, 2003, the Company issued $235,500 of subordinated promissory
notes to officers, directors and certain shareholders (the "May 2003 Notes").
The notes are due on November 19, 2003 and bear interest at an annual rate of
14%. With the consent of the holders, the Company may elect to pay interest on
the notes in shares of the Company's common stock, with the stock value based on
the most recent closing bid price of the stock at the time the notes were
executed or for the five trading days before such date, whichever is lower. The
Company also issued warrants to purchase 82,425 shares of common stock
exercisable at $0.86 per share in connection with the notes. The warrants issued
are exercisable for a period of three (3) years from and after the date on which
the notes are repaid or otherwise surrendered to the Company, but in no event
later than November 19, 2006. The offer and sale of the notes, the warrants and
the shares underlying the warrants were exempt from registration as private
offerings to "accredited investors" under Sections 4(2) and 4(6) of the Act and
Rules 505 and 506 of Regulation D thereunder. The Company has also agreed to
register the shares underlying the warrants for resale, which it intends to do
sometime after the filing of this Form 10-K.
The Company repaid the 2001 Notes, the January 2003 Notes, the remaining
balance of the Shareholder Notes and the May 2003 Notes in September 2003 with
the proceeds of a private placement in August 2003 of $6.925 million in
promissory notes and common stock purchase warrants (the "August 2003 Promissory
Notes"). The Company issued warrants to purchase 2,008,250 shares of common
stock exercisable at $1.00 per share in connection with the August 2003
promissory notes. The offer and sale of the notes, the warrants and the shares
underlying the warrants were exempt from registration as private offerings to
"accredited investors" under Sections 4(2) and 4(6) of the Act and Rules 505 and
506 of Regulation D thereunder. The Company has also agreed to register the
shares underlying the warrants for resale, which it intends to do sometime after
the filing of this Form 10-K.
10
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company and its consolidated
subsidiaries are qualified in their entirety by, and should be read in
conjunction with, the Consolidated Financial Statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected financial table below is for each of the fiscal years
ended June 30, 2003 and 2002, the transition period ended June 30, 2001, and the
fiscal years ended January 31, 2001, 2000, and 1999. Except for the unaudited
financial and statistical information section, and the unaudited selected
financial data for the fiscal year ended June 30, 2001 which is presented for
12-month comparison information only, the selected financial data is derived
from the audited Consolidated Financial Statements of the Company for the fiscal
years ended June 30, 2003 and 2002, the transition period ended June 30, 2001,
and the fiscal years ended January 31, 2001, 2000, and 1999.
(in thousands, except net margin per gallon and per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
Five-month
Fiscal Years Ended June 30, Transition Fiscal Years Ended January 31,
- -------------------------------------------------------------------------------- Period ------------------------------
Ended
2003 2002 2001 June 30, 2001 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Income Statement Data: (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue, net of fuel taxes 53,579 43,538 60,293 22,235 65,002 50,801 30,332
Gross profit 4,023 4,591 2,520 740 3,093 4,629 2,754
Operating profit (loss) (693) 209 (1,273) (1,386) 241 1,559 (54)
Beneficial conversion of debt to equity
interest expense -- (241) -- -- -- -- --
------------------------------------------------------------------------------------
Net income (loss) (1,581) (1,162) (2,774) (1,951) (1,335) 472 (1,082)
Less: Beneficial conversion of debt to
Equity interest expense -- 241 -- -- -- -- --
------------------------------------------------------------------------------------
Net income (loss) adjusted for beneficial
conversion interest expense (1,581) (921) (2,774) (1,951) (1,335) 472 (1,082)
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Per Share Data:
- ---------------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share (0.22) (0.20) (0.84) (0.47) (0.49) 0.17 (0.42)
Diluted net income (loss) per share (0.22) (0.20) (0.84) (0.47) (0.49) 0.16 (0.42)
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data:
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 211 815 6 6 447 353 123
Accounts receivable, net 6,113 6,382 8,669 8,669 9,638 9,588 5,775
Bank line of credit payable 4,410 4,680 6,905 6,905 7,286 7,679 4,571
Shareholders' equity 4,111 5,676 3,332 3,332 5,218 4,289 3,360
Total Assets 16,011 18,560 22,194 22,194 24,645 23,931 16,194
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
Financial and Statistical Information (Unaudited):
- ---------------------------------------------------------------------------------------------------------------------------------
EBITDA (1) 737 1,712 223 (748) 1,659 2,709 592
Working Capital (deficit) (4) (2,430) (1,576) (3,093) (3,093) (1,891) (1,797) (2,325)
Net Margin (2) 5,426 6,049 3,946 1,354 4,442 5,713 3,588
Net Margin per gallon (in dollars) (3) 0.115 0.122 0.073 0.062 0.077 0.096 0.086
Total Gallons (000's) 47,294 49,500 54,102 21,800 57,600 59,400 41,900
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
EBITDA Calculation (Unaudited):
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1,581) (1,162) (2,774) (1,951) (1,335) 472 (1,082)
Add back:
Interest expense 915 1,175 1,571 590 1,645 1,152 840
Beneficial conversion of debt to
equity interest expense -- 241 -- -- -- -- --
Depreciation and amortization expense 1,403 1,458 1,426 613 1,349 1,085 834
------------------------------------------------------------------------------------
EBITDA 737 1,712 223 (748) 1,659 2,709 592
=================================================================================================================================
(1) EBITDA = Earnings before interest, taxes, depreciation and amortization.
