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U.S. 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 FEBRUARY 28, 2002
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[_] 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)
DELAWARE 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
---------------------------------------- --------------------------
(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: MARCH 18, 2002 - 233,948,244
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(CHECK ONE):
Yes [_] No [X]
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PALWEB CORPORATION
FORM 10-QSB
FOR THE PERIOD ENDED FEBRUARY 28, 2002
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Statements of Operations
For the Nine Month Periods Ended
February 28, 2002 and 2001 1
Statements of Operations
For the Three Month Periods Ended
February 28, 2002 and 2001 2
Balance Sheets as of February 28,
2002 and May 31, 2001 3
Statements of Cash Flows for the
Nine Month Periods Ended February 28,
2002 and 2001 5
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 8
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended From Inception
February 28, (November 20,
-------------------------------- 1995) to
2002 2001 Feb.28,2002
------------- ------------- -------------
MANUFACTURING:
Sales $ 48,189 $ 47,851 $ 244,107
Expenses:
Research and development 67,000 -- 568,943
Salaries and benefits 320,093 182,220 1,978,510
General and administrative
expenses 965,194 654,516 10,630,842
Depreciation expense 107,139 155,718 925,642
Impairment -- -- 3,456,231
Interest expense 115,943 239,342 1,068,407
------------- ------------- -------------
Total expenses 1,575,369 1,231,796 18,628,575
------------- ------------- -------------
Other income (expense):
Gain on settlement
of liabilities -- 38,784 1,599,262
Other -- -- 272,308
------------- ------------- -------------
Total other income (expense) -- 38,784 1,871,570
------------- ------------- -------------
LOSS FROM MANUFACTURING OPERATIONS (1,527,180) (1,145,161) (16,512,898)
FINANCE:
Revenues -
Interest and fees on loans 41,765 152,726 288,251
Other income -- 3,092 4,992
Gain (loss) on sale of assets -- 29,716 17,365
------------- ------------- -------------
Total Revenues 41,765 185,534 310,608
------------- ------------- -------------
Expenses -
Interest on thrift accounts and
time certificates 124,873 271,103 516,768
Interest on notes payable 5,274 14,348 25,933
Salaries and benefits -- 40,340 57,175
Other operating expenses 43,842 191,672 421,507
Provision for credit losses -- 173,426 353,426
Depreciation and amortization -- 782,398 888,308
------------- ------------- -------------
Total expenses 173,989 1,473,287 2,263,117
------------- ------------- -------------
LOSS FROM FINANCE OPERATIONS (132,224) (1,287,753) (1,952,509)
------------- ------------- -------------
LOSS FROM TOTAL OPERATIONS, BEFORE DISCONTINUED
AND EXTRAORDINARY ITEMS (1,659,404) (2,432,914) (18,465,407)
INCOME (LOSS) FROM DISCONTINUED OPERATION 74,079 (792,648)
EXTRAORDINARY GAIN -- -- 68,616
------------- ------------- -------------
NET LOSS $ (1,659,404) $ (2,358,835) $ (19,189,439)
============= ============= =============
LOSS PER COMMON SHARE $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 232,705,000 191,061,000
============= =============
The accompanying notes are an integral part of this consolidated financial
statement.
1
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
February 28,
-------------------------------------
2002 2001
------------- -------------
MANUFACTURING:
Sales $ 9,401 $ 14,422
Expenses:
Research and development 19,000 --
Salaries and benefits 103,206 69,159
General and administrative
expenses 341,282 175,232
Depreciation expense 46,367 51,320
Impairment -- --
Interest expense 10,849 80,974
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Total expenses 520,704 376,685
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LOSS FROM MANUFACTURING OPERATIONS (511,303) (362,263)
FINANCE:
Revenues -
Interest and fees on loans 3,078 (3,208)
Other income -- --
Gain (loss) on sale of assets -- 1,135
------------- -------------
Total Revenues 3,078 (2,073)
------------- -------------
Expenses -
Interest on thrift accounts and
time certificates 19,201 73,690
Interest on notes payable 945 4,531
Salaries and benefits -- --
Other operating expenses 10,338 41,477
Provision for credit losses -- --
Depreciation and amortization -- --
------------- -------------
Total expenses 30,484 119,698
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LOSS FROM FINANCE OPERATIONS (27,406) (121,771)
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LOSS FROM TOTAL OPERATIONS, BEFORE DISCONTINUED
OPERATION (538,709) (484,034)
INCOME FROM DISCONTINUED OPERATION -- 62,501
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NET LOSS $ (538,709) $ (421,533)
============= =============
LOSS PER COMMON SHARE $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 233,260,000 199,071,000
============= =============
The accompanying notes are an integral part of this consolidated financial
statement.
