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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended MAY 31, 2006
[ ] 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.
(Name of small business issuer in its charter)
OKLAHOMA 75-2954680
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
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,
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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, 2006, was $15,956,386.
As of August 21, 2006, 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 $1,326,599.
As of August 21, 2006, 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]
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GREYSTONE LOGISTICS, INC.
FORM 10-KSB
TABLE OF CONTENTS
PART I
Item 1. Description of Business 4
Item 2. Description of Property 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 11
Item 6. Management's Discussion and Analysis or Plan of Operation 12
Item 7. Financial Statements 22
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 22
Item 8A. Controls and Procedures 22
Item 8B. Other Information 23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 23
Item 10. Executive Compensation 25
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 28
Item 12. Certain Relationships and Related Transactions 31
Item 13. Exhibits 33
Item 14. Principal Accountant Fees and Services 40
Signatures 41
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATION
Greystone Logistics, Inc. ("Greystone" or the "Company") was incorporated
in Delaware on February 24, 1969, under the name Permaspray Manufacturing
Corporation. It changed its name to Browning Enterprises Inc. in April 1982, to
Cabec Energy Corp. in June 1993, to PalWeb Corporation in April 1999 and became
Greystone Logistics, Inc. in March 2005 as further described below. In December
1997, Greystone acquired all of the issued and outstanding stock of Plastic
Pallet Production, Inc., a Texas corporation ("PPP"), and since that time,
Greystone has primarily been engaged in the business of manufacturing and
selling plastic pallets.
On May 2, 2002, Greystone completed a redomiciliation merger having the
effect of changing its state of incorporation from Delaware to Oklahoma. The
redomiciliation merger did not result in any change in the number of shares
owned or percentage of ownership of any shareholder of the Company, nor did it
result in any change in the business, management, location of the principal
executive offices, assets, liabilities or shareholders' equity of the Company.
Upon completion of the merger, each outstanding share of Greystone's common
stock, par value $0.10 per share, was automatically converted into one share of
common stock, par value $0.0001 per share, of Greystone as an Oklahoma
corporation, and each outstanding share of Greystone's Series 2001 12%
Cumulative Convertible Senior Preferred Stock ("2001 Preferred Stock") was
automatically converted into one share of 2001 Preferred Stock of Greystone as
an Oklahoma corporation under the same terms and conditions.
As authorized by Greystone's certificate of incorporation, Greystone's
Board of Directors determined in 2002 that a reverse split of Greystone's common
stock would be beneficial to the Company by enhancing the efficiency of the
market for the stock. Accordingly, the Board approved a reverse split of 1 share
for each 50 shares of common stock outstanding. The reverse split was effective
as of June 25, 2002. At such time, appropriate adjustments were also made to the
terms of the outstanding 2001 Preferred Stock, warrants and stock options of the
Company to reflect the reverse stock split in accordance with the terms of such
instruments. Unless otherwise noted, all references in this Form 10-KSB to the
shares of the Company's common stock, including historical references to the
common stock of the Company issued in connection with transactions occurring
prior to the effective date of the reverse stock split, refer to the number and
price of such shares as adjusted for the reverse split. Effective September 8,
2003, the holders of Greystone's 2001 Preferred Stock elected to convert all of
their 2001 Preferred Stock into 5,250,000 shares of common stock.
Also 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 Greystone's newly formed, wholly-owned subsidiary,
Greystone Manufacturing, L.L.C., an Oklahoma limited
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liability company ("GSM"). Greystone Plastics, Inc. was a manufacturer of
plastic pallets used in the beverage industry. For more information regarding
the acquisition, see "Acquisition of Assets of Greystone Plastics, Inc." under
this Item 1.
Effective as of March 18, 2005, the Company caused its newly formed, wholly
owned subsidiary, Greystone Logistics, Inc., an Oklahoma corporation, to be
merged with and into the Company. In connection with such merger and as of the
effective time of the merger, the Company amended its certificate of
incorporation by changing its name to Greystone Logistics, Inc., pursuant to the
terms of the certificate of ownership and merger filed by the Company with the
Secretary of State of Oklahoma. Also in connection with such merger, the Company
amended its bylaws to change its name to Greystone Logistics, Inc.
CURRENT BUSINESS
PRODUCTS
Greystone's primary business is manufacturing and selling high quality,
recycled plastic pallets through its wholly owned subsidiaries Greystone
Manufacturing, L.L.C., or GSM, and Plastic Pallet Production, Inc., or PPP. In
addition, Greystone has developed a large multi-station plastic injection
molding system known as the PIPER 600, which it markets pursuant to a licensing
agreement with a third party. As of May 31, 2006, Greystone had an aggregate
production capacity of approximately 69,000 pallets per month (9,000 pallets
through PPP and 60,000 pallets through GSM).
GSM's product line as of May 31, 2006 consists of the following:
o 40" X 32" pallet marketed solely to the beverage industry,
o 37" X 37" pallet,
o 48" X 40" pallet,
o 110cm X 120cm pallet (approximately 44" by 48").
As of May 31, 2006, PPP's product line included the following 48" X 40"
pallets:
o HAWKER(TM) 4840 - A picture frame, web-top pallet that utilizes a
patented inter-locking design and features CJ2(TM) fire retardant
polymers that are UL 2335 certified. It has a rackable load of 2,500
lbs., dynamic load of 5,000 lbs., static load of 25,000 lbs. and
weighs 53 lbs.
o TANK(TM) PICTURE FRAME - A picture frame, web-top pallet that utilizes
a patented inter-locking design and is produced using virgin
materials. It has a rackable load of 3,000
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lbs., dynamic load of 5,000 lbs., static load of 29,900 lbs., and
weighs approximately 50 lbs.
o GRANADA(TM) PICTURE FRAME - A picture frame, web-top pallet that
utilizes a patented inter-locking design and is produced using a
proprietary blend of recycled plastics. It has a rackable capacity of
2,500 lbs., a dynamic load of 5,000 lbs., static load of 25,000 lbs.,
and weighs 47.5 lbs.
o GRANADA(TM) STACKABLE - A web-top pallet that is produced using a
proprietary blend of recycled plastics, has a dynamic load of 5,000
lbs., static load of 7,000 lbs., and weighs 32 lbs.
o GRANADA(TM) NESTABLE - This pallet is the same as the Granada(TM)
Stackable, except that its legs nestle inside one another for
convenient and more efficient storage and it weighs 30 lbs.
o GRANADA(TM) 3-RUNNER - A web-top pallet that utilizes a patented
inter-locking design on a three runner bottom and is produced using a
proprietary blend of recycled plastics. It has a rackable load of
1,200 lbs., dynamic load of 5,000 lbs., static load of 12,000 lbs and
weighs 41 lbs.
o A3R FLAT DECK 3-RUNNER - This pallet is the same as the Granada(TM)
3-Runner, except it has a solid top and weighs 55 lbs.
The principal raw materials used in manufacturing Greystone's plastic
pallets are in abundant supply, and some of these materials may be obtained from
recycled plastic containers. At the present time, these materials are being
purchased from local suppliers.
Certain Greystone's suppliers of resin have agreed to give Greystone a
discount of $0.01 to $0.10 for each pound of resin purchased from such suppliers
provided that Greystone prepays for such resin. On July 11, 2006, Greystone's
Board of Directors approved an arrangement pursuant to which if Yorktown
Management & Financial Services, L.L.C., an entity wholly owned by Greystone's
Vice Chairman, prepays for resin on Greystone's behalf, Greystone will repay
Yorktown any such amount it pays within two weeks along with an amount equal to
$0.01 per pound for any discount it receives as a result of such prepayment.
There is no formal written agreement evidencing this arrangement.
OTHER BUSINESS
Effective June 23, 2003, Greystone entered into an agreement with ForcePro,
LLC, which gives ForcePro the exclusive right to market and sell the PIPER 600
subject to making certain minimum royalty payments. Bryan Kirchmer, a former
member of Greystone's Board, is the President of ForcePro. The term of the
agreement is for five years with the right to renew for three additional terms
of five years each. Greystone will receive a royalty of 5% of the gross
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proceeds from sales of the PIPER 600. There is no assurance that ForcePro will
be able to sell any PIPER 600 plastic injection molding machines.
In July 2006, Greystone entered into an agreement with Advanced Fiber
Products (AFP) of La Crosse, Wisconsin, pursuant to which Greystone and AFP
agreed to launch a beta test program involving the lease of a small pool of
recycled plastic pallets by Greystone to AFP to be utilized by AFP to ship a
portion of its manufactured products in a closed loop system. Pursuant to the
agreement, Greystone will deliver and track throughout the logistics cycle
sufficient quantities of plastic pallets for use in shipping a segment of the
AFP fiberglass product. The pallets will stay in a closed loop environment and
be continually sent back for reuse. If a pallet is damaged, Greystone will grind
the pallet and reutilize the resin.
PALLET INDUSTRY
According to the U. S. Forest Service, as printed in the National Wooden
Pallet and Container Association publication, approximately 400 million new
pallets are purchased in the United States each year, and some research sources
estimate that even more than 400 million new pallets are purchased each year. At
an overall average selling price of $9/wood pallet, the pallet manufacturing and
sales business is approximately a $4 billion industry. It is estimated that the
United States wood pallet industry is served by approximately 3,600 companies,
most of which are small, privately held firms that operate in only one location.
The industry is generally comprised of companies that manufacture new pallets or
repair and recycle pallets. New pallet manufacturing generates about 60% to 65%
of the industry's revenues. The U.S. Forest Service estimates that approximately
1.9 billion wood pallets are in circulation in the United States today and that
roughly 400 million of the wood pallets currently in circulation were newly
manufactured. On an annual basis, approximately 175 million wood pallets are
recycled through a process of retrieval, repair, re-manufacturing and secondary
marketing, approximately 225 million are sent to landfills, and approximately
100 million are burned, lost, abandoned or leave the country.