(2) Net Margin = Gross profit plus depreciation
(3) Net margin per gallon = Net Margin / Total Gallons
(4) Working Capital (deficit)= current assets - current liabilities
11
UNAUDITED QUARTERLY SELECTED FINANCIAL DATA FOR FISCAL YEAR ENDED JUNE 30, 2003 AND 2002
(in thousands, except net margin per gallon and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2003 June 30, 2002
YTD YTD
Selected Income Statement Data: Q1 Q2 Q3 Q4 2003 Q1 Q2 Q3 Q4 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue, net of fuel taxes 12,557 12,667 14,841 13,514 53,579 12,299 9,867 9,892 11,480 43,538
Gross profit 1,393 744 889 997 4,023 1,167 965 1,169 1,290 4,591
Operating profit (loss) 313 (632) (272) (102) (693) 32 (182) 64 296 209
Beneficial conversion of debt to equity
Interest expense -- -- -- -- -- -- -- (241) -- (241)
--------------------------------------------------------------------------------------------
Net income (loss) 103 (858) (501) (325) (1,581) (307) (515) (405) 63 (1,162)
Less: Beneficial conversion of debt to
equity interest expense -- -- -- -- -- -- -- 241 -- 241
--------------------------------------------------------------------------------------------
Net income (loss) adjusted for
beneficial conversion of debt
to equity interest expense 103 (858) (501) (325) (1,581) (307) (515) (164) 63 (921)
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share 0.01 (0.12) (0.07) (0.04) (0.22) (0.07) (0.11) (0.06) 0.01 (0.20)
Diluted net income (loss) per share 0.01 (0.12) (0.07) (0.04) (0.22) (0.07) (0.11) (0.06) 0.00 (0.20)
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheets Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 314 21 -- 211 211 163 183 402 815 815
Accounts receivable, net 7,689 7,091 6,297 6,113 6,113 9,678 7,011 7,313 6,382 6,382
Bank line of credit payable 5,542 5,533 4,468 4,410 4,410 7,322 5,850 5,552 4,680 4,680
Shareholders' equity 5,784 4,921 4,424 4,111 4,111 3,224 2,743 5,630 5,676 5,676
Total Assets 18,947 18,005 16,498 16,011 16,011 22,616 20,013 19,816 18,560 18,560
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Financial and Statistical Information:
- ------------------------------------------------------------------------------------------------------------------------------------
EBITDA 677 (266) 77 249 737 416 194 449 653 1,712
Working Capital (Deficit) (1,798) (2,188) (2,243) (2,430) (2,430) (2,051) (2,479) (1,950) (1,576) (1,576)
Net Margin 1,737 1,108 1,235 1,346 5,426 1,537 1,327 1,540 1,645 6,049
Net Margin per gallon (in dollars) 0.146 0.097 0.107 0.108 0.115 0.099 0.111 0.142 0.146 0.122
Total Gallons (000's) 11,892 11,476 11,496 12,430 47,294 15,495 11,905 10,808 11,292 49,500
====================================================================================================================================
(1) EBITDA = Earnings before interest, taxes, depreciation and amortization.
(2) Net Margin = Gross profit plus depreciation
(3) Net margin per gallon = Net Margin / Total Gallons
(4) Working Capital (deficit)= current assets - current liabilities
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements and related notes included elsewhere
in this Form 10-K.
This report, including but not limited to this Item 7 and the footnotes to
the financial statements found in Section F, contains "forward looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). These statements concern expectations,
beliefs, projections, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
Statements preceded by, followed by, or that include the words "believes,"
"expects," "anticipates," or similar expressions are generally considered to be
forward-looking statements.
The forward-looking statements, include the following:
o The Company's beliefs regarding its position in the mobile fueling
industry
o The Company's strategies, plans and objectives and expectations
concerning its future operations, cash flow, margins, revenue,
profitability, liquidity and capital resources
o The Company's efforts to improve operational, financial and management
controls, reporting systems and procedures
The forward-looking statements reflect the Company's current view about
future events and are subject to risks, uncertainties and assumptions. The
Company cautions readers of this report that certain important factors may have
affected, and could in the future affect, its actual results and could cause
actual results to differ significantly from those expressed in any
forward-looking statement. The following important factors, in addition to
factors discussed elsewhere in this report and in Item 1 under the caption
"Certain Risk Factors Affecting Future Operating Results," could prevent the
Company from achieving its goals, and cause the assumptions underlying the
forward-looking statements and the actual results to differ materially from
those expressed in or implied by those forward-looking statements:
o future net losses
o adverse consequences relating to the Company's outstanding debt
o the Company's ability to pay interest and principal on its bank line
of credit, senior secured promissory notes and pay its accounts
payable and other liabilities when due
o the Company's ability to comply with financial covenants contained in
its $10 million bank line of credit
o the Company's ability to reach an agreement with its bank line of
credit lender with regard to a waiver of possible covenant violations
or an amendment to the financial covenants contained in its debt
agreement in the event the Company were not in compliance with such
financial covenants
o further provisions for bad debts on the Company's accounts receivable
o fluctuations in demand for the Company's mobile fueling services
resulting from changed economic conditions
o the Company's ability to acquire sufficient trade credit from fuel
suppliers and other vendors
o competitive pricing for the Company's services at acceptable net
margins
13
GENERAL
The Company generates substantially all of its revenue from providing
mobile fueling and fuel management services. Revenue is comprised principally of
delivery service charges and the related sale of diesel fuel and gasoline. Cost
of sales is comprised principally of direct operating expenses and the cost of
fuel. Included in both revenue and cost of sales are federal and state fuel
taxes, which are collected by the Company from its customers, when required, and
remitted to the appropriate taxing authorities.
The Company provides mobile fueling and fuel management services at a
negotiated rate for service plus the cost of fuel based on market prices.
Revenue levels will vary depending on the upward or downward movement of fuel
prices in each market. For the fiscal year ended June 30, 2003, market prices
for fuel were substantially higher than for the fiscal year ended June 30, 2002
due to military events in the Middle East, refinery shutdowns in Venezuela and a
severe winter in the U.S. Northeast, and were primarily responsible for the
significant increases in both revenue and cost of sales notwithstanding
approximately 2,200,000 fewer gallons delivered during the fiscal year ended
June 30, 2003, as compared to the fiscal year ended June 30, 2002. The volume
decline was due primarily to the termination of unprofitable mobile fueling
service accounts and elimination of bulk delivery services in northern
California.
In the mobile fueling business, the majority of deliveries are made on
workdays, Monday through Friday, to coincide with customers' fuel service
requirements. The number of workdays in any given month will impact the
quarterly financial performance of the Company. In addition, a downturn in
customer demand generally takes place on and/or in conjunction with national
holidays, resulting in decreased volumes of fuel delivered. This downturn may be
offset by emergency mobile fueling services and fuel deliveries to certain
customers resulting from impending or actual severe meteorological or geological
events, including hurricanes, tropical storms, ice and snow storms, forest fires
and earthquakes.
