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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended MAY 31, 2004
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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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GREYSTONE LOGISTICS, INC.
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(Name of small business issuer in its charter)
OKLAHOMA 75-2954680
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1613 EAST 15TH STREET, TULSA, OKLAHOMA 74120
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(Address of principal executive offices) (Zip Code)
(918) 583-7441
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.0001 PAR VALUE
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(Title of class)
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. [X] Yes [_] No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
The issuer's revenue for the year ended May 31, 2004, was $6,964,943.
As of August 18, 2004, the aggregate market value of the voting common stock
held by non-affiliates of the registrant, computed by using the average of the
high and low price on such date, was $1,526,717.
As of August 18, 2004, the issuer had outstanding a total of 12,790,451 shares
of its $0.0001 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
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PALWEB CORPORATION
FORM 10-KSB/A
TABLE OF CONTENTS
PART II
Item 6. Management's Discussion and Analysis or Plan of Operation ... 4
Item 7. Financial Statements ........................................ 14
Item 8A. Controls and Procedures ..................................... 14
PART III
Item 13. Exhibits and Reports on Form 8-K ............................ 15
Signatures .................................................. 22
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EXPLANATORY NOTE
This Form 10-KSB/A is being filed by Greystone Logistics, Inc. (the
"Company"), as Amendment No. 1 to its Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2004, to revise Part II, Items 6, 7 and 8A and Part
III, Item 13 in the original Form 10-KSB. In general, the amendment:
o revises the Company's financial statements and management's
discussion and analysis to assign a value to a purchase order
acquired in connection with the Company's acquisition of the assets
of Greystone Plastics, Inc. as an intangible asset apart from
goodwill; and
o modifies the Company's disclosure regarding its controls and
procedures.
This Amendment No. 1 to the Company's Annual Report on Form 10-KSB/A amends and
restates Part II, Items 6, 7 and 8A and Part III, Item 13 of its original Annual
Report on Form 10-KSB. The information included in Items 6 and 7 of Part I has
not been updated to reflect events or developments that may have occurred
subsequent to May 31, 2004. At the time the Company filed its original Annual
Report on Form 10-KSB, the Company's name was PalWeb Corporation and any
references below to "PalWeb" shall mean the Company.
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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This annual report on Form 10-KSB/A contains "forward-looking"
statements regarding potential future events and developments affecting the
business of PalWeb. Such statements relate to, among other things: future
operations of PalWeb, the development of distribution channels, product sales
and potential future financings. Forward-looking statements may be indicated by
the words "expects," "estimates," "anticipates," "intends," "predicts,"
"believes," or other similar expressions. Forward-looking statements appear in a
number of places in this Form 10-KSB/A and may address the intent, belief or
current expectations of PalWeb and its Board of Directors and management with
respect to PalWeb and its business. The forward-looking statements are subject
to various risks and uncertainties described in this Form 10-KSB/A. For these
reasons, PalWeb's actual results may vary materially from the forward-looking
statements.
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RISK FACTORS
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PALWEB CONTINUES TO OPERATE AT A LOSS.
PalWeb was incorporated on February 24, 1969. From April 1993 to
December 1997, PalWeb was engaged in various businesses, including the business
of exploration, production, and development of oil and gas properties in the
continental United States and the operation of related service business. In
December 1997, PalWeb acquired all of the issued and outstanding stock of
Plastic Pallet Production, Inc., and its principal business changed to selling
plastic pallets and plastic injection molding machines. Although PalWeb has
completed the construction of a fully operational plastic injection molding
machine and commenced the sales of plastic pallets, it continues to incur losses
from operations and there is no assurance that it will achieve profitability or
obtain funds to finance continued operations.
PALWEB'S BUSINESS COULD BE AFFECTED BY CHANGES IN AVAILABILITY OF RAW MATERIALS.
PalWeb uses a proprietary mix of raw materials to produce its plastic
pallets. Such raw materials are generally readily available and some may be
obtained from recycled plastic containers. At the present time, these materials
are being purchased from local suppliers. The availability of PalWeb's raw
materials could change at any time for various reasons. For example, the market
demand for PalWeb's raw materials could suddenly increase, or the rate at which
plastic materials are recycled could decrease, affecting both availability and
price. Additionally, the laws and regulations governing the production of
plastics and the recycling of plastic containers could change and, as a result,
affect the supply of PalWeb's raw materials. Any interruption in the supply of
raw materials or components could have a material adverse effect on PalWeb.
Furthermore, certain potential alternative suppliers may have pre-existing
exclusive relationships with competitors of PalWeb and others that may preclude
PalWeb from obtaining its raw materials from such suppliers.
PALWEB MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING NECESSARY TO SUSTAIN AND
GROW ITS OPERATIONS.
PalWeb's financial statements have been qualified on a going concern
basis principally due to lack of long term financing to achieve its goal of
producing and marketing plastic pallets to compete with wood pallets. PalWeb has
funded its operations to date primarily through equity and debt financings.
PalWeb may need additional debt or capital in order to begin generating a
sufficient cash flow to sustain operations for the foreseeable future. PalWeb
will need to raise substantial additional funds to continue to fund operating
expenses or its expansion strategy. There can be no assurance that additional
financing will be available, or, if available, that such financing will be on
terms favorable to PalWeb. Failure to obtain such additional financing would
have a material adverse effect on PalWeb.
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PALWEB'S BUSINESS COULD BE AFFECTED BY COMPETITION AND RAPID TECHNOLOGICAL
CHANGE.
PalWeb currently faces competition from many companies that produce
wooden pallets at prices that are substantially lower than the prices PalWeb
charges for its plastic pallets and other companies that manufacture plastic
pallets. It is anticipated that the plastic pallet industry will be subject to
intense competition and rapid technological change. PalWeb could potentially
face additional competition from recycling and plastics companies, many of which
have substantially greater financial and other resources than PalWeb and,
therefore, are able to spend more than PalWeb in areas such as product
development, manufacturing and marketing. Although a company with greater
resources will not necessarily be able to bring a new product to market before
its smaller competitors, substantial resources enable a company to support many
new products simultaneously, thereby improving the likelihood of at least some
of its new products being among the first to make it to market. PalWeb's
revenues and profitability could be adversely affected by technological change.
Competitors may develop products that render PalWeb's products or proposed
products uneconomical or result in products being commercialized that may be
superior to PalWeb's products. In addition, alternatives to plastic pallets
could be developed, which would have a material adverse effect on PalWeb.
PALWEB IS DEPENDENT ON A FEW LARGE CUSTOMERS.
PalWeb derives, and expects that in the foreseeable future it will
continue to derive, substantially all of its revenue from a few large customers.
There is no assurance that PalWeb will retain these customers' business at the
same level, or at all. The loss of a material amount of business from any one of
these customers could have a material adverse effect on PalWeb.
PALWEB MAY NOT BE ABLE TO EFFECTIVELY PROTECT ITS PATENTS AND PROPRIETARY
RIGHTS.
PalWeb relies on a combination of patents and trade secrets to protect
its proprietary technology, rights and know-how. There can be no assurance that
such patent rights will not be infringed upon, that PalWeb's trade secrets will
not otherwise become known to or independently developed by competitors, that
non-disclosure agreements will not be breached, or that PalWeb would have
adequate remedies for any such infringement or breach. Litigation may be
necessary to enforce proprietary rights of PalWeb or to defend PalWeb against
third-party claims of infringement. Such litigation could result in substantial
cost to, and a diversion of effort by, PalWeb and its management and may have a
material adverse effect on PalWeb. PalWeb's success and potential competitive
advantage is dependent upon its ability to exploit the technology under these
patents. There can be no assurance that PalWeb will be able to exploit the
technology covered by these patents or that it will be able to do so
exclusively. PalWeb currently has certain patent applications pending. There can
be no assurance that patent applications will result in patents being issued, or
that, if issued, the patents will afford protection against competitors with
similar technology.
Although PalWeb is not aware of any claim against it for infringement,
there can be no assurances that parties will not bring claims against PalWeb for
infringement in the future. PalWeb's ability to commercialize its products and
proposed products depends, in part, on its ability to avoid
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claims for infringement brought by other parties. Laws regarding the
enforceability of intellectual property vary from jurisdiction to jurisdiction.
There can be no assurance that intellectual property issues will be uniformly
resolved, or that local laws will provide PalWeb with consistent rights and
benefits. In addition, there can be no assurance that competitors will not be
issued patents that may prevent the manufacturing or marketing of PalWeb's
products or proposed products.
PALWEB'S BUSINESS COULD BE AFFECTED BY NEW LEGISLATION REGARDING ENVIRONMENTAL
MATTERS.
The business operations of PalWeb are subject to extensive and changing
federal, state and local environmental laws and regulations pertaining to the
handling and disposition of wastes (including solid and hazardous wastes) or
otherwise relating to the protection of the environment. As is the case with
manufacturers in general, if a release of hazardous substances occurs on or from
PalWeb's properties or any associated off-site disposal location, or if
contamination from prior activities is discovered at any of PalWeb's properties,
PalWeb may be held liable. No assurances can be given that additional
environmental issues will not require future expenditures.
Both the plastics industry, in general, and PalWeb are subject to
existing and potential federal, state, local and foreign legislation designed to
reduce solid wastes by requiring, among other things, plastics to be degradable
in landfills, minimum levels of recycled content, various recycling
requirements, disposal fees and limits on the use of plastic products. In
addition, various consumer and special interest groups have lobbied from time to
time for the implementation of these and other such similar measures. Although
PalWeb believes that the legislation promulgated to date and such initiatives to
date have not had a material adverse effect on PalWeb, there can be no assurance
that any such future legislative or regulatory efforts or future initiatives
would not have a material adverse effect on PalWeb.
