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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2003
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission file number 000-26331
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PALWEB CORPORATION
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(Exact name of small business issuer as specified in its charter)
OKLAHOMA 75-2954680
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1607 WEST COMMERCE STREET DALLAS, TEXAS 75208
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(Address of principal executive offices) (City, State and Zip Code)
(214) 698-8330
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: OCTOBER 10, 2003 - 12,790,451
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(CHECK ONE):
Yes [_] No [X]
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PALWEB CORPORATION
FORM 10-QSB
FOR THE PERIOD ENDED AUGUST 31, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets as of August 31, 1
2003 and May 31, 2003
Condensed Consolidated Statement of Operations 2
For the Three Month Periods Ended
August 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows 3
For the Three Month Periods Ended
August 31, 2003 and 2002
Notes to Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 5
ITEM 3. CONTROLS AND PROCEDURES 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 9
ITEM 2. CHANGES IN SECURITIES 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALWEB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 31, MAY 31,
ASSETS 2003 2003
------ ------------ ------------
CURRENT ASSETS:
Cash $ 6,209 $ 6,209
Accounts receivable 207,820 347,844
Inventory 322,598 384,557
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TOTAL CURRENT ASSETS 536,627 738,610
PROPERTY, PLANT AND EQUIPMENT, at cost 8,617,678 8,617,128
Accumulated depreciation (752,358) (695,586)
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TOTAL PROPERTY, PLANT AND EQUIPMENT 7,865,320 7,921,542
OTHER ASSETS 114,768 141,198
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TOTAL ASSETS $ 8,516,715 $ 8,801,350
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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CURRENT LIABILITIES:
Notes payable $ 7,245,098 $ 901,422
Accounts payable and accrued liabilities 1,043,708 971,133
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TOTAL CURRENT LIABILITIES 8,288,806 1,872,555
LONG-TERM DEBT-RELATED PARTY 900,000 7,000,000
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.0001 par, 20,750,000
shares authorized; 750,000 outstanding 75 75
Common stock, $.0001 par value, 5,000,000,000
authorized; outstanding - 6,499,681 and
5,938,722, respectively 650 594
Additional paid-in capital 42,193,452 41,969,124
Deficit (42,866,268) (42,040,998)
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (672,091) (71,205)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,516,715 $ 8,801,350
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The accompanying notes are an integral part
of this consolidated financial statement.
1
PALWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31,
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2003 2002
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SALES $ 193,219 $ 60,917
COST OF SALES, including depreciation
of $41,351 and $39,173, respectively 385,915 621,742
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GROSS PROFIT (LOSS) (192,696) (560,825)
EXPENSES:
General and administrative expenses 235,912 348,375
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OPERATING LOSS (428,608) (909,200)
OTHER INCOME (EXPENSE):
Other income 3,656 --
Interest Expense (175,934) (57,807)
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TOTAL OTHER INCOME (EXPENSE) (172,278) (57,807)
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NET LOSS (600,886) (967,007)
PREFERRED DIVIDENDS 224,384 225,000
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NET LOSS TO COMMON STOCKHOLDERS $ (825,270) $ (1,192,007)
============ ============
NET LOSS PER COMMON SHARE $ (0.13) $ (0.25)
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WEIGHTED AVERAGE SHARES OUTSTANDING 6,317,000 4,795,000
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The accompanying notes are an integral part
of this consolidated financial statement.
2
PALWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31,
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2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used by continuing operations $ (243,126) $ (421,286)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (550) (544,876)
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Net cash used in investing activities (550) (544,876)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 243,676 950,000
Payments on notes -- (15,000)
Proceeds from issuance of common stock -- 27,750
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Net cash provided by financing activities 243,676 962,750
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NET INCREASE (DECREASE) IN CASH -- (3,412)
CASH, beginning of period 6,209 13,521
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CASH, end of period $ 6,209 $ 10,109
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NONCASH ACTIVITIES:
Issuance of common stock in lieu of
cash payment of preferred dividends $ 224,384 $ 225,000
Issuance of common stock in payment
of liabilities -- 40,000
The accompanying notes are an integral part
of this consolidated financial statement.