In July 2003 the Company's largest competitor in the markets served by the
Company discontinued operations. Some of the volumes previously delivered by the
former competitor have been redirected to the Company and further redirection is
possible. In any event, the Company believes that it will increase deliveries
and generate incremental margins in those locations where it previously directly
competed, and it intends to enter other new locations where it is believed that
market share can be gained at profitable margins.
The Company believes that there are significant opportunities to increase
the size of its mobile fueling and fuel management services business and the
volumes of fuel sold and delivered in conjunction with it. However, this growth
is dependent upon a number of business and economic factors, including, but not
limited to, the success of its sales and marketing efforts and other business
strategies; the availability of qualified personnel to provide the level of
service required by customers; the generation of cash flow from operating
activities; the availability of sufficient debt or equity capital to meet the
business requirements; and favorable market conditions in the related
transportation or petroleum industries, some of which factors are beyond the
Company's control.
CAPITAL RESOURCES AND LIQUIDITY
In August 2003 the Company raised $6.925 million from the issuance of
five-year 10% promissory notes (the "August 2003 refinancing" and the "August
2003 promissory notes") and 2,008,250 five-year warrants to purchase the
Company's common stock at $1.00 per share. The notes are collateralized by a
first priority security interest in the Company's specialized fueling truck
fleet and related equipment and by the patents on its proprietary fuel
management system. The resulting liquidity impact of this financing transaction
has been the repayment of all outstanding equipment and subordinated debt; the
generation of $2.9 million of working capital for business expansion; and a $2.8
million improvement in cash flow resulting from a moratorium of principal
payments during the first two years of the five-year term of the notes.
In its financial statements for the first quarter ended September 30, 2003
the Company expects to record a pre-tax gain of $757,000 from the prepayment of
the outstanding balance owed to its principal equipment lender; and an increase
in shareholders' equity of $1.84 million for the value of the 2,008,250 warrants
issued in connection with the August 2003 refinancing. During the period from
February 2001 to June 30, 2003, the Company raised in the
14
aggregate $6.7 million in equity capital through private placements of common
stock and the issuance of subordinated debt. During the year ended June 30,
2003, the Company raised $750,000 from the private placements of subordinated
debt, the proceeds from which have been used for working capital in the
Company's operations as well as the implementation of its business plan.
In January 2002, certain holders of $2.617 million of the Company's
convertible subordinated promissory notes converted that debt into unregistered
shares of the Company's common stock at a conversion price of $1.24 per share,
for a total of 2,110,322 shares of common stock. The notes converted contained
conversion rates ranging from $1.35 to $1.50 per share. The conversion resulted
in the Company recording a one time, non-cash beneficial conversion of debt to
equity interest expense of $241,000 during the quarter ended March 31, 2002. The
beneficial conversion of debt to equity interest expense had no impact on
shareholders' equity.
The Company is highly leveraged and since its inception has financed its
working capital requirements for operations by issuing common stock and
subordinated debt and utilizing its bank line of credit. The August 2003
refinancing has significantly strengthened the Company's financial position,
enabling it to achieve a stronger balance sheet and improve cash flow resulting
from the two-year principal moratorium on principal payments under the August
2003 promissory notes. The Company believes that this transaction enhances its
business credibility with present and prospective customers, fuel suppliers,
trade creditors, other lenders and the investment community, and its ability to
compete in its business sector.
The Company's material financial commitments, other than payroll, relate
primarily to maintaining its bank line of credit and making monthly payments of
principal and interest on equipment notes through August 2003; making
semi-annual interest payments on its August 2003 promissory notes beginning
December 31, 2003; and making semi-annual principal and interest payments for
the remaining three year term of the August 2003 promissory notes, with a
balloon payment of $3,000,000 due August 28, 2008.
The Company's debt agreements contain covenants establishing certain
financial requirements and operating restrictions. The Company's failure to
comply with any covenant or material obligation contained in these debt
agreements, absent a waiver or forbearance from the lenders, would result in an
event of default which could accelerate debt repayment terms under the debt
agreements. Due to cross-default provisions contained in its debt agreements, an
event of default could accelerate repayment terms under the other agreements,
which would have a material adverse affect on the Company's liquidity and
capital resources.
In December 2002, the Company and its principal equipment lender amended
the notes and security agreements between them to extend the maturity dates of
the equipment notes payable by three months. This revision modified the
repayment schedule by reducing principal payments for the period of December
2002 through April 2003 by $467,000. In May 2003, the Company and this lender
agreed to an additional extension of the maturity dates of the equipment notes
by two months and reduced its payments for the period from May 2003 through
August 2003 by $284,000. In August 2003 this lender was repaid in full in the
amount of $2,204,815 from the proceeds of the August 2003 refinancing. The
Company received a $757,000 cash discount from the lender in consideration of
the prepayment of the equipment debt.
The Company has incurred net losses during most of its operating history
and has met its working capital and long-term debt service requirements by
raising both equity capital and subordinated debt and utilizing its bank line of
credit. For the years ended June 30, 2003, 2002 and 2001, the Company had net
losses of $1.6 million, $1.2 million, and $2.8 million, respectively. The
Company earned net income of $63,000 in the fourth quarter of its year ended
June 30, 2002, and $103,000 in the first quarter of its year ended June 30,
2003. The other quarterly results during this three-year period were net losses.
The Company believes that cash flow from operations; the $2.9 million in
working capital from the August 2003 refinancing; and the two-year principal
payment moratorium on the August 2003 promissory notes should satisfy its
foreseeable liquidity requirements. However, it may seek additional sources of
financing if any cash flow deficiency were to arise in the future. There is no
assurance that additional financing would be available to the Company on
acceptable terms, or at all. If the Company does not comply with the covenants
in its debt agreements,
15
or if adequate funds are not available to finance operations or to pay debt
service obligations as they become due, the Company may be required to
significantly alter its operations.
At June 30, 2003, the Company had cash and cash equivalents of $211,000 as
compared to $815,000 at June 30, 2002. The reduction was primarily due to cash
used in financing activities of $953,000. The Company had $101,000 available on
its bank line of credit as of June 30, 2003.