Infestation is a concern in the wood pallet industry. According to Virginia
Tech's Center for Unit Loan Design Center Tech Note No. 1, dated November 11,
1998, the Asian Longhorn Beetle ("ALB"), a devastating wood boring pest native
to China and other Asian countries, has invaded hardwood trees in New York City
and Chicago. The ALB outbreaks have been traced to solid wood packaging
materials ("SWPM"), including wood pallets imported from China. As a result, the
USDA Animal and Plant Health Inspection Service has proposed certain interim
rules, which include upgrading treatment procedures for SWPM. These treatments
are estimated to increase the cost of SWPM by at least 10%, and some treatments
will double the price of SWPM.
Pallets are used in virtually all United States industries in which
products are broadly distributed, including, but not limited to, the automotive,
chemical, consumer products, grocery, produce and food production, paper and
forest products, retailing and steel and metals industries.
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Forklifts, pallet trucks and pallet jacks are used to move loaded pallets,
reducing the need for costly hand loading and unloading at distribution centers
and warehouses.
Until very recently, plastic pallets had not penetrated the market
significantly, due in part to their cost. Heavy duty plastic pallets cost $46 to
$100, heavy duty wood pallets typically cost approximately $26, and less sturdy
wood pallets typically cost $8 to $11. As stated in an article in the July 1996
issue of Material Handling Engineering, wood pallets have an estimated useful
life of 7 to 10 trips before repair or recycling is required. A trip, or cycle,
is defined as the movement of a pallet under a load from a manufacturer to a
distributor (or from a distributor to a retailer) and the movement of the empty
pallet back to the manufacturer. Heavy duty plastic pallets, as currently
manufactured, have a useful life of 60 or more trips, on average. Greystone
management believes that the trend will continue to switch from wood to plastic,
with the only limiting factor being price.
Greystone intends to stay on the "cutting edge" of the market by constantly
conducting research on pallet design and the materials used to make the plastic
pallets.
EMPLOYEES
As of May 31, 2006, Greystone had 75 full-time employees and used a
temporary personnel service to provide additional production personnel as
needed.
MARKETING AND CUSTOMERS
Greystone's primary focus is to provide quality plastic pallets to its
existing customers while continuing its marketing efforts to broaden its
customer base. Greystone's existing customers are primarily located in the
United States and engaged in the beverage, pharmaceutical and other industries.
Greystone has generated and plans to continue to generate interest in its
pallets by attending trade shows sponsored by industry segments that would
benefit from Greystone's products. Greystone hopes to gain wider product
acceptance by marketing the concept that the widespread use of plastic pallets
could greatly reduce the destruction of trees on a worldwide basis.
Greystone sells its pallets through a combination of a network of
independent contractor distributors and its officers and employees. Currently,
Greystone has one distributor. Greystone will continue utilizing this structure
until sales volumes justify the development of an internal sales staff.
Greystone derives, and expects that in the foreseeable future it will
continue to derive, substantially all of its revenue from a few large customers.
One of Greystone's customers currently accounts for approximately 85% of all
orders for its pallets. There is no assurance that Greystone will retain these
customers' business at the same level, or at all. The loss of a material amount
of business from any one of Greystone's larger customers could have a material
adverse effect on Greystone.
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COMPETITION
Greystone's primary competitors are a large number of small, privately held
firms that sell wood pallets in very limited geographic locations. Greystone
believes that it can compete with manufacturers of wood pallets by emphasizing
the cost savings realized over the longer life of its plastic pallets as well as
the environmental benefits of its plastic pallets as compared to wood pallets.
Greystone also competes with approximately three large and fifteen medium to
small manufacturers of plastic pallets. Some of Greystone's competitors may have
substantially greater financial and other resources than Greystone and,
therefore, may be able to commit greater resources than Greystone in such areas
of product development, manufacturing and marketing. However, Greystone believes
that its proprietary designs coupled with the competitive pricing of its
products gives Greystone a competitive advantage over other plastic pallet
manufacturers.
GOVERNMENT REGULATION
The business operations of Greystone are subject to existing and potential
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. In addition, both the
plastics industry and Greystone 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.
PATENTS AND TRADEMARKS
Greystone seeks to protect its technical advances by pursuing national and
international patent protection for its products and methods when appropriate.
As of May 31, 2006, Greystone's subsidiary, PPP, held the following patents that
are material to its business:
1. Materials Handling Plastic Pallet
Application No. 09/421,766
Filing Date: October 19, 1999
U.S. Patent No. 6,109,190 issued on August 29, 2000
Expiration Date: August 28, 2017
2. Multiple Mold Workstation with Single Injection Feeder and
Hydraulic Pumping Station
Application No. 09/346,165
Filing Date: July 1, 1999
U.S. Patent No. 6,241,508 B1 issued on June 5, 2001
Expiration Date: June 4, 2018
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The first patent is for a new concept in the construction of materials
handling plastic pallets. These pallets are lighter, stronger and more durable
than traditional wood pallets and have a unique two-part interlocking system.
The second patent is for a new concept in the construction of more compact
plastic injection molding machines.
Greystone also recently filed for patent protection for its PIPER 600
Multi-Station Injection Molding Equipment. In addition, Greystone uses a
patent-pending CJ2(TM) fire retardant formula licensed from Westgate Capital
Company, L.L.C. ("WCC"), a company of which Greystone's Vice Chairman is a
member, in connection with the production of Greystone's plastic pallets.
Pallets produced with CJ2(TM) fire retardant have met UL 2335 classification
requirements with respect to fire retardancy.
ACQUISITION OF ASSETS OF GREYSTONE PLASTICS, INC.
Effective September 8, 2003, Greystone 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 notes described in the preceding sentence were paid in full
in March 2005.
SALE AND LEASEBACK OF CERTAIN PRODUCTION EQUIPMENT
On September 8, 2003, Greystone completed a sale and leaseback transaction
whereby it sold its Dallas plant for $1,350,000 and certain production equipment
located in the Dallas plant, including its PIPER 600 plastic pallet injection
molding machine, for $5,650,000 to a company owned by Paul Kruger (a major
shareholder of Greystone), 1607 Commerce Limited Partnership, a Texas limited
partnership ("1607 Commerce"), in exchange for the cancellation of debt in the
amount of $7,000,000 owed by Greystone to Paul Kruger. The assets were sold at
the approximate net book value of such assets. The lease agreement for the plant
was a three-year triple net lease with a monthly rental of $17,720; however,
during 2004, Greystone closed its Dallas plant and moved the equipment located
in such plant to its Bettendorf, Iowa plant and Greystone notified the lessor
that effective March 1, 2005, the lease was considered terminated due to the
breach of certain provisions in the lease agreement by the landlord. In letters
dated May and September of 2005, the landlord contested Greystone's assertion
that the plant lease has been terminated and demanded past due rent under the
plant lease for the months any of April through August of 2005. The equipment
lease was for 130 months with a monthly rental of $48,000 beginning six months
after the first day of the lease. Greystone has accrued the rental costs of
$576,000 per year but not made payments under the equipment lease subsequent to
March of 2005. In letters dated May and September of 2005, the landlord demanded
past due rent under the equipment lease for the months of April through August
of 2005. In connection with this sale and leaseback transaction, Greystone and
each its subsidiaries, PPP and GSM, granted 1607 Commerce a security interest in
substantially all of its
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assets, other than those assets acquired from Greystone Plastics, Inc. In
addition, pursuant to two guaranty agreements, Greystone has agreed to guarantee
PPP's obligations under the leases described in this paragraph and, pursuant to
a stock pledge agreement, Greystone has pledged its ownership interests in PPP
and GSM as security for the payment of Greystone's obligations under the two
guaranty agreements.
ITEM 2. DESCRIPTION OF PROPERTY
Greystone has approximately 3 acres of land in Bettendorf, Iowa and a
building with 60,000 square feet of manufacturing and warehouse space. In
addition, Greystone entered in a lease agreement with Greystone Properties, LLC,
for an adjacent building with 60,000 square feet of manufacturing and warehouse
space. The lease is for a ten year period with monthly rental of $25,000 plus
insurance and taxes, amended January 1, 2006 to $17,500 plus insurance and taxes
.. The manufacturing and warehouse space is sufficiently equipped and designed to
accommodate the manufacturing of plastic pallets. Greystone Properties, LLC is
owned by Warren Kruger and Robert Rosene, Board members of the Company.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Greystone's common stock is traded on the National Association of
Securities Dealers Automatic Quotation (NASDAQ) over-the-counter bulletin board
system ("OTCBB"), under the symbol "GLGI." The following table sets forth the
range of high and low prices at which Greystone's common stock traded during the
time periods indicated, as reported by NASDAQ:
QUARTER ENDING HIGH LOW
Aug. 31, 2004 $0.70 $0.29
Nov. 30, 2004 0.49 0.26
Feb. 29, 2005 0.47 0.32
May 31, 2005 0.70 0.27
Aug. 31, 2005 0.40 0.14
Nov. 30, 2005 0.20 0.10
Feb. 29, 2006 0.12 0.05
May 31, 2006 0.22 0.06
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Quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.
HOLDERS
As of May 31, 2006, Greystone had approximately 1,361 common shareholders
of record.
As of May 31, 2006, there were approximately 2,906 beneficial owners
(including those holding in street names) of Greystone's common stock.
DIVIDENDS
Greystone paid no cash dividends to its common shareholders during the last
two fiscal years and does not plan to pay any cash dividends in the near future.
SALES OF EQUITY SECURITIES
There were no sales of equity securities by Greystone during the fiscal
year ended May 31, 2006.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-KSB includes "forward looking statements" as
defined by the Securities and Exchange Commission. These statements concern
Greystone's plans, expectations and objectives for future operations. All
statements, other than statements of historical facts, included in this Form
10-KSB that address activities, events or developments that Greystone expects,
believes or anticipates will or may occur in the future are forward-looking
statements. The words "believe," "plan," "intend," "anticipate," "estimate,"
"project" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements include, among others, such things
as:
o expansion and growth of Greystone's business and operations;
o future financial performance;
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o future acquisitions and developments;
o potential sales of products;
o future financing activities; and
o business strategy.
