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
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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
25
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.
26
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.
27
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement in connection with its 2003 Annual Meeting
of Shareholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement in connection with its 2003 Annual Meeting
of Shareholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement in connection with its 2003 Annual Meeting
of Shareholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement in connection with its 2003 Annual Meeting
of Shareholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 14. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and participation of the Company's
Chief Executive Officer and Chief Financial Officer (the "Officers") of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that
evaluation, the Officers concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic SEC
filings, including this report.
INTERNAL CONTROLS
There were no significant changes made in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
28
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibits Description
-------- -----------
3.1 Restated Articles of Incorporation (16)
3.2 Amended and Restated Bylaws (6)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Redeemable Common Stock Purchase Warrant (1)
4.3 Underwriters' Purchase Option Agreement between the Registrant
and Argent Securities, Inc. (1)
4.4 Warrant Agreement between the Registrant and American Stock
Transfer & Trust Company (1)
10.1 Employment Agreement, dated November 1, 2000 between the
Registrant and Stanley H. Streicher (2)(6)
10.2 Registrant's 1996 Stock Option Plan (1)(2)
10.3 $10,000,000 Amended and Restated Loan Agreement, dated May 25,
1999, between the Registrant and Bank Atlantic and First
Amendment, dated December 22, 1999, to Amended and Restated Loan
Agreement (5)
10.4 Amended and Restated $10,000,000 Promissory Note, dated May 9,
2001, between the Registrant and Bank Atlantic (7)
10.5 Registrant's 2000 Stock Option Plan (2)(8)
10.6 Employment Agreement, dated October 26, 2000 between the
Registrant and Richard E. Gathright (2)(9)
10.7 Second Amendment, dated May 9, 2001, to Amended and Restated Loan
Agreement, dated May 25, 1999 (10)
10.8 Promissory Note, dated July 7, 2000, between the Registrant and
C. Rodney O'Connor (11)
10.9 Form of Convertible Subordinated Promissory Note (12)
10.10 Streicher Mobile Fueling, Inc. 2001 Directors Stock Option Plan
(13)
10.11 Agreement dated April 1, 2002 between Stanley H. Streicher,
individually, and Supreme Oil Company Inc. ("Supreme"), a company
wholly owned by Mr. Streicher and the Company with respect to the
repayment by Supreme of certain debts owned to the Company by
Supreme (14)
10.12 Loan and Security Agreement with Congress Financial Corporation
dated September 26, 2002 (15)
10.13 First Amendment to Loan and Security Agreement with Congress
Financial Corporation dated March 31, 2003 (16)
29
10.14 Indenture with The Bank of Cherry Creek dated August 29, 2003
(16)
10.15 Security Agreement with The Bank of Cherry Creek dated August
29, 2003 (16)
23.1 Consent of KPMG LLP (16)
31.1 Certificate of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (16)
31.2 Certificate of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (16)
32.1 Certificate of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
(16)
---------------
(1) Incorporated by reference to the exhibit of the same number filed with the
Company's Registration Statement on Form SB-2 (No. 333-11541)
(2) Management Contract or Compensatory Plan
(3) Incorporated by reference to the exhibit of the same number filed by the
Company with Form 10-K for the fiscal year ended January 31, 1998.
(4) Incorporated by reference to the exhibit of the same number filed by the
Company with Form 10-K for the fiscal year ended January 31, 1999.
(5) Incorporated by reference to the exhibit of the same number filed by the
Company with Form 10-K for the fiscal year ended January 31, 2000.
(6) Incorporated by reference to the exhibit of the same number filed by the
Company with Form 10-K for the fiscal year ended January 31, 2001.
(7) Incorporated by reference to Exhibit 10.5 filed by the Company with Form
10-K for the fiscal year ended January 31, 2001.
(8) Incorporated by reference to Exhibit 10.6 filed by the Company with Form
10-K for the fiscal year ended January 31, 2001.
(9) Incorporated by reference to Exhibit 10.7 filed by the Company with Form
10-K for the fiscal year ended January 31, 2001.
(10) Incorporated by reference to Exhibit 10.8 filed by the Company with Form
10-K for the fiscal year ended January 31, 2001.
(11) Incorporated by reference to Exhibit 10.9 filed by the Company with Form
10-K for the fiscal year ended January 31, 2001.
(12) Incorporated by reference to Exhibit 10.10 filed by the Company with Form
10-K for the fiscal year ended January 31, 2001.
(13) Incorporated by reference to Exhibit A of the Proxy Statement filed by the
Company for the Annual Meeting of Shareholders held on July 19, 2001
(14) Incorporated by reference to Exhibit 99.1 of the Form 8-K dated June 12,
2002 filed by the Company
(15) Incorporated by reference to Exhibit 99.1 of the Form 8-K dated September
30, 2002 filed by the Company
(16) Filed herewith.
30
(b) FINANCIAL STATEMENT SCHEDULE
(c) REPORTS ON FORM 8-K
The Company filed a Form 8-K dated May 15, 2003, under Item 12, reporting
the issuance of a press release covering the operating results for the
third quarter ending March 31, 2003.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: October 3, 2003 STREICHER MOBILE FUELING, INC.
By: /S/ RICHARD E. GATHRIGHT
-----------------------------------
Richard E. Gathright, Chief
Executive Officer and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Title Date
---- ----- ----
By:/S/ RICHARD E. GATHRIGHT Chairman of the Board, October 3, 2003
-------------------------- Chief Executive Officer and
Richard E. Gathright President (Principal
Executive Officer)
By:/S/ MICHAEL S. SHORE Senior Vice President - October 3, 2003
-------------------------- Chief Financial Officer
Michael S. Shore (Principal Financial and
Accounting Officer)
By:/S/ WENDELL R. BEARD Director October 3, 2003
--------------------------
Wendell R. Beard
By:/S/ LARRY S. MULKEY Director October 3, 2003
--------------------------
Larry S. Mulkey
By:/S/ C. RODNEY O'CONNOR Director October 3, 2003
--------------------------
C. Rodney O'Connor
By:/S/ ROBERT S. PICOW Director October 3, 2003
--------------------------
Robert S. Picow
By:/S/ W. GREG RYBERG Director October 3, 2003
--------------------------
W. Greg Ryberg
32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants............. F-2
Consolidated Balance Sheets as of June 30, 2003 and 2002....... F-3
Consolidated Statements of Operations for the Years
Ended June 30, 2003 and 2002, the Five-Month
Transition Period Ended June 30, 2001 and the Year
Ended January 31, 2001...................................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended June 30, 2003 and 2002, the Five-Month
Transition Period Ended June 30, 2001 and the Year
Ended January 31, 2001...................................... F-5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 2003 and 2002, the Five-Month
Transition Period Ended June 30, 2001 and the Year
Ended January 31, 2001...................................... F-6
Notes to Consolidated Financial Statements..................... F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Independent Auditors' Report
The Board of Directors and Shareholders
Streicher Mobile Fueling, Inc.:
We have audited the accompanying consolidated balance sheets of Streicher Mobile
Fueling, Inc. and subsidiaries as of June 30, 2003 and 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended June 30, 2003 and 2002, the five-month transition period ended
June 30, 2001, and the year ended January 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Streicher Mobile
Fueling, Inc. and subsidiaries as of June 30, 2003 and 2002, and the results of
their operations and their cash flows for the years ended June 30, 2003 and
2002, the five-month transition period ended June 30, 2001, and the year ended
January 31, 2001, in conformity with accounting principles generally accepted in
the United States of America.