$10 MILLION THREE-YEAR CREDIT FACILITY
On September 26, 2002, the Company entered into a three-year $10 million
credit facility with a national financial institution, replacing its prior
short-term $10 million credit facility. This bank line of credit permits the
Company to borrow up to 85% of the total amount of eligible accounts receivable.
Interest is payable monthly at 6% (1.75% over the prime rate of 4.25% at June
30, 2003), and outstanding borrowings under the line are secured by
substantially all Company assets other than its truck fleet and related
equipment. The maturity date of the bank line of credit is September 25, 2005,
with a prepayment fee to be charged if the Company terminates the credit
facility prior to such date. In addition, the credit facility may be extended by
the mutual consent of the Company and the bank after September 25, 2005.
As of June 30, 2003 and June 30, 2002, the Company had outstanding
borrowings of $4.41 million and $4.68 million, respectively, under its bank
lines of credit. Based on eligible receivables outstanding, the Company had
$101,000 of cash availability on its bank line of credit at June 30, 2003. As of
June 30, 2003 and the date of this Form 10-K filing, the Company was in
compliance with the financial covenants required by the loan and security
agreement. As a result of the pay down of the bank line credit with proceeds
from the August 2003 refinancing, the Company has substantially increased its
availability under the bank line of credit.
In August 2003, the Company and its bank line of credit lender amended the
loan and security agreement between them in connection with the Company's August
2003 refinancing which (1) released the lender's lien on patents, patent rights
and patent applications; (2) increased the unused line of credit fee by .50%;
(3) revised the effective book net worth covenant to include the August 2003
promissory notes in its calculation; (4) established a covenant to maintain a
minimum quarterly fixed charge coverage ratio as defined in the amended loan
agreement; (5) established a covenant for the Company to maintain a minimum
excess availability of $500,000; and (6) eliminated the loan prepayment fee. The
Company utilized a portion of the proceeds of the August 2003 refinancing to pay
down the bank line of credit by $2.9 million. The proceeds that were used to
pay down the outstanding line of credit balance are available to the Company for
working capital.
Management believes that the Company's bank line of credit will provide the
working capital needed to maintain and grow its business and to accomplish its
business plan. However, if additional financing is required, there can be no
assurance that the Company will be able to obtain such financing from its
present bank line of credit or another lender at acceptable terms, or at all.
Further, since the Company's borrowings under its bank line of credit bear
interest at variable interest rates and represent a large portion of the
Company's outstanding debt, the Company's financial results could be materially
affected by significant increases or decreases in interest rates.
JANUARY 2002 CONVERSION OF SUBORDINATED DEBT
In January 2002, certain holders of the convertible subordinated promissory
notes converted an aggregate of $2.617 million to unregistered shares of the
Company's common stock at a conversion price of $1.24 per share, for a total of
2,110,322 shares of common stock. The notes converted contained conversion rates
ranging from $1.35 to $1.50 per share. The holders of the remaining $283,600 of
convertible subordinated promissory notes issued by the Company who did not
convert their notes in January 2002 waived any conversion price adjustment. With
the consent of the holder, interest on two of these notes may be paid in the
Company's common stock, with the stock value based on the average closing price
of the stock during the most recent quarter. In September 2002, the maturity
dates of these non-converted notes were extended to August 31, 2004.
16
The outstanding balance of these notes was repaid in full in September 2003
with proceeds from the August 2003 refinancing.
SUBORDINATED PROMISSORY NOTES
On December 23, 2002, the Company issued a $150,000 short-term promissory
note to a shareholder. The note was due on January 31, 2003, with interest at 5%
over the prime interest rate. On January 21, 2003 the Company and the holder of
the note substituted the note for a $150,000 subordinated promissory note due on
January 31, 2005, bearing interest at an annual rate of 9%. With the consent of
the holder, interest on the note may be paid in unregistered shares of the
Company's common stock, with the stock value based on the closing bid price of
the stock for the five trading days before the last day of the quarter in which
the interest is due but in no event less than the closing bid price at the time
of issuance or the average of the closing bid prices for the five trading days
prior to such time, whichever is lower.
On January 21, 2003, the Company issued $300,000 of subordinated promissory
notes to two shareholders. The notes are due on January 31, 2005 and bear
interest at an annual rate of 9%. With the consent of the holders, interest on
the notes may be paid in the Company's common stock, with the stock value based
on the closing bid price of the stock for the five trading days before the last
day of the quarter in which the interest is due but in no event less than the
closing bid price at the time of issuance or the average of the closing bid
prices for the five trading days prior to such time, whichever is lower.
On May 12, 2003, the Company issued $300,000 of subordinated promissory
notes to certain shareholders. The notes bear interest at an annual rate of 14%
and are payable on demand. The Company repaid $235,500 of these notes with the
proceeds of the May 20, 2003 private placement issuance of subordinated
promissory notes and common stock purchase warrants. The exercise price of the
warrants is $0.86 per share.
On May 20, 2003, the Company issued $235,500 of subordinated promissory
notes to officers, directors and certain shareholders. The notes are due on
November 19, 2003 and bear interest at an annual rate of 14%. With the consent
of the holders, the Company may elect to pay interest on the notes in shares of
the Company's common stock, with the stock value based on the most recent
closing bid price of the stock at the time the notes were executed or for the
five trading days before such date, whichever is lower. The Company also issued
warrants to purchase 82,425 shares of common stock exercisable at $0.86 per
share in connection with the notes. The warrants issued are exercisable for a
period of three (3) years from and after the date on which the notes are repaid
or otherwise surrendered to the Company, but in no event later than November 19,
2006.
The outstanding balance of these notes was repaid in full in September 2003
with proceeds from the August 2003 refinancing.