These forward-looking statements are based on assumptions that Greystone
believes are reasonable based on current expectations and projections about
future events and industry conditions and trends affecting Greystone's business.
However, whether actual results and developments will conform to Greystone's
expectations and predictions is subject to a number of risks and uncertainties
that could cause actual results to differ materially from those contained in the
forward-looking statements, including those factors discussed under the section
of this Form 10-KSB entitled "Risk Factors." In addition, Greystone's historical
financial performance is not necessarily indicative of the results that may be
expected in the future and Greystone believes that such comparisons cannot be
relied upon as indicators of future performance.
RISK FACTORS
GREYSTONE OPERATES AT A LOSS.
The Company was incorporated on February 24, 1969. From April 1993 to
December 1997, the Company 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 a related service
business. In December 1997, the Company acquired all of the issued and
outstanding stock of Plastic Pallet Production, Inc., and its principal business
changed to selling plastic pallets. Since such time, the Company has continued
to incur losses from operations. There is no assurance that Greystone will
achieve profitability or obtain funds to finance continued operations.
GREYSTONE'S FINANCIAL STATEMENTS HAVE BEEN QUALIFIED ON A GOING CONCERN BASIS
AND GREYSTONE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING NECESSARY TO
SUSTAIN AND GROW ITS OPERATIONS.
Greystone's financial statements have been qualified on a going concern
basis principally due to lack of long term financing to achieve Greystone's goal
of producing and marketing plastic pallets to compete with wood pallets.
Greystone has funded its operations to date primarily through equity and debt
financings. Greystone will likely need additional debt or equity capital in
order to begin generating a sufficient cash flow to sustain operations for the
foreseeable future. In addition, Greystone will need to raise additional funds
to implement any expansion strategy. There can be no assurance that additional
financing will be available or, if available, that such financing will be on
favorable terms. Failure to obtain such additional financing could have a
material adverse effect on Greystone.
GREYSTONE HAS GRANTED SECURITY INTERESTS IN SUBSTANTIALLY ALL OF ITS ASSETS IN
CONNECTION WITH CERTAIN DEBT FINANCINGS AND OTHER TRANSACTIONS.
In connection with certain debt financings and other transactions,
Greystone has granted third
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parties security interests in substantially all of its assets pursuant to
agreements entered into with such third parties. Upon the occurrence of an event
of default under such agreements including the defaults that 1607 Commerce
claims exist as further described under "Sales and Leaseback of Dallas Plant and
Certain Production Equipment under Item 1 of this Form 10-KSB, the secured
parties may enforce their rights and Greystone may lose all or a portion of its
assets. In addition, Greystone may be subject to penalties at the time of any
default. As a result, Greystone could be forced to materially reduce its
business activities or cease operations.
GREYSTONE'S BUSINESS COULD BE AFFECTED BY CHANGES IN AVAILABILITY OF RAW
MATERIALS.
Greystone use 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 Greystone's raw
materials could change at any time for various reasons. For example, the market
demand for Greystone'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 Greystone's raw materials. Any interruption in the supply
of raw materials or components could have a material adverse effect on
Greystone. Furthermore, certain potential alternative suppliers may have
pre-existing exclusive relationships with Greystone's competitors and others
that may preclude Greystone from obtaining raw materials from such suppliers.
GREYSTONE'S BUSINESS COULD BE AFFECTED BY COMPETITION AND RAPID TECHNOLOGICAL
CHANGE.
Greystone currently faces competition from many companies that produce
wooden pallets at prices that are substantially lower than the prices Greystone
charge 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. Greystone could potentially
face additional competition from recycling and plastics companies, many of which
have substantially greater financial and other resources than Greystone and,
therefore, are able to spend more than Greystone in areas such as product
development, manufacturing and marketing. Competitors may develop products that
render Greystone's products or proposed products uneconomical or result in
products being commercialized that may be superior to Greystone's products. In
addition, alternatives to plastic pallets could be developed, which would have a
material adverse effect on Greystone.
GREYSTONE IS DEPENDENT ON A FEW LARGE CUSTOMERS.
Greystone derives, and expects that in the foreseeable future it will
continue to derive, substantially all of its revenue from a few large customers.
In fact, one of Greystone's customers currently accounts for approximately 85%
of its orders. There is no assurance that Greystone 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
Greystone.
14
GREYSTONE MAY NOT BE ABLE TO EFFECTIVELY PROTECT GREYSTONE'S PATENTS AND
PROPRIETARY RIGHTS.
Greystone relies upon 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 Greystone's trade secrets
will not otherwise become known to or independently developed by competitors,
that non-disclosure agreements will not be breached, or that Greystone would
have adequate remedies for any such infringement or breach. Litigation may be
necessary to enforce Greystone's proprietary rights or to defend Greystone
against third-party claims of infringement. Such litigation could result in
substantial cost to, and a diversion of effort by, Greystone and its management
and may have a material adverse effect on Greystone. Greystone's success and
potential competitive advantage is dependent upon its ability to exploit the
technology under these patents. There can be no assurance that Greystone will be
able to exploit the technology covered by these patents or that Greystone will
be able to do so exclusively.
GREYSTONE'S BUSINESS COULD BE AFFECTED BY CHANGING NEW LEGISLATION REGARDING
ENVIRONMENTAL MATTERS.
Greystone's business is subject to changing federal, state and local
environmental laws and regulations pertaining to the discharge of materials into
the environment, 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 Greystone's properties or any associated off-site disposal
location, or if contamination from prior activities is discovered at any of
Greystone's properties, Greystone may be held liable. No assurances can be given
that additional environmental issues will not require future expenditures. In
addition, both the plastics industry and Greystone 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 and 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 Greystone
believes that the legislation promulgated to date and such initiatives to date
have not had a material adverse effect on it, there can be no assurance that any
such future legislative or regulatory efforts or future initiatives would not
have a material adverse effect.
GREYSTONE'S BUSINESS COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
The testing, manufacturing and marketing of Greystone's products and
proposed products involve inherent risks related to product liability claims or
similar legal theories that may be asserted against Greystone, some of which may
cause Greystone to incur significant defense costs. Although Greystone currently
maintains product liability insurance coverage that it believes is adequate,
there can be no assurance that the coverage limits of its insurance will be
adequate under all circumstances or that all such claims will be covered by
insurance. In addition, these policies generally must be renewed every year.
While Greystone has been able to obtain product liability insurance in the past,
15
there can be no assurance it will be able to obtain such insurance in the future
on all of its existing or future products. A successful product liability claim
or other judgment against Greystone in excess of its insurance coverage, or the
loss of Greystone's product liability insurance coverage could have a material
adverse effect upon Greystone.
GREYSTONE CURRENTLY DEPENDS ON CERTAIN KEY PERSONNEL.
Greystone is dependent on the experience, abilities and continued services
of its current management. In particular, Warren Kruger, Greystone's former
President and CEO and current Vice Chairman, has played a significant role in
the development, management and financing of Greystone. The loss or reduction of
services of Warren Kruger or any other key employee could have a material
adverse effect on Greystone. In addition, there is no assurance that additional
managerial assistance will not be required, or that Greystone will be able to
attract or retain such personnel.
GREYSTONE'S EXECUTIVE OFFICERS AND DIRECTORS CONTROL A LARGE PERCENTAGE OF
GREYSTONE'S OUTSTANDING COMMON STOCK, WHICH ALLOWS THEM TO CONTROL MATTERS
SUBMITTED TO GREYSTONE'S SHAREHOLDERS FOR APPROVAL, AND ALL OF GREYSTONE'S 2003
PREFERRED STOCK, WHICH ENTITLES THEM TO CERTAIN VOTING RIGHTS, INCLUDING THE
RIGHT TO ELECT A MAJORITY OF GREYSTONE'S BOARD OF DIRECTORS.
Greystone's executive officers and directors (and their affiliates), in the
aggregate, own over 50% of Greystone's outstanding common stock. Therefore,
Greystone's executive officers and directors have the ability to decide the
outcome of matters submitted to Greystone's shareholders for approval (including
the election and removal of directors and any merger, consolidation or sale of
all or substantially all of Greystone's assets) and to control Greystone's
management and affairs. In addition, an entity that is wholly owned by
Greystone's executive officers and directors owns all of Greystone's outstanding
2003 preferred stock. The terms and conditions of Greystone's 2003 preferred
stock provide that such holder has the right to elect a majority of Greystone's
Board of Directors. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control, impeding a merger,
consolidation, takeover or other business combination or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain
control, which in turn could have an adverse effect on the market price of
Greystone's common stock.
CERTAIN RESTRICTED SHARES OF GREYSTONE 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 GREYSTONE'S COMMON STOCK.
Certain of the outstanding shares of Greystone's common stock are
"restricted securities" under Rule 144 of the Securities Act, and (except for
shares purchased by "affiliates" of Greystone as such term is defined in Rule
144) would be eligible for sale as the applicable holding periods expire or in
the event that the Company files a registration statement relating to such
shares. 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
16
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 Greystone 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. In addition, Greystone has
agreed to file a registration statement in connection with some of these
outstanding shares of restricted stock. Sales or the expectation of sales of a
substantial number of shares of common stock in the public market by selling
shareholders 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 Greystone's ability to raise capital at that time through
additional sales of its equity securities.
GREYSTONE'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
DEVELOP OR BE SUSTAINED.
There has been a limited public trading market for Greystone's common stock
and there can be no assurance that an active trading market will develop or be
sustained. There can be no assurance that Greystone's common stock will trade at
or above any particular price in the public market, if at all. The trading price
of Greystone's 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, Greystone's common stock should be
expected to experience substantial price changes in short periods of time. Even
if Greystone 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 Greystone's common stock
for the foreseeable future. In addition, the limited market for Greystone's
common stock may restrict Greystone's shareholders ability to liquidate their
shares.
GREYSTONE DOES NOT EXPECT TO DECLARE OR PAY ANY DIVIDENDS IN THE FORESEEABLE
FUTURE.
Greystone has not declared or paid any dividends on its common stock.