KPMG LLP
Fort Lauderdale, Florida
September 30, 2003
F-2
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
(in 000's, except share and per share data)
ASSETS June 30, 2003 June 30, 2002
---------------------------------------------------------- ------------- -------------
Current assets:
Cash and cash equivalents ............................ $ 211 $ 815
Restricted cash ...................................... 78 245
Accounts receivable, net ............................. 6,113 6,382
Inventories .......................................... 168 363
Prepaid expenses and other current assets ............ 387 460
-------------- --------------
Total current assets ............................ 6,957 8,265
Property and equipment, net ............................ 8,741 10,012
Note receivable from related party ..................... 52 200
Other assets ........................................... 261 83
-------------- --------------
Total assets ................................... $ 16,011 $ 18,560
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------
Current liabilities:
Bank line of credit payable ......................... $ 4,410 $ 4,680
Current portion of long-term equipment debt and
subordinated promissory notes ...................... 1,965 2,101
Accounts payable and other liabilities .............. 3,012 3,052
-------------- --------------
Total current liabilities ....................... 9,387 9,833
Long-term liabilities:
Subordinated promissory notes ....................... 734 284
Long-term equipment debt, excluding current portion 1,779 2,767
-------------- --------------
Total liabilities ............................... 11,900 12,884
-------------- --------------
Commitments and contingencies (Notes 3 and 10)
Shareholders' equity:
Common stock, par value $.01 per share;
20,000,000 shares authorized; 7,234,168 and
7,211,751 issued and outstanding at
June 30, 2003 and 2002, respectively ............... 72 72
Additional paid-in capital .......................... 11,458 11,442
Accumulated deficit ................................. (7,419) (5,838)
-------------- --------------
Total shareholders' equity ...................... 4,111 5,676
-------------- --------------
Total liabilities and shareholders' equity ...... $ 16,011 $ 18,560
============== ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
STREICHER MOBILE FUELING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002, THE FIVE-MONTH TRANSITION PERIOD ENDED
JUNE 30, 2001 AND THE YEAR ENDED JANUARY 31, 2001
(in 000's, except share and per share data)
Transition Transition
Fiscal Year Fiscal Year Period Period Fiscal Year
June 30, June 30, June 30, June 30, January 31,
2003 2002 2001 2000 2001
------------ ------------ ------------ ------------ ------------
(unaudited)
Fuel sales and service revenues .... $ 53,579 $ 43,538 $ 22,235 $ 26,944 $ 65,002
Fuel taxes ......................... 18,615 17,311 7,275 9,537 21,455
------------ ------------ ------------ ------------ ------------
Total revenues ................. 72,194 60,849 29,510 36,481 86,457
Cost of fuel sales and service ..... 49,556 38,947 21,495 25,607 61,909
Fuel taxes ......................... 18,615 17,311 7,275 9,537 21,455
------------ ------------ ------------ ------------ ------------
Total cost of sales ............ 68,171 56,258 28,770 35,144 83,364
Gross profit ................. 4,023 4,591 740 1,337 3,093
Selling, general and administrative
expenses.......................... 4,716 4,382 2,126 1,209 2,852
------------ ------------ ------------ ------------ ------------
Operating income (loss) ...... (693) 209 (1,386) 128 241
Beneficial conversion of debt to
equity interest expense .......... -- (241) -- -- --
Interest expense ................... (915) (1,175) (590) (665) (1,645)
Interest and other income .......... 27 45 25 25 69
------------ ------------ ------------ ------------ ------------
Loss before income taxes ..... (1,581) (1,162) (1,951) (512) (1,335)
Income tax expense ................. -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss ..................... $ (1,581) $ (1,162) $ (1,951) $ (512) $ (1,335)
============ ============ ============ ============ ============
Basic and Diluted net loss per
share ............................ $ (.22) $ (.20) $ (.47) $ (.19) $ (.49)
============ ============ ============ ============ ============
Basic and Diluted weighted average
common shares outstanding ........ 7,221,070 5,698,147 4,194,283 2,712,220 2,716,855
============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002, THE FIVE-MONTH TRANSITION PERIOD
ENDED JUNE 30, 2001 AND THE YEAR ENDED JANUARY 31, 2001
(in 000's, except share data)
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 31, 2000 .......................... 2,710,400 $ 27 $ 5,651 $ (1,390) $ 4,288
Net loss ........................................... -- -- -- (1,335) (1,335)
Exercise of stock options .......................... 2,200 -- 8 -- 8
Net proceeds from private placement of stock........ 531,667 5 1,898 -- 1,903
Conversion of note payable to equity ............... 333,333 3 497 -- 500
Treasury stock purchased and retired ............... (67,343) -- (146) -- (146)
----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 31, 2001 .......................... 3,510,257 35 7,908 (2,725) 5,218
Net loss ........................................... -- -- -- (1,951) (1,951)
Issuance of stock held as subscribed ............... 811,666 8 (12) -- (4)
Net proceeds from private placement of stock........ 35,000 1 52 -- 53
Issuance of stock in lieu of debt .................. 10,614 -- 16 -- 16
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2001 ............................. 4,367,537 44 7,964 (4,676) 3,332
Net loss ........................................... -- -- -- (1,162) (1,162)
Net proceeds from private placement of stock........ 666,666 7 573 -- 580
Issuance of stock in lieu of debt .................. 67,226 -- 91 -- 91
Conversion of note payable to equity ............... 2,110,322 21 2,814 -- 2,835
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2002 ............................. 7,211,751 72 11,442 (5,838) 5,676
Net loss ........................................... -- -- -- (1,581) (1,581)
Cost associated with extension of warrants.......... -- -- (9) -- (9)
Issuance of stock in lieu of debt .................. 22,417 -- 25 -- 25
----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2003 ............................. 7,234,168 $ 72 $ 11,458 $ (7,419) $ 4,111
=========== =========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002, THE FIVE-MONTH TRANSITION
PERIOD ENDED JUNE 30, 2001 AND THE YEAR ENDED JANUARY 31, 2001
(in 000's, except supplemental disclosure and share data)
Transition Transition
Fiscal Year Fiscal Year Period Period Fiscal Year
June 30, June 30, June 30, June 30, January 31,
2003 2002 2001 2000 2001
----------- ----------- ---------- ----------- -----------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................ $(1,581) $(1,162) $(1,951) $ (512) $(1,335)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Loss on asset disposal .............. -- 9 18 -- 4
Depreciation and amortization ....... 1,403 1,458 613 535 1,349
Interest expense from beneficial
conversion of debt to equity ...... -- 241 -- -- --
Provision for doubtful accounts ..... 263 637 37 38 90
Changes in operating assets and liabilities:
Decrease (increase) in
restricted cash ................... 167 (21) 580 312 (282)
Decrease (increase) in accounts