AUGUST 2003 PROMISSORY NOTES
On August 29, 2003 the Company closed a $6.925 million offering to
institutions and other accredited lenders consisting of five-year 10% promissory
notes and five-year warrants to purchase a total 2,008,250 shares of the
Company's common stock at $1.00 per share. The August 2003 promissory notes are
collateralized by a first priority security interest in its specialized fueling
truck fleet and related equipment and by patents in its proprietary fuel
management system. The August 2003 promissory notes provide (1) for no principal
payments until August 28, 2005; (2) six $750,000 semi-annual principal payments
commencing on August 28, 2005 through February 28, 2008; (3) a balloon payment
of $3,000,000 at maturity on August 28, 2008; (4) require semi-annual interest
payments on June 30 and December 31 commencing December 31, 2003; and (5) are
callable after August 1, 2005 at 105% of par. The net cash proceeds from the
financing were $2.9 million, after payment of related fees and expenses and
repayment of all outstanding equipment and subordinated debt. In connection with
the issuance of the August 2003
17
promissory notes, the Company negotiated a settlement with its primary equipment
lender and received a $757,000 cash discount by prepaying the outstanding
balance on August 29, 2003.
OPERATIONS
Since the Company's current management team assumed operating control in
February 2001, and through the filing of the Company's 10-K, the Company has
undergone a top to bottom transformation. During this period, $14.2 in capital
has been raised, $8.2 million repaid to equipment lenders, and $1.0 million
repaid to holders of subordinated debt, with the Company currently having over
$2.9 million available on its bank line of credit. While the volume of delivered
business grew by only 12% from February 2001 through June 30, 2003, a
significant volume of non-profitable gallons being delivered has been
renegotiated or replaced with positive margin contributing business. Net margins
have improved by 143% per gallon and 172% in dollars from February 2001 through
June 30, 2003. These improvements stem from a reduction in direct operating
expenses over that period of 29% per gallon and 20% in dollars while at the same
time insurance costs have doubled due to noncontrollable economic factors.
From February 2001 through June 30, 2003, The Company's delivery efficiency
has improved by 52% for gallons delivered per driver payroll hour and 30% for
gallons delivered per truck. As of June 30, 2003, the Company was delivering 12%
more gallons than in February 2001 while reducing the number of trucks utilized
in the delivery process to 70 from 90 during that time. The Company has 30
trucks available for its current expansion program, and believes it has the
capacity in its overall truck fleet to meet its foreseeable requirements for
business growth without acquiring additional equipment. During this period the
total number of Company employees was reduced by 27%, from 203 to 148, while
management and supervisory personnel was reduced by 38%, from 26 to 16.
The Company's mobile fueling business requires it to utilize considerable
working capital for fuel, labor and equipment costs prior to receiving payments
from customers. The fuel purchased by the Company for resale to customers
generally must be paid for within 10 to 15 days of purchase, with labor costs
and related taxes paid bi-weekly, and equipment related costs generally paid
within 30 days. The Company invoices customers both daily and weekly and
generally collects the majority of its accounts within 30 to 45 days.
The Company believes that it will add incremental business from new and
existing customers at acceptable margins; continue to control and reduce
operating costs; improve equipment utilization; and generate additional cash
flow to support its working capital credit facility and carrying cost of the
August 2003 promissory notes. However, there is no assurance that the Company
will be able to improve its operating performance in the future; generate
sufficient cash flow; or raise additional capital to fund any working capital or
debt service shortfalls during possible future business downturns, whether the
downturn is caused by depressed economic conditions, or the Company's inability
to execute its business plan.
A series of five unanticipated events adversely impacted the Company's
financial performance in the last three quarters of the 2003 fiscal year. As a
result, the average net margin per gallon of fuel delivered was reduced from
$.14 in September 2002 to $.11 in June 2003; the growth in net new business was
restricted; and the Company's reported loss for the year ended June 30, 2003 was
materially increased:
(1) CONVERSION TO AUTOMATED DAILY BILLING SYSTEM
The Company's second quarter loss of $858,000 resulted in part from
problems associated with an automated daily billing system project.
The additional costs incurred and lost revenue accounted for $203,000
of the loss. These problems were finally resolved in December of 2002
and the Company now maintains an average 27 to 30 days sales
outstanding, the lowest in its history.
(2) INCREASE IN INSURANCE PREMIUMS
The Company's annual insurance premiums increased in October 2002 by
$360,000 and $270,000 for the year ended June 30, 2003. The October
2002 increase follows a substantial increase in premiums in October
2001. The Company believes that these increases were directly related
to the events of September 11, 2001. It is anticipated by management
that property liability and workers' compensation coverage renewals in
October 2003 will result in relatively flat premiums as the
18
insurance industry has stabilized in the calming period following the
2001 terrorist attack and the Company has significantly improved its
claims performance since the current management assumed control of
operations in February 2001.
(3) INCREASED PETROLEUM PRODUCT PRICES
From February 2002 to February 2003 the average price of diesel fuel
in the Company's markets increased over 120%, from $0.51 to $1.14 per
gallon, primarily due to military events in the Middle East, refinery
shutdowns in Venezuela and a severe winter in the U. S. Northeast.
This extraordinary price escalation adversely affected the addition of
new business opportunities from the fall of 2002 until late spring of
2003 when prices stabilized and a more customary decision making
process regarding mobile fueling services was restored.
(4) COMPETITION
The Company believes that, in the last calendar quarter of 2002 and
through the first half of calendar year 2003, its largest competitor,
a privately held mobile fueling company, undertook a strategy of
seeking to drive competition out of business and increase market share
through an extremely aggressive pricing scheme. While this pricing
strategy was ultimately unsuccessful and the Company believes that it
contributed to the competitor ceasing operations in July 2003, it did
force the Company to lower prices to many of its customers and
adversely impacted the profitability of the Company's business and the
development of new business during the year ended June 30, 2003.
(5) LEGAL AND PROFESSIONAL FEES
During the fiscal year ending June 30, 2003, the Company incurred
$200,000 of higher legal and professional fees. These higher costs
partly related to the new SEC mandates and legislative regulatory
initiatives under the Sarbanes-Oxley Act of 2002.
During the year ended June 30, 2003 management continued to implement
operational changes which have required time and capital resources; have enabled
the Company to compete more effectively for mobile fueling business; and have
provided the Company a more stable platform to implement its business plan.