3
PALWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments and reclassifications, which are of
a normal recurring nature, necessary to present fairly its financial position as
of August 31, 2003, and the results of its operations and its cash flows for the
three month periods ended August 31, 2003 and 2002. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements as of and for the year ended May 31, 2003 and the notes
thereto included in the Company's Form 10-KSB. The financial statements have
been prepared assuming that PalWeb will continue as a going concern. The working
capital deficit of approximately $7,752,000 at August 31, 2003, reflects the
uncertain financial condition of PalWeb and its inability to obtain long term
financing until it is able to attain profitable operations.
2. The results of operations for the three month periods ended August 31, 2003
are not necessarily indicative of the results to be expected for the full year.
3. The computation of loss per share is computed by dividing the loss
available to common stockholders by the weighted average shares outstanding for
the periods. Loss available to common stockholders is determined by adding
preferred dividends for the periods to the net loss. For the three month periods
ended August 31, 2003 and 2002, the average common shares outstanding are
6,317,000 and 4,795,000, respectively. Convertible preferred stock is not
considered as its effect is antidilutive.
4. During the three month period ended August 31, 2003, the Board of Directors
authorized dividends on the Series 2001 preferred stock in the total amount of
$224,384. Further, the board authorized payment of such preferred dividends in
the form of restricted common stock at the then market rate of $0.40 per share.
A total of 560,959 shares of common stock were issued.
7. See "Management Discussion and Analysis, Liquidity and Capital Resources,"
for discussion regarding certain transactions on September 8, 2003 pertaining to
issuance of $5,000,000 of Series 2003 Preferred Stock, conversion of Series 2001
Preferred Stock into common stock, exchange of $900,000 of notes payable by
Warren Kruger to common stock, the sale and leaseback of the Dallas, Texas plant
and certain production equipment to Paul Kruger in exchange for a note payable
in the amount of $7,000,000 and acquisition of the assets of Greystone Plastics,
Inc. a manufacturer of plastic pallets.
8. See "Legal Proceedings" in Item 1 of Part II regarding PalWeb being named
as a defendant in a personal injury lawsuit.
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
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GENERAL TO ALL PERIODS
The consolidated statements include PalWeb and its wholly-owned subsidiary,
Plastic Pallet Production, Inc. ("PPP").
PalWeb has incurred significant losses from operations, and there is no
assurance that it will achieve profitability or obtain funds necessary to
finance operations.
SALES
PalWeb's primary business is the manufacturing and selling of plastic
pallets. PalWeb distributes its pallets through a combination of a network of
independent contractor distributors and sales by PalWeb officers and employees.
Additionally, PalWeb has licensed its PIPER 600 injection molding machine to
ForcePro, LLC, a company of which Bryan Kirchmer, a director of PalWeb, is
president. ForcePro will pay PalWeb a 5% royalty on gross proceeds from sales of
the PIPER 600.
PalWeb has a production capacity of approximately 40,000 pallets per month.
During the three months ended August 31, 2003, pallet production averaged about
10% of capacity. Future production levels will be maintained as sales dictate.
There is no assurance that PalWeb will receive orders for pallets that will
maintain, or justify any significant increase to, PalWeb's current production
levels.
PERSONNEL
PalWeb has approximately 14 full-time employees. Temporary employees are
used to supplement the manufacturing process as necessary.
TAXES
For all years presented, PalWeb's effective tax rate is 0%. PalWeb has
generated net operating losses since inception, which would normally reflect a
tax benefit in the statement of operations and a deferred asset on the balance
sheet. However, because of the current uncertainty as to PalWeb's ability to
achieve profitability, a valuation reserve has been established that offsets the
amount of any tax benefit available for each period presented in the
consolidated statement of operations.
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THREE MONTH PERIOD ENDED AUGUST 31 28, 2003, COMPARED TO THREE MONTH PERIOD
ENDED AUGUST 31, 2002
Sales for the three month period ended August 31, 2003 were $193,219
compared to $60,917 in 2002. The increase is $132,302 and is attributable in
part to PalWeb's increased focus on sales and marketing since the completion of
its fully functional plastic injection molding machine.
Cost of sales in 2003 was $385,915 or 200% of sales compared to $621,742 or
1,020% of sales in 2002. During 2003, because production continued at about 10%
of capacity, fixed costs have an adverse effect on the ratio of cost to sales.