receivable ....................... 118 1,650 931 540 (287)
Decrease (increase) in
inventories, prepaid expenses
and other assets .................. 90 143 133 142 (213)
(Decrease) increase in
accounts payable and other
liabilities ....................... (15) (456) (511) (236) 36
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities .............. 445 2,499 (150) 819 (638)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment ......................... (248) (152) (288) (1,117) (1,410)
Proceeds from disposal of
equipment ......................... 4 276 29 -- 21
Decrease (increase) note
receivable due from
related party ..................... 148 443 (43) (19) (39)
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities .............. (96) 567 (302) (1,136) (1,428)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft ................ -- (318) 318 294 --
Net repayments on line of credit ........ (270) (2,225) (381) (471) (394)
Proceeds from the issuance of
subordinated debt ..................... -- 1,700 1,000 -- --
Proceeds from the issuance of
subordinated promissory notes ......... 905 -- 100 917 2,092
Repayments on subordinated promissory
notes ................................. (155) -- -- -- --
Principal payments on long-term debt .... (1,424) (2,114) (1,091) (760) (1,949)
Net proceeds (costs) from issuance of
common stock and common stock
warrants .............................. (9) 700 65 60 2,411
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities ................ (953) (2,257) 11 40 2,160
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................. (604) 809 (441) (277) 94
CASH AND CASH EQUIVALENTS,
beginning of period ................... 815 6 447 353 353
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
end of period ......................... $ 211 $ 815 $ 6 $ 76 $ 447
======== ======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002, THE FIVE-MONTH TRANSITION
PERIOD ENDED JUNE 30, 2001 AND THE YEAR ENDED JANUARY 31, 2001
(in 000's, except supplemental disclosure and share data)
(Continued)
Transition Transition
Fiscal Year Fiscal Year Period Period Fiscal Year
June 30, June 30, June 30, June 30, January 31,
2003 2002 2001 2000 2001
----------- ----------- ---------- ----------- -----------
(unaudited)
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for-
Interest................................. $ 880 $ 1,193 $ 615 $ 668 $ 1,642
-------- -------- -------- -------- --------
Income taxes............................. $ -- $ -- $ -- $ -- $ --
-------- -------- -------- -------- --------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
FISCAL YEAR ENDED JUNE 30, 2003:
Issuance of $25,000 of common stock in lieu of payment of interest on
subordinated convertible promissory notes
Transfer of $112,000 of fixed assets to account receivable from third
party relating to disposal of vehicle
FISCAL YEAR ENDED JUNE 30, 2002:
Conversion of $2,617,000 of subordinated convertible promissory notes into
common stock resulting in a non-cash charge to interest expense of
$241,000
Issuance of $91,000 of common stock in lieu of payment on subordinated
convertible promissory notes
Transfer of $60,000 of fixed assets to note receivable from related party
FIVE MONTHS ENDED JUNE 30, 2001:
Issuance of $16,000 of common stock in lieu of payment on subordinated
convertible promissory notes
FISCAL YEAR ENDED JANUARY 31, 2001:
Conversion of $500,000 of subordinated convertible promissory notes into
common stock
Exchange of receivable of $147,000 from related party for 67,343 shares of
common stock
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Streicher Mobile Fueling, Inc., a Florida corporation (the "Company")
was formed in 1996.
The Company provides mobile fueling and fuel management out-sourced
services to businesses that operate all size fleets of vehicles and
equipment, 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. At
June 30, 2003, the Company had operations in California, Florida, Georgia,
North Carolina, Tennessee and Texas.
The Company generates substantially all of its revenue from mobile fueling
and fuel management services. Revenue is comprised principally of delivery
service charges and the related sales 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 authority. The Company
provides mobile fueling and fuel management services at a minimum rate.
Included in the rate are negotiated service charges and the cost of fuel
based on market prices. Revenue and cost of fuel will vary depending on
the upward or downward movement of fuel prices in each market.
In the mobile fueling business, the majority of deliveries are made on
workdays, Monday through Friday, to coincide with customers' fuel service
requirements. Thus, 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 during the fiscal year 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of
Streicher Mobile Fueling, Inc. and its wholly owned subsidiaries,
Streicher West, Inc., Streicher Realty, Inc., and Mobile Computer
Systems, Inc. As of August 8, 2001 the Company's subsidiaries,
Streicher West, Inc. and Mobile Computer Systems, Inc., were
merged into Streicher Realty, Inc., the surviving corporation.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Effective July 19, 2001, the Company changed its fiscal year-end
from January 31 to June 30. The five-month transition period of
February 1, 2001 through June 30, 2001 ("transition period")
preceded the start of the new fiscal year.
F-8
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Included
in cash and cash equivalents in the accompanying consolidated
balance sheets is interest bearing cash of approximately $211,000
and $815,000 as of June 30, 2003 and 2002, respectively.
(c) Restricted Cash
Restricted cash at June 30, 2003 and 2002 consists of $78,000 and
$245,000, respectively, in collections on customer accounts
receivable, which were deposited in a restricted account and used to
repay advances made to the Company on its working capital line of
credit.
(d) Accounts Receivable
Accounts receivable are due from customers within a broad range of
industries and are generally unsecured. Additionally, accounts
receivable are composed of refunds from state and federal
governments for fuel taxes which are not billable to certain
customers, yet have been paid to vendors by the Company and other
receivables from insurance companies for policy refunds and
insurance claims. The Company provides for credit losses based on
management's evaluation of collectibility based on current and
historical performance of each customer and from state and federal
governments from whom refunds are expected.
A roll forward of the activity in the allowance for doubtful
accounts for the indicated periods is as follows:
Transition
Fiscal Year Fiscal Year Period Fiscal Year
June 30, June 30, June 30, January 31,
2003 2002 2001 2001
----------- ------------ ----------- -----------
Balance - beginning of period $ 509,000 $ 78,000 $ 55,000 $ 111,000
Provision for bad debts 263,000 637,000 37,000 90,000
Write-offs, net of recoveries (242,000) (206,000) (14,000) (146,000)
----------- ------------ ----------- -----------
Balance - end of period $ 530,000 $ 509,000 $ 78,000 $ 55,000
=========== =========== =========== ===========
(e) Inventories
Inventories, consisting primarily of diesel fuel and gasoline, are
stated at the lower of cost or market and include federal and state
fuel taxes payable to vendors. Cost is determined using the
first-in, first-out method.