These initiatives have included:
o Reducing field operating expenses, primarily direct labor and
maintenance costs, and enhancing the effectiveness of environmental
and safety programs
o Changing delivery routes and schedules to increase efficiencies,
decrease costs, and improve the quality of customer service and
reliability of fuel deliveries
o Decreasing administrative and field overhead costs, primarily
personnel and information system expenses
o Reevaluating margin contribution on all accounts, increasing service
charges on low margin accounts and discontinuing service on
unprofitable accounts
o Expanding marketing and sales efforts in selected locations with
experienced sales personnel having specific volume and margin
objectives
o Upgrading field personnel hiring and training procedures to improve
employee retention and labor efficiency
o Improving the patented electronic fuel dispensing and field
information gathering system to reduce labor costs, enhance reporting
accuracy, eliminate manual manipulation of fueling data and integrate
multiple safety features
19
o Redesigning field and supervision procedures to increase gallons of
fuel delivered per day, per payroll hour and per truck
o Revamping credit and collections policies and procedures to reduce
days sales outstanding and decrease uncollectible accounts
o Establishing improved financial, accounting and operating internal
control systems and procedures over important Company processes in
order to more effectively manage business risks, safeguard assets and
comply with new legislative and regulatory requirements.
NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45"). FIN 45 requires the recognition of a liability for certain guarantee
obligations issued or modified after December 31, 2002. FIN 45 also clarifies
disclosure requirements to be made by a guarantor for certain guarantees. The
disclosure provisions of FIN 45 were effective for fiscal years ending after
December 15, 2002. The Company adopted the disclosure provisions of FIN 45 as of
June 30, 2003 and the adoption the accounting requirements effective July 1,
2003. The adoption of FIN 45 did not have a significant impact on the Company's
consolidated financial position, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities, an Interpretation of APB No. 50," ("FIN 46"). FIN
46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company did not create or acquire any
variable interest entities between January 31, 2003 and June 30, 2003.
Similarly, the Company does not have any variable interest entities created or
acquired prior to February 1, 2003 that would have a significant impact on the
Company's consolidated financial position, results of operations or cash flows
upon adoption of the remaining provisions of FIN 46 for the quarter ended
September 30, 2003.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 clarifies under what
circumstances a contract with an initial net investment meets the
characteristics of a derivative and clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS 149 amends certain other existing pronouncements. SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and should be applied prospectively. The adoption of SFAS 149 is not expected to
have a significant impact on the Company's consolidated financial position,
results of operations or cash flows.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The Company did not issue any financial instruments between May
31, 2003 and June 30, 2003 and does not expect SFAS 150 to have a significant
impact on the Company's consolidated financial position, results of operations
or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has identified the policies outlined below as critical to its
business operations and an understanding of the results of operations. The
listing is not intended to be a comprehensive list of all accounting
20
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting principles generally accepted in the United
States, with no need for management's judgment in their application. The impact
and any associated risks related to these policies on business operations are
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 2 in the Notes to the Consolidated Financial
Statements in Item 8 on Form 10-K. Note that the preparation of this Form 10-K
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. There can be no assurance that
actual results will not differ from those estimates.
Accounts Receivable and Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customers' current
credit worthiness, as determined by a review of their current credit
information. Management continuously monitors collections and payments from
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that are
identified. While such credit losses have historically been within expectations
and the provisions established, the Company cannot guarantee that it will
continue to experience the same credit loss rates that have occurred in the
past. The Company's accounts receivable as of June 30, 2003 were approximately
$6.1 million, net of an allowance for doubtful accounts of approximately
$530,000.
Property and Equipment
The Company records property and equipment at cost and depreciates that
cost over the estimated useful life of the asset on a straight-line basis.
Ordinary maintenance and repairs are expensed as incurred and improvements that
significantly increase the value or useful life of property and equipment are
capitalized.
The Company tests property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. The conditions that would trigger an impairment assessment of
property, plant and equipment would include, but not be limited to, a
significant, sustained negative trend in operating results or cash flows; a
decrease in demand for the Company's services; a change in the competitive
environment; and other industry and economic factors. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of the
asset to future net cash flows expected to be generated by the asset. If such
assets are deemed to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets based on the projected net cash flows discounted at a rate
commensurate with the risk of the assets.
Income Taxes
In connection with the preparation of the Company's financial statements,
income taxes are required to be estimated. This process involves estimating
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included on the balance sheet. The likelihood that deferred tax assets will be
recovered from future taxable income is assessed and to the extent that recovery
is not likely, a valuation allowance is established. To the extent a valuation
allowance is established or an increase in the allowance is recorded in a
period, a tax is provided in the statement of operations. Management judgment is
required in determining the provision for income taxes, the deferred tax assets
and liabilities and any valuation allowance recorded against net deferred tax
assets. A valuation allowance of approximately $2.9 million was recorded as of
June 30, 2003, due to uncertainties related to utilizing some of the deferred
tax assets, primarily consisting of certain net operating losses carried
forward, before they expire. The valuation allowance is based on estimates of
taxable income and the period over which deferred tax assets will be
recoverable. In the event that actual results differ from these estimates, or
these estimates are adjusted in future periods, it may be necessary to establish
an additional valuation allowance
21
which could materially impact the Company's financial position and results of
operations. The net deferred tax asset as of June 30, 2003 was zero, net of the
valuation allowance.
COMPARISON OF YEAR ENDED JUNE 30, 2003 TO YEAR ENDED JUNE 30, 2002
REVENUES
Revenue increased $11.3 million, or 18.6%, in the year ended June 30, 2003
compared to the year ended June 30, 2002. The increase in revenue resulted from
extraordinary increases in the wholesale price of diesel fuel and gasoline,
offset by a decline in gallons delivered. The Company delivered 47.3 million
gallons of fuel to its customers in the year ended June 30, 2003, a decrease of
4.4% compared to the 49.5 million gallons delivered in the year ended June 30,
2002. The decrease in gallons was due to reduced demand by certain customers
arising from depressed economic conditions throughout the year; modifications of
certain customers' mobile fueling programs in response to substantially
increased fuel prices; termination of unprofitable mobile fueling service
accounts; and elimination of bulk delivery services in northern California. The
discontinued bulk delivery service in northern California accounted for 5.6
million gallons of the total 49.5 million gallons delivered in the prior fiscal
year ending June 30, 2002. Notwithstanding the aforementioned, the Company
delivered 3.4 million or 7.7% more mobile fueling gallons than the prior fiscal
year.