Greystone currently intends to retain future earnings to fund the development
and growth of its business, to repay indebtedness and for general corporate
purposes, and, therefore, does not anticipate paying any cash dividends on its
common stock in the foreseeable future. In addition, pursuant to the terms and
conditions of certain loan documentation between Greystone and F&M Bank and the
terms and conditions of Greystone's 2003 preferred stock, Greystone is
restricted in its ability to pay dividends to holders of its common stock.
17
GREYSTONE'S COMMON STOCK MAY BE SUBJECT TO SECONDARY TRADING RESTRICTIONS
RELATED TO PENNY STOCKS.
Certain transactions involving the purchase or sale of Greystone's common
stock may be affected by a 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, among other things, 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 Greystone's common
stock for their customers and the ability of persons now owning or subsequently
acquiring Greystone's common stock to resell such securities.
GREYSTONE MAY ISSUE ADDITIONAL EQUITY SECURITIES, WHICH WOULD LEAD TO FURTHER
DILUTION OF GREYSTONE'S ISSUED AND OUTSTANDING STOCK.
The issuance of additional common stock or securities convertible into
common stock would result in further dilution of the ownership interest in
Greystone held by existing shareholders. Greystone is authorized to issue,
without shareholder approval, 20,700,000 shares of preferred stock, $0.0001 par
value per share, in one or more series, which may give other shareholders
dividend, conversion voting and liquidation rights, among other rights, which
may be superior to the rights of holders of Greystone's common stock. In
addition, Greystone is authorized to issue, without shareholder approval, over
4,960,000,000 additional shares of its common stock and securities convertible
into common stock.
RESULTS OF OPERATIONS
GENERAL
The consolidated statements include Greystone and its wholly-owned
subsidiaries, Greystone Manufacturing, L.L.C., or GSM, and Plastic Pallet
Production, Inc., or PPP.
Greystone's primary business is the manufacturing and selling of plastic
pallets through its wholly owned subsidiaries GSM and PPP.
PPP 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, Greystone will receive a royalty of 5% of the gross
proceeds from sales of the PIPER 600.
As of May 31, 2006, Greystone had 75 full-time employees and used temporary
personnel as needed. The number of temporary personnel generally ranged from six
to ten during the past twelve months. Greystone's production capacity is about
69,000 plastic pallets per month, or 828,000 per year. Production levels have
generally been governed by sales and will increase as sales dictate.
18
Greystone 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, Greystone's effective tax rate is 0%. Greystone
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 Greystone'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, 2006, COMPARED TO YEAR ENDED MAY 31, 2005
Sales were $15,956,386 for fiscal year 2006 compared to $9,305,534 for
fiscal year 2005 for an increase of $6,650,852. The increase is due to the
addition of two production lines by GSM - one in February 2005 and one in August
2005.
Cost of sales was $15,030,690 (94% of sales) and $9,573,029 (103% of sales)
in fiscal years 2006 and 2005, respectively. The improvement in the ratio of
cost of sales to sales is due primarily to increases in sales prices and the
addition of the two production lines operating at near full capacity. The
overall high rate of cost of sales to sales is due in part to annual lease costs
of $576,000 for the PIPER 600 production line which operates at approximately
10% of designed capacity.
General and administrative expense was $2,248,719 for fiscal year 2006
compared to $3,449,422 in fiscal year 2005 for a decrease of $(1,200,703). This
decrease is primarily due to nonrecurring charges in 2005 of $691,527 relating
to the final amortization of intangibles and $400,000 relating to licensing fees
for fire retardant formulation with Westgate Capital, L.L.C., an entity of which
Warren Kruger, Vice Chairman, is an owner. In addition, decreases in 2006 of
$257,305 were attributable to travel expense and professional fees incurred in
2005 in seeking capital to provide for future growth.
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. In
addition, 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.
Interest expense was $1,013,830 in fiscal year 2006 compared to $692,341 in
fiscal year 2005 for an increase of $321,489. The increase is primarily
attributable to debt incurred in the acquisition of equipment and funding
provided by related parties for working capital.
19
The consolidated net loss, before the deduction for preferred dividends, in
fiscal year 2006 was $(2,335,153) compared to $(10,421,825) in fiscal year 2005
for a decrease of $8,086,672. This decrease results from the reasons discussed
above.
After deducting dividends to preferred shareholders of $513,938 and
$404,555 in fiscal years 2006 and 2005, respectively, the consolidated net loss
available to common shareholders was $(2,849,091) ($(0.12) per share of common
stock) in fiscal year 2006 compared to $(10,826,380) ($(0.60) per share of
common stock) in fiscal year 2005.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Greystone'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. Greystone
is dependent on outside sources of cash to fund its operations. As of May 31,
2006, revenues from sales remain insufficient to meet current liabilities.
A summary of cash flows for the year ended May 31, 2006 is as follows:
Cash used in operating activities $ (723,321)
Cash used in investing activities (1,626,658)
Cash provided by financing activities 2,349,494
Contractual obligations of Greystone are as follows:
OVER
TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
----- ------ --------- --------- -------
Long-term debt $12,941,639 $2,055,463 $ 8,452,167 $1,197,908 $1,236,101
Operating leases 5,808,000 786,000 1,572,000 1,572,000 1,878,000
----------- ---------- ----------- ---------- ----------
Total $18,749,639 $2,841,463 $10,024,167 $2,769,908 $3,114,101
=========== ========== =========== ========== ==========
To provide for the funding to meet Greystone's operating activities and
contractual obligations for fiscal 2007, Greystone is exploring various options
including long-term debt and equity financing. However, there is no guarantee
that Greystone will be able to raise sufficient capital to meet these
obligations.
Greystone has accumulated a working capital deficit of $(4,364,324) at May
31, 2006, which includes advances payable to related parties of $394,567,
current portion of long-term debt of $2,055,463 and accounts payable and accrued
liabilities of $2,740,555. This deficit reflects the
20
uncertain financial condition of Greystone resulting from its inability to
obtain long term financing from traditional financing sources. There is no
assurance that Greystone will secure such financing.
As described below, substantially all of the financing that Greystone has
received through May 31, 2006, has been provided by loans or through loan
guarantees from the officers and directors of Greystone, the offerings of
preferred stock to current and former officers and directors of Greystone in
2001 and 2003 and through a private placement of common stock completed in March
2005.
Greystone continues to be dependent upon its officers and directors 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
Greystone to continue operations.
Greystone has 50,000 outstanding shares of cumulative 2003 Preferred Stock
for a total of $5,000,000 with a preferred dividend rate of the prime rate of
interest plus 3.25%. Greystone does not anticipate that it will make cash
dividend payments to any holders of its preferred stock or its common stock
unless and until the financial position of Greystone improves through increased
revenues, another financing or otherwise.
ADVANCES AND LOANS FROM WARREN KRUGER
During 2006, Mr. Kruger advanced $429,100 to Greystone. Effective December
15, 2005, Greystone entered into a loan agreement with Warren Kruger to convert
$527,716 of the advances into a note payable at 7.5% interest and payable in
three equal installments of principal and accrued interest beginning January 15,
2008 through January 15, 2010. At May 31, 2006, note payable of $527,716,
advances of $382,318 and accrued interest of $28,718 were due to entities owned
or controlled by Warren Kruger.
During 2005, Warren Kruger advanced $1,256,925 to Greystone, was repaid
$807,669 and exchanged $515,672 of advances and accrued interest for common
stock, as discussed above in Note 9. Interest accrued on notes and advances to
entities owned or controlled by Warren Kruger totaled $45,871 in 2005. At May
31, 2005, advances of $452,216 and accrued interest of $10,485 were due to
entities owned or controlled by Warren Kruger.
LOANS FROM F&M BANK
On March 4, 2005, Greystone entered into a loan agreement with GLOG
Investment, L.L.C. ("GLOG") and The F&M Bank & Trust Company ("F&M), which,
among other things, sets forth certain terms applicable to a $1,500,000
revolving loan extended by F&M to GSM on or about December 18, 2004 and a new
$5,500,000 term loan extended by F&M to GSM on March 4, 2005. GLOG is wholly
owned by the following officers and/or directors of the Registrant: Marshall S.
Cogan (Non-Executive Chairman), Warren F. Kruger (Vice Chairman), Robert B.
Rosene, Jr. (Director) and Robert H. Nelson (Chief Financial Officer). GLOG was
a party to the loan agreement for the sole purpose of securing the funds
necessary to purchase 50,000 shares of Greystone's 2003
21
preferred stock previously owned by Paul A. Kruger. Amounts borrowed under the
revolving loan are represented by a promissory note, which bears interest at the
prime rate plus 1% and is payable in full on January 5, 2006. Substantially all
of the proceeds available under the revolving note have been used to retire the
loan from another bank. Amounts borrowed under the term loan are represented by
a promissory note, which bears interest at the prime rate plus 2% and GSM is
required to make monthly payments based upon a full fifteen year amortization of
the outstanding principal balance under the term note with any outstanding
principal and all accrued and unpaid interest payable in full on March 15, 2008.
Substantially all of the proceeds from the term loan have been used to refinance
certain short-term debt of GSM, including the repayment of the notes issued by
GSM to Greystone Plastics, Inc. and Bill Hamilton that were the subject of
dispute as further described under the heading "Acquisition of Greystone
Plastics, Inc." in Item 1 of this Form 10-KSB.
Greystone's obligations under the loan agreement with F&M are secured by a
lien in favor of F&M on substantially all of GSM's assets pursuant to the terms
of a security agreement and second mortgage. Also, pursuant to the terms of a
guaranty agreement, Greystone guaranteed GSM's performance and payment under the
notes. In addition, in order to induce F&M to enter into the loan agreement,
certain officers and directors of the Company (Messrs. Cogan, Kruger, Rosene and
Nelson) entered into a limited guaranty agreement with F&M and Mr. Rosene
entered into a pledge agreement with F&M.