(f) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Ordinary maintenance and repairs are
expensed as incurred. Improvements which significantly increase the
value or useful life of property and equipment are capitalized.
Property and equipment are depreciated or amortized using the
straight-line method over their estimated useful lives. Property and
equipment balances and the estimated useful lives were as follows at
the indicated dates:
F-9
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
-------------------------------- Estimated Useful
2003 2002 Life
-------------- -------------- --------------------------
Fuel trucks, tanks and vehicles 14,450,000 14,681,000 5 - 25 years
Machinery and equipment 302,000 1,148,000 3 - 5 years
Furniture and fixtures 260,000 295,000 5 - 10 years
Leasehold improvements 22,000 19,000 Lesser of lease term or
useful life
Software 270,000 46,000 3 years
Land 67,000 67,000 --
-------------- --------------
15,371,000 16,256,000
Less: Accumulated depreciation
and amortization (6,630,000) (6,244,000)
-------------- --------------
Property and equipment, net 8,741,000 10,012,000
============== ==============
In accordance with Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use,"
the Company capitalizes certain costs used in the development of
internal use software. These costs include the costs associated with
coding, software configuration, upgrades and enhancements. The
amount capitalized at June 30, 2003 and 2002 relating to internal
use software is $252,000 and $31,000, respectively.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method,
in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). Deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(h) Revenue Recognition
The Company recognizes revenue at the time services are performed
which is when the fuel is delivered and the customer takes ownership
and assumes risk of loss.
(i) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These
assumptions, if not realized, could affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-10
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(j) Fair Value of Financial Instruments
The Company's financial instruments, primarily consisting of cash
and cash equivalents, accounts receivable, note receivable from
related party, accounts payable, bank line of credit payable,
subordinated promissory notes and long-term debt, approximate fair
value due to their short-term nature or interest rates that
approximate current market rates.
(k) Net Income or Loss Per Share
Net income or loss per share is determined by dividing net income or
loss by the weighted average common shares outstanding. Common stock
equivalents, consisting of employee stock options and common stock
warrants, in the amount of 2,604,777, 2,516,852, 2,509,052 and
2,379,052 for the years ended June 30, 2003 and 2002, the five-month
transition period ended June 30, 2001, and the year ended January
31, 2001, respectively, were antidilutive and were not included in
the computation of net loss per share in those fiscal years.
(l) Impairment or Disposal of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement requires that
long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
(m) Stock Options
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations including FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25" issued in March 2000, to
account for its fixed plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted under the provisions of SFAS No. 123,
the Company applies the principles of APB Opinion 25 and related
interpretations in accounting for its stock option plans. If the
Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS No.
123, net loss and loss per share would have been reduced to
the pro forma amounts indicated in the table below. The fair value
of each option grant was estimated at the date of grant using the
Black-Scholes option pricing model.
F-11
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's net income or loss, pro forma net loss, net income or
loss per share, pro forma net loss per share, and related
assumptions are as follows:
Fiscal Year Fiscal Year Transition Fiscal Year
June 30, June 30, June 30, January 31,
2003 2002 2001 2001
------------- ------------- ------------- --------------
Net income (loss) as reported $ (1,581) $ (1,162) $ (1,951) $ (1,335)
Net income (loss) pro forma $ (2,137) $ (1,287) $ (2,144) $ (1,509)
Fully diluted net income
(loss) per share as reported $ (.22) $ (.20) $ (.47) $ (.49)
Fully diluted net income
(loss) per share pro forma $ (.30) $ (.23) $ (.51) $ (.56)
Risk free interest rate 3% 3% 3.5% 7%
Dividend yield 0% 0% 0% 0%
Expected volatility 100% 100% 100% 50%
Expected life 10 years 10 years 10 years 10 years
The full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma loss amounts
presented because compensation cost is reflected over the vesting
period of the options.
(n) Recent Accounting Pronouncements
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
F-12
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(o) Reclassifications
Certain prior period amounts have been reclassified to conform to
the current year presentation.
(3) 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 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 (more fully described in Note 6),
the proceeds from which have been used for working capital in the
Company's operations.
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.
F-13
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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'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.
(4) BANK LINE OF CREDIT PAYABLE
On September 26, 2002, the Company entered into a new 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
6.0% (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 line of credit is September 25, 2005. If the
Company elects to terminate the credit facility prior to such date,
prepayment fees of 3%, 1.5% and .5% will apply during years one, two
and three, respectively. In addition, the credit facility may be
extended by the mutual consent of the Company and the bank after
September 25, 2005. Effective March 31, 2003, the Company and its
lender revised one of the financial covenants to include all
subordinated debt in the calculation of its effective book net worth.
As of June 30, 2003 and 2002, the Company had outstanding borrowings of
$4.4 million and $4.7 million, respectively, under its $10.0 million bank
lines of credit. Based on eligible receivables outstanding at June 30,
2003, the Company had $101,000 of cash availability on the bank line of
credit, and was in compliance with all financial covenants required by the
loan and security agreement.
F-14
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. These proceeds that were used to pay
down the outstanding line of credit balance are available to the Company
for working capital.
(5) LONG-TERM EQUIPMENT DEBT
Long-term equipment debt consists of the following:
June 30,
----------------------------
2003 2002
------------ -------------
Equipment debt (10.18% weighted average
interest rate at June 30, 2003 and 2002) due in monthly
installments with varying maturities through October 2005 $ 3,444,000 $ 4,868,000
Less: current portion (1,665,000) (2,101,000)
------------ ------------
Long-term equipment debt, excluding current portion $ 1,779,000 $ 2,767,000
============ ============
Future principal payments on equipment debt are due as follows
as of June 30, 2003:
Year Ended June 30,
-------------------
2004 $ 1,665,000
2005 1,694,000
2006 85,000
--------------
$ 3,444,000
==============
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 promissory notes. The Company received a
$757,000 cash discount from the lender in consideration of the prepayment
of the equipment debt.
During August and September 2003, the Company repaid all the remaining
long-term and current portions of equipment debt outstanding at June 30,
2003 from the proceeds of the August 2003 refinancing. 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.
F-15
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) DEBT AND EQUITY SECURITIES
The following schedule presents the activity of subordinated debt
securities for the years ended June 30, 2003 and 2002:
Subordinated debt at June 30, 2001 $1,200,000
Issuances of subordinated debt 1,700,000
Conversion of subordinated debt to equity (2,616,000)
-----------
Subordinated debt at June 30, 2002 284,000
Issuances of subordinated debt 750,000
-----------
Subordinated debt at June 30, 2003 $1,034,000
===========
At June 30, 2003, $734,000 of subordinated debt was classified as long
term on the Company's balance sheet, and $300,000 classified as current.