2
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
February 28, May 31,
2002 2001
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ASSETS
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MANUFACTURING:
Current Assets:
Cash $ 686,452 $ 10,923
Accounts receivable 22,656 72,788
Due from related party 113,279 --
Inventory 228,986 142,689
Prepaid Expenses -- 95,000
------------ ------------
Total current assets 1,051,373 321,400
Property, plant and equipment 7,361,565 2,730,654
Accumulated depreciation (512,310) (405,171)
------------ ------------
Total property, plant and equipment 6,849,255 2,325,483
Other Assets 75,604 76,031
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TOTAL MANUFACTURING ASSETS 7,976,232 2,722,914
------------ ------------
FINANCE:
Cash 119,274 69,546
Loans receivable, net of allowance for
doubtful accounts 232,201 814,349
------------ ------------
TOTAL FINANCE ASSETS 351,475 883,895
------------ ------------
TOTAL ASSETS $ 8,327,707 $ 3,606,809
============ ============
The accompanying notes are an integral part of this consolidated financial
statement.
3
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
February 28, May 31,
2002 2001
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
MANUFACTURING:
Current Liabilities:
Current portion of long-term debt $ 3,060,000 --
Note payable -- $ 1,536,559
Notes payable - related party -- 947,200
Accounts payable and accrued liabilities 401,977 1,823,064
------------ ------------
Total current liabilities 3,461,977 4,306,823
Long-term debt 740,000 --
Deferred Income -- 707,044
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TOTAL MANUFACTURING LIABILITIES 4,201 977 5,013,867
------------ ------------
FINANCE:
Thrift accounts and time certificates 3,749,951 5,107,257
Accrued interest payable
and other liabilities 333,007 204,061
Notes payable -- 171,836
------------ ------------
TOTAL FINANCE LIABILITIES 4,082,958 5,483,154
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STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $.0001 par, 20,000,000 shares
authorized:
Series 2001, 750,000 and -0- shares outstanding 75 --
Preferred, 605,000 and 2,525,000 shares outstanding 61 253
Common stock, $.10 par value, 250,000,000
authorized, outstanding - 233,948,244 and 231,928,244 23,394,824 23,192,825
Additional paid-in capital 17,190,461 9,725,686
Deficit accumulated during development stage (36,918,114) (35,258,710)
------------ ------------
3,667,307 (2,339,946)
Treasury stock, 34,650,000 and 43,500,000 shares common (3,624,535) (4,550,266)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 42,772 (6,890,212)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 8,327,707 $ 3,606,809
============ ============
The accompanying notes are an integral part of this consolidated financial
statement.
4
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended From Inception
February 28, (November 20,
------------------------------ 1995) to
2002 2001 Feb.28, 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (2,923,399) $ (960,239) $ (3,259,756)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,905,567) (4,665) (9,158,420)
Net liabilities from acquisition
of finance and real estate -- -- 230,724
Proceeds from sale of equipment -- 385,413 1,456,456
Decrease in loans receivable 617,124 1,290,985 2,086,986
Proceeds from lease finance obligation -- -- 149,517
------------ ------------ ------------
Net cash provided by (used)
investing activities (3,288,443) 1,671,733 (5,234,737)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 6,956,820 712,200 10,321,886
Payments on notes payable (185,091) (73,959) (1,477,071)
Decrease in savings certificates (1,357,306) (1,530,282) (2,909,248)
Proceeds from mortgage payable -
related party -- -- 1,350,000
Proceeds from sale of preferred stock 522,676 -- 522,676
Proceeds from sale of treasury stock 1,000,000 -- 1,000,000
Proceeds from issuance of common stock -- -- 491,976
------------ ------------ ------------
Net cash provided (used) by
financing activities 6,937,099 (892,041) 9,300,219
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 725,257 (180,547) 805,726
CASH, beginning of period 80,469 267,882 --
------------ ------------ ------------
CASH, end of period $ 805,726 $ 87,335 $ 805,726
============ ============ ============
SUPPLEMENTAL INFORMATION:
NON-CASH FINANCING ACTIVITIES
Preferred stock issued in acquisition of
building, net of $813,255 of mortgage debt $ 537,745
Preferred stock issued in exchange for debt 6,440,579
Issuance of common stock for services 10,000
Decrease of mortgage payable by sale of real
estate with buyer assumption of debt -- 996,303
Common stock issued for debt -- 12,000
The accompanying notes are an integral part of this consolidated financial
statement.
5
PALWEB CORPORATION
NOTES TO 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 February 28, 2002, and the results of its
operations and its cash flows for the nine month periods and three
month periods ended February 28, 2002 and 2001. These consolidated
financial statements should be read in conjunction with the
consolidated financial statements as of and for the year ended May 31,
2001 and the notes thereto included in the Company's Form 10-KSB.
2. The results of operations for the nine month period and three month
period ended February 28, 2002 are not necessarily indicative of the
results to be expected for the full year.
3. Segment of Business - The Company's business has two reportable
segments - manufacturing and finance. The manufacturing segment is the
production of plastic pallets and is separately presented in the
accompanying financial statements. The finance segment, also presented
separately in the accompanying financial statements, was acquired on
April 3, 2000 and is in the business of lending money. The accounting
policies are the same as those described in the summary of significant
accounting policies. Intersegment transactions are not significant.