ADVANCES AND LOANS FROM ROBERT ROSENE
In May 2005, Robert Rosene, a member of Greystone's Board of Directors,
advanced $500,000 to Greystone. During fiscal year 2006, Mr. Rosene advanced an
additional amount of $1,578,249. Effective December 15, 2005, Greystone entered
into a loan agreement with Mr. Rosene to convert $2,066,000 of the advances into
a note payable at 7.5% interest and payable in three equal annual installments
of principal and accrued interest beginning January 15, 2008 and ending January
15, 2010.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of Greystone are set forth on pages F-1 through
F-19 inclusive, found at the end of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
As of May 31, 2006, Greystone carried out an evaluation under the
supervision of Greystone's Chief Financial Officer (and interim principal
executive officer) of the effectiveness of the design and operation of
Greystone's disclosure controls and procedures pursuant to the Securities
22
Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation,
Greystone's Chief Financial Officer (and interim principal executive officer)
concluded that the disclosure controls and procedures as of May 31, 2006 were
effective.
During the quarter ended May 31, 2006, there was no change in Greystone's
internal controls over financial reporting that has materially affected, or that
is reasonably likely to materially affect, Greystone's internal control over
financial reporting.
ITEM 8B. OTHER INFORMATION
None.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following lists the directors and executive officers of Greystone.
Directors of Greystone are elected at annual meetings of shareholders unless
appointed by the Board of Directors to fill a vacancy upon the resignation or
removal of a member or an increase in the number of members of the Board of
Directors. Executive officers serve at the pleasure of the Board of Directors.
TERM AS DIRECTOR
NAME POSITION EXPIRES
---- -------- -------
Marshall S. Cogan Non-Executive Chairman 2006
Warren F. Kruger Vice Chairman 2006
Robert B. Rosene, Jr. Director 2006
Robert H. Nelson Chief Financial Officer N/A
MARSHALL S. COGAN, NON-EXECUTIVE CHAIRMAN OF BOARD OF DIRECTORS
Mr. Marshall S. Cogan was named Non-Executive Chairman of the Board of
Directors of Greystone effective July 19, 2004. Mr. Cogan is 68 years old and
was the former Vice Chairman of Cogan, Berlind, Weill & Levitt-Hayden Stone,
Inc. (predecessor to Shearson Lehman/American Express). Mr. Cogan has had over
40 years of industrial and financial experience with custodial responsibility
for the following companies: General Felt Industries, Inc.; Sheller-Globe
Corporation;
23
Color Tile, Inc.; Knoll International, Inc.; United Auto Group, Inc.; Foamex
International, Inc.; and the '21' Club.
Mr. Cogan has an undergraduate degree and M.B.A. from Harvard University.
He serves as a Trustee of New York University Hospital, Boston Latin School, New
York Museum of Modern Art and is a member of Harvard University serving on
several committees.
WARREN F. KRUGER, VICE CHAIRMAN AND DIRECTOR
Mr. Warren F. Kruger, Manager/CEO of privately held Yorktown Management &
Financial Services, L.L.C., is 49 years old. Yorktown Management is involved in
investment banking, real estate, manufacturing and energy endeavors. Mr. Kruger
earned a Bachelor of Business Administration degree from the University of
Oklahoma, and an Executive M.B.A. from Southern Methodist University. Mr. Kruger
has over twenty-five years experience in the financial services industry. In
1980, Mr. Kruger co-founded MCM Group, Ltd., which owned and controlled United
Bank Club Association, Inc. until 1996 when the firm was sold to a subsidiary of
Cendant Corp. (CD-NYSE). He also owned and operated Century Ice, a manufacturer
and distributor of ice products from 1996 to 1997, when Packaged Ice, Inc.,
acquired Century Ice in an industry rollup. Mr. Kruger is a partner with William
W. Pritchard in privately held WCC, with investments in oil and gas, real estate
and investment banking.
Mr. Kruger became a director of Greystone on January 4, 2002, and has
served as President and Chief Executive Officer since January 10, 2003.
MR. ROBERT B. ROSENE, JR., DIRECTOR
Mr. Rosene, age 51, is President of Seminole Energy Services, L.L.C., a
natural gas marketing and gathering company that he co-founded in 1998. Also in
1998, Mr. Rosene co-founded Summit Exploration, L.L.C., an oil and gas
production company that holds oil and gas production in several states. Mr.
Rosene has served as a director of publicly traded Syntroleum Corporation since
1985. Mr. Rosene has a B.A. with an emphasis in accounting from Oklahoma Baptist
University.
Mr. Rosene became a director of Greystone effective June 14, 2004.
ROBERT H. NELSON, CHIEF FINANCIAL OFFICER
From 2001 until joining Greystone's company in 2004, Mr. Robert H. Nelson,
age 60, was a financial consultant to the Key Auto Group, a retail automobile
dealership chain. Mr. Nelson served as Chief Financial Officer to Fusion
Telecommunications International, Inc., a provider of long distance
international communication systems from 1999 to 2001. Mr. Nelson has also
served as Chief Financial Officer of: United Auto Group, the second largest
publicly traded retail auto group in the United States from 1996 to 1999; Trace
International Holding, Inc., a privately owned company with controlling
interests in a variety of public and privately owned companies from 1987 to
1999;
24
and Ogden Allied Service and Allied Maintenance Corporation from 1982 to 1987.
Prior to that, Mr. Nelson was with Coopers and Lybrand, the predecessor to
PricewaterhouseCoopers from 1970 to 1981. Mr. Nelson is a certified public
accountant and a graduate of Manhattan College.
Mr. Nelson was named Chief Financial Officer effective as of November 1,
2004.
IDENTIFICATION OF THE AUDIT COMMITTEE; AUDIT COMMITTEE FINANCIAL EXPERT
Due to Greystone's size and stage of development, it has had difficulty
recruiting individuals to serve on its Board of Directors who are qualified to
serve as an audit committee financial expert on an audit committee. As of May
31, 2006, the Company had not established an audit committee and the entire
Board of Directors essentially serves as Greystone's audit committee.
CODE OF ETHICS
As of May 31, 2006, Greystone has not adopted a Code of Ethics applicable
to the Company's officers. Through May 31, 2006, Greystone's primary focus has
been on achieving profitability. Greystone intends to adopt a Code of Ethics
during fiscal year 2007.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Greystone's
directors, officers and persons who beneficially own more than 10% of any class
of the Company's equity securities registered under Section 12 to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of such registered securities of the Company. Officers,
directors and greater than 10% beneficial owners are required by regulation to
furnish to Greystone copies of all Section 16(a) reports they file.
Based solely on review of the copies of such reports furnished to Greystone
and any written representations that no other reports were required during
fiscal 2006, to Greystone's knowledge, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
during fiscal 2006 were complied with on a timely basis, except as follows:
NUMBER OF TRANSACTIONS
NUMBER OF NOT REPORTED NUMBER OF
NAME LATE REPORTS ON A TIMELY BASIS REPORTS NOT FILED
---- ------------ ----------------- -----------------
Warren F. Kruger 1 2 0
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to named executive
officers during the
25
fiscal years ended May 31, 2004, 2006 and 2006:
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NAME AND FISCAL YEAR SECURITIES UNDERLYING
PRINCIPAL POSITION ENDING MAY 31 SALARY BONUS OPTIONS/SARS (#)
------------------ ------------- ------ ----- ----------------
Warren F. Kruger, President 2006 $198,462 -0- -0-
and Chief Executive Officer(1) 2005 $240,000 -0- -0-
2004 $180,000 -0- -0-
Bobby L. Moore, 2006 $121,193 -0- -0-
President and Chief
Executive Officer(1)(2)
Robert H. Nelson, Chief 2006 $151,754 -0- -0-
Financial Officer(3) 2005 $ 78,461 -0- 1,000,000
Marshall Cogan, 2006 $ 123,192 -0- -0-
Non-Executive Chairman 2005 $ 153,846 -0- 1,250,000
------------------------
(1) Mr. Warren Kruger was succeeded by Bobby L. Moore as President and CEO
effective August 15, 2005.
(2) Mr. Bobby L. Moore's employment began August 15, 2005. Mr. Moore resigned
effective December 30, 2005.
(3) Mr. Robert H. Nelson's employment October 15, 2004.
There were no grants of stock options or SAR's during the fiscal year ended
May 31, 2006.
The following table provides information with respect to named executive
officers concerning the exercise of options during the fiscal year ended May 31,
2006, and unexercised options held as of May 31, 2006:
AGGREGATE OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
NUMBER OF SECURITIES
UNDERLYING
SHARED UNEXERCISED OPTIONS VALUE OF UNEXERCISED
ACQUIRED VALUE AT FY-END IN-THE-MONEY OPTIONS
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE FY-END EXERCISABLE/UNEXERCISABLE
Warren F. Kruger -0- N/A 231,250/43,750 -0-
Marshall Cogan -0- N/A 625,000/625,000 -0-
Robert H. Nelson -0- N/A 500,000/500,000 -0-
26
COMPENSATION OF DIRECTORS
Greystone does not pay cash compensation to the members of its Board of
Directors, except as disclosed in the above "Summary Compensation Table." From
time to time in the past, Greystone has granted options to the members of its
Board of Directors under its stock option plan as compensation for serving on
Greystone's Board of Directors. There were no options granted to any members of
its Board of Directors during the fiscal year ended May 31, 2006 as
consideration for serving on its Board.
EMPLOYMENT CONTRACTS
Greystone entered into an employment agreement dated August 13, 2003, with
Warren Kruger, Vice Chairman and Director, for a period of five years with three
automatic one-year renewal periods. Pursuant to the employment agreement, Mr.
Kruger is entitled to be paid a base annual salary of $240,000, and either Mr.
Kruger or Greystone may give the other party at least ninety days prior written
notice that such party does not intend to renew the contract prior to the end of
the then-current term.
In October 2004, Greystone entered into an employment agreement with
Greystone's Non-Executive Chairman, Marshall S. Cogan, which was effective as of
August 1, 2004, and has a term that ends on July 13, 2007. Pursuant to the
employment agreement, Mr. Cogan received a base salary of $10,000 per month
through September 2004 and a base salary of $15,000 per month beginning October
1, 2004. Mr. Cogan is also entitled to an annual bonus determined by Greystone's
Board of Directors in an amount not less than 50% of the annual bonus to be
received by Greystone's Chief Executive Officer. Also pursuant to the employment
agreement, on December 1, 2004, Greystone granted to Mr. Cogan a warrant to
purchase 1,250,000 shares of Greystone's common stock at an exercise price of
$0.50 per share. The warrant became vested with respect to 25% of the shares
underlying the warrant on August 1, 2004, and will vest with respect to 25% of
the shares underlying the warrant on each September 30th of 2005, 2006 and 2007,
respectively, and may be exercised in whole or in part until September 13, 2013.
Beginning February 23, 2006, Greystone suspended payment or accrual of salary
pending further review by the Board of Directors as to performance of duties
under the contract.
On January 7, 2005, Greystone entered into an employment agreement with its
Chief Financial Officer, Robert H. Nelson, which was effective as of November 1,
2004, and has an initial
27
term of 30 months. Pursuant to the employment agreement, Mr. Nelson is entitled
to receive a base salary of $15,245 per month and an annual bonus determined by
Greystone's Board of Directors in an amount not less than $65,000 per year after
Greystone has met certain financial thresholds. Also pursuant to the employment
agreement and upon Mr. Nelson relocating to Tulsa, Oklahoma on February 1, 2005,
Greystone granted to Mr. Nelson an option to purchase up to 1,000,000 shares of
its common stock at an exercise price of $0.50 per share in accordance with the
terms of Greystone's stock option plan. The option vested with respect to 50% of
the shares underlying the option effective February 1, 2005, and will vest with
respect to another 50% on the date 30 months thereafter. Beginning January 26,
2006, Greystone reduced Mr. Nelson salary to $8,000 per month. Effective August
23, 2006, Greystone and Mr. Nelson entered into an agreement to negate the
employment agreement for which Mr. Nelson will receive a monthly salary of
$5,000 per month beginning August 2006 through December 31, 2006 and will
receive a guaranteed term of five years for his stock options regardless of his
employment status.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
As of May 31, 2006, Greystone had one equity incentive plan under which
equity securities have been authorized for issuance to Greystone's directors,
officers, employees and other persons who perform substantial services for or on
behalf of Greystone. The following table provides certain information relating
to such stock option plan during the year ended May 31, 2006:
EQUITY COMPENSATION PLAN INFORMATION
(A) (B) (C)
-------------------------- ------------------- ------------------------------
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE EXERCISE PRICE OF UNDER EQUITY COMPENSATION
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------- -------------------------- ------------------- ------------------------
Equity compensation plans approved
by security holders 3,610,000 $1.06 16,365,000
Equity compensation plans approved
by security holders -0- N/A -0-
--------- ----- ----------
Total 3,610,000 $1.06 16,365,000
28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of August 18, 2006, Greystone had 24,061,201 shares of its common stock
and 50,000 shares of its 2003 preferred stock outstanding. Each share of the
2003 preferred stock is convertible into approximately 66.67 shares of
Greystone's common stock.
The following table sets forth certain information regarding the shares of
Greystone's common stock beneficially owned as of May 31, 2006, by (i) each
person known by Greystone to own beneficially 5% or more of Greystone's
outstanding common stock, (ii) each of Greystone's directors and officers, and
(iii) all of Greystone's directors and officers as a group:
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Owner(1) Percent of Class(2)
---------------- ------------------- -------------------
Paul A. Kruger 3,498,098(3) 14.6%
2500 South McGee, Ste. 147
Norman, OK 73072
Hildalgo Trading Company, LC 1,767,014(4) 7.3%
2500 South McGee
Norman, OK 73072
GLOG Investment, L.L.C. 3,333,333(5) 12.2%
1613 E. 15th Street
Tulsa, OK 74160
Warren F. Kruger 12,050,112(6) 41.6%
Vice Chairman and Director
1613 East 15th Street
Tulsa, OK 74120
Robert H. Nelson 4,657,502(7) 16.4%
Chief Financial Officer
1613 East 15th Street
Tulsa, OK 74120
Marshall S. Cogan 6,079,177(8) 21.2%
Director
New York, NY
Robert B. Rosene, Jr. 7,977,231(9) 27.3%
Director
Tulsa, OK
All Directors & Officers as a
Group (4 persons) 20,764,023(10) 62.5%
------------------------
(1) The number of shares beneficially owned by each holder is calculated in
accordance with the rules of the Commission, which provide that each holder
shall be deemed to be a beneficial owner of a security if that holder has
the right to acquire
29
beneficial ownership of the security within 60 days through options,
warrants or the conversion of another security; provided, however, if such
holder acquires any such rights in connection with or as a participant in
any transaction with the effect of changing or influencing control of the
issuer, then immediately upon such acquisition, the holder will be deemed
to be the beneficial owner of the securities. The number the shares of
common stock beneficially owned by each holder includes common stock
directly owned by such holder and the number of shares of common stock such
holder has the right to acquire upon the conversion of 2003 preferred stock
and/or upon the exercise of certain options or warrants.
(2) The percentage ownership for each holder is calculated in accordance with
the rules of the Commission, which provide that any shares a holder is
deemed to beneficially own by virtue of having a right to acquire shares
upon the conversion of warrants, options or other rights, or upon the
conversion of preferred stock or other rights are considered outstanding
solely for purposes of calculating such holder's percentage ownership.
(3) The total includes: (i) 1,205,584 shares of common stock beneficially owned
directly or indirectly; (ii) 225,000 shares of common stock that Paul
Kruger directly has the right to acquire in connection with options; (iii)
1,767,014 shares held of record by Hildalgo Trading Company, LC, an entity
wholly owned by Mr. Kruger; (iv) 300,500 held by Paceco Financial Services,
Inc, an entity owned by Mr. Kruger.
(4) The total includes 1,767,014 shares of common stock beneficially owned
directly by Hildalgo Trading Company, LC. By virtue of his ownership of and
control over Hildalgo Trading Company, LC, these shares are also included
in the number of shares beneficially owned by Paul Kruger.
(5) The total includes 3,333,333 shares of common stock deemed to be owned
directly by GLOG Investment, L.L.C. by virtue of its ownership of the 2003
Preferred Stock, which is convertible into common stock. GLOG is wholly
owned by the following officers and/or directors of the Registrant: Warren
F. Kruger (Director), Marshall S. Cogan (Director), Robert B. Rosene, Jr.
(Director) and Robert H. Nelson, Chief Financial Officer. By virtue of
their ownership of and control over GLOG, these shares are also included in
the number of shares beneficially owned by each of Warren F. Kruger,
Marshall S. Cogan, Robert B. Rosene, Jr. and Robert H. Nelson.
(6) The total includes: (i) 5,920,805 shares of common stock beneficially owned
directly by Warren Kruger; (ii) 1,198,299 shares of common stock that Mr.
Kruger has the right to acquire in connections with warrants (iii) 19,000
shares held of record by Yorktown; (iv) 237,500 shares of common stock that
Warren Kruger directly has the right to acquire in connection with options;
(v) 1,142,857 shares and an additional 153,818 shares which Westgate has
the right to acquire in connection with warrants, owned by Westgate
Capital, L.L.C., an entity of which Warren Kruger owns 50%; (vi) 44,500
shares of common stock that Warren Kruger holds on behalf of his minor
children, of which he only holds the power to vote; and (vii) 3,333,333
shares that GLOG Investment, L.L.C. has the right to acquire upon
conversion of the 2003 preferred stock. By virtue of his ability to control
GLOG Investment, L.L.C., Warren Kruger is also deemed to beneficially own
the shares directly owned by GLOG.
(7) The total includes: (i) 500,000 shares of common stock that Robert Nelson
directly has the right to acquire in connection with options; (ii) 500,000
shares of common stock that Robert Nelson directly has the right to acquire
in connection with warrants; (iii) 285,714 shares of common stock
beneficially owned by Mr. Nelson's wife, of which he disclaims any
interest; (iv) 38,455 shares of common stock that Mr. Nelson's wife has the
right to acquire in connection with warrants, of which he disclaims any
interest; and (v) 3,333,333 shares that GLOG Investment, L.L.C. has the
right to acquire upon conversion of the 2003 preferred stock .
(8) The total includes: (i) 1,428,571 shares of common stock beneficially owned
directly by Marshall Cogan; (ii) 625,000 shares of common stock that Mr.
Cogan directly has the right to acquire in connection with options; (iii)
692,273 shares of common stock that Mr. Cogan directly has the right to
acquire in connection with warrants; and (iii) 3,333,333 shares that GLOG
Investment, L.L.C. has the right to acquire upon conversion of the 2003
preferred stock. By virtue of his ability to control GLOG, Marshall Cogan
is also deemed to beneficially own the shares directly owned by GLOG.
(9) The total includes: (i) 2,770,951 shares of common stock beneficially owned
directly by Robert Rosene; (ii) 1,872,947 shares of common stock that
Robert Rosene directly has the right to acquire in connection with
warrants; and (iii) 3,333,333 shares that GLOG Investment, L.L.C. has the
right to acquire upon conversion of the 2003 preferred stock. By virtue of
his ability to control GLOG, Robert Rosene is also deemed to beneficially
own the shares directly owned by GLOG.
(10) The total includes: (i) 11,612,398 outstanding shares, (ii) 1,362,500
shares issuable upon exercise of vested stock options, (iii) 4,455,792
shares issuable upon exercise of vested warrants and (iv) 3,333,333 shares
that GLOG Investment, L.L.C. has the right to acquire upon conversion of
the 2003 preferred stock. By virtue of their ownership of and control over
GLOG, these shares are also included in the number of shares beneficially
owned by the directors and officers as a group.
30
CHANGE IN CONTROL
Effective March 8, 2005, GLOG Investment, L.L.C., which is owned by
Marshall Cogan, Non-Executive Chairman, Warren F. Kruger, Vice Chairman, and
Robert Rosene, Jr., Director, and Robert H. Nelson, Chief Financial Officer,
acquired the outstanding 50,000 shares of Series 2003 Preferred Stock from Paul
Kruger, a major shareholder of Greystone. In connection with such transaction,
the members of GLOG, as the holder of the Series 2003 Preferred Stock, possess
certain voting rights to elect a majority of the Board of Directors of
Greystone. These voting rights and other material terms and conditions of the
Series 2003 Preferred Stock are set forth in the Certificate of Designation
relating to such Series 2003 Preferred Stock included as an exhibit to a Current
Report on Form 8-K filed by Greystone on September 23, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH NYOK
Effective as of October 31, 2004, NYOK Partners, a general partnership
owned equally 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 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 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.
AGREEMENT 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, Greystone's 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.
31
ADVANCES AND LOANS
For information regarding loans from Warren Kruger, see "Loans from Warren
Kruger" under the heading "Liquidity and Capital Resources" in Item 6 of this
Form10-KSB.
For information regarding an advance from Robert Rosene, see "Advances and
Loans from Robert Rosene" under the heading "Liquidity and Capital Resources" in
Item 6 of this Form10-KSB.
SALE AND LEASEBACK
As of September 8, 2003, Greystone's Dallas plant and certain production
equipment were sold to 1607 Commerce, an entity owned by Paul Kruger, and leased
back to PPP. For more information on this sale and leaseback transaction, see
"Sale and Leaseback of Dallas Plant and Certain Production Equipment" under Item
1 of this Form 10-KSB. During the year ended May 31, 2005, Greystone paid rents
of $255,480 to 1607 Commerce.
TECHNOLOGY LICENSE AGREEMENT
In April 2001, Greystone entered into a license agreement with WCC, an
entity owned by Warren Kruger and William Pritchard, providing for Greystone to
have the exclusive right and license to use fire retardancy technology then
being developed under the direction and expense of WCC. The license agreement
was negotiated and executed 9 months before Warren Kruger, William Pritchard, or
entities with which they are affiliated became directors or beneficial owners of
10% or more of Greystone's common stock in January 2002. Under the agreement,
Greystone must pay the greater of 2.5% of Greystone's gross monthly revenues
derived from the sale of UL listed pallets using the technology or a minimum
monthly royalty of $10,000. However, WCC also agreed in the license agreement to
convey to Greystone ownership of the licensed Process (as defined in the
agreement) in the event that cumulative royalties paid by Greystone equaled
$250,000 during the first two years of the agreement, subject to an override or
carried interest in favor of WCC equal to 2.5% of the gross monthly revenues
which are the same payments as would have been received under the license
agreement. Subsequent to the execution of the original agreement which provided
for a "coating" technology, Westgate Capital Company, L.L.C., developed an
additive process which Greystone used to successfully complete UL testing. The
technology is currently known as CJ2(TM).
During fiscal year 2005, Greystone accrued $400,000 of past licensing fees
under the license agreement and accordingly Greystone has entered into a paid-up
licensing agreement with Westgate Capital Company, L.L.C. This liability was
subsequently settled through the issuance of common stock during fiscal year
2005.
32
OTHER TRANSACTIONS
For information relating to an arrangement entered into between Greystone
and Yorktown Management and Financial Services, L.L.C., and entity wholly owned
by Greystone's Vice Chairman, Warren Kruger, relating to the prepayment for
resin on Greystone's behalf. See "Other Business" under Item 1 of this Form
10-KSB.
For information regarding employment contracts, see "Employment Contracts"
under Item 10 of this Form 10-KSB.
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).
4.2 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).
33
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).
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).
34
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 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
35
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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).
36
10.26** Employment Agreement between PalWeb Corporation and Warren Kruger
dated August 13, 2003 (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).
10.27** 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).
10.28** 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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).
10.33 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).
37
10.34 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).
10.35 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).
10.36 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).
10.37 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).
10.38 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).
10.39 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).
10.40 Promissory Note dated as of June 17, 2005 in the amount of
$500,100 issued by Greystone Logistics, Inc. and Greystone
Manufacturing, L.L.C. to Robert B. Rosene, Jr. (incorporated
herein by reference to Exhibit 10.1 of the Company's Form 10-QSB
for the Quarterly Period Ended November 30, 2005, which was filed
with the SEC on January 17, 2006).
10.41 Promissory Note dated as of December 15, 2005 in the amount of
$2,066,000 issued by Greystone Logistics, Inc. and Greystone
Manufacturing, L.L.C. to Robert B. Rosene, Jr. (incorporated
herein by reference to Exhibit 10.2 of the Company's Form 10-QSB
for the Quarterly Period Ended November 30, 2005, which was filed
with the SEC on January 17, 2006).
38
10.42 Promissory Note dated as of December 15, 2005 in the amount of
$527,716 issued by Greystone Logistics, Inc. and Greystone
Manufacturing, L.L.C. to Warren F. Kruger, Jr. (incorporated
herein by reference to Exhibit 10.3 of the Company's Form 10-QSB
for the Quarterly Period Ended November 30, 2005, which was filed
with the SEC on January 17, 2006).
10.43 Security Agreement dated as of December 15, 2005 by and between
Greystone Logistics, Inc. and Greystone Manufacturing, L.L.C. and
Robert B. Rosene, Jr. relating to Promissory Note in the amount
of $500,100 (incorporated herein by reference to Exhibit 10.4 of
the Company's Form 10-QSB for the Quarterly Period Ended November
30, 2005, which was filed with the SEC on January 17, 2006).
10.44 Security Agreement dated as of December 15, 2005 by and between
Greystone Logistics, Inc. and Greystone Manufacturing, L.L.C. and
Robert B. Rosene, Jr. relating to Promissory Note in the amount
of $2,066,000 (incorporated herein by reference to Exhibit 10.5
of the Company's Form 10-QSB for the Quarterly Period Ended
November 30, 2005, which was filed with the SEC on January 17,
2006).
10.45 Security Agreement dated as of December 15, 2005 by and between
Greystone Logistics, Inc. and Greystone Manufacturing, L.L.C. and
Warren F. Kruger, Jr. relating to Promissory Note in the amount
of $527,716 (incorporated herein by reference to Exhibit 10.6 of
the Company's Form 10-QSB for the Quarterly Period Ended November
30, 2005, which was filed with the SEC on January 17, 2006).
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. (submitted herewith).
23.1 Consent of Murrell, Hall, McIntosh & Co., PLLP (submitted
herewith).
31.1 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. 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).
39
** Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to Greystone by Murrell, Hall
& McIntosh, PLLP, Greystone's independent registered public accounting firm, for
professional services rendered for the fiscal years ended May 31, 2006 and May
31, 2005:
Fee Category Fiscal 2006 Fees Fiscal 2005 Fees
---------------- ----------------
Audit Fees(1) $ 36,400 $ 44,065
Audit-Related Fees 0 0
Tax Fees 0 0
All Other Fees 0 0
---------- ----------
Total Fees $ 36,400 $ 44,065
========== ==========
------------------------
(1)Audit Fees consist of aggregate fees billed for professional services
rendered for the audit of Greystone's annual financial statements and review of
the interim financial statements included in quarterly reports or services that
are normally provided by the independent registered public accounting firm in
connection with statutory and regulatory filings or engagements during the
fiscal years ended May 31, 2006 and May 31, 2005, respectively.
The entire Board of Directors of Greystone is responsible for the
appointment, compensation and oversight of the work of the independent
registered public accounting firm and approves in advance any services to be
performed by the independent registered public accounting firm, whether
audit-related or not. The entire Board of Directors reviews each proposed
engagement to determine whether the provision of services is compatible with
maintaining the independence of the independent registered public accounting
firm. All of the fees shown above were pre-approved by the entire Board of
Directors.
40
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: 09/13/06 /s/ Robert H. Nelson
------------------------------
Robert H. Nelson, Chief Financial Officer
(Principal Financial and 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: 09/13/06 /s/ Robert H. Nelson
--------------------------------------------
Robert H. Nelson, Chief Financial Officer
(Principal Financial and Accounting Officer
and interim principal executive officer)
Date: 09/13/06
--------------------------------------------
Marshall S. Cogan, Director
Date: 09/13/06 /s/ Warren F. Kruger
--------------------------------------------
Warren F. Kruger, Director
Date: 09/13/06 /s/ Robert B. Rosene, Jr.
--------------------------------------------
Robert B. Rosene, Jr., Director
41
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
42
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. (an Oklahoma corporation) and its subsidiaries as of May 31,
2006, and the related consolidated statements of operations, changes in
stockholders' equity (deficiency) and cash flows for each of the years ended May
31, 2006 and 2005. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required, 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. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Greystone Logistics, Inc. and its subsidiaries as of May 31, 2006, and the
consolidated results of their operations and cash flows for each of the years
ended May 31, 2006 and 2005, 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, 2006 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.