SUBORDINATED DEBT SECURITIES
In July 2001, the Company issued $600,000 of convertible subordinated
promissory notes to three shareholders. The notes are due on August 31,
2003 and bear interest at 1% over the prime interest rate announced from
time to time by the Company's principal lender. With the consent of the
Payee, the interest on the notes may be paid in Company stock, with the
stock value based on the average market price of the stock for the quarter
in which interest is due. The notes provide the note holder the right and
option to request a prepayment of the outstanding principal amount and
accrued interest thereon from the net proceeds of any issuance or sale by
the Company of equity or debt securities from and after July 6, 2001. The
notes contain a conversion feature entitling the note holder to convert
the note balance into common stock of the Company at the rate of $1.35 per
share. These notes were converted to common stock in January 2002 (see
January 2002 Conversion of Subordinated Debt).
In September 2001, the Company issued $800,000 of convertible subordinated
promissory notes to five shareholders. The notes are due on August 31,
2003 and bear interest at 3% over the prime interest rate announced from
time to time by the Company's principal lender. With the consent of the
Payee, the interest on the notes may be paid in Company stock, with the
stock value based on the average market price of the stock for the quarter
in which interest is due. The notes provide the note holder the right and
option to request a prepayment of the outstanding principal amount and
accrued interest thereon from the net proceeds of any issuance or sale by
the Company of equity or debt securities from and after July 6, 2001. The
notes contain a conversion feature entitling the note holder to convert
the note balance into common stock of the Company at the rate of $1.35 per
share. These notes were converted to common stock in January 2002 (see
January 2002 Conversion of Subordinated Debt).
In October 2001, the Company issued $300,000 of convertible subordinated
promissory notes to three shareholders. The notes are due on August 31,
2003 and bear interest at 3% over the prime interest rate announced from
time to time by the Company's principal lender. With the consent of the
Payee, the interest on the notes may be paid in Company stock, with the
stock value based on the average market price of the stock for the quarter
in which interest is due. The notes provide the note holder the right and
option to request a prepayment of the outstanding principal amount and
accrued interest thereon from the net proceeds of any issuance or sale by
the Company of equity or debt securities from and after July 6, 2001.
F-16
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The notes contain a conversion feature entitling the note holder to
convert the note balance into common stock of the Company at the rate of
$1.35 per share. These notes were converted to common stock in January
2002 (see January 2002 Conversion of Subordinated Debt).
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. The Company repaid this note in September 2003
with the proceeds of the August 2003 refinancing.
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. The Company repaid this note
in September 2003 with the proceeds of the August 2003 refinancing.
On May 12, 2003, the Company issued $300,000 of 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 Company repaid
the balance of the May 12, 2003 notes in September 2003 with the proceeds
of the August 2003 refinancing.
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 Company
repaid these notes in September 2003 with the proceeds of the August 2003
refinancing.
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 the
Company's 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 elect to so convert their notes in January 2002
waived any conversion price adjustment. The accrued quarterly interest
earned on these notes can be paid with shares of the Company's common
stock instead of cash; however, two notes require the prior written
consent of the payee for such payment in shares. In September 2002,
the maturity dates of these non-
F-17
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
converted notes were extended for one year to August 31, 2004. The
outstanding balance of these notes was repaid in full in September
2003 with proceeds from the issuance of the August 2003 promissory
notes.
EQUITY SECURITIES
In January 2001, the Company issued 531,667 shares of common stock in a
private placement at $1.50 per share. The Company also issued 333,333
shares of common stock in January 2001 to three shareholders upon their
conversion of a promissory note in the principal amount of $500,000, at a
conversion price of $1.50. In February 2001 and March 2001, the Company
issued a total of 846,666 shares of common stock in a private placement at
$1.50 per share.
In August 2001, the Company issued 133,333 shares of common stock in a
private placement at $1.50 per share. In January 2002, the Company issued
476,190 shares of common stock in a private placement at $1.05 per share.
As a result of the reduction in the offering price in January 2002 to
$1.05 per share, 57,143 additional shares were issued to the August 2001
investor in January 2002, resulting in an effective price of $1.05 for all
purchasers in the offering.
(7) WARRANTS AND UNDERWRITER'S OPTION
(a) Public Offering Warrants
The Company issued 1,150,000 common stock warrants in conjunction
with its initial public offering in December 1996. Each warrant
entitles the holder to purchase one share of common stock at a
exercise price of $6.90 per share. In October 2002, the Company
extended the expiration date of the warrants from December 11, 2002
to December 11, 2003. The common stock underlying the warrants has
been registered with the Securities and Exchange Commission. As of
June 30, 2003, none of these warrants have been exercised.
The number of shares of common stock that may be purchased upon
exercise of the warrants will be adjusted if the Company makes a
dividend distribution to its shareholders or subdivide, combine or
reclassify its outstanding shares of common stock. In addition, the
exercise price of the warrants will be adjusted, subject to certain
exceptions, if the Company issues additional common stock or rights
to acquire common stock at a price per share that is less than the
current market price per share of common stock. For this purpose,
the term "current market price" means the average of the daily
closing prices for the twenty consecutive trading days ending three
days prior to the issuance or record date. The exercise price of the
warrants will also be adjusted if the Company consolidates or merges
and make a distribution to its shareholders of assets or evidences
of indebtedness (other than cash or stock dividends).
The Company may redeem the warrants, at a redemption price of $0.01
per warrant, at any time upon thirty days' prior written notice, if
the average closing bid price of its common stock equals or exceeds
$10.50 per share for twenty consecutive trading days.
The Company may further extend the exercise period of the warrants
at any time. If the Company does so, it will give written notice of
the extension to the warrant holders prior to the expiration date in
effect at the time of the extension. Also, the Company may reduce
the exercise price of the warrants for limited periods or through
the end of the exercise period if its Board of Directors deems it
appropriate. The Company has not made any determination at this time
as to a further extension of the exercise period or a reduction in
the exercise price of the warrants.
F-18
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Underwriter's Option
In connection with the initial public offering the Company sold the
underwriter an option to purchase up to 100,000 shares of common
stock at $9.30 per share and warrants at an exercise price of
$.19375 to purchase an additional 100,000 shares, at an exercise
price of $9.30 per share. The underwriter's option was extended
concurrent with the warrants and currently expires on December 11,
2003. The exercise price of the warrants subject to the
underwriter's option and the number of shares of common stock
covered by these warrants, are subject to adjustment on similar
terms as the Company's other outstanding warrants. As of June 30,
2003, none of these warrants have been exercised.