PALWEB'S BUSINESS WILL BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
The testing, manufacturing and marketing of PalWeb's products and
proposed products involve the inherent risks of product liability claims or
similar legal theories against PalWeb, some of which may cause PalWeb to incur
significant defense costs. Although PalWeb currently maintains product liability
insurance coverage that it believes is adequate, there can be no assurance that
the coverage limits of its insurance are adequate or that all such claims will
be covered by insurance. In addition, these policies generally must be renewed
every year. While PalWeb has been able to obtain product liability insurance in
the past, there can be no assurance it will be able to obtain insurance in the
future on its products or proposed products. Product liability insurance varies
in cost, is difficult to obtain and may not be available in the future on terms
acceptable to PalWeb, if at all. A successful product liability claim or other
judgment against PalWeb in excess of its insurance coverage could have a
material adverse effect upon PalWeb.
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PALWEB CURRENTLY DEPENDS ON CERTAIN KEY PERSONNEL.
PalWeb is dependent on the experience, abilities and continued services
of its current management personnel. In particular, Warren Kruger, its President
and Chief Executive Officer, has played a significant role in the development
and management of PalWeb and Bill Hamilton, Vice President of Production, has a
significant role in oversight of the manufacturing process. The loss or
reduction of services of Warren Kruger, Bill Hamilton, or any other key employee
could have a material adverse effect on PalWeb. In addition, there is no
assurance that additional managerial assistance will not be required.
PALWEB'S STOCK TRADES IN A LIMITED PUBLIC MARKET, IS SUBJECT TO PRICE
VOLATILITY, AND THERE CAN BE NO ASSURANCE THAT AN ACTIVE TRADING MARKET WILL BE
SUSTAINED.
There has been a limited public trading market for PalWeb's common
stock, and there can be no assurance that an active trading market will be
sustained. There can be no assurance that the common stock will trade at or
above any particular price in the public market, if at all. The trading price of
the common stock could be subject to significant fluctuations in response to
variations in quarterly operating results or even mild expressions of interest
on a given day. Accordingly, the common stock should be expected to experience
substantial price changes in short periods of time. Even if PalWeb is performing
according to its plan and there is no legitimate company-specific financial
basis for this volatility, it must still be expected that substantial percentage
price swings will occur in PalWeb's securities for the foreseeable future.
CERTAIN RESTRICTED SHARES OF PALWEB WILL BE ELIGIBLE FOR SALE IN THE FUTURE AND
ARE LIKELY TO BE SOLD IN THE FUTURE, WHICH COULD AFFECT THE PREVAILING MARKET
PRICE OF PALWEB'S COMMON STOCK.
Certain of the outstanding shares of common stock are "restricted
securities" under Rule 144 of the Securities Act, and (except for shares
purchased by "affiliates" of PalWeb as such term is defined in Rule 144) would
be eligible for sale as the applicable holding periods expire. In the future,
these shares may be sold only pursuant to a registration statement under the
Securities Act or an applicable exemption, including pursuant to Rule 144. Under
Rule 144, a person who has owned common stock for at least one year may, under
certain circumstances, sell within any three-month period a number of shares of
common stock that does not exceed the greater of 1% of the then outstanding
shares of common stock or the average weekly trading volume during the four
calendar weeks prior to such sale. A person who is not deemed to have been an
affiliate of PalWeb at any time during the three months preceding a sale, and
who has beneficially owned the restricted securities for the last two years is
entitled to sell all such shares without regard to the volume limitations,
current public information requirements, manner of sale provisions and notice
requirements. Sales or the expectation of sales of a substantial number of
shares of common stock in the public market by selling stockholders could
adversely affect the prevailing market price of the common stock, possibly
having a depressive effect on any trading market for the common stock, and may
impair PalWeb's ability to raise capital at that time through additional sale of
its equity securities.
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PALWEB DOES NOT EXPECT TO DECLARE OR PAY ANY DIVIDENDS IN THE FORESEEABLE
FUTURE.
PalWeb has not declared or paid any dividends on its common stock.
PalWeb currently intends to retain future earnings to fund the development and
growth of its businesses, to repay indebtedness and for general corporate
purposes, and, therefore, does not anticipate paying any cash dividends or its
common stock in the foreseeable future.
PALWEB'S COMMON STOCK MAY BE SUBJECT TO SECONDARY TRADING RESTRICTIONS RELATED
TO PENNY STOCKS.
Certain transactions involving the purchase or sale of common stock of
PalWeb may be affected by a Securities and Exchange Commission rule for "penny
stocks" that imposes additional sales practice burdens and requirements upon
broker-dealers that purchase or sell such securities. For transactions covered
by this penny stock rule, broker-dealers must make certain disclosures to
purchasers prior to the purchase or sale. Consequently, the penny stock rule may
impede the ability of broker-dealers to purchase or sell PalWeb's securities for
their customers and the ability of persons now owning or subsequently acquiring
PalWeb's securities to resell such securities.
PALWEB'S PRINCIPAL SHAREHOLDERS OWN A SIGNIFICANT AMOUNT OF COMMON STOCK, GIVING
THEM CONTROL OVER CORPORATE TRANSACTIONS AND OTHER MATTERS.
Warren Kruger, President and Chief Executive Officer of PalWeb, and
entities with which he is affiliated, beneficially own over 35% of PalWeb's
common stock. Paul Kruger, Warren Kruger's brother, and entities with which he
is affiliated beneficially owns over 42% of PalWeb's common stock. While these
shareholder groups have not agreed to act in concert with respect to all
shareholder matters, they may act together in connection with matters presented
to the shareholders in the future. This concentrated ownership makes it unlikely
that any other holder or group of holders of common stock will be able to affect
the way PalWeb is managed or the direction of its business. These factors may
also delay or prevent a change in the management or voting control of PalWeb.
RESULTS OF OPERATIONS
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GENERAL
The consolidated statements include PalWeb and its wholly-owned
subsidiaries, Greystone Manufacturing, L.L.C., or GSM, and Plastic Pallet
Production, Inc., or PPP.
PalWeb's primary business is the manufacturing and selling of plastic
pallets through its wholly owned subsidiaries GSM and PPP. GSM is a newly formed
subsidiary of PalWeb which acquired substantially all the assets and operations
of Greystone Plastics, Inc. GSM manufactures pallets for the beverage industry,
operates at full capacity and sells its product to one customer.
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PPP also markets its own designed injection molding machine, the PIPER
600, through a licensing agreement with ForcePro, LLC, which gives ForcePro the
exclusive right to market and sell the PIPER 600. Pursuant to the terms of the
licensing agreement, PalWeb will receive a royalty of 5% of the gross proceeds
from sales of the PIPER 600.
As of May 31, 2004, PalWeb had 60 full-time employees and its
production capacity is about 73,000 plastic pallets per month, or 876,000 per
year. Production levels have generally been governed by sales and will increase
as sales dictate. PalWeb anticipates that a new production line will be
installed at its Iowa plant on or before November 15, 2004, at which time
PalWeb's production capacity will increase to approximately 84,000 pallets per
month, or 1,008,000 per year.
PalWeb has incurred significant losses from operations, and there is no
assurance that it will achieve profitability or obtain funds necessary to
finance continued operations. See "Liquidity and Capital Resources" under this
Item 6.
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.
YEAR ENDED MAY 31, 2004 COMPARED TO YEAR ENDED MAY 31, 2003
Sales were $6,964,943 for fiscal year 2004 compared to $1,280,945 for
fiscal year 2003 for an increase of $5,683,998. The acquisition of GSM added
$6,029,336 to sales in fiscal year 2004. Sales by PPP declined approximately
$345,000 as a result of relocating the production equipment from its Dallas
plant to its Iowa plant as described below.
Cost of sales was $6,768,426 (97% of sales) and $2,438,342 (190% of
sales) in fiscal years 2004 and 2003, respectively. Production levels were
approximately 100% of capacity for GSM in fiscal year 2004 and approximately 10%
of capacity for PPP in fiscal years 2004 and 2003. Because of the low production
rate for PPP, fixed costs in relation to the level of production resulted in a
higher rate of cost of sales to sales. In addition, during fiscal year 2003,
substantial costs were incurred during the first quarter in connection with the
startup of the PIPER 600 and for the repair and maintenance of the prototype
injection molding machine.
General and administrative expense was $2,041,970 in fiscal year 2004
compared to $1,312,824 for fiscal year 2003 for an increase of $729,146. This
increase is primarily due to the acquisition of GSM as discussed above,
including amortization expense of intangible costs for customer contract in the
amount of $514,002.
Subsequent to the acquisition of GSM, PalWeb elected to consolidate its
operations at GSM's plant in Bettendorf, Iowa. The consolidation of PalWeb's
manufacturing operations into one facility
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was made by management in order to improve customer service and reduce costs
related to manufacturing operations. As a result of the closing of the Dallas
plant, PalWeb recorded an expense $441,949 in fiscal year 2004 which includes
$222,196 for relocation costs and $219,753 for abandonment of leasehold
improvements and estimated costs to settle the outstanding lease agreement on
the property. In 2003, PalWeb recorded a one time impairment expense to adjust
the cost on its prototype injection molding machine based on estimated future
cash flows.
Other income of $12,134 includes income of $133,455 primarily from
settlement of a claim against a vendor offset by a loss of $121,321 from the
sale of equipment.
Interest expense was $699,661 in fiscal year 2004 compared to $433,756
in fiscal year 2003 for an increase of $265,905.
The consolidated net loss, before the deduction for preferred
dividends, in fiscal year 2004 was $(2,974,929) compared to $(3,214,852) in
fiscal year 2003 for a decrease of $239,923. This decrease results from the
reasons discussed above.
After deducting dividends to preferred stockholders of $660,171 and
$900,166 in fiscal years 2004 and 2003, respectively, the consolidated net loss
available to common stockholders was $(3,635,100) ($(0.33) per share of common
stock) compared to $(4,115,018) ($(0.79) per share of common stock) in fiscal
year 2003. The disproportionate decline in the per share amounts from 2003 to
2004 is primarily due to the conversion of the Series 2001 preferred stock into
5,250,000 shares of common stock effective September 8, 2003.
LIQUIDITY AND CAPITAL RESOURCES
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GENERAL
PalWeb's cash requirements for operating activities consist principally
of accounts receivable, inventory, accounts payable requirements, operating
leases and scheduled payments of interest on outstanding indebtedness. PalWeb is
dependent on outside sources of cash to fund its operations. As of May 31, 2004,
revenues from sales remain insufficient to meet current liabilities.
A summary of cash flows for the year ended May 31, 2004 is as follows:
Cash used in operating activities $ (1,964,405)
Cash used in investing activities (4,450,436)
Cash provided by financing activities 6,682,717
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Contractual obligations of PalWeb are as follows:
LESS THAN OVER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----------- ----------- ----------- ----------- -----------
Long-term debt $ 7,894,111 $ 1,503,612 $ 2,817,517 $ 2,003,575 $ 1,569,407
Operating leases 6,121,800 788,640 1,205,160 1,152,000 2,976,000
----------- ----------- ----------- ----------- -----------
Total $14,015,911 $ 2,292,252 $ 4,022,677 $ 3,155,575 $ 4,545,407
=========== =========== =========== =========== ===========
Cash used in investing activities during fiscal 2004 principally
consisted of the cash portion of the purchase price of the assets of Greystone
Plastics, Inc., which was raised from the sale of the Series 2003 Preferred
Stock as described under "Sales of Unregistered Securities" under Item 5 of
PalWeb's original Annual Report on Form 10-KSB for the period ended May 31,
2004, which was filed with the SEC on August 30, 2004. PalWeb anticipates
equipment additions of approximately $1,500,000 in fiscal 2005 in connection
with the purchase of a new injection molding machine and new molds. PalWeb plans
to finance these acquisitions of production equipment either through long-term
installment notes or operating leases.
PalWeb anticipates that the cash necessary for funding its operating
activities will decline in fiscal 2005 as compared to fiscal 2004 based on its
projection of increased sales activities for fiscal 2005. To provide for the
additional cash to meet PalWeb's operating activities and contractual
obligations for fiscal 2005, PalWeb is exploring various options including
long-term debt and equity financing. However, there is no guarantee that PalWeb
will be able to raise sufficient capital to meet these obligations.
PalWeb has accumulated a working capital deficit of $3,748,721 at May
31, 2004, which includes notes payable of $2,352,667 ($1,344,501 to entities
owned or controlled by Warren Kruger and $899,980 to a bank), $1,503,612 for
current portion of long-term debt and $1,578,917 in accounts payable and accrued
liabilities. This deficit reflects the uncertain financial condition of PalWeb
resulting from its inability to obtain long term financing from traditional
financing sources. There is no assurance that PalWeb will secure such financing.
As described below, substantially all of the financing that PalWeb has
received through May 31, 2004, has been provided by loans from entities
controlled Warren Kruger, President and Chief Executive Officer of PalWeb, and
from entities affiliated with Paul Kruger, the brother of Warren Kruger, and
through the offering of 2001 Preferred Stock and 2003 Preferred Stock described
below to the same persons.
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.
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PREFERRED STOCK FINANCING
On January 4, 2002, PalWeb issued 750,000 of Series 2001 convertible
preferred stock, $10.00 par value and convertible at the rate of 7 shares of
common for each share of preferred stock, for a total of $7,500,000. Entities
owned by Paul Kruger, acquired 176,302 shares of 2001 Preferred Stock in
exchange for the conversion of $950,200 of existing indebtedness and $536,745 of
equity in the Dallas plant, based on an agreed value of $1,350,000, less
indebtedness assumed by PalWeb of $813,255. Entities owned or controlled by
Warren Kruger acquired 573,698 shares of 2001 Preferred Stock in exchange for
$522,680 in cash and the conversion of $5,214,297 of existing indebtedness.
Effective September 8, 2003, the holders of the Series 2001 preferred elected to
convert the outstanding 750,000 shares of preferred stock into 5,250,000 shares
of common stock.
Effective September 8, 2003, PalWeb sold 50,000 shares of 2003
Preferred Stock for a total of $5,000,000 to Paul Kruger as further described
under "Sales of Unregistered Securities" under Item 5 of PalWeb's original
Annual Report on Form 10-KSB for the period ended May 31, 2004, which was filed
with the SEC on August 30, 2004. The proceeds of the offering were primarily
used for the acquisition of the assets of Greystone Plastics, Inc.
PalWeb does not anticipate that it will make cash dividend payments to
any holders of its common stock unless and until the financial position of
PalWeb improves through increased revenues, another financing or otherwise.
LOANS FROM WARREN KRUGER
Through May 31, 2003, entities owned or controlled by Warren Kruger,
had loaned or advanced $901,422, at an interest rate of 9%, to PalWeb. Effective
September 8, 2003, PalWeb authorized the issuance of 629,811 shares of common
stock in exchange for the payment of $900,000 of such indebtedness at an
exchange rate of $1.429 per share of common stock. During fiscal year 2004, an
entity owned by Warren Kruger advanced an additional $1,344,501 for which
interest is accrued at an interest rate of 7.5%. At May 31, 2004, advances and
accrued interest due to such entities total $1,344,501 and $31,713.
LOAN FROM PAUL KRUGER
Effective January 10, 2003, Paul Kruger refinanced outstanding loans of
$2,150,000 to PalWeb by providing a $7,000,000 loan at an interest rate of prime
plus 3%, due June 4, 2004, secured by all of PalWeb's assets. The additional
proceeds were used to pay outstanding bank debt of approximately $4,242,700 and
to provide working capital.
Effective September 8, 2003, PalWeb completed a sale and leaseback
transaction whereby it sold for agreed upon prices its Dallas, Texas plant for
$1,350,000 and certain production equipment for $5,650,000 to a company owned by
Paul Kruger in exchange for the $7,000,000 note payable to Paul Kruger. The
assets were sold at approximately net book value. The lease agreement for the
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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.
OTHER
Effective September 8, 2003, PalWeb acquired the assets of Greystone
Plastics, Inc., a manufacturer of plastic pallets used in the beverage industry.
The purchase price for the assets was $12,500,000, of which $4,200,546 was paid
in cash and $8,299,454 was paid by issuing the following notes: a $5,000,000
note payable by GSM to Greystone Plastics, Inc. at 7.5% interest, due October 1,
2008; a $2,500,000 note payable by GSM to Greystone Plastics, Inc. at 7.5%
interest, due October 1, 2018; and a $799,454 note payable by GSM to Bill
Hamilton, one of the owners of Greystone Plastics, Inc., at 6% interest, due
February, 2008. The proceeds from the issuance of the Series 2003 Preferred
Stock, described above, were utilized to make the cash payment. As stated above,
the terms of the 2003 Preferred Stock and further details relating to the
acquisition of the assets of Greystone Plastics, Inc., have been further
described in a Form 8-K filed on September 23, 2003 and a related Form 8-K/A
filed on February 18, 2004. For more information regarding this transaction, see
"Sale and Leaseback of Dallas Plant and Certain Production Equipment" under Item
1 of PalWeb's original Annual Report on Form 10-KSB for the period ended May 31,
2004, which was filed with the SEC on August 30, 2004.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of PalWeb are set forth on pages F-1 through
F-20 inclusive, found at the end of this report.
ITEM 8A. CONTROLS AND PROCEDURES.
As of May 31, 2004, PalWeb carried out an evaluation under the
supervision of PalWeb's Chief Executive Officer and Chief Financial Officer of
the effectiveness of the design and operation of PalWeb's disclosure controls
and procedures pursuant to the Securities Exchange Act Rules 13a-15(e) and
15d-15(e). Based on this evaluation and at such time, PalWeb's Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures as of May 31, 2004 were effective. However, as previously reported in
the Company's amended Quarterly Report on Form 10-QSB for the quarter ended
February 28, 2005, the Company recently failed to timely file certain Current
Reports on Form 8-K. In addition, the Company has filed a Notification of Late
Filing on Form 12b-25 in connection with its Quarterly Report on Form 10-QSB for
the quarter ended February 28, 2005, and its Annual Report on Form 10-KSB for
the year ended May 31, 2005. As a result of the foregoing, as of the date of
this filing, in the opinion of the Company's Chief Executive Officer and Chief
Financial Officer, there are material weaknesses in the Company's disclosure
controls and procedures and such disclosure controls and procedures were
ineffective.
Also as previously reported in its amended Quarterly Report on Form
10-QSB for the quarter ended February 28, 2005, in an effort to address the
deficiencies in the Company's disclosure controls and procedures, the Company
has:
14
o caused its outside legal counsel provide the Company's officers and
directors with a summary of the new Form 8-K requirements and other
reporting requirements and responsibilities applicable to public
companies;
o designated the Company's Chief Financial Officer as the
representative of the Company responsible for coordinating with the
Company's outside legal counsel in connection with determining if
any developments relating to the Company require a filing with the
SEC; and
o implemented new accounting software and hired additional accounting
and operational employees in an effort to relieve some of the
current burdens of the Company's Chief Financial Officer, which
will allow him to focus more time the Company's design and
operation of its disclosure controls and procedures.
During the quarter ended May 31, 2004, there was no change in the Company's
internal controls over financial reporting that has materially affected, or that
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Certificate of Ownership and Merger Merging PalWeb
Corporation, a Delaware corporation, into PalWeb Oklahoma
Corporation, an Oklahoma corporation, filed with the
Delaware Secretary of State on May 2, 2002 (incorporated
herein by reference to Exhibit 2.1 of PalWeb Corporation's
Form 8-K12G3 dated May 2, 2002, which was filed with the SEC
on May 24, 2002).
2.2 Certificate of Ownership and Merger Merging PalWeb
Corporation, a Delaware corporation, into PalWeb Oklahoma
Corporation, an Oklahoma corporation, filed with the
Oklahoma Secretary of State on May 2, 2002 (incorporated
herein by reference to Exhibit 2.2 of PalWeb Corporation's
Form 8-K12G3 dated May 2, 2002, which was filed with the SEC
on May 24, 2002).
3.1 Certificate of Incorporation of PalWeb Oklahoma Corporation
filed with the Oklahoma Secretary of State on May 2, 2002
(incorporated herein by reference to Exhibit 3.1 of PalWeb
Corporation's Form 8-K12G3 dated May 2, 2002, which was
filed with the SEC on May 24, 2002).
15
EXHIBIT NO. DESCRIPTION
----------- -----------
3.2 Bylaws of PalWeb Oklahoma Corporation as adopted on May 2,
2002 (incorporated herein by reference to Exhibit 3.2 of
PalWeb Corporation's Form 8-K12G3 dated May 2, 2002, which
was filed with the SEC on May 24, 2002).
4.1 Certificate of Incorporation of PalWeb Oklahoma Corporation
filed with the Oklahoma Secretary of State on May 2, 2002
(included in Exhibit 3.1).
4.2 Certificate of the Designation, Preferences, Rights and
Limitations of PalWeb Corporation's Series 2003 Cumulative
Convertible Senior Preferred Stock (incorporated herein by
reference to Exhibit 4.1 of PalWeb Corporation's Form 8-K
dated September 8, 2003, which was filed with the SEC on
September 23, 2003).
10.1 License Agreement by and between Westgate Capital Company,
L.L.C., and PalWeb Corporation dated April 20, 2001
(incorporated herein by reference to Exhibit 10.21 of PalWeb
Corporation's Form 10-KSB for the Fiscal Year Ended May 31,
2002, which was filed with the SEC on September 13, 2002).
10.2 Non Exclusive Distribution Agreement between PalWeb
Corporation and Bosh Material Handling Incorporated dated
August 5, 2002 (incorporated herein by reference to Exhibit
10.23 of PalWeb Corporation's Form 10-KSB for the Fiscal
Year Ended May 31, 2002, which was filed with the SEC on
September 13, 2002).
10.3** Form of Indemnity Agreement between Members of the Board of
Directors and PalWeb Corporation (incorporated herein by
reference to Exhibit 10.30 of PalWeb Corporation's Form
10-KSB for the Fiscal Year Ended May 31, 2002, which was
filed with the SEC on September 13, 2002).
10.4 Indemnity Agreement by and between The Union Group, Inc.,
and Cabec Energy Corp. dated August 31, 1998 (incorporated
herein by reference to Exhibit 10.6 of Amendment No. 3 to
PalWeb Corporation's Form 10-SB, which was filed on May 2,
2000).
10.5** Stock Option Plan of PalWeb Corporation (effective May 11,
2001), as amended (incorporated herein by reference to
Exhibit 10.32 of PalWeb Corporation's Form 10-KSB for the
Fiscal Year Ended May 31, 2002, which was filed with the SEC
on September 13, 2002).
10.6** Form of Non-Qualified Stock Option Agreement (incorporated
herein by reference to Exhibit 99.8 of PalWeb Corporation's
Form 10-KSB for the Fiscal Year Ended May 31, 2001, which
was filed with the SEC on September 13, 2001).
16
EXHIBIT NO. DESCRIPTION
----------- -----------
10.7** Form of Incentive Stock Option Agreement (incorporated
herein by reference to Exhibit 99.9 of PalWeb Corporation's
Form 10-KSB for the Fiscal Year Ended May 31, 2001, which
was filed with the SEC on September 13, 2001).
10.8** Form of Nonemployee Director Stock Option Agreement
(incorporated herein by reference to Exhibit 99.10 of PalWeb
Corporation's Form 10-KSB for the Fiscal Year Ended May 31,
2001, which was filed with the SEC on September 13, 2001).
10.9** Form of Employee Director Incentive Stock Option Agreement
(incorporated herein by reference to Exhibit 10.36 of PalWeb
Corporation's Form 10-KSB for the Fiscal Year Ended May 31,
2002, which was filed with the SEC on September 13, 2002).
10.10 Assignment and Indemnity Agreement between PalWeb
Corporation and Paul A. Kruger (regarding transfer of stock
of PP Financial, Inc.) dated May 30, 2002 (incorporated
herein by reference to Exhibit 10.39 of PalWeb Corporation's
Form 10-KSB for the Fiscal Year Ended May 31, 2002, which
was filed with the SEC on September 13, 2002).
10.11 Promissory Note in the amount of $500,000.00 executed by
PalWeb Corporation and Plastic Pallet Production, Inc., in
favor of Yorktown Management & Financial Services, Inc.,
dated December 4, 2002 (incorporated herein by reference to
Exhibit 10.1 of PalWeb Corporation's Form 10-QSB for the
Quarterly Period Ended November 30, 2002, which was filed
with the SEC on January 14, 2003).
10.12 Letter Agreement between PalWeb Corporation, Plastic Pallet
Production, Inc., and Paul A. Kruger dated January 10, 2003
(incorporated herein by reference to Exhibit 10.2 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
November 30, 2002, which was filed with the SEC on January
14, 2003).
10.13 Loan Agreement between PalWeb Corporation, Plastic Pallet
Production, Inc., and Paul A. Kruger dated January 10, 2003
(incorporated herein by reference to Exhibit 10.3 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
November 30, 2002, which was filed with the SEC on January
14, 2003).
10.14 Promissory Note in the amount of $7,000,000.00 executed by
PalWeb Corporation and Plastic Pallet Production, Inc., in
favor of Paul A. Kruger dated January 10, 2003 (incorporated
herein by reference to Exhibit 10.4 of PalWeb Corporation's
Form 10-QSB for the Quarterly Period Ended November 30,
2002, which was filed with the SEC on January 14, 2003).
17
EXHIBIT NO. DESCRIPTION
----------- -----------
10.15 Stock Pledge Agreement executed by PalWeb Corporation in
favor of Paul A. Kruger dated January 10, 2003 (incorporated
herein by reference to Exhibit 10.5 of PalWeb Corporation's
Form 10-QSB for the Quarterly Period Ended November 30,
2002, which was filed with the SEC on January 14, 2003).
10.16 Security Agreement between PalWeb Corporation, Plastic
Pallet Production, Inc., and Paul A. Kruger dated January
10, 2003 (incorporated herein by reference to Exhibit 10.6
of PalWeb Corporation's Form 10-QSB for the Quarterly Period
Ended November 30, 2002, which was filed with the SEC on
January 14, 2003).
10.17 Deed of Trust executed by Plastic Pallet Production, Inc.,
in favor of Paul A. Kruger dated January 10, 2003
(incorporated herein by reference to Exhibit 10.7 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
November 30, 2002, which was filed with the SEC on January
14, 2003).
10.18** Letter Agreement between PalWeb Corporation and Lyle W.
Miller dated January 10, 2003 (amending terms of outstanding
stock options) (incorporated herein by reference to Exhibit
10.8 of PalWeb Corporation's Form 10-QSB for the Quarterly
Period Ended November 30, 2002, which was filed with the SEC
on January 14, 2003).
10.19 Letter Agreement dated January 22, 2003 between Gravity
Management & Engineering Group, LLC and PalWeb Corporation
(incorporated herein by reference to Exhibit 10.48 of PalWeb
Corporation's Form 10-KSB for the Fiscal Year Ended May 31,
2003, which was filed with the SEC on September 15, 2003).
10.20 Asset Purchase Agreement between Greystone Plastics, Inc.
and Greystone Manufacturing, L.L.C. dated September 3, 2003
(incorporated herein by reference to Exhibit 10.1 of PalWeb
Corporation's Form 8-K dated September 8, 2003, which was
filed with the SEC on September 23, 2003).
10.21 Senior Secured Promissory Note in the amount of $5,000,000
payable to Greystone Plastics, Inc. (incorporated herein by
reference to Exhibit 10.2 of PalWeb Corporation's Form 8-K
dated September 8, 2003, which was filed with the SEC on
September 23, 2003).
10.22 Real Estate Note in the amount of $2,500,000 payable to
Greystone Plastics, Inc. (incorporated herein by reference
to Exhibit 10.3 of PalWeb Corporation's Form 8-K dated
September 8, 2003, which was filed with the SEC on September
23, 2003).
18
EXHIBIT NO. DESCRIPTION
----------- -----------
10.23 Wraparound Promissory Note in the amount of $799,454.06
payable to Bill Hamilton (incorporated herein by reference
to Exhibit 10.4 of PalWeb Corporation's Form 8-K dated
September 8, 2003, which was filed with the SEC on September
23, 2003).
10.24 Security Agreement between Greystone Plastics, Inc. and
Greystone Manufacturing, L.L.C. dated September 3, 2003
(incorporated herein by reference to Exhibit 10.5 of PalWeb
Corporation's Form 8-K dated September 8, 2003, which was
filed with the SEC on September 23, 2003).
10.25** Employment Agreement between Greystone Manufacturing, L.L.C.
and Bill Hamilton dated September 3, 2003 (incorporated
herein by reference to Exhibit 10.6 of PalWeb Corporation's
Form 8-K dated September 8, 2003, which was filed with the
SEC on September 23, 2003).
10.26 Asset Purchase Agreement between Plastic Pallet Production,
Inc. and 1607 Commerce Limited Partnership dated September
8, 2003 (incorporated herein by reference to Exhibit 10.7 of
PalWeb Corporation's Form 8-K dated September 8, 2003, which
was filed with the SEC on September 23, 2003).
10.27 Letter Agreement between Plastic Pallet Production, Inc. and
1607 Commerce Limited Partnership dated September 8, 2003
(incorporated herein by reference to Exhibit 10.8 of PalWeb
Corporation's Form 8-K dated September 8, 2003, which was
filed with the SEC on September 23, 2003).
10.28 Sale Agreement between Plastic Pallet Production, Inc. and
1607 Commerce Limited Partnership dated September 8, 2003
(incorporated herein by reference to Exhibit 10.9 of PalWeb
Corporation's Form 8-K dated September 8, 2003, which was
filed with the SEC on September 23, 2003).
10.29 Equipment Lease between 1607 Commerce Limited Partnership
and Plastic Pallet Production, Inc. dated September 8, 2003
(incorporated herein by reference to Exhibit 10.10 of PalWeb
Corporation's Form 8-K dated September 8, 2003, which was
filed with the SEC on September 23, 2003).
10.30 Lease Agreement between 1607 Commerce Limited Partnership
and Plastic Pallet Production, Inc. dated September 8, 2003
(incorporated herein by reference to Exhibit 10.11 of PalWeb
Corporation's Form 8-K dated September 8, 2003, which was
filed with the SEC on September 23, 2003).
10.31 Security Agreement among PalWeb Corporation, Plastic Pallet
Production, Inc., Greystone Manufacturing, L.L.C. and 1607
Commerce Limited Partnership dated September 8, 2003
(incorporated herein by reference to Exhibit 10.12 of PalWeb
Corporation's Form 8-K dated September 8, 2003, which was
filed with the SEC on September 23, 2003).
19
EXHIBIT NO. DESCRIPTION
----------- -----------
10.32 Guaranty of Obligations of Tenant Pursuant to Equipment
Lease by PalWeb Corporation and Greystone Manufacturing,
L.L.C. dated September 8, 2003 (incorporated herein by
reference to Exhibit 10.13 of PalWeb Corporation's Form 8-K
dated September 8, 2003, which was filed with the SEC on
September 23, 2003).
10.33 Guaranty of Obligations of Tenant Pursuant to Lease by
PalWeb Corporation and Greystone Manufacturing, L.L.C. dated
September 8, 2003 (incorporated herein by reference to
Exhibit 10.14 of PalWeb Corporation's Form 8-K dated
September 8, 2003, which was filed with the SEC on September
23, 2003).
10.34 Stock Pledge Agreement between PalWeb Corporation and 1607
Commerce Limited Partnership dated September 8, 2003
(incorporated herein by reference to Exhibit 10.15 of PalWeb
Corporation's Form 8-K dated September 8, 2003, which was
filed with the SEC on September 23, 2003). Employment
Agreement between PalWeb Corporation and Warren Kruger dated
August 13, 2003.
10.35** (incorporated herein by reference to Exhibit 10.35 of PalWeb
Corporation's Form 10-KSB for the Fiscal Year Ended May 31,
2004, which was filed with the SEC on August 30, 2004).
11.1 Computation of Loss Per Share is in Note 1 in the Notes to
the Financial Statements.
21.1 Subsidiaries of PalWeb Corporation (incorporated herein by
reference to Exhibit 21.1 of PalWeb Corporation's Form
10-KSB for the Fiscal Year Ended May 31, 2004, which was
filed with the SEC on August 30, 2004).
23.1 Consent of Murrell, Hall, McIntosh & Co., PLLP (submitted
herewith).
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, and Item 601(b)(31) of
Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (submitted herewith).
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, and Item 601(b)(31) of
Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (submitted herewith).
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (submitted herewith).
20
EXHIBIT NO. DESCRIPTION
----------- -----------
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (submitted herewith).
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this report.
(b) REPORTS ON FORM 8-K:
On March 24, 2004, PalWeb filed a Form 8-K under Item 12, Results of
Operations and Financial Conditions, attaching a press release of PalWeb, which
announced PalWeb's results for the third quarter ended February 29, 2004. No
financial statements were filed in connection with such Form 8-K.
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PALWEB CORPORATION
------------------
(Registrant)
Date: 09/13/05 /s/ Bobby L. Moore
-----------------------------------------------------
Bobby L. Moore, President and Chief Executive Officer
(Principal Executive Officer)
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.
Date: 09/13/05 /s/ Bobby L. Moore
-----------------------------------------------------
Bobby L. Moore, President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: 09/13/05 /s/ Robert H. Nelson
-----------------------------------------------------
Robert H. Nelson, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: 09/13/05 /s/ Marshall S. Cogan
-----------------------------------------------------
Marshall S. Cogan, Director
Date: 09/13/05 /s/ Warren F. Kruger
-----------------------------------------------------
Warren F. Kruger, Director
Date: 09/13/05 /s/ Robert B. Rosene, Jr.
-----------------------------------------------------
Robert B. Rosene, Jr., Director
22
INDEX TO FINANCIAL STATEMENTS
-----------------------------
FINANCIAL STATEMENTS OF PALWEB CORPORATION
Report of Independent Registered Public Accounting Firm.....................F-1
Consolidated Balance Sheet..................................................F-2
Consolidated Statements of Operations ......................................F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)........F-4
Consolidated Statements of Cash Flows ......................................F-5
Notes to Consolidated Financial Statements..................................F-6
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders
of PalWeb Corporation
We have audited the accompanying consolidated balance sheet (restated)
of PalWeb Corporation (an Oklahoma corporation) and its subsidiaries as of May
31, 2004, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows (restated 2004) for each of the years ended May
31, 2004 and 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). The Company is not required
to have, nor have we been engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of
PalWeb Corporation and its subsidiaries as of May 31, 2004, and the consolidated
results of their operations and cash flows for each of the years ended May 31,
2004 and 2003, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered
significant losses from operations. Substantial additional funding will be
required to implement its business plan and to attain profitable operations. The
lack of adequate funding to maintain working capital and stockholders' deficits
at May 31, 2004 raises substantial doubt about its ability to continue as a
going concern unless additional funds from outside sources, its president or
other board members are obtained. Management's plans in regard to these matters
are described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
As discussed in Note 18 to the consolidated financial statements, the
accompanying consolidated financial statements have been restated.
MURRELL, HALL, MCINTOSH & CO., PLLP
Norman, Oklahoma
August 30, 2005
F-1
PALWEB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
RESTATED (NOTE 18)
MAY 31, 2004
ASSETS
------
CURRENT ASSETS:
Cash $ 274,085
Accounts receivable 951,596
Inventory (Note 3) 521,376
------------
TOTAL CURRENT ASSETS 1,747,057
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation (Note 4) 6,589,028
OTHER ASSETS (Note 5 and 14) 6,140,874
------------
TOTAL ASSETS $ 14,476,959
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable (Note 6) $ 2,352,667
Current portion of long-term debt (Note 6) 1,503,612
Accounts payable and accrued expenses 1,578,917
Preferred dividends payable 60,582
------------
TOTAL CURRENT LIABILITIES 5,495,778
LONG-TERM DEBT (Note 6) 6,390,499
COMMITMENTS AND CONTINGENCIES (Note 15 and 16)
STOCKHOLDERS' EQUITY (Notes 2, 9 and 10):
Preferred stock, $0.0001 par value, 20,750,000
shares authorized, 50,000 shares outstanding 5
Common stock, $0.0001 par value, 5,000,000,000
authorized, 12,790,451 shares outstanding 1,279
Additional paid-in capital 48,265,496
Deficit (45,676,098)
------------
TOTAL STOCKHOLDERS' EQUITY 2,590,682
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,476,959
============
The accompanying notes are an integral part of this consolidated financial
statement.
F-2
PALWEB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31,
-----------------------------
2004 2003
------------ ------------
Restated
(Note 18)
Sales $ 6,964,943 $ 1,280,945
Cost of sales, including depreciation of
$357,952 and $165,736, respectively 6,768,426 2,438,342
------------ ------------
Gross profit (loss) 196,517 (1,157,397)
Expenses:
General and administrative 2,041,970 1,312,824
Impairment and relocation expenses 441,949 310,875
------------ ------------
Total expenses 2,483,919 1,623,699
------------ ------------
Operating loss (2,287,402) (2,781,096)
Other Income (Expense):
Other Income 12,134 --
Interest expense (699,661) (433,756)
------------ ------------
Net Loss (2,974,929) (3,214,852)
Preferred Dividends 660,171 900,166
------------ ------------
Net Loss Available to Common Stockholders $ (3,635,100) $ (4,115,018)
============ ============
LOSS AVAILABLE TO COMMON STOCKHOLDERS PER
COMMON SHARE (Note 1) $ (0.33) $ (0.79)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 11,026,000 5,201,000
============ ============
The accompanying notes are an integral part of this consolidated financial
statement.
F-3
PALWEB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
RESTATED (NOTE 18)
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------------------- --------------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES, May 31, 2002 750,000 75 4,691,625 469 40,732,767 (37,925,980) 2,807,331
Common stock in lieu
2003 preferred dividends -- -- 1,058,263 106 900,060 (900,166) --
2002 preferred dividends -- -- 132,150 13 211,427 211,440
Issuance of common stock -- -- 40,584 4 97,122 97,126
Options exercised -- -- 16,100 2 27,748 -- 27,750
Net loss -- -- -- -- -- (3,214,852) (3,214,852)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES, May 31, 2003 750,000 75 5,938,722 594 41,969,124 (42,040,998) (71,205)
Common stock in lieu of
preferred dividends -- -- 971,918 97 396,890 (396,987) --
Preferred dividends paid
or accrued -- -- -- -- -- (263,184) (263,184)
Stock issued in exchange
for debt -- -- 629,811 63 899,937 -- 900,000
Conversion of 2001
preferred Stock (750,000) (75) 5,250,000 525 (450) -- --
Issuance of 2003 preferred
stock 50,000 5 -- -- 4,999,995 -- 5,000,000
Net loss -- -- -- -- -- (2,974,929) (2,974,929)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES, May 31, 2004 50,000 $ 5 12,790,451 $ 1,279 $ 48,265,496 $(45,676,098) $ 2,590,682
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of this consolidated financial
statement.
F-4
PALWEB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31,
-----------------------------
2004 2003
------------ ------------
Restated
(Note 18)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,974,929) $ (3,214,852)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation and amortization 927,010 230,794
Loss on sale of equipment 121,321 --
Expenses paid by issuance of common stock -- 57,126
Impairment of investment -- 310,875
Changes in accounts receivable (603,752) (304,198)
Changes in inventory 389,051 (180,111)
Changes in other assets (26,000) (24,208)
Changes in accounts payable and accrued
expenses 668,482 440,265
Change in preferred dividends payable 60,582 --
Other (26,300) --
------------ ------------
Net cash used in continuing operations (1,464,535) (2,684,309)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (701,847) (1,474,475)
Acquisition of assets of Greystone
Plastics, Inc. (4,248,459) --
------------ ------------
Net cash used in investing activities (4,950,306) (1,474,475)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and advances payable 2,631,245 8,401,422
Payments on notes payable (685,343) (4,277,700)
Preferred dividends paid (263,184) --
Proceeds from issuance of common/preferred
stock 5,000,000 27,750
------------ ------------
Net cash provided by financing
activities 6,682,717 4,151,472
------------ ------------
NET INCREASE (DECREASE) IN CASH 267,876 (7,312)
CASH, beginning of period 6,209 13,521
------------ ------------
CASH, end of period $ 274,085 $ 6,209
============ ============
SUPPLEMENTAL INFORMATION (Note 12)
The accompanying notes are an integral part of this consolidated financial
statement.
F-5
PALWEB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
ORGANIZATION
------------
PalWeb Corporation ("PalWeb") through its wholly-owned subsidiaries
Plastic Pallet Production, Inc. ("PPP") and Greystone Manufacturing,
LLC ("GSM"), is engaged in the manufacture and marketing of plastic
pallets.
Effective June 25, 2002, PalWeb effected a reverse stock split of its
par value $0.0001, common stock whereby each stockholder received one
share for each fifty shares held. Fractional shares were rounded up to
one share. All previously reported per share common share data has been
restated to reflect the reverse split.
PRINCIPLES OF CONSOLIDATION
---------------------------
The accompanying consolidated financial statements include the accounts
of PalWeb and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
PRIOR YEAR FINANCIAL STATEMENTS
-------------------------------
The prior year statement of operations has been restated for
comparative purposes.
STATEMENT OF CASH FLOWS
-----------------------
PalWeb considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
USE OF ESTIMATES
----------------
The preparation of PalWeb's financial statements in conformity with
generally accepted accounting principles in the United States of
America requires PalWeb's management to make estimates and assumptions
that affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ materially from those
estimates.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------------------------------
PalWeb carries its accounts receivable at their face value less an
allowance for doubtful accounts. On a periodic basis, PalWeb evaluates
its accounts receivable and establishes an allowance for doubtful
accounts based on a combination of specific customer circumstances and
credit conditions and based on a history of
F-6
collections. The allowance for doubtful accounts at May 31, 2004 was
$69,727.
INVENTORY
---------
Inventory consists of finished pallets and raw materials and is stated
at the lower of cost (first-in, first-out) or market value.
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
PalWeb's property, plant and equipment is stated at cost. Depreciation
expense is computed on the straight-line over the estimated useful
lives or the units of production method, as follows:
Plant building ................................... 39 years
Production machinery equipment ................... 5-10 years or Unit
of Production
Office equipment & furniture & fixtures .......... 3- 5 years
The production equipment being amortized on the unit of production
method had a total cost of $633,924 at May 31, 2004.
Upon sale, retirement or other disposal, the related costs and
accumulated depreciation of items of property, plant or equipment are
removed from the related accounts and any gain or loss is recognized.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed comparing the estimated future
undiscounted cash flows associated with the asset to the assets
carrying amount. If the asset carrying amount exceeds the cash flows, a
write-down to market value or discounted cash flow value is required.
INVESTMENT
----------
PalWeb has a 20% ownership in Vimonta AG which is carried on the cost
basis of accounting since management has no board representation,
financial information or other influence on the operation of Vimonta
AG. The asset is valued at $5,000 and included in other assets.
GOODWILL
--------
Goodwill is reviewed annually for impairment relying on a number of
factors including operating results, business plans and future cash
flows. An impairment charge is recognized for any amount by which the
carrying value of goodwill exceed its fair value. Discounted cash flows
are used to establish fair values
F-7
INTANGIBLES
-----------
Customer contract - Customer contract consists of the value assigned to
the customer's purchase order from the acquisition of the assets of
Greystone Plastics, Inc. (Note 14). This intangible is being amortized
on the unit of production of method based on the total estimated unit
sales to the customer.
Patents - Amortization expense for the costs incurred by PalWeb to
obtain the patents on the modular pallet system and accessories is
computed on the straight-line method over the estimated life of 15-17
years.
STOCK OPTIONS
-------------
PalWeb applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related interpretations, in
accounting for its stock options. As such, compensation expense would
be 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 for stock-based employee compensation plans. As
allowed by SFAS No. 123, PalWeb has elected to continue to apply the
intrinsic value-based method of accounting under APB No. 25, and has
adopted the disclosure requirements of SFAS No. 123 as reflected in
Note 10.
RECOGNITION OF REVENUES
-----------------------
Revenue is recognized when the product is shipped.
RESEARCH AND DEVELOPMENT COSTS
------------------------------
Research and Development costs are charged to operations in the period
incurred.
INCOME TAXES
------------
PalWeb accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based in the difference
between the financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-8
LOSS PER SHARE
--------------
Basic loss per share is computed by dividing the loss available to
common stockholders by the weighted average number of common shares
outstanding for the year. In arriving at income (loss) available to
common stockholders, preferred stock dividends are added to the net
loss for the year. Convertible preferred stock and stock options are
not considered as their effect is antidilutive.
RECENT PRONOUNCEMENTS
---------------------
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No.
104, REVENUE RECOGNITION. This SAB revises or rescinds portions of the
revenue recognition interpretive guidance included in the SAB
codification to make it consistent with current authoritative
accounting guidance. The principal revisions relate to revenue
recognition guidance no longer necessary due to developments in U.S.
generally accepted accounting principles. The pronouncement had no
impact on the Company's historical financial statements.
FASB Interpretation No. 46 (revised December 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ACCOUNTING RESEARCH
BULLETIN NO. 51, addresses consolidation by business enterprises of
variable interest entities. PalWeb has no variable interest entities
and accordingly this statement has on impact on the company's
historical financial statements.
NOTE 2. CONTINUATION AS A GOING CONCERN
-------------------------------
The accompanying financial statements have been prepared assuming that
PalWeb will continue as a going concern. PalWeb has suffered
significant losses from operations. Currently, management believes that
PalWeb has the capacity to produce sufficient plastic pallets to
achieve profitability; however, sales have not reached such level. To
date, PalWeb has received substantial advances from investors but will
require additional substantial funding in order to attain its business
plan and have an opportunity to achieve profitable operations.
Management has been successful in financing its operations primarily
through short-term loans and personal guarantees on bank loans by two
of its principal stockholders, Paul Kruger and Warren Kruger.
Management continues to seek long-term and/or permanent financing.
Neither the receipt of additional funding in adequate amounts nor the
successful implementation of its business plan can be assured. The
combination of these factors raises substantial doubt about PalWeb's
ability to continue as a going concern. It is management's opinion that
(1) based upon expressions of interest from potential customers,
adequate sales will be attained to reach a profitable status, (2) the
funding for working capital required to reach necessary production
levels will be obtained and (3) PalWeb will continue as a going
concern.
F-9
NOTE 3. INVENTORY
---------
Inventory at May 31, 2004 consists of:
Raw materials .......................................... $ 432,662
Finished goods ......................................... 88,714
------------
Total inventory ........................................ $ 521,376
============
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
A summary of the property, plant and equipment at May 31, 2004, is as
follows:
Production machinery and equipment ..................... $ 4,681,433
Building and land ...................................... 2,510,500
Furniture and fixtures ................................. 138,246
------------
7,330,179
Less: accumulated depreciation ......................... (741,151)
------------
$ 6,589,028
============
Depreciation expense for the years ended May 31, 2004 and 2003 is
$377,788 and $186,388, respectively.
NOTE 5. OTHER ASSETS
------------
At May 31, 2004, other assets consist of:
Goodwill ............................................... $ 3,309,103
Customer's contract, net of accumulated amortization
of $514,002 ......................................... 2,341,330
Note receivable ........................................ 314,000
Patents, net of accumulated amortization of $10,689 .... 160,841
Investments ............................................ 5,000
Deposits and other ..................................... 10,600
------------
Total Other Assets .............................. $ 6,140,874
============
Amortization of intangible costs was $549,222 and $44,406 in 2004 and
2003, respectively.
F-10
NOTE 6. LONG-TERM DEBT AND NOTES PAYABLE
--------------------------------
Long-term debt at May 31, 2004 consists of the following:
Note payable to Greystone Plastics, Inc.,
7.5% interest, due September 7, 2008,
secured by equipment with net book
value of $3,149,270 $ 4,500,000
Note payable to Greystone Plastics, Inc.,
7% interest, due September 7, 2018, secured
by land and building with net book value of
$2,215,207 2,402,747
Note payable to Bill Hamilton, 6% interest,
due February, 2008 680,474
Note payable to Whaco Plastics, 7.5% interest,
due January, 2009 264,413
Other notes payable 46,477
------------
Total 7,894,111
Less: Current portion 1,503,612
------------
Long-term debt $ 6,390,499
============
The notes payable to Greystone Plastics, Inc. and Bill Hamilton were
debt incurred pursuant to the acquisition of the assets of Greystone
Plastics by PalWeb's subsidiary Greystone Manufacturing, LLC. Bill
Hamilton commenced employment with PalWeb as of the date of the
acquisition in the capacity of Vice President of Production.
Whaco Plastics is an entity owned by Bill Hamilton, Vice President of
Production. The issuance of the note for purchase of equipment is
described in Note 7,"Related Party Transactions."
Maturities of long term debt for the five years after May 31, 2004 are
$1,503,612, $1,405,682, $1,411,835, $1,376,592, $626,983, and
$1,569,407 thereafter.
At May 31, 2004, notes payable of $2,352,667 consist of a note payable
to a bank in the amount of $899,980, prime rate of interest plus 1%,
due October 2004, a note payable of $108,186 to Paul Kruger, 7.5%
interest and due October, 2004, and notes payable of $276,101, due
October 2004, and advances of $1,068,400, all at 7.5% interest, from
entities owned or controlled by Warren Kruger, President and Chief
Executive Officer.
F-11
NOTE 7. RELATED PARTY TRANSACTIONS
--------------------------
Bill Hamilton, Vice President of Production, owns a trucking company,
Greystone-Bill Hamilton Trucking, that provided freight services
totaling $699,966 for the year ended May 31, 2004. PalWeb believes that
the freight rates are equivalent to an arms-length transaction.
GSM paid or accrued fees totaling $246,870 for grinding services to
Whaco Plastics, an entity also owned by Bill Hamilton. A portion of the
fees paid to Whaco Plastics is applied to the purchase of a
grinder/granulator at a cost of $280,000, amortized over five years at
7.5% interest.
Until September 8, 2003, PalWeb had a $7,000,000 note payable to Paul
Kruger, a significant stockholder, 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 for agreed upon prices its plant for $1,350,000 and
certain production equipment for $5,710,698, including expenses, to
1607 Commerce Limited Partnership, an entity owned by Paul Kruger, in
exchange for the $7,000,000 note payable and accrued interest of
$60,698, which resulted in no gain or loss on the transaction. 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 March 8, 2004. The total cost of
the lease, $5,952,000 ($48,000 per month for 124 months), will be
amortized to cost of sales using the unit of production method so the
cost is allocated pro rata based on the estimated number of pallets to
be produced during the term of the lease. During 2004, the total
amounts paid to 1607 Commerce Limited Partnership under these leases
totaled $255,480.
Interest paid or accrued on indebtedness to Paul Kruger was $133,824
and $262,886 in 2004 and 2003, respectively, including $23,376 in 2003
for which Paul Kruger received 15,584 shares of PalWeb common stock in
exchange for the debt. The exchange rate of $1.50 per share was based
on the market price of the common stock on the date of authorization.
Interest paid or accrued on notes and advances to entities owned or
controlled by Warren Kruger, President and CEO, total $56,715 and
$23,216 in 2004 and 2003, respectively. Effective May 1, 2004, PalWeb
commenced reimbursing an entity owned by Warren Kruger for office rent
at $1,500 per month.
PalWeb has a contract with a consulting engineering firm for the design
and supervision of the construction of the new production equipment.
The president of the consulting engineers is a Director of PalWeb. Fees
paid to the engineering firm were $4,110 and
F-12
$124,951 in 2004 and 2003, respectively. In addition, PalWeb paid the
director, individually, $22,500 and $7,500 in consulting fees during
2004 and 2003, respectively.
A former director of PalWeb provided legal services through a law firm
of which he is of counsel. The fees for 2004, through the date of his
resignation, and 2003 were $36,009 and $67,519, respectively.
See Note 15, Commitments and Contingencies, regarding a licensing
agreement between PalWeb and Westgate Capital, LLC, an entity owned by
directors Warren Kruger and William Pritchard.
Effective June 23, 2003, PalWeb entered into an agreement with
ForcePro, LLC, for the right to market and sell PalWeb's injection
molding machine, PIPER 600, for a royalty of 5% of the sales price or
gross lease payment. Bryan Kirchmer, a director of PalWeb, is a
President of ForcePro, LLC.
See also Note 9, "Stockholders' Equity."
NOTE 8. FEDERAL INCOME TAXES
--------------------
Deferred taxes as of May 31, 2004 and 2003 are as follows:
2004 2003
------------ ------------
Deferred Tax Assets:
Net operating loss $ 6,847,091 $ 6,839,880
Amortization of intangible costs 82,694 --
Loss on impairments 1,057,740 1,151,070
Accrued expenses 151,148 --
Allowance for doubtful accounts 23,707 --
------------ ------------
Total deferred tax assets 8,162,380 7,990,950
Deferred Tax Liabilities:
Depreciation and amortization,
tax over financial (244,806) (623,359)
------------ ------------
7,917,574 7,367,591
Less: Valuation allowance (7,917,574) (7,367,591)
------------ ------------
Total $ -- $ --
============ ============
Management has provided a valuation allowance for the full amount of
the deferred tax asset as PalWeb continues to incur substantial losses
from its operations. While management projects that the products being
developed will be profitable and the deferred asset will ultimately be
realized, PalWeb has not yet reached sufficient reliability on product
acceptance and marketability to reduce the valuation allowance.
F-13
The net change in deferred taxes is as follows:
YEAR ENDED MAY 31,
-----------------------------
2003 2002
------------ ------------
Net operating losses $ 7,211 $ 1,541,712
Depreciation, tax over financial 394,541 (475,306)
Amortization of intangible costs 66,706
Accrued expenses 151,148 --
Impairments (93,330) --
Allowance for doubtful accounts 23,707 --
Change in Valuation allowance (549,983) (1,066,406)
------------ ------------
Tax Benefit $ -- $ --
============ ============
PalWeb's effective tax rate differs from the federal statutory rate as
follows:
YEAR ENDED MAY 31,
-----------------------------
2004 2003
------------ ------------
Tax benefit using statutory tax rate $ 1,013,602 $ 1,093,050
Effect of state tax rates -- 96,446
Effect of rate adjustment (272,601) --
Net change in valuation allowance (549,983) (1,066,406)
Other (191,018) (123,090)
------------ ------------
Tax benefit, per financial statements $ -- $ --
============ ============
PalWeb has a net operating loss (NOL) for Federal income tax purposes
as of May 31, 2004 of $20,138,000 as follows:
YEAR OF
AMOUNT EXPIRATION
----------- ----------
$ 1,290,000 2012
1,291,000 2018
5,871,000 2019
2,634,000 2020
883,000 2021
2,370,000 2022
4,167,000 2023
1,632,000 2024
NOTE 9. STOCKHOLDERS' EQUITY
--------------------
Effective June 25, 2002, PalWeb declared a 50 for 1 reverse split of
its common stock. References to common shares have been adjusted for
the reverse stock split.
In September, 2003, PalWeb issued 50,000 shares of Series 2003,
cumulative, convertible preferred stock, par value $0.0001, to Paul
F-14
Kruger for a total purchase price of $5,000,000. Each share of the
preferred stock has a stated value of $100.00 and a dividend rate equal
to the prime rate of interest plus 3.25% and may be converted into
common stock at the conversion rate of $1.50 per share or an aggregate
of 3,333,333 shares of common stock. The holder of the 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.
In September, 2003, the holders of the outstanding Series 2001
cumulative, convertible preferred stock, 750,000 shares, converted the
preferred stock into 5,250,000 shares of common stock for an exchange
rate of $1.429 per share.
In September, 2003, Warren Kruger, President and CEO, exchanged
$900,000 of debt for 629,811 shares of common stock at a rate of $1.429
per share.
The board of directors authorized issuance of common stock in lieu of
cash to pay the dividends on the Series 2001 preferred stock. The rate
of exchange is based on the market value of the stock on the date
authorized. The issuances are as follows:
PREFERRED COMMON STOCK RATE PER SHARE
DIVIDEND DATE DIVIDEND ISSUED OF COMMON
------------- --------- ------------ -------------
June 30, 2002 $225,000 140,625 $1.60
September 30, 2002 $223,934 149,289 $1.50
December 31, 2002 $226,849 360,078 $0.63
March 31, 2003 $224,384 407,971 $0.55
June 30, 2003 $224,384 560,959 $0.40
September 8, 2003 $172,603 410,959 $0.40
NOTE 10. STOCK OPTIONS
-------------
PalWeb has a stock option plan that provides for the granting of
options to key employees and non-employee directors. The options are to
purchase common stock at not less than fair market value at the date of
the grant. The maximum number of shares of common stock for which
options may be granted is 20,000,000 of which 18,065,000 are available
for grant as of May 31, 2004. Stock options generally expire in ten
years from date of grant or upon termination of employment and are
generally exercisable one year from date of grant in cumulative annual
installments of 25%, except that the options granted in fiscal 2001
were 100% vested at the date of grant.
F-15
Following is a summary of option activity for the three years ended May
31, 2004:
WEIGHTED
AVERAGE
SHARES EXERCISE
(000'S) PRICE
------------ ------------
Options outstanding at May 31, 2001 190 $ 2.00
Options granted 690 3.18
------------ ------------
Options outstanding at May 31, 2002 880 2.92
Options granted 760 0.88
Options exercised (25) 2.00
Options cancelled (30) 2.00
------------ ------------
Options outstanding at May 31, 2003 1,585 1.96
Options granted 350 0.54
------------ ------------
Options outstanding at May 31, 2004 1,935 $ 1.68
============ ============
Exercisable as of May 31, 2002 190 $ 2.00
============ ============
Exercisable as of May 31, 2003 555 $ 2.70
============ ============
Exercisable as of May 31, 2004 1,131 $ 2.16
============ ============
With respect to options outstanding at May 31, 2004:
WEIGHTED WEIGHTED
OPTIONS AVERAGE AVERAGE
RANGE OUTSTANDING LIFE PRICE EXERCISABLE
------------ ----------- --------- -------- -----------
$0.42-$0.65 860,000 7.3 years $0.51 287,500
$1.429-$1.60 250,000 6.5 years $1.57 138,750
$2.00 135,000 4.3 years $2.00 135,000
$3.125-$4.00 690,000 6.3 years $3.17 570,000
--------- ---------
Total 1,935,000 6.6 years $1.68 1,131,250
PalWeb applies APB Opinion No. 25 in accounting for its stock options
and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had PalWeb determined
compensation cost at the grant date based on fair value under SFAS No.
123, PalWeb's net loss would have been increased to the pro forma
amount indicated below:
F-16
2004 2003
------------ ------------
Net loss to common shareholders:
As reported $ (3,635,100) $ (4,115,018)
Pro forma $ (3,654,691) $ (4,230,753)
Per share:
As reported $ (0.33) $ (0.79)
Pro Forma $ (0.33) $ (0.81)
The fair value of the options used to compute the compensation cost is
estimated using the Black-Scholes option pricing model using the
following assumptions:
Dividend Yield None
Expected Volatility 1.36
Risk Free Interest Rate 4%
Expected Holding Period 4 years
NOTE 11. FINANCIAL INSTRUMENTS
---------------------
PalWeb's financial instruments consist principally of accounts payable,
accrued liabilities and notes and mortgages payable. Management
estimates the market value of the notes and mortgage payable based on
expected cash flows and believes these market values approximate
carrying values at May 31, 2004 and 2003.
NOTE 12. SUPPLEMENTAL INFORMATION OF CASH FLOWS
--------------------------------------
Supplemental information of cash flows for the years ended May 31:
2004 2003
------------ ------------
Non-cash activities:
Common stock issuances for:
Retirement of debt $ 900,000 $ 97,126
Dividends on preferred stock 396,987 1,111,606
Debt issued in acquisition of assets
of Greystone Plastics, Inc. 8,299,454 --
Retirement of debt in exchange for
property and equipment 7,060,698 --
Note receivable received on sale of
equipment 314,000 --
Interest paid 599,792 475,835
F-17
NOTE 13. OPERATING LEASES
----------------
Rental expense on operating leases totaled $254,480 and $212,538 during
2004 and 2003. Commitments for operating leases for the five years
after May 31, 2004 are $788,640, $629,160, $576,000, $576,000, and
$576,000 and $2,976,000 thereafter.
NOTE 14. ACQUISITION
-----------
Effective September 8, 2003, PalWeb acquired substantially 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, Greystone Manufacturing, L.L.C., an Oklahoma limited liability
company. The purchase price for the assets was $12,500,000, of which
$4,200,546 was paid in cash and $8,299,454 was paid by issuing the
following notes: a $5,000,000 note payable by Greystone Manufacturing,
L.L.C. to Greystone Plastics, Inc. at 7.5% interest, due October 1,
2008; a $2,500,000 note payable by Greystone Manufacturing, L.L.C. to
Greystone Plastics, Inc. at 7.5% interest, due October 1, 2018; and a
$799,454 note payable by Greystone Manufacturing, L.L.C. to Bill
Hamilton, one of the owners of Greystone Plastics, Inc, at 6% interest,
due February, 2008. The cash payment was financed through the issuance
of Series 2003 cumulative convertible preferred stock in the amount of
$5,000,000 (see Note 9, "Stockholders' Equity"). The acquisition cost
of $12,500,000 plus closing costs of $47,913 consisted of inventory of
$499,870, building and equipment of $5,735,695, intangibles (patent and
customer contracts) of $3,003,245 and goodwill of $3,309,103.
NOTE 15. CONCENTRATIONS OF CREDIT RISK
-----------------------------
Financial instruments that potentially subject PalWeb to concentrations
of credit risk consist principally of cash deposits in excess of
federally insured limits. As of May 31, 2004, PalWeb's bank balances
exceeded federally insured limits by $174,085.
NOTE 16. COMMITMENTS AND CONTINGENCIES
-----------------------------
In April 2001, PalWeb entered into a Licensing Agreement with Westgate
Capital, LLC ("WCC"), an entity owned by Warren Kruger and William
Pritchard, providing PalWeb the exclusive right and license to use fire
retardancy technology then being developed under the direction and
expense of WCC. The Licensing Agreement was negotiated and executed
prior to Warren Kruger, William Pritchard or entities which they are
affiliated became directors or beneficial owners of 10% of more of
PalWeb's common stock in January 2002. Under the agreement, PalWeb must
pay the greater of 2.5% of gross sales of UL listed pallets using fire
retardant technology or a minimum monthly royalty of $10,000. The
agreement also provided that in the event that cumulative payments to
WCC total $250,000 during the first two years, WCC would convey the
ownership of the technology process to
F-18
PalWeb subject to the 2.5% royalty payment. Subsequent to the execution
of the original agreement which provided for a "coating" process
technology, the fire retardancy process changed to a chemical additive
which WCC and PalWeb incorporated in the manufacturing process and used
to successfully obtain the UL listing. As of May 31, 2004, no minimum
or other royalties have been paid or accrued by PalWeb. However, PalWeb
has recorded expenses of approximately $126,000 that are associated
with the license agreement. WCC has not asserted that PalWeb is in
default under the license agreement, and WCC has indicated that it has
no current intentions of asserting any default by PalWeb under such
agreement. PalWeb is exploring the possibility of purchasing the
technology from WCC.
PalWeb derives, and expects that in the foreseeable future it will
continue to derive, a substantial amount of its revenue from a few
large customers of which 2004 sales totaling $5,940,991 came from one
customer. The 2003 sales included amounts of $301,000 and $271,227 from
individual customers. There is no assurance that PalWeb will retain
these customers' business at the same level, or at all. The loss of a
material amount of business from any one of these customers could have
a material adverse effect on PalWeb.
NOTE 18. RESTATEMENT OF FINANCIAL STATEMENTS
-----------------------------------
On August 26, 2005, PalWeb's Board of Directors concluded that the
accounting treatment for the acquisition of the assets of Greystone
Plastics, Inc., as of September 8, 2003, should have provided for an
allocation of a portion of the purchase price to place a value on the
customer's purchase order in effect at the time of the acquisition.
Greystone has calculated this value, $2,855,332, based on the estimated
present value of the future cash flows to be derived from sales to such
customer. Further, the accounting treatment for the value of the
customer's purchase order should provide for the amortization of such
cost over the estimated life based on unit sales. The financial
statements for the year ended May 31, 2004 are restated to include
amortization expense in the amount of $514,002 on the value placed on
the customer contract; such amortization expense in included under
"General and administrative expense," in PalWeb's statement of
operations. The net loss available to common stockholders as reported
on PalWeb's Form 10-KSB for May 31, 2004 and Form 10-QSB for the first
three quarters of fiscal year 2004 is restated to reflect the related
amortization expense, as follows:
F-19
AS REPORTED AS RESTATED
----------------------------- -----------------------------
PERIOD AMOUNT PER SHARE AMOUNT PER SHARE
-------------------------- ------------ ------------ ------------ ------------
Year ended May 31, 2004 $ (3,121,098) $ (0.28) $ (3,635,100) $ (0.33)
February 28, 2004:
Nine months then ended $ (1,602,293) $ (0.15) $ (1,931,923) $ (0.18)
Three months then ended (229,635) (0.02) (409,279) (0.03)
November 30, 2003:
Six months then ended (1,372,239) (0.15) (1,522,225) (0.16)
Three months then ended (546,969) (0.04) (696,955) (0.06)
August 31, 2003:
Three months then ended (825,670) (0.13) (825,670) (0.13)
F-20