4. Interest expense of $181,900 and $35,895 was capitalized during the
nine month period and three month period ended February 28, 2002,
respectively, in connection with the construction of a new production
line.
5. The computation of earnings per share is based on the weighted average
shares outstanding. For the nine month periods ended February 28, 2002
and 2001, the average shares outstanding are 232,705,000 and
191,061,000, respectively. For the three month periods ended February
28, 2002 and 2001, the average shares outstanding are 233,260,000 and
199,071,000, respectively. Convertible preferred stock is not
considered as their effect is antidilutive.
6. Deferred income, resulting from a sale and lease back transaction with
a related party, is being amortized to additional paid in capital over
sixty months. During fiscal year 2002, $82,488 is the amount so
amortized. Effective January 4, 2002, the real estate was repurchased
from the related party at a cost of $1,350,000. The remaining
unamortized deferred income of $624,656 is netted against the
6
purchase price so the net cost in the financial statements is $725,344.
7. In January, 2002, PalWeb issued 750,000 shares of Series 2001 12%
Cumulative Convertible Senior Preferred Stock, par value $0.0001,
convertible into 350 shares of common stock for each share of preferred
and warrants to purchase up to 225,000,000 shares of PalWeb common
stock in exchange for a total consideration of $7,500,000. The ability
to convert the preferred stock and/or exercise the warrants depends on
PalWeb amending its capital structure to authorize additional capital
and reduce the par value of its common stock. See "Liquidity and
Capital Resources" in Part I, Item 2, "Management Discussion and
Analysis or Plan of Operation."
During fiscal year 2002, 1,920,000 shares of the junior convertible
preferred stock were converted into a like amount of common stock.
8. Effective December 11, 2001, PalWeb through its subsidiary, Plastic
Pallet Production, Inc., entered into a revolving note payable with F&M
Bank and Trust Company for a $3,000,000 line of credit at prime plus
0.25%, due December 21, 2002.
9. In October, 2001, a former employee of PalWeb filed a cause of action
for certain payments and stock options valued in excess of $1,000,000
related to an employment agreement dated September 1, 1996 when
PalWeb's name was Cabec Energy. See Part II, Item 1, "Litigation" in
PalWeb's Form 10-QSB for the period ended November 30, 2001, which was
filed on January 14, 2002.
7
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
---------------------
GENERAL TO ALL PERIODS
PalWeb Corporation ("PalWeb") is in the development stage. It has
incurred significant losses from operations, and there is no assurance that it
will achieve profitability or obtain funds necessary to finance continued
operations.
PalWeb's primary business is the manufacturing and selling of plastic
pallets, which is referred to herein as manufacturing. In the quarter ended
February 28, 2002, PalWeb also began to explore the possible marketing of its
patented injection molding equipment, which it may sell to third parties as a
part of its manufacturing operations. PalWeb also indirectly owns a subsidiary
finance company, Paceco Financial Services, Inc. ("PFS"), acquired in April
2000, which was previously engaged in consumer and small business lending and
real estate activities. As described below, the finance activities have been
curtailed until PFS is able to repay outstanding investment certificate
liabilities, and in December 2000, its real estate activities were discontinued.
As of February 28, 2002, production of plastic pallets utilizing
prototype production equipment has been approximately 800 pallets per month and
the current production capacity of the prototype machine is approximately 4,000
pallets per month. As of February 28, 2002, PalWeb had 11 full-time employees
and a production capacity of approximately 2,000 pallets per month. Production
levels of approximately 4,000 pallets per month can be attained by adding
approximately two more shifts. On or about March 18, 2002, the construction and
installation of PalWeb's new production line to manufacture plastic pallets was
completed at a cost of approximately $5,500,000. This new production line has a
maximum capacity of about 40,000 plastic pallets per month. PalWeb has financed
the construction through a combination of accounts payable and interim financing
from Yorktown Management and Financial Services, LLC ("Yorktown"), which were
subsequently paid from the proceeds of a $7,500,000 preferred stock offering as
discussed below in "Liquidity and Capital Resources." Yorktown is principally
owned by Warren F. Kruger, Paul A. Kruger's brother. Management anticipates that
it will continue current production of approximately 800 pallets per month with
appropriate increases based on sales. There is no assurance that PalWeb will
receive orders for pallets that justify any significant increase to PalWeb's
current production level.
Inventory levels at February 28, 2002, included approximately 2,606
stackable and 2,693 rackable pallets. In addition, as of February 28, 2002,
PalWeb had developed a new plastic pallet that uses a 3-runner design, which
allows for easier handling by electric plastic pallet trucks. Seventy of these
3-runner pallets were held in inventory at February 28, 2002. PalWeb's marketing
efforts have generated several leads with customers who are considering sizable
orders of pallets, but as of April 1, 2002, no significant orders had been
received. There is no assurance that PalWeb will secure any sizable orders of
pallets or, if it does, that PalWeb will be able to manufacture the pallets
necessary to fill such orders.
8
According to the U. S. Forest Service as printed in a National Wooden
Pallet and Container Association publication, the United States market for new
pallets, both wooden and plastic, is, at a minimum, approximately 400,000,000
annually. Projected sales of 40,000 pallets per month, or 480,000 pallets per
year, is less than 1/10th of 1% of the total new pallet market, and it appears
that the market trend is moving toward the use and purchase of plastic pallets.
PalWeb currently has four models of plastic pallets - Hawker FR,
Hawker, Tank 3-Runner, and Stackable, all of which are 40 X 48". The Hawker FR
utilizes a patented inter-locking design featuring CJII fire retardant polymers
that are UL 2335 certified, and has a free span racking capacity of 2,800 lbs.,
dynamic load of 5,000 lbs., and weighs approximately 54 lbs. The Hawker also
utilizes the patented inter-locking design, and has a dynamic load of 5,000
lbs., rackable load of 2,800 lbs., and weighs approximately 50 lbs. The Tank
3-Runner utilizes a design that allows for easier handling by electric plastic
pallet trucks, has dynamic load of 5,000 lbs., rackable load of 2,800 lbs., and
weighs approximately 45 lbs. The Stackable consists of tops of the Hawker
pallet, has a dynamic load of 5,000 lbs., and weighs approximately 30 lbs.
PalWeb continues to test and improve its pallets with respect to
strength, durability and fire retardancy. In January, 2002, PalWeb submitted its
Hawker FR plastic pallet manufactured from its new production equipment with its
patent pending fire retardancy formula to Underwriters Laboratory for UL
certification with respect to fire retardancy. The Hawker FR pallet successfully
completed the UL tests and has received its UL2335 classification with respect
to fire retardancy. This UL certification is a requirement of major purchasers
and lessors of plastic pallets and, accordingly, is expected to enhance the
marketability of this pallet. In August, 2001, PalWeb received test results on
its Hawker plastic pallet from the Virginia Polytech Institute & State
University's ("Virginia Tech") Fastrack Evaluation, which in the opinion of
PalWeb further demonstrates the strength and durability of this pallet. The
Virginia Tech Fastrack Evaluation is a private test that was conducted at
PalWeb's request. Although the Virginia Tech Fastrack Evaluation is not an
industry standard, PalWeb believes that the results of the Fastrack Evaluation
will be useful in marketing PalWeb's Hawker plastic pallet.
For all periods 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.
The consolidated statements include PalWeb Corporation and its
wholly-owned subsidiaries, Plastic Pallet Production, Inc. ("PPP") and PFS. PPP
represents the manufacturing segment of PalWeb and PFS represents the financial
segment.
9
NINE MONTH PERIOD ENDED FEBRUARY 28, 2002 COMPARED TO NINE MONTH PERIOD ENDED
-----------------------------------------------------------------------------
FEBRUARY 28, 2001
-----------------
MANUFACTURING
Sales for the nine month period ended February 28, 2002, were $48,189
compared to $47,851 in the nine month period ended February 28, 2001. Sales in
fiscal year 2002 are approximately 38% of management's goal of 2,000 pallets per
quarter. Management believes the lower-than-expected sales are attributable to
the diversion of PalWeb's resources and personnel during the building of its
fully functional production line, which was completed in March 2002.
Salary and benefits expense of $320,093 in the first nine months of
fiscal year 2002 increased from $182,220 in the first nine months of fiscal year
2001. This increase of $137,873 was primarily due to the addition of three
employees and an office manager plus overtime expenses incurred in preparing
pallets for fire retardancy testing.
The general and administrative expenses for the manufacturing segment
during the first nine months of fiscal year 2002 and 2001 were $965,194 and
$654,516, respectively, an increase of $310,678, or 47%. The principal reasons
for this increase were increased rental expense at PalWeb's manufacturing
facility of approximately $121,000, testing expense of approximately $90,000
related to the UL certification for fire retardancy, and research and
development costs during fiscal year 2002 for the fire retardancy formula of
about $67,000.
Interest expense was $115,943 and $239,342 for the nine months ended
February 28, 2002 and 2001, respectively, for a decrease of $123,399. Effective
May 1, 2001, PalWeb terminated its option to purchase the plant facility and,
accordingly, rents that were previously classified as interest expense for
financial statement reporting purposes in the nine months ended February 28,
2001, were reported as rent expense in the nine months ended February 28, 2002.
In addition during fiscal year 2002, $181,900 of interest cost was capitalized
as cost of construction of a new production line. Total interest expense during
the first three quarters of fiscal 2002, including capitalized interest, was
$297,843, an increase of $58,501 over the first three quarters of fiscal 2001,
reflecting the additional borrowings primarily for construction. In January,
2002, PalWeb completed a preferred stock offering of $7,500,000 as discussed
below in "Liquidity and Capital Resources." Approximately $6,440,000 of debt was
exchanged for shares of Series 2001 12% Cumulative Convertible Senior Preferred
Stock ("2001 Preferred Stock").
The loss from the manufacturing segment in the first nine months of
fiscal year 2002 and 2001 was $1,527,180 and $1,145,161, respectively. The
increase from 2001 to 2002 of $382,019 was primarily due to the increases in
expenses described above.
FINANCE
PalWeb intended to use its finance operation primarily for pallet
financing activities. Due to regulatory issues with the Oklahoma Department of
Securities in connection with its investment certificates and the liquidation
thereof, management has not engaged in any new financing activities since
November, 2000.
10
Interest income for the first three quarters of fiscal year 2002 was
$41,765 compared to $152,726 in the prior year. The decrease of $110,961 was due
to the reduction of outstanding loans. Interest income in 2002 is based on cash
payments as substantially all loans at February 28, 2002, are on a nonaccrual
status. In addition, as discussed in the preceding paragraph, management is not
making new loans as of February 28, 2002.
Total expenses in the first nine months of fiscal year 2002 were
$173,989 compared to $1,473,287 in the comparable period of fiscal 2001. The
decrease of $1,299,298 was primarily due to (i) no depreciation and amortization
in fiscal year 2002 due to the write-off of goodwill in 2001, (ii) the
liquidation of thrift savings accounts and a reduction of interest on the
accounts to passbook savings rate of 1%, and (iii) a general reduction of
operating expenses in connection with the latent activity of the segment.
The net loss of $132,224 in fiscal year 2002 compared to $1,287,753
in 2001 was a decrease of $1,155,529 and is primarily due to the reductions in
expenses described above.
COMBINED
The consolidated net loss for the first three quarters of fiscal year
2002 was $1,659,404, or $0.01 per share, compared to a net loss of $2,358,835,
or $0.01 per share, in the first three quarters of fiscal 2001 for a decrease of
$699,431.
THREE MONTH PERIOD ENDED FEBRUARY 28, 2002 COMPARED TO THREE MONTH PERIOD ENDED
-------------------------------------------------------------------------------
FEBRUARY 28, 2001
-----------------
MANUFACTURING
Sales for the three month period ended February 28, 2002, were $9,401
compared to $14,422 in the three month period ended February 28, 2001. Sales of
approximately 500 pallets in the current year period did not meet management's
goal of 2,000 pallets per quarter.
Salary and benefits expense of $103,206 in the three months ended
February 28, 2002, increased from $69,159 in the comparable period of the prior
year. This increase of $34,047 was primarily due to the addition of three
employees and an office manager and overtime incurred in preparation of pallets
for fire retardancy testing.
The general and administrative expenses for the manufacturing segment
for the three months ending February 28, 2002 and 2001, were $341,282 and
$175,232, respectively, for a increase of $166,050. This increase resulted from
testing expense of approximately $45,000 related to the UL certification for
fire retardancy and costs associated with the overall increase in activity
including marketing, insurance, taxes, utilities, etc.
Interest expense was $10,849 and $80,974 in the three months ended
February 28, 2002 and 2001, respectively, a decrease of $70,125. Effective May
1, 2001, PalWeb terminated its option to purchase the plant facility, and,
accordingly, rents that were previously classified as interest expense
11
for financial statement reporting purposes in the three months ended February
28, 2001, were reported as rent expense in the three months ended February 28,
2002, until the plant building was acquired by PalWeb in January, 2002, in
connection with the offering of the 2001 Preferred Stock. In addition, during
the three months ending February 28, 2002, $35,895 of interest expense was
capitalized as cost of construction of the new production line. Total interest
expense during the third quarter of fiscal 2002, including capitalized interest,
was $46,744, a decrease of $34,230 over the third quarter of fiscal 2001. In
January, 2002, PalWeb completed an offering of $7,500,000 in 2001 Preferred
Stock as discussed below in "Liquidity and Capital Resources." Approximately
$6,440,000 of debt was exchanged for 2001 Preferred Stock.
The loss from the manufacturing segment in the third quarter of
fiscal year 2002 and 2001 was $511,303 and $362,263, respectively. The increase
from 2001 to 2002 of $149,040 was primarily due to the increases in expenses
described above.
FINANCE
PalWeb intended to use its finance operation primarily for pallet
financing activities. Due to regulatory issues with the Oklahoma Department of
Securities in connection with its investment certificates and the liquidation
thereof, management has not engaged in any new financing activities since
November, 2000.
Interest income in the third quarter fiscal year 2002 was $3,078
compared to $(3,208) in the third quarter of fiscal year 2001. The increase of
$6,286 was due to a change to the cash basis of recognizing interest income
during the third quarter of 2001. Interest income in fiscal year 2002 was based
on cash payments as substantially all loans at February 28, 2002, are on a
nonaccrual status. In addition, as discussed in the preceding paragraph,
management is not making new loans at the present time.
Total expenses in the three months ended February 28, 2002 were
$30,484 compared to $119,698 in the three months ended February 28, 2001. The
decrease of $89,214 was primarily due to the liquidation of thrift savings
accounts and a reduction of interest on the accounts to passbook savings rate of
1%, and a general reduction of operating expenses in connection with the latent
activity of the segment.
The net loss of $27,406 in the third quarter of fiscal year 2002
compared to $121,771 in the third quarter of fiscal year 2001 was a decrease of
$94,365, primarily due to the reasons described above.
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COMBINED
The consolidated net loss for the third quarter of fiscal year 2002
was $538,709, or $0.01 per share, compared to a net loss of $421,533, or $0.01
per share, for the third quarter of fiscal year 2001, an increase of $117,176.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
GENERAL
As of February 28, 2002, and with the new production equipment,
PalWeb's management projects that sales of approximately 12,000 pallets per
month will be necessary to break even due to increased costs associated with
dividend payments, interest expense, labor costs, and utility costs. There is no
assurance that this break-even level will be achieved. Until sales reach the
break-even 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.
Due to its development stage status, PalWeb has had difficulty in
obtaining financing from traditional financing sources. As described below,
substantially all of the financing that PalWeb has received through February 28,
2002, has been provided by loans from entities controlled by Mr. Paul Kruger,
PalWeb's Chairman and Chief Executive Officer, and from entities affiliated with
Warren Kruger, Paul Kruger's brother, and through the offering of 2001 Preferred
Stock described below to the same persons. In addition, the bank line of credit
discussed below under "Line of Credit" was obtained with the personal guarantees
of Paul Kruger and Warren Kruger plus a lien on all equipment. There is no
assurance that Paul Kruger or Warren Kruger will continue to provide loans or
loan guarantees in the future.
PREFERRED STOCK FINANCING
On May 8, 2001, PalWeb announced that it had signed a letter of
intent (the "Letter of Intent") for a private placement of 500,000 shares of
convertible preferred stock and warrants to purchase 150,000,000 shares of
common stock of PalWeb ("Common Stock") for a total of $5,500,000. The Letter of
Intent was with Westgate Capital Company, L.L.C., a private limited liability
company of which Warren F. Kruger is a manager ("WCC"), and Hidalgo Trading
Company, LC ("Hildalgo"), which is 100% owned by Paul A. Kruger.
Subsequent to the execution of the Letter of Intent, an affiliated
entity of Warren Kruger provided loan financing. Subsequent to the signing of
the Letter of Intent, WCC also required as an additional condition to its equity
investment that PalWeb acquire the land and building in which its manufacturing
facilities are located (the "Building") from Onward, LLC, an entity that is 100%
owned by Paul A. Kruger ("Onward"), subject to existing debt in exchange for
additional shares of convertible preferred stock and additional warrants on the
same terms as described in the Letter of Intent. Hildalgo and Onward are
sometimes referred to herein as the "Paul A. Kruger Controlled Entities."
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On January 4, 2002, PalWeb entered into a Securities Purchase
Agreement, which was subsequently amended on January 21, 2002 (the "Purchase
Agreement"), with Hildalgo, Onward and Westgate Investments, L.P., an Oklahoma
limited partnership ("Westgate") of which WCC is the general partner
(collectively, the "Purchasers"). Pursuant to the Purchase Agreement, PalWeb
issued 750,000 shares of 2001 Preferred Stock and warrants to purchase up to
225,000,000 shares of Common Stock for $0.10 per share ("Warrants") to the
Purchasers in exchange for total consideration of $7,500,000. Hildalgo acquired
95,020 shares of 2001 Preferred Stock and Warrants to purchase 28,506,660 shares
of Common Stock in exchange for the conversion of $950,200 of existing
indebtedness owed to Hildalgo. Onward acquired 81,282 shares of 2001 Preferred
Stock and Warrants to purchase 24,384,000 shares of Common Stock in exchange for
the conversion of $276,082 of existing indebtedness owed to Onward and $536,745
of equity in the Building, based on an agreed value of $1,350,000, less
indebtedness assumed by PalWeb of $813,255. Westgate acquired 573,698 shares of
2001 Preferred Stock and Warrants to purchase 172,109,340 shares of Common Stock
in exchange for $522,680 in cash and the conversion of $5,214,297 of existing
indebtedness owed to Yorktown.
The terms of the 2001 Preferred Stock and Warrants are the same as
those announced in May of 2001 when the Letter of Intent was signed; however,
the total amount of 2001 Preferred Stock and Warrants offered was increased to
account for additional indebtedness that was incurred and the transfer of the
Building from Onward to PalWeb. Each share of the 2001 Preferred Stock has a
stated value of $10 per share and is convertible at any time into 350 shares of
Common Stock of PalWeb or a total of 262,500,000 shares, which is an effective
conversion price of $0.0286 per share. Holders of the 2001 Preferred Stock are
also entitled to cumulative dividends of 12% per annum, $1.20 per share, or a
total of $900,000. The Warrants are exercisable at a price of $0.10 per share
for a period of four years, subject to acceleration of the expiration date for
three separate 25% tranches of the total Warrants, if PalWeb's Common Stock
trades at prices of $0.15, $0.20 and $0.25 per share, respectively.
The ability to convert the 2001 Preferred Stock and exercise the
Warrants depends on PalWeb amending its capital structure to authorize
additional shares of Common Stock and reduce the par value of its Common Stock.
At the 2002 annual meeting of the shareholders of PalWeb, PalWeb intends to
submit to its shareholders a proposal whereby PalWeb will merge with PalWeb
Oklahoma Corporation, an Oklahoma corporation, and become redomiciled in
Oklahoma, and in connection with such merger, the surviving entity will have
sufficient authorized shares of common stock, par value $0.0001, to be issued
upon the conversion of the 2001 Preferred Stock and the exercise of the
Warrants.
In connection with the Purchase Agreement, PalWeb and Westgate
entered into a Shareholders and Voting Agreement dated January 4, 2002, as
amended on January 21, 2002 (the "Shareholders Agreement"), whereby the parties
agreed, among other things, that Westgate shall have the right to:
o designate for nomination by management for election to the Board of
Directors at least two- thirds of the members of the Board for as
long as Westgate holds at least 5% of the 2001 Preferred Stock or
Common Stock of PalWeb;
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o designate one of the Westgate designees for appointment on every
committee of the Board of Directors of PalWeb for as long as Westgate
continues to have one or more designees serving on the Board of
Directors of PalWeb; and
o routinely consult with, and advise, the management of PalWeb
regarding PalWeb's operations.
In addition, the Shareholders Agreement provides that the following
actions may not be taken without the prior approval of 60% of the members of the
Board of Directors of PalWeb:
o amend the certificate of incorporation or bylaws of PalWeb;
o consolidate with, or merge with or into, any entity, except for
certain mergers of wholly owned subsidiaries of PalWeb with or into
PalWeb;
o make certain sales, leases, transfers or dispositions of the
properties or assets of PalWeb;
o change the general nature of the business of PalWeb;
o make certain acquisitions or issuances of shares of PalWeb;
o enter into certain commitments or obligations for the grant of
options, warrants or rights to acquire or issue shares of PalWeb;
o incur any funded indebtedness, except for indebtedness incurred as
contemplated by an annual budget, incurred under PalWeb's primary
credit facility, or in an aggregate amount not exceeding $250,000;
o make any investment by PalWeb in any entity other than a wholly-owned
subsidiary in an amount exceeding $100,000;
o pay any dividends on shares of Common Stock of PalWeb;
o file any petition seeking to reorganize PalWeb pursuant to, or to
obtain relief under, any federal or state bankruptcy or insolvency
law;
o dissolve, liquidate or wind-up of the affairs of PalWeb;
o appoint or dismiss the chief executive officer, the president, the
chief operating officer, the chief financial officer or any senior
vice president of PalWeb; or
o make any capital expenditures not approved in an annual budget in an
aggregate amount exceeding $250,000 in any fiscal year.
Westgate's voting and other rights in connection with the Purchase
Agreement and Shareholders Agreement constitute a change in control of PalWeb.
Westgate's general partner is
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WCC, whose managers are Warren F. Kruger, Paul A. Kruger's brother, and William
W. Pritchard. By virtue of their authority to control Westgate, WCC, Warren F.
Kruger and William W. Pritchard may be deemed to be in control of PalWeb.
In connection with the certificate of designation of the 2001
Preferred Stock, PalWeb is required to pay dividends to the holders of the 2001
Preferred Stock on a quarterly basis. The first dividend payments were due on
March 31, 2002; however, PalWeb was not able to make the dividend payments at
that time. PalWeb does not anticipate that it will make cash dividend payments
to any shareholders unless and until the financial position of PalWeb improves
through increased revenues, another financing, or otherwise. In addition, as a
practical matter, the negative covenants described below under "Line of Credit,"
which essentially limit PPP from transferring funds to PalWeb, could impair
PalWeb's ability to pay dividends to its shareholders. As of April 1, 2002,
PalWeb was considering making the March 31, 2002 dividend payment to the holders
of the 2001 Preferred Stock in Common Stock.
LINE OF CREDIT
On December 11, 2001, PalWeb through its subsidiary, PPP, entered
into a loan agreement with The F&M Bank and Trust Company ("F&M") dated December
11, 2001 (the "Loan Agreement"), whereby PPP issued a revolving note due
December 31, 2002 (the "Revolving Note"), in exchange for a $3,000,000 line of
credit at prime plus 0.25%. In connection with the Loan Agreement, PPP has
agreed not to, among other things:
o create, assume or suffer to exist certain liens, charges or
encumbrances on the properties encumbered to F&M;
o sell, assign, transfer, convey, or encumber its assets;
o create, assume or suffer to exist any indebtedness in excess of
$100,000 in any single year without the prior consent of F&M;
o make certain loans, advances or extensions of credit;
o merge, consolidate, enter into certain business combinations, or
acquire substantially all of the assets of any other corporation
without the prior consent of F&M;
o engage in any business activities substantially different from or
unrelated to its present or proposed business activities; or
o declare or pay certain cash or asset dividends.
As additional inducements for F&M to establish the line of credit,
Paul Kruger executed an unlimited guaranty and a pledge, assignment and security
agreement pursuant to which he pledged certain shares of Precis, Inc. common
stock owned by him, and Warren Kruger executed a limited guaranty in the amount
of $1,000,000. Neither Paul nor Warren Kruger received any consideration from
the Company for these guaranties. The loan is secured by substantially all of
the assets of PPP,
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excluding the Company's building which has been mortgaged to the building lender
as described below. Proceeds of this line will be used to pay certain accounts
payable, complete the production line installation, and provide working capital.
As of February 28, 2002, this loan was fully advanced. The Company's goal is to
develop its business to the point that this loan can be extended or refinanced
at its current maturity of December 31, 2002, to be repaid from cash flow from
future operations. If this goal is not achieved, repayment of the loan at
December 31, 2002, will require additional external financing of some type.
In connection with the issuance of the 2001 Preferred Stock, PalWeb
acquired the Building on January 4, 2002, as described above under "Preferred
Stock Financing," subject to existing debt assumed by the Company as further
described below under "Other." Although as of April 1, 2002 F&M has not waived
its rights in connection with the negative covenants described above prior to
PalWeb's assumption of the debt related to the Building, PalWeb anticipates that
F&M will not object to such a waiver.
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.
OTHER
PalWeb had accumulated a working capital deficit of $2,411,000 at
February 28, 2002, in connection with its manufacturing operations, which
includes $3,000,000 due to F&M and $402,000 in accounts payable and accrued
liabilities. This deficit reflects the uncertain financial condition of PalWeb
resulting from its inability to obtain long term financing to progress beyond
the development stage. There is no assurance that PalWeb will secure such
financing.
Effective January 4, 2002 , PalWeb acquired its facility from Onward,
LLC, an affiliate of Paul Kruger, for $1,350,000 through the issuance of 53,674
shares of preferred stock and the assumption of about $812,000 of mortgage debt.
The note assumed by PalWeb in connection with this acquisition has an interest
rate of prime plus 1%, requires a payment of $5,000 per month in principal plus
accrued interest, and matures in January, 2003.
On December 20, 2001, PFS made a payment of $1,357,000 in connection
with the redemption of its depositors' passbook savings accounts and time
certificates. For more information on this transaction, see "Paceco Financial
Services, Inc." under Part II, Item 5 of PalWeb's Form 10- QSB for the period
ended November 30, 2001, which was filed on January 14, 2002.
MATERIAL RISKS
--------------
PalWeb is in the development stage, it 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, 2001,
which was filed on September 13, 2001.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In connection with the Purchase Agreement, PalWeb issued 750,000
shares of 2001 Preferred Stock and Warrants to purchase 225,000,000 shares of
Common Stock as further described under "Preferred Stock Financing" in Item 2 of
this Form 10-QSB. On December 11, 2001, PalWeb issued the Revolving Note in
consideration for the line of credit as further described under "Line of Credit"
in Item 2 of this Form 10-QSB. As a practical matter, the negative covenants
described under "Line of Credit," which essentially limit PPP from transferring
funds to PalWeb, could impair PalWeb's ability to pay dividends to its
shareholders. In January, 2002, PalWeb issued 100,000 shares of Common Stock as
partial consideration for consulting services, valued at $10,000, performed by a
third party in connection with the development of the fire retardancy formula
used by PalWeb. PalWeb relied on the exemption set forth in Section 4(2) of the
Securities Act of 1933, as amended, in connection with the issuances of the
securities described in this paragraph. All parties involved in these issuances
of securities are sophisticated persons or entities, and there were no
underwriting or other commissions paid to any party upon the issuance of such
securities.
In addition, through the quarter ended February 28, 2002, PalWeb
issued 1,375,000 shares of its Common Stock in a no-sale transaction upon the
conversion of 1,375,000 shares of Convertible Preferred Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Amendment No. 1 to Securities Purchase Agreement and
Shareholders and Voting Agreement by and among PalWeb
Corporation and certain purchasers dated January 21, 2002
11.1 Computation of Loss per Share is in Note 5 in the Notes
to the financial statements
B. Reports on Form 8-K
No reports on Form 8-K were filed by PalWeb Corporation during the
three months ended February 28, 2002.
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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
(Registrant)
Date: 04/12/02 /s/ Paul A. Kruger
---------- ------------------------------------
Paul A. Kruger
Chairman of the Board and President
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