GROSS PROFIT
Gross profit decreased approximately $568,000, or 12.4%, in the year ended
June 30, 2003 compared to the year ended June 30, 2002. The average net margin
per delivered gallon of fuel in the year ended June 30, 2003 decreased to 11.5
cents compared to 12.2 cents in the year ended June 30, 2002. The decrease in
gross profit was due to increases in the cost of fuel used to operate the
Company's delivery fleet of $99,000; higher fixed costs associated with an
increase in property and liability insurance of $214,000; and decreases in other
service charges revenue of $82,000. The remaining decrease is attributable to
the Company's largest competitor driving down service margins during the current
year, which resulted in the Company lowering prices it charges to some of its
customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased approximately
$334,000, or 7.6%, in the year ended June 30, 2003 compared to the year ended
June 30, 2002. The increase in these expenses primarily resulted from an
increase in professional fees of $169,000; an increase in insurance expense of
$193,000; an increase in sales and marketing costs of $37,000; an increase in
temporary labor expense of $60,000; and an increase in depreciation expense of
$57,000; offset by a decrease in provision for bad debts of $161,000.
INTEREST EXPENSE
Interest expense decreased approximately $260,000, or 22.1%, in the year
ended June 30, 2003 compared to the year ended June 30, 2002 as a result of
lower interest rates on variable rate debt and decreased borrowings resulting
from the scheduled repayment of existing equipment debt; reduced bank line of
credit advances; and conversion of subordinated debt to equity.
The Company incurred in January 2002 in connection with the conversion of
its convertible subordinated promissory notes to equity, a one-time non-cash
charge related to EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features". This charge was $241,000 and recorded as a
beneficial conversion of debt to equity interest expense in the year ended June
30, 2002.
INCOME TAXES
The Company recorded no income tax expense for the years ended June 30,
2003 or 2002. The Company has net operating loss carryforwards of $13.0 million
at June 30, 2003.
22
EBITDA
Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
was $737,000 for the year ended June 30, 2003, a decrease of $975,000 from
$1,712,000 for the year ended June 30, 2002. The decrease was primarily due to
the higher net loss during fiscal year ended June 30, 2003, offset by reduced
interest expense in the current year. The components of EBITDA for the years
ended June 30, 2003 and 2002 are as follows:
2003 2002
----------- ----------
Net loss $ (1,581,000) $(1,162,000)
Add back:
Interest expense 915,000 1,175,000
Beneficial conversion of debt
to equity interest expense -- 241,000
Depreciation and amortization
expense 1,403,000 1,458,000
----------- ----------
EBITDA $ 737,000 $ 1,712,000
=========== ==========
COMPARISON OF YEAR ENDED JUNE 30, 2002 TO YEAR ENDED JUNE 30, 2001
REVENUES
Revenue decreased $18.6 million, or 23.4%, for the year ended June 30, 2002
compared to the year ended June 30, 2001. The decrease in revenue resulted from
a substantial decrease in the wholesale price of diesel fuel and gasoline as
well as a decline in gallons delivered. The Company delivered 49.5 million
gallons of fuel to its customers in the year ended June 30, 2002, a decrease of
8.5% compared to the 54.1 million gallons delivered in the year ended June 30,
2001. The decrease in gallons delivered resulted primarily from the elimination
of non-profitable markets and accounts, as well as volume declines of certain
customers whose levels of business activity have been adversely impacted by the
current economic downturn.
GROSS PROFIT
Gross profit increased approximately $2.1 million, or 82.2%, in the year
ended June 30, 2002 compared to the year ended June 30, 2001. The average net
margin per delivered gallon of fuel in the year ended June 30, 2002 improved to
12.2 cents compared to 7.3 cents in the year ended June 30, 2001. The increase
in gross profit was due to the results of the business initiatives started
February 2001, yielding reduced direct operating expenses, improved margins on
existing accounts and new, higher-margin accounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased approximately
$589,000, or 15.5%, in the year ended June 30, 2002 compared to the year ended
June 30, 2001. The increase in these expenses primarily resulted from increases
in payroll costs associated with the reestablishment of a marketing and sales
department and program (including direct marketing) which had been previously
eliminated, together with the restructuring of the management, operations, and
information technology departments and related personnel; increases in insurance
expense and legal fees; and an increase in the allowance for doubtful accounts.
INTEREST EXPENSE
Interest expense decreased approximately $396,000, or 25.2%, in the year
ended June 30, 2002 compared to the year ended June 30, 2001 as a result of
lower interest rates on variable rate debt and decreased borrowings, primarily
due to repayment of existing equipment debt, credit facility and the conversion
of the subordinated promissory notes to equity.
23
The Company incurred, in connection with the conversion of its convertible
subordinated promissory notes to equity in January 2002, a one-time non-cash
charge related to EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features". This charge was $241,000 and classified as
beneficial conversion of debt to equity interest expense for the year ended June
30, 2002.
INCOME TAXES
The Company recorded no income tax expense for the years ended June 30,
2002 or 2001. The Company has net operating loss carryforwards of $12.2 million
at June 30, 2002.
EBITDA
EBITDA increased by $1.5 million to $1.7 million for the year ended June
30, 2002 from $223,000 for the year ended June 30, 2001. The increase was
primarily due to higher net margins and operating profit. The components of
EBITDA for the years ended June 30, 2002 and 2001 are as follows:
2002 2001
---------- -----------
(unaudited)
Net loss $(1,162,000) $(2,774,000)
Add back:
Interest expense 1,175,000 1,571,000
Beneficial conversion of debt
to equity interest expense 241,000 --
Depreciation and amortization
expense 1,458,000 1,426,000
---------- ----------
EBITDA $ 1,712,000 $ 223,000
========== ==========
COMPARISON OF FIVE-MONTH TRANSITION PERIOD ENDED JUNE 30, 2001 TO FIVE MONTHS
ENDED JUNE 30, 2000
REVENUES
Revenue decreased $7.0 million, or 19.1%, for the five months ended June
30, 2001 compared to the five months ended June 30, 2000. The decrease in
revenue resulted from a decrease in the wholesale price of diesel fuel and
gasoline, declines in the actual quantities of fuel delivered and, to a lesser
extent, declines in the average delivery service fee as a result of changes in
the mix of business. The Company delivered 21.8 million gallons of fuel to its
customers in the five months ended June 30, 2001, a decrease of 13.9% compared
to the 25.3 million gallons delivered in the five months ended June 30, 2000.