(c) May 2003 Warrants
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%. 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 Company repaid these notes in
September 2003 with the proceeds of the August 2003 refinancing. As
of June 30, 2003, none of these warrants were exercisable.
The number of shares of common stock that may be purchased upon
exercise of the warrants will be adjusted if the Company makes a
dividend distribution to its shareholders or subdivide, combine or
reclassify its outstanding shares of common stock. The exercise
price of the warrants will also be adjusted if the Company
consolidates or merges.
The Company has agreed to register the shares underlying the
warrants for resale, which it intends to do so sometime after the
filing of its Form 10-K.
(d) August 2003 Warrants
As a result of the August 2003 refinancing, the Company raised
$6.925 million and issued 2,008,250 five-year warrants to purchase
the Company's common stock at $1.00 per share.
(8) STOCK OPTIONS
(a) Employee Stock Options
The Company has adopted two stock option plans (the "1996 Plan" and
the "2000 Plan") under which options to purchase shares of the
Company's common stock may be granted to employees. The purpose of
the 1996 Plan and the 2000 Plan is to provide an incentive to
attract, motivate and retain qualified competent employees whose
efforts and judgment are important to the Company's success through
the encouragement of the ownership of stock by such persons.
Under the 1996 Plan 500,000 shares of common stock are reserved for
issuance upon exercise of options granted. Under the 2000 Plan,
1,000,000 shares of common stock are reserved for issuance upon the
exercise of options, with the amount reserved being increased each
year by ten percent of the total shares subject to the 2000 Plan at
the end of the previous calendar year. Options to purchase 311,048
shares of stock are outstanding under the 1996 Plan and options to
purchase 349,000 shares of stock are available to be granted under
the 2000 Plan. The Board of
F-19
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Directors has determined that no additional options will be granted
under the 1996 Plan.
Options granted under the 1996 Plan and the 2000 Plan expire no
later than ten years from the date of grant. Options granted under
the 1996 Plan and the 2000 Plan are not exercisable after the period
or periods provided in the respective option agreements. The
following table summarizes stock option activity for both plans for
the periods indicated:
Weighted
1996 and 2000 Average
Plans Exercise Price
------------- --------------
Options outstanding as of January 31, 1999 210,052 $ 3.49
=========== ========
Granted ................................. 159,000 $ 5.49
Cancelled ............................... (32,200) $ 4.60
Exercised ............................... (60,300) $ 3.44
----------- --------
Options outstanding as of January 31, 2000 276,552 $ 4.55
=========== ========
Granted ................................. 738,000 $ 1.50
Cancelled ............................... (13,200) $ 5.16
Exercised ............................... (2,200) $ 3.69
----------- --------
Options outstanding as of January 31, 2001 999,152 $ 2.30
=========== ========
Granted ................................. 240,000 $ 1.50
Cancelled ............................... (35,700) $ 2.68
Exercised ............................... -- $ --
----------- --------
Options outstanding as of June 30, 2001 ... 1,203,452 $ 2.13
=========== ========
Granted ................................. 190,000 $ 1.32
Cancelled ............................... (379,000) $ 2.31
Exercised ............................... -- $ --
----------- --------
Options outstanding as of June 30, 2002 ... 1,014,452 $ 1.89
=========== ========
Granted ................................. -- $ --
Cancelled ............................... (27,000) $ 2.08
Exercised ............................... -- $ --
----------- --------
Options outstanding as of June 30, 2003 ... 987,452 $ 1.88
=========== ========
Exercisable ............................. 608,385 $ 2.77
Available for future grant (2000 Plan only) 349,000
===========
F-20
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
under both plans as of June 30, 2003:
Weighted
Average Weighted Weighted
Remaining Average Number Average
Exercise Number Contractual Exercise of Shares Exercise
Price Outstanding Life (Years) Price Exercisable Price
-------------- ----------- ------------ --------- ----------- ----------
$1.07 to $1.50 861,000 7.58 $ 1.46 481,933 $ 1.49
$3.37 to $4.13 90,952 4.29 $ 3.75 90,952 $ 3.75
$6.00 to $7.63 35,500 6.08 $ 7.31 35,500 $ 7.31
------ -------
TOTALS 987,452 608,385
======= =======
(b) Director Stock Options
The Company adopted effective as of May 2001 a separate stock option
plan for non-employee members of the Company's Board of Directors
(the "Directors Plan"). The purpose of the Directors Plan is to
provide an additional incentive to attract and retain qualified
competent directors upon whose efforts and judgment are important to
the Company's success through the encouragement of the ownership of
stock by such persons.
Under the Directors Plan, 250,000 shares of common stock are
reserved for issuance upon the exercise of options granted. Each
non-employee who serves as a member of the Company's board of
directors as of the effective date of the Directors Plan, and each
non-employee who is elected or otherwise appointed as one of the
Company's directors thereafter, will receive a fully vested option
to purchase 20,000 shares of stock. On the last day of each fiscal
quarter while the Directors Plan is in effect, each non-employee
director will receive an additional grant of an option to purchase
625 shares of stock. Further, in accordance with the Directors Plan,
additional options may be granted to non-employee directors from
time to time. Options to purchase 185,000 shares of common stock are
currently outstanding under the Directors Plan and 65,000 shares of
stock are available to be granted in the future.
Options granted under the Directors Plan expire no later than ten
years from the date of grant and are with limited exceptions
exercisable as of the grant date.
The following table summarizes the stock option activity under the
Directors' Plan for the periods indicated:
F-21
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted Average
Directors Plan Exercise Price
-------------- ----------------
Options outstanding as of January 31, 2001....... -- $ --
Granted........................................ 100,000 $ 1.60
Cancelled...................................... -- $ --
Exercised...................................... -- $ --
--------- ---------
Options outstanding as of June 30, 2001.......... 100,000 $ 1.60
========= =========
Granted........................................ 52,500 $ 1.52
Cancelled...................................... -- $ --
Exercised...................................... -- $ --
--------- ---------
Options outstanding as of June 30, 2002.......... 152,500 $ 1.57
========= =========
Granted........................................ 53,125 $ 1.21
Cancelled...................................... (20,625) $ 1.25
Exercised...................................... -- $ --
--------- ---------
Options outstanding as of June 30, 2003.......... 185,000 $ 1.51
========= =========
Exercisable 185,000 $ 1.51
=========
Available for future grant 65,000
=========
The following table summarizes information about the Directors stock
options outstanding under the Plan as of June 30, 2003:
Weighted
Average Weighted Weighted
Remaining Average Number Average
Exercise Number Contractual Exercise of Shares Exercise
Price Outstanding Life (Years) Price Exercisable Price
-------------- ----------- ------------ -------- ----------- --------
$.92 to $1.11 12,500 9.35 $ 1.02 12,500 $1.02
$1.24 to $1.35 29,375 9.11 $ 1.27 29,375 $1.27
$1.50 to $1.60 143,125 7.81 $ 1.60 143,125 $1.60
------- -------
TOTALS 185,000 185,000
======= =======
(9) SIGNIFICANT CUSTOMERS
Revenue (excluding fuel taxes) from one significant customer, the United
States Postal Service, totaled $8.5 million or 16%, 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 independent written contracts of varying
lengths of service and renewal options for the years ended June 30, 2003
and 2002, respectively. Accounts receivable from this customer totaled
$943,000 and $1.3 million at June 30, 2003 and 2002, respectively. Revenue
from two significant 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
significant customers, excluding fuel taxes, totaled $12.1 million or 19%
of the total revenue, excluding fuel taxes in the fiscal year ended
January 31, 2001.