Also during 2003, production problems, which have since been resolved, caused
material costs to be high in relation to sales. Cost of sales for 2002 is
abnormally high due to startup costs on PalWeb's newly installed Piper 600
injection molding machines and repair and maintenance of approximately $516,000
incurred on the prototype injection molding machine and the production plant.
General and administrative expenses decreased $112,463 from $348,375 in
fiscal year 2002 to $235,912 in fiscal year 2003. This decrease is principally
due to a settlement of claims charge in fiscal 2002 of $83,750 and a decrease in
professional fees and travel of approximately $75,000 offset by a charge to bad
debt expense of $45,000.
Interest expense increased $118,127 from $57,807 in fiscal year 2002 to
$175,934 in fiscal year 2003. Notes payable at August 31, 2002 totaled
$4,712,700 compared to $8,145,098 at August 31, 2003, thereby resulting in the
increase in interest expense. The additional financing was used primarily for
working capital.
The net loss decreased $366,121 from $967,007 in fiscal year 2002 to
$600,886 in fiscal year 2003 for the reasons discussed above.
After deducting preferred dividends the net loss available to common
stockholders is $825,270, or $0.13 per share, in fiscal 2003 compared to
$1,192,007 or $0.25 per share in fiscal year 2002 for an decrease of $366,737.
LIQUIDITY AND CAPITAL RESOURCES
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GENERAL
Currently, PalWeb's management projects that the sales of approximately
15,000 pallets per month are necessary to break even. Sales at this level would
provide monthly revenues of approximately $450,000 and should provide sufficient
cash flow to sustain its operations including about $225,000 in cash operating
expenses for labor, recurring overhead and interest and $225,000 for material
costs. There is no assurance that this sales level will be achieved. Until sales
reach this level, PalWeb will remain dependent on outside sources of cash to
fund its operations as its sales revenues will be insufficient to meet current
liabilities.
6
PalWeb has had difficulty in obtaining financing from traditional financing
sources. As described below, substantially all of the financing that PalWeb has
received through August 31, 2003, has been provided by loans from entities
controlled by Mr. Paul Kruger, a significant stockholder of PalWeb, and entities
affiliated with Warren Kruger, President and Chairman of PalWeb, and through the
offering of preferred stock to essentially the same persons. PalWeb is currently
reliant on loans provided by Paul Kruger and Warren Kruger. There is no
assurance that Paul Kruger or Warren Kruger will continue to provide loans or
loan guarantees in the future.
LOANS FROM WARREN KRUGER
Effective December 4, 2002, Yorktown Management & Financial Services, LLC
("Yorktown"), an entity 100% owned by Warren Kruger, executed an unsecured
$500,000 loan to PalWeb at 9% interest, due January 4, 2003 with automatic
30-day extensions until Yorktown provides notice of its election not to further
extend such maturity. As of August 31, 2003, Yorktown had not provided any
notice of an election not to extend the maturity of the note and Yorktown had
advanced an additional $445,208, which accrued interest at the rate of 9%.
Effective September 8, 2003, Yorktown agreed and PalWeb authorized the
issuance of 629,811 shares of common stock in exchange for $900,000 of
indebtedness.
At August 31, 2003, Westgate Capital LP, an entity controlled by Warren
Kruger, had advanced an additional $200,000 to PalWeb. The advance accrues
interest at 9%.
LOAN FROM PAUL KRUGER
As of August 31, 2003, PalWeb had a $7,000,000 note payable to Paul Kruger,
a major stockholder of PalWeb, at an interest rate of prime plus 3%, due June 4,
2004, secured by all of PalWeb's assets. Effective September 8, 2003, PalWeb
completed a sale and leaseback transaction whereby it sold its Dallas plant for
$1,350,000 and certain production equipment located in its Dallas plant for
$5,650,000 to a company owned by Paul Kruger in exchange for the cancellation of
debt in the amount of $7,000,000 owed by PalWeb Corporation to Paul Kruger. The
assets were sold at the assets' approximate net book value. The lease agreement
for the plant is a three year triple net lease with a monthly rental of $17,720.
The equipment lease is for 130 months with a monthly rental of $48,000 beginning
six months after the first day of the lease. For more information relating to
this transaction, see PalWeb's Form 8-K filed on September 23, 2003.
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OTHER
PalWeb has accumulated a working capital deficit of approximately
$7,752,000 at August 31, 2003, which includes a $7,000,000 note payable to Paul
Kruger which on September 9, 2003 was exchanged for property and equipment of
PalWeb as discussed above, $245,000 of notes payable to entities owned or
controlled by Warren Kruger and $1,044,000 in accounts payable and accrued
liabilities. The working capital deficit reflects the uncertain financial
condition of PalWeb resulting from its inability to obtain long term until such
time as it is able to achieve a profitable status. There is no assurance that
PalWeb will secure such financing.
Effective September 8, 2003, the Series 2001 preferred stockholders elected
to convert their holdings into common stock at the rate of approximately $1.429
per share and common shares totaling 5,250,000 were issued. In addition, accrued
dividends on the Series 2001 preferred stock at September 8, 2003, totaling
$172,603 were paid with common stock at the then market rate of $0.42 per share
for a total of 410,959 shares.
Also effective September 8, 2003, PalWeb Corporation completed the
acquisition of all of the assets of Greystone Plastics, Inc., an Iowa
corporation, through the purchase of such assets by a newly formed, wholly-owned
subsidiary of PalWeb Corporation, Greystone Manufacturing, L.L.C., an Oklahoma
limited liability company. Greystone Plastics, Inc. manufactured plastic pallets
used in the beverage industry. The purchase price for the assets was
$12,500,000, of which $4,200,000 was paid in cash and $8,300,000 was paid by
issuing the following notes: a $5,000,000 note payable to Greystone Plastics,
Inc. at 7.5% interest, due October 1, 2008; a $2,500,000 note payable to
Greystone Plastics, Inc. at 7.5% interest due October 1, 2018; and an $800,000
note payable to Bill Hamilton, one of the owners of Greystone Plastics, Inc., at
6% interest, due October 26, 2007. The cash payment was financed through the
issuance of the preferred stock described below. The notes issued to Greystone
Plastics, Inc. are secured by the assets acquired from Greystone Plastics, Inc.
The $800,000 note issued to Bill Hamilton is a wraparound note pursuant to which
PalWeb Corporation has assumed the liabilities of Greystone Plastics, Inc. under
that certain loan agreement between US Bancorp Equipment Finance, Inc. and
Greystone Plastics, Inc. dated February 12, 2003 (which loan was guaranteed by
Bill Hamilton) pursuant to which US Bancorp loaned Greystone Plastics, Inc. the
money necessary to purchase an extruder, which was included in the assets
acquired from Greystone Plastics, Inc. In connection with the acquisition,
Greystone Manufacturing, L.L.C. hired Mr. Hamilton to oversee the operation of
the assets acquired from Greystone Plastics, Inc. and assist PalWeb with other
production matters. The consideration paid in these transactions was determined
through arm's- length negotiations between the parties. For more information
relating to this acquisition, see PalWeb's Form 8-K filed on September 23, 2003.
Simultaneously with the acquisition described above and in order to
partially finance such acquisition, PalWeb sold 50,000 shares of preferred stock
designated "Series 2003 Cumulative Convertible Senior Preferred Stock" ("2003
Preferred Stock"), to Paul Kruger, a major stockholder of PalWeb, at $100 per
share for a total purchase price of $5,000,000. The 2003 Preferred Stock has a
dividend rate equal to the prime rate of interest plus 3.25% and may
8
be converted into common stock at the conversion rate of $1.50 per share, or for
an aggregate of 3,333,333 shares of common stock. In addition, the holder of the
2003 Preferred Stock has been granted certain voting rights so that such holder
has the right to elect a majority of the Board of Directors of PalWeb. For more
information relating to the 2003 Preferred Stock, see PalWeb's Form 8-K filed on
September 23, 2003.
PalWeb continues to be dependent upon Paul Kruger and Warren Kruger to
provide and/or secure additional financing and there is no assurance that either
will do so. As such, there is no assurance that funding will be available for
PalWeb to continue operations.
MATERIAL RISKS
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PalWeb has incurred significant losses from operations and there is no
assurance that it will achieve profitability or obtain funds to finance
continued operations. For other material risks, see PalWeb's Form 10-KSB for the
period ended May 31, 2003, which was filed on September 15, 2003.
ITEM 3. CONTROLS AND PROCEDURES
Based on their evaluations, PalWeb's Chief Executive Officer and Principal
Financial Officer have concluded that the PalWeb's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this report on Form 10-QSB are effective
to ensure that information required to be disclosed by PalWeb in reports that it
files or submits under the Exchange Act are recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
During the period covered by this report on Form 10-QSB, there has been no
changes in PalWeb's internal control over financial reporting that have
materially affected or are reasonably likely to materially affect the PalWeb's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Justin Baker and Bobbie Baker v. Cooper Manufacturing, Inc., a foreign
corporation, Stanford International, Inc., a foreign corporation, Allied
Products, a foreign corporation, Cabec Energy Corporation, a foreign
corporation, Tulsa Industries, Inc., a foreign corporation, Cabec Energy
Industries, a foreign corporation, Curton Capital Corporation, a foreign
corporation, The Union Group, a foreign corporation, PalWeb Corporation, a
foreign corporation, BP America Production Company, f/k/a/ Amoco Production
Company, a foreign corporation and John Doe, an unknown drilling representative,
Cause No. D-101-CV-200301515, filed in the First Judicial District, County of
Santa Fe, State of New Mexico, on August 19, 2003.
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Justin Baker and his wife, Bobbie Baker, have sued a number of defendants,
including PalWeb, in connection with an alleged accident that occurred on an oil
rig unit on February 1, 2002 in which Mr. Baker allegedly injured his right leg.
The plaintiffs claim, among other things, that: Mr. Baker's right leg was
amputated because of the accident described in the preceding sentence; the oil
rig unit and its component parts were designed, manufactured, assembled,
promoted, advertised, sold and distributed by a certain manufacturers, including
certain companies of which PalWeb is a successor and/or parent corporation; and
such manufacturers were negligent, should be held strictly liable for
plaintiffs' injuries, and breached certain implied warranties. The plaintiffs
are seeking past and future compensatory and punitive damages, interest on such
damages and certain costs and expenses, all of which are in unspecified amounts.
PalWeb is not currently engaged in the oil and gas business. However, from April
1993 to December 1997, PalWeb was engaged in various businesses, including the
exploration, production and development of oil and gas properties in the
continental United States and the operation of related service businesses. In
connection with an acquisition by PalWeb in December 1997, all of the assets,
contract rights and liabilities of PalWeb that related in any way to the oil and
gas business were transferred to The Union Group, Inc., a Nevada corporation.
PalWeb is currently evaluating the plaintiffs' claims and anticipates that it
will vigorously defend the lawsuit.
ITEM 2. CHANGES IN SECURITIES
Holders of PalWeb's Series 2001 12% Cumulative Convertible Senior Preferred
Stock ("2001 Preferred Stock") are entitled to cumulative dividends of 12% per
annum, $1.20 per share, or a total of $900,000. In lieu of the quarterly payment
of cash dividends $224,384 due on June 30, 2003, the holders of such 2001
Preferred Stock agreed to accept common stock of PalWeb, and PalWeb's Board of
Directors approved the payment of such dividends in the form of 560,959 shares
of the authorized but unissued shares of PalWeb's common stock at an effective
price of $0.40 per share as of the date such payment of shares was authorized.
PalWeb relied on the exemption set forth in Section 4(2) of the Securities
Act of 1933, as amended, in connection with the offer and sale of the stock
described above. All parties listed above are sophisticated persons or entities.
All of the purchasers executed investment letters representing that they had
sufficient access to information to make the investment and acknowledging the
restrictions on transfer of the stock. There was no underwriting, and no
commissions were paid to any party upon the issuance of such stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of Loss per Share is in Note 3 in the Notes
to the financial statements.
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) (submitted herewith).
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) (submitted herewith).
10
32.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
Act of 2002 (submitted herewith).
32.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
Act of 2002 (submitted herewith).
(b) Reports on Form 8-K
There were no reports filed by PalWeb during the three months ended August
31, 2003.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be singed on its behalf by the undersigned, thereunto duly
authorized.
PALWEB CORPORATION
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(Registrant)
Date: October 15, 2003 /s/ Warren F. Kruger
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Warren F. Kruger
President and CEO
11