The Company sells fuel at prices based upon the daily market averages in each
operating location and provides delivery services at a fixed price per gallon.
Revenue levels can vary depending on the upward or downward movement of fuel
prices in each market. The Company has begun the reestablishment of its
marketing and sales function in order to increase the volume of mobile and bulk
fueling business for future periods.
GROSS PROFIT
Gross profit decreased $597,000, or 44.7%, in the five months ended June
30, 2001 compared to the five months ended June 30, 2000. The net margin per
gallon of fuel in the five months ended June 30, 2001 was 6.2 cents compared to
7.4 cents in the five months ended June 30, 2000. Several factors contributed to
the decrease in gross profit and net margin per gallon, including decreases in
volume; reduced historical inventory gains from gross volumes sold to net
volumes purchased; increases in inventory shrink arising from inefficiencies in
field control and reporting systems; increased product procurement costs;
increased vehicle expenses, primarily depreciation, running fuel and insurance;
and decreases in the average delivery service fee resulting from the loss of
higher margin mobile fueling business and the replacement of a portion of that
business with lower margin bulk delivery business.
24
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $917,000, or 75.9%,
in the five months ended June 30, 2001 compared to the five months ended June
30, 2000. The increase in these expenses primarily resulted from increases in
payroll costs associated with a restructuring of the marketing, information
technology and management functions; increases in direct marketing and sales
payroll; and increases in insurance expense, legal fees and other employee
benefits.
INTEREST EXPENSE
Interest expense decreased $75,000, or 11.2%, in the five months ended June
30, 2001 compared to the five months ended June 30, 2000 as a result of
decreased borrowings, primarily due to repayment of existing equipment debt.
INCOME TAXES
The Company recorded no income tax expense in the five-month periods ended
June 30, 2001 or 2000. The Company has net operating loss carryforwards of $11.0
million at June 30, 2001.
EBITDA
EBITDA decreased by $1,436,000 to a negative $748,000 for the five-month
transition period ended June 30, 2001 from $688,000 for the five-month
transition period ended June 30, 2000. The decrease was primarily due to the
decreases in gross profit as well as the increases in selling, general and
administrative expenses. The components of EBITDA for the five-month transition
periods ended June 30, 2001 and 2000 are as follows;
2001 2000
----------- ----------
(unaudited)
Net loss $(1,951,000) $ (512,000)
Add back:
Interest expense 590,000 665,000
Depreciation and amortization 613,000 535,000
expense
---------- ---------
EBITDA $ (748,000) $ 688,000
========== =========
COMPARISON OF FISCAL YEAR ENDED JANUARY 31, 2001 TO FISCAL YEAR ENDED JANUARY
31, 2000
REVENUES
Revenue increased $12.3 million, or 16.6%, for the year ended January 31,
2001 ("fiscal 2001") compared to the year ended January 31, 2000 ("fiscal
2000"). The increase in revenue resulted from an overall increase in the
wholesale price of diesel fuel and gasoline, offset by declines in the actual
quantity of fuel delivered and, to a lesser extent, declines in the average
delivery service fee as a result of changes in the mix of business. The Company
delivered 57.6 million gallons of fuel to its customers in fiscal 2001, a
decrease of 3.0% over the 59.4 million gallons delivered in fiscal 2000. The
Company sells fuel at prices based upon the daily market averages in each
operating location and provides delivery services at a fixed price per gallon.
Revenue levels can vary depending on the upward or downward movement of fuel
prices in each market.
GROSS PROFIT
Gross profit decreased $1.5 million, or 33.2%, in fiscal 2001 compared to
fiscal 2000. The net margin per gallon of fuel in fiscal 2001 was 7.7 cents
compared to 9.6 cents in fiscal 2000. A number of factors contributed to
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the decrease in gross profit, including decreases in volume, reduced historical
inventory gains from gross volumes sold to net volumes purchased, increases in
inventory shortages arising from inefficiencies in field control and reporting
systems, increased product procurement costs, increased vehicle expenses,
primarily depreciation, running fuel and insurance, and decreases in the average
delivery service fee resulting from the loss of higher margin mobile fueling
business and the replacement of a portion of that business with lower margin
bulk delivery business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $218,000, or 7.1%,
in fiscal 2001 compared to fiscal 2000. The decrease in these expenses primarily
resulted from eliminating marketing and sales personnel in the first quarter of
the year, including related travel and entertainment expenses and reduced
financial/public relations expenses, offset by increases in corporate payroll
costs in the last quarter of the year.
INTEREST EXPENSE
Interest expense increased $493,000, or 42.8%, in fiscal 2001 compared to
fiscal 2000 as a result of increased borrowings, primarily in prior years, to
pay for new custom fuel trucks for the Company's operations and as a result of
interest rate increases throughout fiscal 2001.
INCOME TAXES
The Company recorded no income tax expense in fiscal 2001 or 2000. The
Company has net operating loss carryforwards of $8.0 million at January 31,
2001.
EBITDA
EBITDA decreased by $1,050,000 to $1,659,000 for the year ended January 31,
2001 from $2,709,000 for the year ended January 31, 2000. The decrease was
primarily due to the decreases in gross profit, increases in interest expense
due to increased borrowings, and was offset by the decrease in selling, general
and administrative expenses. The components of EBITDA for the years ended
January 31, 2001 and 2000 are as follows:
2001 2000
---------- ----------
Net (loss) income $(1,335,000) $ 472,000
Add back:
Interest expense 1,645,000 1,152,000
Depreciation and
amortization expense 1,349,000 1,085,000
---------- ----------
EBITDA $ 1,659,000 $ 2,709,000
========== ==========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is limited primarily to the
fluctuating interest rates associated with variable rate debt outstanding to
finance working requirements. This debt bears interest at the United States
prime interest rate plus a fixed markup and is subject to change based upon
interest rate changes in the United States. The Company does not currently use,
and has not historically used, derivative instruments to hedge against such
market interest rate risk. Increases or decreases in market interest rates could
have a material impact on the financial condition, results of operations and
cash flows of the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company required by Form 10-K are attached
following Part III of this report, commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIAN