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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, 2005
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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:
Title of each class Name of each exchange
on which registered
NONE NONE
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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, 2005, was $9,305,534.
As of August 25, 2005, 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 $1,887,851.
As of August 18, 2005, the issuer had outstanding a total of 24,061,201 shares
of its $0.0001 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
2
GREYSTONE LOGISTICS, INC.
FORM 10-KSB
TABLE OF CONTENTS
PART II
Item 7. Financial Statements ............................. 4
PART III
Item 13. Exhibits ......................................... 4
3
EXPLANATORY NOTE
This Form 10-KSB/A is being filed by Greystone Logistics, Inc. (the
"Company"), as Amendment No. 1 (the "Amendment") to the Company's Annual Report
on Form 10-KSB for the fiscal year ended May 31, 2005 (the "Prior Form 10-KSB"),
to amend Part II, Item 7 and Part III, Item 13 of the Prior Form 10-KSB. In
general, the Amendment is being filed to revise notes 16 and 18 to the financial
statements contained in the Prior Form 10-KSB. Although the Amendment amends and
restates Part II, Item 7 and Part III, Item 13 of the Prior Form 10-KSB in their
entirety, the information contained herein has not been updated to reflect
events or developments that may have occurred subsequent to May 31, 2005.
PART II.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of Greystone are set forth on pages F-1
through F-22 inclusive, found at the end of this report.
ITEM 13. 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 the Company'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 the Company'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 the Company's Form 8-K12G3 dated May 2,
2002, which was filed with the SEC on May 24, 2002).
3.2 Bylaws of PalWeb Oklahoma Corporation as adopted on May 2, 2002
(incorporated herein by reference to Exhibit 3.2 of the Company'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
EXHIBIT
NO. DESCRIPTION
------- -----------
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 the
Company's Form 8-K dated September 8, 2003, which was filed with the
SEC on September 23, 2003).
4.3 Certificate of Ownership and Merger Merging Greystone Logistics, Inc.,
into PalWeb Corporation filed with the Oklahoma Secretary of State on
March 18, 2005 (incorporated herein by reference to Exhibit 4.1 of the
Company's Form 8-K dated March 18, 2005, which was filed with the SEC
on March 24, 2005).
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 the Company'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 the Company'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 the Company'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 the Company'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 the
Company'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 the Company's Form 10-KSB for the Fiscal
Year Ended May 31, 2001, which was filed with the SEC on September 13,
2001).
10.7** Form of Incentive Stock Option Agreement (incorporated herein by
reference to Exhibit 99.9 of the Company's Form 10-KSB for the Fiscal
Year Ended May 31, 2001, which was filed with the SEC on September 13,
2001).
5
EXHIBIT
NO. DESCRIPTION
------- -----------
10.8** Form of Nonemployee Director Stock Option Agreement (incorporated
herein by reference to Exhibit 99.10 of the Company'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 the Company'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 the Company 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 the
Company's Form 10-KSB for the Fiscal Year Ended May 31, 2002, which was
filed with the SEC on September 13, 2002).
10.11 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 the Company'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 dated January 22, 2003 between Gravity Management &
Engineering Group, LLC and PalWeb Corporation (incorporated herein by
reference to Exhibit 10.48 of the Company's Form 10-KSB for the Fiscal
Year Ended May 31, 2003, which was filed with the SEC on September 15,
2003).
10.13 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 The Company's Form 8-K dated September 8,
2003, which was filed with the SEC on September 23, 2003).
10.14 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 The Company's Form 8-K dated September 8, 2003, which was filed
with the SEC on September 23, 2003).
10.15 Real Estate Note in the amount of $2,500,000 payable to Greystone
Plastics, Inc. (incorporated herein by reference to Exhibit 10.3 of The
Company's Form 8-K dated September 8, 2003, which was filed with the
SEC on September 23, 2003).
6
EXHIBIT
NO. DESCRIPTION
------- -----------
10.16 Wraparound Promissory Note in the amount of $799,454.06 payable to Bill
Hamilton (incorporated herein by reference to Exhibit 10.4 of The
Company's Form 8-K dated September 8, 2003, which was filed with the
SEC on September 23, 2003).
10.17 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 The Company's Form 8-K dated September 8,
2003, which was filed with the SEC on September 23, 2003).
10.18** Employment Agreement between Greystone Manufacturing, L.L.C. and Bill
Hamilton dated September 3, 2003 (incorporated herein by reference to
Exhibit 10.6 of The Company's Form 8-K dated September 8, 2003, which
was filed with the SEC on September 23, 2003).
10.19 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 The Company's Form 8-K dated
September 8, 2003, which was filed with the SEC on September 23, 2003).
10.20 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 The Company's Form 8-K dated
September 8, 2003, which was filed with the SEC on September 23, 2003).
10.21 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 The Company's Form 8-K dated
September 8, 2003, which was filed with the SEC on September 23, 2003).
10.22 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 the Company's Form 8-K dated September 8,
2003, which was filed with the SEC on September 23, 2003).
10.23 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 the Company's Form 8-K dated September 8,
2003, which was filed with the SEC on September 23, 2003).
10.24 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 the Company's Form 8-K dated September 8, 2003,
which was filed with the SEC on September 23, 2003).
7
EXHIBIT
NO. DESCRIPTION
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10.25 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 the Company's
Form 8-K dated September 8, 2003, which was filed with the SEC on
September 23, 2003).
10.26 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 the Company's
Form 8-K dated September 8, 2003, which was filed with the SEC on
September 23, 2003).
10.27 Stock Pledge Agreement between PalWeb Corporation and 1607 Commerce
Limited Partnership dated September 8, 2003 (incorporated herein by
reference to Exhibit 10.15 of the Company'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
10.28** (incorporated herein by reference to Exhibit 10.35 of the Company's
Form 10-KSB for the Fiscal Year Ended May 31, 2004, which was filed
with the SEC on August 30, 2004).
10.29** Employment Agreement dated as of August 1, 2004, by and between PalWeb
Corporation and Marshall S. Cogan (incorporated herein by reference to
Exhibit 10.1 of the Company's Form 10-QSB for the Quarterly Period
Ended November 30, 2004, which was filed with the SEC on January 19,
2005).
10.30** Employment Agreement dated as of November 1, 2004, by and between
PalWeb Corporation and Robert H. Nelson (incorporated herein by
reference to Exhibit 10.2 of the Company's Form 10-QSB for the
Quarterly Period Ended November 30, 2004, which was filed with the SEC
on January 19, 2005).
10.31 Form of Securities Purchase Agreement entered into between PalWeb
Corporation and certain accredited investors in connection with
November 2004 private placement (incorporated herein by reference to
Exhibit 10.3 of the Company's Form 10-QSB for the Quarterly Period
Ended November 30, 2004, which was filed with the SEC on January 19,
2005).
10.32 Letter Agreement dated January 3, 2005, by and between Greystone
Manufacturing, L.L.C., and Greystone Plastics, Inc. (incorporated
herein by reference to Exhibit 10.4 of the Company's Form 10-QSB for
the Quarterly Period Ended November 30, 2004, which was filed with the
SEC on January 19, 2005).
8
EXHIBIT
NO. DESCRIPTION
------- -----------
10.33 Loan Agreement dated March 4, 2005, by and among Greystone
Manufacturing, L.L.C., GLOG Investment, L.L.C., The F&M Bank & Trust
Company and PalWeb Corporation (incorporated herein by reference to
Exhibit 10.1 of the Company's Form 8-K dated March 4, 2005, which was
filed with the SEC on March 10, 2005).
10.34 Promissory Note dated November 30, 2004, in the amount of $1,500,000
issued by Greystone Manufacturing, L.L.C., to The F&M Bank & Trust
Company (incorporated herein by reference to Exhibit 10.2 of the
Company's Form 8-K dated March 4, 2005, which was filed with the SEC on
March 10, 2005).
10.35 Term Note dated March 4, 2005, in the amount of $5,500,000 issued by
Greystone Manufacturing, L.L.C., to The F&M Bank & Trust Company
(incorporated herein by reference to Exhibit 10.3 of the Company's Form
8-K dated March 4, 2005, which was filed with the SEC on March 10,
2005).
10.36 Security Agreement dated March 4, 2005, by and between Greystone
Manufacturing, L.L.C., and The F&M Bank & Trust Company (incorporated
herein by reference to Exhibit 10.4 of the Company's Form 8-K dated
March 4, 2005, which was filed with the SEC on March 10, 2005).
10.37 Mortgage Agreement dated March 4, 2005, by and between Greystone
Manufacturing, L.L.C., and The F&M Bank & Trust Company (incorporated
herein by reference to Exhibit 10.5 of the Company's Form 8-K dated
March 4, 2005, which was filed with the SEC on March 10, 2005).
10.38 Guaranty of PalWeb Corporation dated March 4, 2005 (incorporated herein
by reference to Exhibit 10.6 of the Company's Form 8-K dated March 4,
2005, which was filed with the SEC on March 10, 2005).
10.39 Industrial Lease dated as of July 1, 2004, by and between Greystone
Properties, LLC, and Greystone Manufacturing, L.L.C. (incorporated
herein by reference to Exhibit 10.1 of the Company's Form 10-QSB for
the Quarterly Period Ended February 28, 2005, which was filed with the
SEC on April 20, 2005).
10.40 Equipment Rental Contract dated as of November 1, 2004, by and between
NYOK Partners and Greystone Manufacturing, L.L.C. relating to certain
grinding equipment (incorporated herein by reference to Exhibit 10.2 of
the Company's Form 10-QSB for the Quarterly Period Ended February 28,
2005, which was filed with the SEC on April 20, 2005).
9
EXHIBIT
NO. DESCRIPTION
------- -----------
10.41 Equipment Rental Contract dated as of November 1, 2004, by and between
NYOK Partners and Greystone Manufacturing, L.L.C. relating to plastic
injection molding machine (incorporated herein by reference to Exhibit
10.3 of the Company's Form 10-QSB for the Quarterly Period Ended
February 28, 2005, which was filed with the SEC on April 20, 2005).
10.42** Employment Agreement dated as of August 15, 2005, between Greystone
Logistics, Inc. and Bobby L. Moore (incorporated herein by reference to
Exhibit 10.1 of the Company's Form 8-K dated August 11, 2005, which was
filed with the SEC on August 12, 2005).
10.43 License Agreement by and between Westgate Capital Company, L.L.C., and
PalWeb Corporation dated March 1, 2005 (incorporated herein by
reference to Exhibit 10.43 of the Company's Form 10-KSB for the Fiscal
Year Ended May 31, 2005, which was filed with the SEC on September 15,
2005).
11.1 Computation of Loss Per Share is in Note 1 in the Notes to the
Financial Statements.
21.1 Subsidiaries of Greystone Logistics, Inc. (incorporated herein by
reference to Exhibit 10.43 of the Company's Form 10-KSB for the Fiscal
Year Ended May 31, 2005, which was filed with the SEC on September 15,
2005).
23.1 Consent of Murrell, Hall, McIntosh & Co., PLLP (submitted herewith).
31.1 Certification of Chief Financial Officer (and interim principal
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).
32.1 Certification of Chief Financial Officer (and interim principal
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).
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this report.
10
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.
GREYSTONE LOGISTICS, INC.
(Registrant)
Date: 01/10/06 /s/ Robert H. Nelson
-------------------------------------------
Robert H. Nelson, Chief Financial Officer
(Principal Financial Officer, Principal
Accounting Officer and Interim 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: 01/10/06 /s/ Robert H. Nelson
-------------------------------------------
Robert H. Nelson, Chief Financial Officer
(Principal Financial Officer, Principal
Accounting Officer and Interim Principal
Executive Officer)
Date: 01/10/06 /s/ Marshall S. Cogan
-------------------------------------------
Marshall S. Cogan, Director
Date: 01/10/06 /s/ Warren F. Kruger
-------------------------------------------
Warren F. Kruger, Director
Date: 01/10/06 /s/ Robert B. Rosene
-------------------------------------------
Robert B. Rosene, Jr., Director
11
INDEX TO FINANCIAL STATEMENTS
-----------------------------
CONSOLIDATED FINANCIAL STATEMENTS OF GREYSTONE LOGISTICS, INC.
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 (Deficiency)..... F-4
Consolidated Statements of Cash Flows ...................................... F-5
Notes to Consolidated Financial Statements.................................. F-6
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders
of Greystone Logistics, Inc.
We have audited the accompanying consolidated balance sheet of
Greystone Logistics, Inc. and its subsidiaries as of May 31, 2005, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for each of the years ended May 31, 2005 and 2004. 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. Accordingly, we express no such opinion. 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
Greystone Logistics, Inc. and its subsidiaries as of May 31, 2005, and the
consolidated results of their operations and cash flows for each of the years
ended May 31, 2005 and 2004, 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, 2005 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 for the year ended May 31, 2004
have been restated.
MURRELL, HALL, MCINTOSH & CO., PLLP
Norman, Oklahoma
August 30, 2005
F-1
GREYSTONE LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 2005
ASSETS
------
CURRENT ASSETS:
Cash $ 1,410
Accounts receivable, net of allowance for doubtful
accounts of $190,364 1,573,635
Inventory 535,523
Prepaid expenses 10,932
------------
TOTAL CURRENT ASSETS 2,121,500
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 7,189,652
OTHER ASSETS:
Patents, net of accumulated amortization 164,951
------------
TOTAL ASSETS $ 9,476,103
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,117,222
Advances payable - related party 952,216
Accounts payable and accrued expenses 2,631,676
Preferred dividends payable 33,785
------------
TOTAL CURRENT LIABILITIES 5,734,899
LONG-TERM DEBT 8,026,739
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $0.0001 par value, 20,750,000 shares
authorized, 50,000 shares outstanding, liquidation
preference of $5,000,000 5
Common stock, $0.0001 par value, 5,000,000,000 shares
authorized, 24,061,201 outstanding 2,406
Additional paid-in capital 52,214,532
Deficit (56,502,478)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (4,285,535)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 9,476,103
============
The accompanying notes are an integral part of these
consolidated financial statements
F-2
GREYSTONE LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31,
----------------------------
2005 2004
------------ ------------
Sales $ 9,305,534 $ 6,964,943
Cost of Sales, including depreciation expense of
$591,905 and $357,952 9,573,029 6,768,426
------------ ------------
Gross Profit (Loss) (267,495) 196,517
Expenses:
General, selling and administration expenses 3,449,422 2,261,723
Impairment costs 5,719,658 219,753
Relocation costs 355,000 222,196
------------ ------------
Total expenses 9,524,080 2,703,672
------------ ------------
Operating Loss (9,791,575) (2,507,155)
Other Income (Expense):
Other income 62,091 12,134
Interest expense (692,341) (699,661)
------------ ------------
Total Other Income (Expense) (630,250) (687,527)
------------ ------------
Net Loss (10,421,825) (3,194,682)
Preferred Dividends 404,555 660,171
------------ ------------
Net Loss Available to Common Stockholders $(10,826,380) $ (3,854,853)
============ ============
Loss Available to Common Stockholders
Per Share of Common Stock - Basic and Diluted $ (0.60) $ (0.35)
============ ============
Weighted Average Shares of Common Stock Outstanding 17,950,000 11,026,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-3
GREYSTONE LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Additional Total
Paid-In Accumulated Accumulated
Preferred Stock Common Stock Capital Deficit Deficit
------------------------- ------------------------- ------------ ------------ ------------
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 Series 2001
preferred stock (750,000) (75) 5,250,000 525 (450) -- --
Issuance of Series 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
Preferred dividends paid
or accrued -- -- -- -- -- (404,555) (404,555)
Stock issued in exchange
for debt -- -- 5,985,037 598 2,099,565 -- 2,100,163
Issuance of common stock -- -- 5,285,713 529 1,849,471 -- 1,850,000
Net loss -- -- -- -- -- (10,421,825) (10,421,825)
----------- ----------- ----------- ----------- ------------ ------------ ------------
Balances, May 31, 2005 50,000 $ 5 24,061,201 $ 2,406 $ 52,214,532 $(56,502,478) $ (4,285,535)
=========== =========== =========== =========== ============ ============ ============
The accompanying notes are an integral part of these financial statements
F-4
GREYSTONE LOGISTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
----------------------------
2005 2004
------------ ------------
Cash Flows from Operating Activities: $(10,421,825) $ (2,974,929)
Net Loss
Adjustments to reconcile net loss to cash used
in operating activities
Depreciation and amortization 1,296,601 927,010
Impairments 5,719,658 --
Loss on sale of equipment -- 121,321
Expenses paid by issuance of common stock 415,900 --
Changes in accounts receivable (622,039) (603,752)
Changes in inventory (14,147) 389,051
Changes in prepaid expenses (10,932) (26,000)
Changes in accounts payable and accrued expenses 699,577 668,482
Changes in preferred dividends payable (26,797) 60,582
Other -- (26,300)
------------ ------------
Net cash used in operating activities (2,964,004) (1,464,535)
Cash Flows from Investing Activities:
Purchase of property and equipment (426,054) (701,847)
Acquisition of assets of Greystone Plastics, Inc. -- (4,248,459)
------------ ------------
(426,054) (4,950,306)
Cash Flows from Financing Activities:
Proceeds from notes and advances payable 8,402,650 2,631,245
Payments on notes and advances payable (6,730,712) (685,344)
Proceeds from issuance of common/preferred stock 1,850,000 5,000,000
Dividends paid on preferred stock (404,555) (263,184)
------------ ------------
Cash provided by financing activities 3,117,383 6,682,717
------------ ------------
Net Increase (Decrease) in Cash (272,675) 267,876
Cash, beginning of year 274,085 6,209
------------ ------------
Cash, end of year $ 1,410 $ 274,085
============ ============
Supplemental Information (Note 12)
The accompanying notes are an integral part of these
consolidated financial statements
F-5
GREYSTONE LOGISTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
ORGANIZATION
------------
Greystone Logistics, Inc. ("Greystone") through its wholly-owned
subsidiaries Greystone Manufacturing, LLC ("GSM"), and Plastic Pallet
Production, Inc. ("PPP"), is engaged in the manufacture and marketing of
plastic pallets.
PRINCIPLES OF CONSOLIDATION
---------------------------
The accompanying consolidated financial statements include the accounts
of Greystone and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
STATEMENT OF CASH FLOWS
-----------------------
Greystone considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
USE OF ESTIMATES
----------------
The preparation of Greystone's financial statements in conformity with
generally accepted accounting principles in the United States of America
requires Greystone'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
-------------------------------------------------------
Greystone carries its accounts receivable at their face value less an
allowance for doubtful accounts. On a periodic basis, Greystone 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 collections. The allowance
for doubtful accounts at May 31, 2005 was $190,364.
INVENTORY
---------
Inventory consists of finished pallets and raw materials and is stated at
the lower of cost (first-in, first-out) or market value.
F-6
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Greystone'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 $322,687 at May 31, 2005.
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
----------
Greystone 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 AND INTANGIBLES
------------------------
Goodwill and intangibles are 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. See Note 16 for recognition
of impairment of goodwill and intangible cost during fiscal year 2005.
Intangible cost consists of the valuation of a customer contract acquired
in connection with the acquisition of the assets of Greystone Plastics,
Inc. effective September 8, 2003. The intangible is being amortized by
the unit of production method based on unit sales to the customer.
PATENTS
-------
Amortization expense for the costs incurred by Greystone to obtain the
patents on the
F-7
modular pallet system and accessories is computed on the straight-line
method over the estimated life of 15-17 years.
STOCK OPTIONS
-------------
Greystone 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,
Greystone 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
------------
Greystone 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.
LOSS PER SHARE
--------------
Basic loss per share is computed by dividing the loss available to common
stockholders of $(10,826,380) and $(3,854,853) for 2005 and 2004,
respectively, by the weighted average number of common shares outstanding
during 2005 and 2004, 17,950,000 shares and 11,026,000 shares,
respectively. 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 2004, the Financial Accounting Standards Board, ("FASB")
issued
F-8
Statement No. 123R, "Share-Based Payment," a revision to Statement No.
123, "Accounting for stock-Based Compensation." This standard requires
the Company to measure the cost of employee services received in exchange
for equity awards based on the grant date fair value of the awards. The
cost will be recognized as compensation expense over the vesting period
of the awards. The Company is required to adopt SFAS 123R at the
beginning of the third quarter of fiscal year 2006. The standard provides
for prospective or retrospective application. Under prospective
application, the Company will begin recognizing compensation cost for
equity based compensation for all new or modified grants after the
adoption date and will recognize the unvested portion of the grant date
fair value of awards issued prior to adoption based on the fair values
previously calculated for disclosure purposes. Under retrospective
application, the fair value based method of accounting will be applied to
grants prior to the adoption date and all prior periods for which SFAS
No. 123 was effective. Greystone is currently evaluating the adoption of
SFAS No. 123R and expects that it may recognize additional compensation
expense for the third quarter of fiscal year 2006.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs." SFAS
No. 151 requires that abnormal amounts of idle facility expense, freight,
handling costs, and spoilage, be charged to expense in the period they
are incurred rather than capitalized as a component of inventory costs.
SFAS No. 151 is effective for inventory costs incurred in fiscal periods
beginning after June 15, 2005. The adoption of this standard may result
in higher expenses in periods where production levels are lower than
normal ranges of production. Because actual future production levels are
subject to many factors, including demand for Greystone's products,
Greystone cannot determine if the adoption of SFAS No. 151 will have a
material impact on future results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." SFAS No. 153 amends Accounting Principles Board ("APB") Opinion
No. 29m "Accounting for Nonmonetary Transactions," to require exchanges
of nonmonetary assets be accounted for at fair value, rather than
carryover basis. Nonmonetary exchanges that lack commercial substance are
exempt from this requirement. SFAS No. 153 is effective for nonmonetary
exchanges entered in fiscal years beginning after June 15, 2005.
Greystone does not expect the adoption of SFAS No. 153 to have a material
impact on its financial statements.
NOTE 2. CONTINUATION AS A GOING CONCERN
-------------------------------
The accompanying financial statements have been prepared assuming that
Greystone will continue as a going concern. Greystone has suffered
significant losses from operations. Currently, management believes that
Greystone has the capacity to produce sufficient plastic pallets to
achieve profitability; however, sales have not reached such level. To
date, Greystone 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
F-9
operations primarily through short-term loans and personal guarantees on
bank loans by its officers and directors. 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 Greystone'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) Greystone
will continue as a going concern.
NOTE 3. INVENTORY
---------
Inventory at May 31, 2005 consists of:
Raw materials $ 446,809
Finished goods 88,714
-----------
Total inventory $ 535,523
===========
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
A summary of the property, plant and equipment at May 31, 2005, is as
follows:
Production machinery and equipment $ 5,780,346
Building and land 2,583,116
Furniture and fixtures 138,246
-----------
8,501,708
Less: accumulated depreciation (1,312,056)
-----------
$ 7,189,652
===========
Depreciation expense for the years ended May 31, 2005 and 2004 is
$591,905 and $377,788, respectively.
NOTE 5. OTHER ASSETS
------------
At May 31, 2005 other assets consist of:
Patents, net of accumulated amortization of $41,387 $ 149,351
Investments 5,000
Deposits and other 10,600
-----------
Total Other Assets $ 164,951
===========
Amortization of intangibles was $704,696 and $515,576 in 2005 and 2004,
respectively.
F-10
Included in amortization expense is $693,206 and $514,002 for 2005 and
2004, respectively, from amortization of the capitalized valuation of the
customer contract acquired in the acquisition of the assets of Greystone
Plastics, Inc.
NOTE 6. LONG-TERM DEBT AND ADVANCES PAYABLE
-----------------------------------
Long-term debt at May 31, 2005 consists of the following:
Note payable to F&M Bank & Trust Company, prime rate
of interest plus 2% (8% at May 31, 2005), monthly
payments based on 15-year amortization, due March 18,
2008 $ 5,477,650
Note payable to F&M Bank & Trust Company, prime rate
of interest plus 1% (7% at May 31, 2005), due January
5, 2006 1,500,000
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 2,236,109
Capitalized lease purchase agreement with related
party, 7.5% interest, $23,136 payable monthly, due
February 18, 2009 911,327
Other notes payable 18,875
-----------
Total 10,143,961
Less: Current portion 2,117,222
-----------
Long-term debt $ 8,026,739
===========
The notes payable to F&M Bank and Trust Company are secured by
Greystone's property and equipment, accounts receivable and cash
balances. The loans are guaranteed by the officers and directors of
Greystone in effect at May 31, 2005.
Maturities of long-term debt for the five years after May 31, 2005 are
$2,117,222, $627,048, $5,383,955, $446,298, $166,668, and $1,402,770
thereafter.
Advances payable to related parties include $452,216 provided by Warren
Kruger and
F-11
$500,000 provided by Robert Rosene, a member of the Board of Directors of
Greystone.
NOTE 7. RELATED PARTY TRANSACTIONS
--------------------------
TRANSACTIONS WITH BILL HAMILTON, FORMER VICE PRESIDENT OF PRODUCTION
--------------------------------------------------------------------
Bill Hamilton owns a trucking company, Greystone-Bill Hamilton Trucking,
which provided freight services totaling $829,672 and $699,966,
respectively, for fiscal 2005 through March 8, 2005, the date of Mr.
Hamilton's resignation, and fiscal year 2004, respectively. Greystone
believes that the freight rates are equivalent to an arms-length
transaction. In addition, GSM paid or accrued fees totaling $117,716 and
$246,870 in 2005 through the date of his resignation and 2004,
respectively, for grinding services to Whaco Plastics, an entity also
owned by Bill Hamilton.
TRANSACTIONS WITH NYOK PARTNERS
-------------------------------
Effective as of October 31, 2004, NYOK Partners, a general partnership
owned by Marshall Cogan, Greystone's Non-Executive Chairman, and Warren
Kruger, Greystone's Vice Chairman, purchased certain grinding equipment
from GSM, at its net book value of $259,000, which approximates the
market value of such equipment, in exchange for the cancellation of a
like amount of indebtedness. NYOK used the equipment as a trade-in to
acquire a grinder with greater capacity. Effective as of November 1,
2004, NYOK entered into an equipment rental contract with GSM, pursuant
to which NYOK has agreed to lease the grinding equipment to GSM for a
period of one year at the rate of $0.06 per pound of plastic material
processed utilizing the equipment.
Effective as of November 1, 2004, NYOK entered into an equipment rental
contract with GSM to lease a Cincinnati Milacron Plastics Injection
Molding Machine for a five-year term at the rate of $21,136 per month. At
the end of such five-year term, GSM has the right to purchase the machine
from NYOK for $100,000. The lease is reflected on Greystone's financial
statements as a capitalized lease.
TRANSACTIONS WITH GREYSTONE PROPERTIES, LLC
-------------------------------------------
Effective as of July 1, 2004, Greystone Properties, LLC, a limited
liability company owned by Robert B. Rosene, Jr., a member of Greystone's
Board of Directors, and Warren Kruger, Vice Chairman, entered into an
industrial lease with GSM, pursuant to which Greystone Properties, LLC
agreed to lease a building containing 60,000 square feet of space to GSM
for ten years in exchange for lease payments of $25,000 per month.
Greystone paid Greystone Properties, LLC, rent of $20,000 per month for
the period from August 1, 2004 to October 31, 2004 and began paying
$25,000 per month beginning November 30, 2004. The industrial building is
located adjacent to Greystone's plant in Bettendorf, Iowa.
F-12
TRANSACTIONS WITH PAUL KRUGER, A SIGNIFICANT STOCKHOLDER
--------------------------------------------------------
Until September 8, 2003, Greystone 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 Greystone's assets. Interest paid on
the indebtedness to Paul Kruger was $131, 250 and $133,824 in 2005 and
2004, respectively. Effective September 8, 2003, Greystone 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 after the first six months of $48,000
beginning March 8, 2004. Initially the rental payments on the equipment
lease were capitalized as prepaid expense and amortized 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 2005 and 2004, the total amounts paid to 1607 Commerce Limited
Partnership under these leases totaled $657,200 and $255,480,
respectively. Effective March 1, 2005, Greystone notified 1607 Commerce
Limited Partnership that pursuant to the breach of certain provisions of
the building lease, Greystone considered the lease on the building
located at 1607 West Commerce, Dallas, Texas, terminated. As discussed in
Note 16, Greystone has recorded an impairment expense in fiscal year 2005
with respect to the equipment lease.
TRANSACTIONS WITH WARREN KRUGER, VICE CHAIRMAN
----------------------------------------------
Interest paid or accrued on notes and advances to entities owned or
controlled by Warren Kruger total $40,629 and $56,715 in 2005 and 2004,
respectively. Greystone also reimburses an entity owned by Warren Kruger
for office rent at the rate of $1,500 per month. At May 31, 2005,
advances payable to Warren Kruger total $452,216.
TRANSACTIONS WITH ROBERT ROSENE, DIRECTOR
-----------------------------------------
Robert Rosene, Director, advanced Greystone $500,000 in May 2005.
Interest is not being accrued on the advance.
TRANSACTIONS WITH BRYAN KIRCHMER, FORMER DIRECTOR
-------------------------------------------------
Greystone had a contract with a consulting engineering firm for the
design and supervision of the construction of the new production
equipment. Bryan Kirchmer, a former director of Greystone, is the
president of the consulting engineers. Fees paid to the engineering firm
were $4,110 and consulting fees of $22,500 were paid to Mr. Kirchmer,
individually, during fiscal year 2004 through the date of his
resignation.
F-13
TRANSACTIONS WITH WILLIAM PRITCHARD, FORMER DIRECTOR
----------------------------------------------------
William Pritchard, a former director of Greystone, provided legal
services through a law firm of which he is of counsel. The fees paid in
2004, through the date of his resignation, total $36,009.
TRANSACTIONS WITH WESTGATE CAPITAL, L.L.C.
------------------------------------------
During fiscal year 2005, Greystone accrued a licensing fee of $400,000
payable to Westgate Capital, L.L.C., an entity of which Warren Kruger,
Vice Chairman and Director, is a member. The licensing agreement relates
to the use of a fire retardant formula in the manufacture of plastic
pallets. See Note 15, Commitments and Contingencies, for further
discussion of the licensing fee.
OTHER TRANSACTIONS
------------------
See also Note 9, "Stockholders' Equity."
NOTE 8. FEDERAL INCOME TAXES
--------------------
Deferred taxes as of May 31, 2005 and 2004 are as follows:
2005 2004
-------------- --------------
Deferred Tax Assets:
Net operating loss $ 8,407,180 $ 6,847,091
Amortization of intangibles 1,862,650 82,694
Loss on investment 1,057,740 1,057,740
Accrued expenses 131,226 151,148
Allowance for doubtful accounts 64,724 23,707
-------------- --------------
Total deferred tax assets 11,523,520 8,162,380
Deferred Tax Liabilities:
Depreciation of property and equipment,
Tax in excess of financial reporting (45,636) (244,806)
-------------- --------------
11,477,884 7,917,574
Less: Valuation allowance (11,447,884) (7,917,574)
-------------- --------------
Total $ -- $ --
============== ==============
Management has provided a valuation allowance for the full amount of the
deferred tax asset as Greystone continues to incur substantial losses
from its operations. While
F-14
management projects that the products being developed will be profitable
and the deferred asset will ultimately be realized, Greystone has not yet
reached sufficient reliability on product acceptance and marketability to
reduce the valuation allowance.
The net change in deferred taxes for the year ended May 31, is as
follows:
2005 2004
-------------- --------------
Net operating loss $ 1,560,089 $ 7,211
Depreciation of property and equipment 199,170 394,541
Amortization of intangibles 1,779,956 66,706
Accrued expenses (19,922) 151,148
Loss on investments -- (93,330)
-------------- --------------
Allowance for doubtful accounts 41,017 23,707
Change in valuation allowance (3,560,310) (549,983)
-------------- --------------
Total $ -- $ --
============== ==============
Greystone's effective tax rate for the year ended May 31, differs from
the federal statutory rate as follows:
2005 2004
-------------- --------------
Tax benefit using statutory rates $ 3,543,420 $ 1,013,602
Effect of rate adjustment -- (272,601)
-------------- --------------
Net change in valuation allowance (3,560,310) (549,983)
Other 16,890 (191,018)
-------------- --------------
Tax benefit, per financial statements $ -- $ --
============== ==============
Greystone has a net operating loss (NOL) for Federal income tax purposes
as of May 31, 2005 of $24,727,000 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
4,589,000 2025
F-15
NOTE 9. STOCKHOLDERS' EQUITY
--------------------
During fiscal year 2005, Greystone sold shares of common stock at a rate
of $0.35 per share plus warrants to officers, directors and unrelated
parties, as follows:
Warrants Exercisable at
-----------------------
Officer/Director Shares Amount $0.6625 $0.795 $0.9275
---------- ---------- ---------- ---------- ----------
Marshall Cogan, 1,428,571 $ 500,000 75,472 62,893 53,908
Non-executive Chairman
Robert Rosene, Director 2,770,951 $ 969,833(1) 146,390 121,992 104,565
Warren Kruger, Vice Chairman and 1,473,347 $ 515,671(2) 77,837 64,864 55,598
Director
Robert Nelson, 285,714(3) $ 100,000 15,094 12,579 10,782
Chief Financial Officer
Westgate Capital, LLC(4) 1,142,857 $ 400,000 60,377 50,314 43,127
All Others 4,139,310 $1,448,759 218,683 182,236 156,203
---------- ---------- ---------- ---------- ----------
Total 11,240,750 3,934,263 593,853 494,878 424,183
========== ========== ========== ========== ==========
---------------------
(1) Includes a cash payment of $750,000 and the exchange of debt and
accrued interest of $219,833 owed by Greystone to Mr. Rosene.
(2) The total amount represents debt and accrued interest owed by
Greystone to Mr. Kruger.
(3) This stock was acquired and is owned by Mr. Nelson's wife.
(4) Warren Kruger is a member of Westgate Capital Company, L.L.C.
In March 2005, Greystone issued for services, 30,000 shares of common
stock valued at $15,900 ($0.53 per share).
Each of Messrs. Cogan, W. Kruger, Rosene and Nelson entered into a
limited guaranty agreement on $2,500,000 of the $5,500,000 term loan with
F&M Bank and Trust Company. In addition, Mr. Rosene entered into a pledge
and security agreement with F&M Bank pursuant to which Mr. Rosene pledged
a certificate of deposit in the face amount of $1,000,000 as security for
payment under the F&M term note. As consideration for agreeing to enter
into the limited guaranty for the benefit of Greystone, Greystone's Board
of Directors authorized Greystone to enter into warrant agreements with
each of the guarantors, pursuant to which each guarantor shall have the
right to purchase 500,000 shares of Greystone's common stock at an
exercise price of $0.50 per share and, as consideration for agreeing to
enter into the pledge agreement for the benefit
F-16
of Greystone, Greystone's Board of Directors authorized Greystone to
enter into a warrant agreement with Mr. Rosene, pursuant to which Mr.
Rosene shall immediately have the right to purchase 500,000 shares of
Greystone's common stock at an exercise price of $0.50 per share.
Greystone's Board of Directors further authorized Greystone to enter into
warrant agreements with each of Messrs. W. Kruger and Rosene as
guarantors of the $1,500,000 line of credit with F&M Bank, pursuant to
which each guarantor shall have the right to purchase 500,000 shares of
Greystone's common stock at an exercise price of $0.50 per share and, as
consideration for agreeing to enter into the pledge agreement for the
benefit of Greystone.
In September, 2003, Greystone issued 50,000 shares of Series 2003,
cumulative, convertible preferred stock, par value $0.0001, to Paul
Kruger, a major stockholder of Greystone, 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 Greystone. On March 9, 2005, the Series 2003 Preferred Stock
was purchased from Paul Kruger by GLOG Investment, L.L.C., a limited
liability company of which the members are Warren Kruger, Vice Chairman
and Director, Robert Nelson, Chief Financial Officer, Marshall Cogan,
Non-Executive Chairman, and Robert Rosene, Director.
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, Vice Chairman, 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:
Rate
Preferred Common Stock per Share
Dividend Date Dividend Issued of Common
------------- -------- ------ ---------
June 30, 2003 $ 224,384 560,959 $ 0.40
September 8, 2003 $ 172,603 410,959 $ 0.42
F-17
NOTE 10. STOCK OPTIONS
-------------
Greystone 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 16,015,000 are available for grant
as of May 31, 2005. 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. Following is a summary of option activity for the three
years ended May 31, 2005:
Weighted
Average
Shares Exercise
(000's) Price
-------- --------
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
Options granted 2,250 0.50
Options cancelled (225) 0.50
-------- --------
Options outstanding at May 31, 2005 3,960 $ 1.01
======== ========
Exercisable as of May 31, 2003 555 $ 2.70
======== ========
Exercisable as of May 31, 2004 1,131 $ 2.16
======== ========
Exercisable as of May 31, 2005 2,045 $ 1.41
======== ========
F-18
With respect to options outstanding at May 31, 2005:
Weighted
Options Weighted Average
Range Outstanding Average Life Price Exercisable
----- ----------- ------------ ----- -----------
$0.42-$0.65 3,010,000 7.1 years $ 0.50 1,207,500
$1.429-$1.60
225,000 5.9 years $ 1.57 147,500
$ 2.00 135,000 3.4 years $ 2.00 135,000
$3.125-$4.00
590,000 6.4 years $ 3.18 555,000
---------- ---------- ---------- ----------
Total 3,960,000 6.3 years $ 1.01 2,045,000
Greystone 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 Greystone determined
compensation cost at the grant date based on fair value under SFAS No.
123, Greystone's net loss would have been increased to the pro forma
amount indicated below:
2005 2004
-------------- --------------
Net loss to common shareholders:
As reported $ (14,633,880) $ (3,635,100)
Pro forma $ (14,648,880) $ (3,654,691)
Per share:
As reported $ (0.82) $ (0.33)
Pro Forma $ (0.82) $ (0.33)
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 5 years
NOTE 11. FINANCIAL INSTRUMENTS
---------------------
Greystone'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, 2005 and 2004.
F-19
NOTE 12. SUPPLEMENTAL INFORMATION OF CASH FLOWS
--------------------------------------
Supplemental information of cash flows for the years ended May 31:
2005 2004
---------- ----------
Non-cash activities
Common stock issuances:
Retirement of debt $2,100,163 $ 900,000
Dividends on preferred stock -- 396,987
Debt issued in acquisition of assets
of Greystone Plastics, Inc. -- 8,299,454
Capital lease 1,025,475 --
Retirement of debt in exchange for
property and equipment 259,000 7,060,698
Note receivable from sale of equipment -- 314,000
Interest paid 844,646 599,795
Taxes paid -- --
NOTE 13. OPERATING LEASES
----------------
Rental expense on operating leases totaled $421,860 and $254,480 during
2005 and 2004. Commitments for operating leases for the five years after
May 31, 2005 are $876,000, $876,000, $876,000, $876,000, and $876,000 and
$4,032,000 thereafter. Operating leases are described further in Note 7,
under the headings "Transactions with Paul Kruger, a significant
stockholder," for the equipment lease and "Transactions with Greystone
Properties, LLC," for the industrial lease.
NOTE 14. ACQUISITION
-----------
Effective September 8, 2003, Greystone 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
Greystone, 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'
F-20
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 Greystone to
concentrations of credit risk consist principally of cash deposits in
excess of federally insured limits. As of May 31, 2005, Greystone's bank
balances did not exceed federally insured limits.
NOTE 16. IMPAIRMENTS AND RELOCATION COSTS
--------------------------------
IMPAIRMENTS
-----------
During fiscal year 2005, Greystone recorded impairment charges of
$5,719,658 as follows: $3,309,103 relating to goodwill, $1,648,124
related to a customer contract and $762,431 relating to damaged or
obsolete equipment. During fiscal year 2004, Greystone recorded
impairment charges of $219,753 for the abandonment of leasehold
improvements in its Dallas, Texas plant and estimated costs to settle the
outstanding lease agreement on the property.
GOODWILL IMPAIRMENT - In September 2003, Greystone acquired the assets
and operations of Greystone Plastics, Inc. for an aggregate purchase
price of $12,500,000. Greystone allocated $3,309,103 of the purchase
price to goodwill. One of the primary reasons for the acquisition was to
provide a catalyst to develop Greystone's business of manufacturing
plastic pallets. Due to rising costs for raw materials, competition and
Greystone's limited capitalization, the customer base acquired from
Greystone Plastics, Inc. has not shown any significant expansion to date
and management does not anticipate any material expansion in the
immediate future. In addition, Greystone has expanded its manufacturing
capability resulting in an increased cost per unit of production, which
has affected current cash flows and will affect future cash flows. In
connection with its annual review for impairment of goodwill, Greystone
analyzed the expected future cash flows from the assets acquired from
Greystone Plastics, Inc. and, since the expected future cash flows (as
well as the discounted cash flows) of such asset do not support the
carrying value of the goodwill, a goodwill impairment charge of
$3,309,103 was recorded during the fourth quarter of 2005.
CUSTOMER CONTRACT - Based primarily on the considerations outlined in the
preceding section on goodwill, Greystone concluded that sufficient
indicators existed to require an impairment assessment of a customer
contract acquired from of Greystone Plastics, Inc. Since the future cash
flows over the estimated life of the customer contract are estimated to
be less than the carrying value of the intangible asset, during the
fourth quarter of fiscal year 2005, an impairment charge was recorded in
the amount of $1,648,124 to write off the remaining unamortized balance
of the intangible costs of the customer contract.
F-21
RELOCATION COSTS
----------------
During fiscal year 2005, Greystone accrued an additional $355,000 for
estimated costs to terminate the lease on its Dallas, Texas, plant, which
was abandoned in the prior fiscal year.
NOTE 17. COMMITMENTS AND CONTINGENCIES
-----------------------------
Greystone 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 2005 sales totaling $7,561,204 came from one customer.
There is no assurance that Greystone will retain this customer's business
at the same level, or at all. The loss of a material amount of business
from this customer could have a material adverse effect on Greystone.
As discussed in Note 7, under the subheading "Transactions with Paul
Kruger, a significant stockholder," Greystone leases its PIPER injection
molding machine at the rate of $48,000 per month. The lease is classified
as an operating lease, and there are approximately nine years remaining
on the term. The equipment is currently capable of operating at
approximately 20 to 25 percent of capacity. If Greystone is not
successful in increasing the production from this equipment to acceptable
levels, future operating results will be adversely affected.
NOTE 18. RESTATEMENT OF FINANCIAL STATEMENTS
-----------------------------------
On August 26, 2005, Greystone'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 a
customer contract in effect at the time of the acquisition. Greystone
calculated this value to be $2,855,332 based on the estimated present
value of the future profits to be derived from sales to such customer.
Further, the accounting treatment for the value of the customer contract
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, were previously restated to reflect the related amortization
expense as discussed more fully in Greystone's amended Annual Report on
Form 10-KSB/A for the fiscal year ended May 31, 2004. The net loss
available to common stockholders as reported on Greystone's Quarterly
Reports on Form 10-QSB for the first three quarters of fiscal year 2005
is restated to reflect the related amortization expense under the caption
"General and administrative expense," as follows:
F-22
Three Month Period Ended
--------------------------------------------
August 31, November 30, February 28,
2004 2004 2005
------------ ------------ ------------
Net loss, as previously reported $ (257,652) $ (1,022,010) $ (614,880)
Adjustment to general and administrative costs
as discussed above (169,150) (137,115) (226,718)
------------ ------------ ------------
Net loss, as adjusted (426,802) (1,159,125) (841,598)
Preferred dividends (92,089) (96,199) (102,568)
------------ ------------ ------------
Net loss to common stockholders, as adjusted $ (518,891) $ (1,255,324) $ (944,166)
============ ============ ============
Per share amounts:
Net loss to common stockholders, as
previously reported $ (0.03) $ (0.09) $ (0.03)
Adjustment to general and administrative
costs as discussed above (0.01) (0.01) (0.01)
------------ ------------ ------------
Net loss to common stockholders, as adjusted $ (0.04) $ (0.10) $ (0.04)
============ ============ ============
Six Nine
Month Month
Period Ended Period Ended
November 30, February 28,
2004 2005
------------ ------------
Net loss, as previously reported $ (1,279,662) $ (1,894,542)
Adjustment to general and administrative
costs as discussed above (306,265) (532,983)
------------ ------------
Net loss, as adjusted (1,585,927) (2,427,525)
Preferred dividends (188,288) (290,856)
------------ ------------
Net loss to common stockholder, as adjusted $ (1,774,215) $ (2,718,381)
============ ============
Per share amounts:
Net loss to common stockholders, as
previously reported $ (0.11) $ (0.14)
Adjustment to general and administrative
costs as discussed above (0.02) (0.03)
------------ ------------
Net loss to common stockholders, as adjusted $ (0.13) $ (0.17)
============ ============
F-23