F-22
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) RELATED PARTY TRANSACTIONS
The note receivable from related party represents amounts owed by
Streicher Enterprises, Inc. ("Enterprises"), an entity wholly owned by the
Company's former Chairman, Stanley H. Streicher. This note receivable
amounted to approximately $52,000, $204,000, and $583,000 at June 30,
2003, 2002 and 2001, respectively, and $540,000 at January 31, 2001
bearing interest at 8.25 percent per annum. Two promissory notes to the
Company, one dated January 31, 1997, in the amount of $319,043 due January
31, 2007, and the second in the amount of $94,850 dated January 31, 1998
due January 31, 2007 (the "Notes"), represented most of the above amount.
Mr. Streicher personally guaranteed the principal of, and interest on, the
Notes. Interest income on the notes included approximately $25,000,
$41,000 and $18,000 for the years ended June 30, 2003 and 2002 and the
transition period ended June 30, 2001 respectively, and approximately
$42,000 for the fiscal year ended 2001. Enterprises was required to make
annual payments of interest only with a final payment of all accrued
interest and unpaid principal due on January 31, 2007. The note receivable
is secured by a pledge of 360,213 shares of the Company's common stock
owned by Supreme Oil Company, another entity wholly owned by
Mr. Streicher.
On April 1, 2002, Mr. Streicher and Supreme Oil Company Inc. and the
Company entered into an agreement with respect to the repayment by
Mr. Streicher and Supreme of the Notes and certain other debt
(collectively, the "Debt"). In connection therewith, Supreme delivered to
the Company additional shares of the Company's stock owned by Supreme, so
that an aggregate of 533,088 shares of the Company's common stock owned by
Supreme (the " Certificates") were pledged as security for the Debt.
On June 12, 2002, Supreme sold 613,000 shares of the Company's common
stock for aggregate gross proceeds of $711,080 and net proceeds of at
least $680,000. On June 29, 2002, Mr. Streicher tendered $480,000 to
the Company as partial repayment of the Debt. The Company informed
Mr. Streicher and Supreme that it considered the failure to pay the
remaining $200,000 to be a breach of the April 1, 2002 agreement and
demanded immediate payment.
On July 19, 2002, after Mr. Streicher and Supreme refused the Company's
demand, the Company suspended further payments of salary to Mr. Streicher
under his November 1, 2000 employment agreement. As of September 29, 2003,
$214,803 in net after-tax salary due to Mr. Streicher under that
employment agreement, as well as interest of $25,119, has been withheld by
the Company.
The Company was also a party to certain lease agreements with
Mr. Streicher as more fully described in Note 12.
In the years ended June 30, 2003, 2002 and 2001, respectfully, the Company
paid $60,000, $38,000 and $101,000 for certain financial consulting and
investor relation services to a third party entity whose Chairman and
Chief Executive Officer is a director of the Company.
The convertible subordinated promissory notes converted in January
2002, the December 2002 short-term promissory note, the January 2003
subordinated promissory notes and the May 12, 2003 promissory notes,
were issued to a director and other affiliates of the Company. In
addition, a portion of the May 20, 2003 subordinated promissory notes
and related warrants were issued to officers, directors and other
affiliates of the Company. These notes are more fully described in Note
6.
F-23
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) INCOME TAXES
The actual tax benefit (provision) of the Company for the years ended June
30, 2003 and 2002, the five-month transition period ended June 30, 2001
and year ended January 31, 2001 differs from the statutory Federal tax
rate of 34% due to the following:
Transition
Fiscal Year Fiscal Year Period Fiscal Year
June 30, June 30, June 30, January 31,
2003 2002 2001 2001
------------------------------------------------------------
Expected benefit (provision) for income taxes
at the statutory Federal income tax rate of 34% $ 538,000 $ 395,000 $ 663,000 $ 454,000
State income taxes, net of federal benefit 37,000 42,000 70,000 50,000
Other 13,000 (59,000) 2,000 (89,000)
Nondeductible expenses (9,000) (102,000) (5,000) (22,000)
Deferred tax valuation allowance (579,000) (276,000) (730,000) (393,000)
---------- ---------- ---------- ----------
Benefit (provision) for income taxes $ -- $ -- $ -- $ --
========== ========== ========== ==========
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and their income tax bases, and operating loss
carryforwards.
The tax effects of temporary differences and operating loss carryforwards
that give rise the significant portions of the deferred tax assets and
liabilities at June 30, 2003 and 2002 are presented below:
June 30,
------------------------------------
2003 2002
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 4,880,000 $ 4,620,000
Asset basis adjustment for Reorganization 275,000 307,000
Allowance for doubtful accounts 200,000 118,000
Accrued expenses 32,000 --
Contributions carryover 3,000 3,000
------------- -------------
Total gross deferred tax assets 5,390,000 5,048,000
Less: valuation allowance (2,863,000) (2,284,000)
------------- -------------
Total deferred tax assets 2,527,000 2,764,000
============= =============
Deferred tax liabilities:
Property and equipment (2,438,000) (2,698,000)
Software development costs (89,000) --
Accrued expenses -- (37,000)
Other -- (29,000)
------------- -------------
Total deferred tax liabilities (2,527,000) (2,764,000)
============= =============
Net deferred tax assets $ -- $ --
============= =============
Realization of deferred tax assets is dependent upon generating sufficient
taxable income in future periods. Management believes that these net
operating loss and credit carryforwards may expire unused and will not
meet the "more likely than not" criteria of SFAS No. 109, and, accordingly
has established a valuation allowance for the excess of deferred tax
assets over deferred tax liabilities.
The net change in the valuation allowance for the years ended June 30,
2003 and 2002, the five-month transition period ended June 30, 2001 and
year ended January 31, 2001 was an increase of $579,000, an
F-24
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
increase of $276,000, an increase of $730,000 and an increase of $393,000,
respectively. All increases to the valuation allowance during these
periods were recorded through the provision for taxes. As of June 30,
2003, the Company has net operating loss carryforwards of approximately
$13.0 million which will begin to expire in the year 2011.
(12) COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases real property and equipment under operating
leases that expire at various times through the year 2015. Future
minimum lease payments under non-cancelable operating leases as of
June 30, 2003:
Year Ended Operating Lease
June 30, Payments
-------------- -----------------
2004 337,000
2005 100,000
2006 49,000
2007 20,000
2008 15,000
Thereafter 105,000
----------
$ 626,000
==========
In April 2001, the Company relocated its corporate offices and
entered into a lease agreement for its new corporate offices. At
that time, the Company was obligated under a July 31, 1993 lease
agreement covering the former corporate offices with the Company's
Chairman, Stanley H. Streicher, the expiration of which lease was
July 31, 2013. In May 2001, the Company entered into a sub-lease
agreement with an unrelated third party for the lease of the
Company's former corporate offices. In January 2002, Mr. Streicher
canceled the lease covering the Company's former corporate offices
and the Company assigned the sublease to Mr. Streicher, effective
February 1, 2002. Under the terms of the lease cancellation and
assignment of sublease, it was provided that Mr. Streicher would
reimburse the Company on or before March 31, 2002 for the net book
value of all leasehold improvements to its former corporate offices
paid for by and carried on the books of the Company, as of April 30,
2001, which amount was $59,600 (see Note 8, Related Party
Transactions).
The Company has also been obligated to Mr. Streicher under two
operating leases covering property utilized for division truck yards
and offices, one of which expired in April 2002. While the second
lease does not expire until August of 2015, Mr. Streicher sold the
property covered by it to an unrelated third party in April 2003. In
conjunction with the sale, Mr. Streicher assigned the lease to the
purchaser of the property extinguishing any further obligation of
the Company to Mr. Streicher under it. Rent expense paid to Mr.
Streicher by the Company for the lease of its former corporate
offices and the two division facilities was $12,000, $30,000,
$23,000 and $88,000, for the fiscal years ended June 30, 2003 and
2002, the transition period ended June 30, 2001, and the fiscal year
ended January 31, 2001.
F-25
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Governmental Regulation
Numerous federal, state and local laws, regulations and ordinances,
including those relating to protection of the environment and worker
safety, affect the Company's operations. 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
future operations and earnings may be affected by new legislation,
new regulations or changes in existing regulations.
Complying with the technical requirements of these laws and
regulations is 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.
In the opinion of management, the Company is in substantial
compliance with existing laws and regulations, although there can be
no assurance that substantial costs for compliance will not be
incurred in the future. 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.
(c) Employment Agreements
The Company entered into a three-year employment agreement with
Stanley H. Streicher on November 1, 2000, pursuant to which
Mr. Streicher serves as Chairman of the Board of Directors and
performs other functions requested by the Company. The agreement
provides for an annual salary of $300,000, bonuses, if any, as
determined by the Board and that 980,000 stock options held by
Mr. Streicher will be forfeited to the Company, without
additional consideration, upon the request of the Board. On
December 21, 2000, Mr. Streicher forfeited these stock options in
response to such a request. The agreement further provides that
it may be terminated by the Company at any time and for any
reason. If the agreement is terminated without cause,
Mr. Streicher is entitled to receive his base salary until the
later of eighteen months following the actual date of termination
or October 31, 2002. If the agreement is terminated for cause,
Mr. Streicher is not entitled to any further salary or other
compensation.
By agreement dated April 1, 2002, the Company, Mr. Streicher and a
company wholly owned by Mr. Streicher, Supreme Oil Company, agreed
that Mr. Streicher would undertake an orderly liquidation of his and
Supreme's shares of the Company's common stock, directly or
indirectly, and use the net proceeds of any sales of such stock to
repay approximately $680,000 which he and
F-26
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supreme owed to the Company. On or about June 13, 2002, Supreme sold
613,000 shares of the stock for net proceeds of approximately
$680,000. Mr. Streicher has paid $480,000 of the proceeds of that
sale to the Company but has challenged the validity of portions
of the underlying debt and has therefore declined to pay the
balance of approximately $200,000 to the Company. As a result of
Mr. Streicher's actions, effective July 19, 2002, the Company
suspended further payments of salary to Mr. Streicher under his
November 1, 2000 employment agreement. The Company believes that
Mr. Streicher's retention of the $200,000 was a breach of the
April 1, 2002 debt repayment agreement between him and the
Company and constitutes grounds for termination of Mr. Streicher's
employment agreement for cause. As of September 30, 2003, the
Company has not terminated Mr. Streicher for cause under his
employment agreement. If the Company does so, it will no longer
be obligated to pay any salary or other compensation to him under
that agreement. Any such termination would not affect the
obligation of Mr. Streicher and Supreme to repay the $200,000
(see Note 10, Related Party Transactions).
The Company entered into an employment agreement with Richard E.
Gathright on October 26, 2000 pursuant to which Mr. Gathright serves
as President and Chief Executive Officer of the Company. The
agreement has a term of three years, commencing on October 26, 2000,
provides for an annual base salary of $300,000, participation, with
other members of management, in a bonus program, whereby up to 10%
of the Company's pretax profits will be set aside for bonus
payments, and the grant of 500,000 options to purchase shares of the
Company's common stock at a price of $1.50 per share. The agreement
further provides that it may be terminated by the Company at any
time and for any reason. If the agreement is terminated by the
Company without cause, Mr. Gathright shall be due the greater of all
base salary payable through the term of the agreement or eighteen
months base salary. If the agreement is terminated for cause, as
defined, Mr. Gathright will not be entitled to the severance
payments specified. On September 25, 2003, the Company and
Mr. Gathright amended the term of the agreement extending it from
three to four years.
The Company has also entered into written employment agreements with
certain other company officers. The agreements vary in terms up to
one year and automatically renew for successive periods unless
notice of termination is given by the Company prior to a renewal
period.
(d) Absence of Written Agreements
Most of the Company's customers do not have written agreements with
the Company and can terminate the Company's mobile fueling services
at any time and for any reason. If the Company were to experience a
high rate of terminations, the Company's business and financial
performance could be adversely affected.
(e) Litigation
The Company may be subject to legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of
management no litigation or claims exist that would have a material
effect on the consolidated financial position or results of
operations of the Company.
(f) Other Commitments
At June 30, 2003, the Company had no purchase commitments.
F-27
STREICHER MOBILE FUELING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) EMPLOYEE BENEFIT PLAN
In May 1998, the Company adopted a 401(k) plan for all employees over the
age of 21 with 1,000 hours of service in the previous six months of
employment. The Company terminated its 401(k) plan as of December 31, 2001
and final liquidation of Plan assets was made in April 2002. The Plan
provided for a discretionary match of employee contributions as determined
by the Board of Directors. No Company contributions were made for the
years ended June 30, 2002, the five-month transition period ended June 30,
2001 or the year ended January 31, 2001.
F-28