MURRELL, HALL, MCINTOSH & CO., PLLP
Oklahoma City, Oklahoma
September 13, 2006
F-1
GREYSTONE LOGISTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
May 31, 2006
ASSETS
------
CURRENT ASSETS:
Cash $ 925
Accounts receivable 842,375
Inventory 631,236
Prepaid expenses 8,913
------------
TOTAL CURRENT ASSETS 1,483,449
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 8,028,275
OTHER ASSETS 151,661
------------
TOTAL ASSETS $ 9,663,385
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,055,463
Cash overdraft 143,928
Advances payable - related parties 394,567
Accounts payable and accrued expenses 2,740,555
Preferred dividends payable 513,260
------------
TOTAL CURRENT LIABILITIES 5,847,773
LONG-TERM DEBT, NET OF CURRENT PORTION 10,886,176
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 52,278,594
Deficit (59,351,569)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (7,070,564)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 9,663,385
============
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,
----------------------------
2006 2005
------------ ------------
Sales $ 15,956,386 $ 9,305,534
Cost of Sales, including depreciation expense of
$745,244 and $591,905 in 2005 and 2004, respectively 15,030,690 9,573,029
------------ ------------
Gross Profit (Loss) 925,696 (267,495)
Expenses:
General, selling and administration expenses 2,248,719 3,449,422
Impairment costs -- 5,719,658
Relocation costs -- 355,000
------------ ------------
Total expenses 2,248,719 9,524,080
------------ ------------
Operating Loss (1,323,023) (9,791,575)
Other Income (Expense):
Other income 1,700 62,091
Interest expense (1,013,830) (692,341)
------------ ------------
Total Other Income (Expense) (1,012,130) (630,250)
------------ ------------
Net Loss (2,335,153) (10,421,825)
Preferred Dividends 513,938 404,555
------------ ------------
Net Loss Available to Common Stockholders $ (2,849,091) $(10,826,380)
============ ============
Loss Available to Common Stockholders
Per Share of Common Stock - Basic and Diluted $ (0.12) $ (0.60)
============ ============
Weighted Average Shares of Common Stock Outstanding 24,061,000 17,950,000
============ ============
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 Stockholders'
Preferred Stock Common Stock Capital Deficit Deficiency
--------------------------- --------------------------- ------------ ------------ ------------
Balances, May 31, 2004 50,000 $ 5 12,790,451 $ 1,279 $ 48,265,496 $(45,676,098) $ 2,590,682
Stock issued in
exchange for debt -- -- 5,985,037 598 2,099,565 -- 2,100,163
Sales of common stock -- -- 5,285,713 529 1,849,471 -- 1,850,000
Preferred dividends
paid or accrued -- -- -- -- -- (404,555) (404,555)
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)
Preferred dividends
paid or accrued -- -- -- -- (513,938) (513,938)
Compensation cost of
stock options -- -- -- -- 64,062 -- 64,062
Net loss -- -- -- -- -- (2,335,153) (2,335,153)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances, May 31, 2006 50,000 $ 5 24,061,201 $ 2,406 $ 52,278,594 $(59,351,569) $ (7,070,564)
============ ============ ============ ============ ============ ============ ============
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,
----------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,335,153) $(10,421,825)
Adjustments to reconcile net loss to cash used
in operating activities
Depreciation and amortization 768,438 1,296,601
Impairments -- 5,719,658
Stock option compensation costs 64,062 --
Loss on sale of equipment 12,887 --
Expenses paid by issuance of common stock -- 415,900
Changes in accounts receivable 731,260 (622,039)
Changes in inventory (95,713) (14,147)
Changes in prepaid expenses 2,019 (10,932)
Changes in accounts payable and accrued expenses 128,879 699,577
------------ ------------
Net cash used in operating activities (723,321) (2,937,207)
Cash Flows from Investing Activities:
Purchase of property and equipment (1,626,658) (426,054)
------------ ------------
Net cash used in investing activities (1,626,658) (426,054)
Cash Flows from Financing Activities:
Proceeds from notes and advances payable 2,960,267 8,402,650
Payments on notes and advances payable (720,238) (6,730,712)
Bank overdraft 143,928 --
Proceeds from issuance of common/preferred stock -- 1,850,000
Dividends paid on preferred stock (34,463) (431,352)
------------ ------------
Cash provided by financing activities 2,349,494 3,090,586
------------ ------------
Net Increase (Decrease) in Cash (485) (272,675)
Cash, beginning of year 1,410 274,085
------------ ------------
Cash, end of year $ 925 $ 1,410
============ ============
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. There is no allowance for
doubtful accounts at May 31, 2006.
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
Office equipment & furniture & fixtures 3- 5 years
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.
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 15 for recognition of impairment of
the unamortized balance of goodwill during fiscal year 2005.
Intangible cost for the acquisition of customer's purchase orders,
resulting from the acquisition of the assets of Greystone Plastics, Inc.
effective September 8, 2003, was being amortized by the unit of production
method based on unit sales to the customer. However, an impairment charge
for the unamortized balance was recognized during fiscal year 2005 as
discussed further in Note 15.
PATENTS
Amortization expense for the costs incurred by Greystone 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
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), "Share-Based Payment." This statement is a revision of
SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25,
F-7
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS No. 123(R) requires companies to recognize in the income
statement the grant-date fair value of stock options and other equity-based
compensation issued to employees and is effective for interim or annual
periods beginning after December 15, 2005. The Company has adopted SFAS No.
123(R) as of March 1, 2006, using the modified prospective transition
method. Under the modified prospective transition method, awards that are
granted, modified or settled after the date of adoption will be measured in
accordance with SFAS No. 123(R). Unvested equity-classified awards that
were granted prior to March 1, 2006 will be accounted for using the
straight-line basis for recognizing compensation costs in accordance with
SFAS No. 123, except that the amounts will be recognized in the Company's
consolidated statements of operations. The effect of adopting SFAS No.
123(R) is a charge in the amount of $64,062 to compensation expense during
the quarter ended and the year ended May 31, 2006.
Prior to March 1, 2006, Greystone applied 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 used the intrinsic value-based method of accounting
under APB No. 25, through March 1, 2005, the adoption date of SFAS No.
123(R).
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 on 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.
EARNINGS (LOSS) PER SHARE
Basic loss per share is computed by dividing the loss available to common
stockholders
F-8
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, warrants and stock options are not considered as their
effect is antidilutive.
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. Historically,
management has been successful in financing its 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, 2006 consists of:
Raw materials $ 554,316
Finished goods 76,920
---------
Total inventory $ 631,236
=========
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
A summary of the property, plant and equipment at May 31, 2006, is as
follows:
Production machinery and equipment $ 7,312,815
Building and land 2,615,742
Furniture and fixtures 159,809
----------
10,088,366
Less: accumulated depreciation (2,060,091)
-----------
$ 8,028,275
===========
F-9
Depreciation expense for the years ended May 31, 2006 and 2005 is $755,148
and $594,989, respectively.
NOTE 5. OTHER ASSETS
At May 31, 2006 other assets consist of:
Patents, net of accumulated amortization of $52,878 $ 137,861
Deposits 13,800
----------
Total Other Assets $ 151,661
==========
Amortization of intangibles was $13,290 and $705,517 for 2006 and 2005,
respectively. Included in amortization expense for 2005 is $693,206 for
amortization of capitalized customer's purchase order 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, 2006 consists of the following:
Note payable to F&M Bank & Trust Company, prime rate of
interest plus 2%, due March 18, 2008, payable
in monthly installments of $51,472 $ 5,319,215
Note payable to F&M Bank & Trust Company, prime rate of
interest plus 1%, due January 5, 2007 1,400,000
Note payable to Greystone Plastics, Inc., 7% interest, due
September 7, 2018, payable in monthly installments of
$13,889 plus accrued interest 2,069,441
Note payable to First Bartlesville Bank, prime rate of
interest plus 1%, due July 1, 2008, payable in monthly
installments of $6,441 390,082
Note payable to Robert Rosene, 7.5% interest, due
January 15, 2010, payable in three equal annual
installments of principal and interest beginning
January 15, 2008 2,066,000
Note payable to Robert Rosene, prime rate of interest
plus 0.5%, due July 1, 2008, payable in monthly
installments of $7,546 458,177
F-10
Note payable to Warren Kruger, 7.5% interest, due
January 15, 2010, payable in three equal annual
installments of principal and interest beginning
January 15, 2007 527,716
Capitalized lease purchase agreement with related party,
7.5% interest, due February 18, 2009, payable in
monthly installments of $21,136 710,621
Other notes payable 387
-----------
Total 12,941,639
Less: Current portion 2,055,463
-----------
Long-term debt $10,886,176
===========
The prime rate of interest as of May 31, 2006 was 8%.
The note payable to Greystone Plastics is secured by land and building with
a net book value of $2,431,997.
The note payable to First Bartlesville Bank is secured by equipment with a
net book value of $1,123,765.
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, 2006.
Maturities of long-term debt for the five years after May 31, 2006
are $2,055,463, $6,501,845, $1,950,322, $1,031,240, $166,668, and $1,236,101
thereafter.
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 for period from July 1,
2004 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 in 2005 through the date of his resignation
for grinding services to Whaco Plastics, an entity also owned by Bill
Hamilton.
F-11
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 President and Chief Executive Officer, 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 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. During 2006, Greystone paid $44,000 to
NYOK for grinding fees.
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, amended
to $17,500 beginning January 1, 2006. Greystone paid Greystone Properties,
LLC, rent of $20,000 per month for the period from beginning August 1,
2004, $25,000 per month beginning November 30, 2004 and $17,500 beginning
January 1, 2006. The industrial building is located adjacent to Greystone's
plant in Bettendorf, Iowa.
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. 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 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. During 2005, the total amount paid to 1607
Commerce Limited Partnership under these leases totaled $657,200. Effective
March 1, 2005, Greystone notified 1607 Commerce Limited Partnership that
pursuant to the breach of certain provisions of the lease, Greystone
considered the lease on the building located at 1607 West Commerce, Dallas,
F-12
Texas, terminated. During 2006, Greystone has made no payments to 1607
Commerce Limited Partnership with respect to the equipment lease, but has
accrued $576,000 for the year.
TRANSACTIONS WITH WARREN KRUGER, VICE CHAIRMAN
During 2006, Mr. Kruger advanced $429,100 to Greystone. Effective December
15, 2005, Greystone entered into a loan agreement with Warren Kruger to
convert $527,716 of the advances into a note payable at 7.5% interest and
payable in three equal installments of principal and accrued interest
beginning January 15, 2008 through January 15, 2010. At May 31, 2006, note
payable of $527,716, advances of $382,318 and accrued interest of $28,718
were due to entities owned or controlled by Warren Kruger.
During 2005, Warren Kruger advanced $1,256,925 to Greystone, was repaid
$807,669 and exchanged $515,672 of advances and accrued interest for common
stock, as discussed above in Note 9. Interest accrued on notes and advances
to entities owned or controlled by Warren Kruger totaled $45,871 in 2005.
At May 31, 2005, advances of $452,216 and accrued interest of $10,485 were
due to entities owned or controlled by Warren Kruger.
Greystone also reimburses an entity owned by Warren Kruger for office rent
at the rate of $1,500 per month.
TRANSACTIONS WITH ROBERT ROSENE, DIRECTOR
In May 2005, Robert Rosene, a member of Greystone's Board of Directors,
advanced $500,000 to Greystone. During fiscal year 2006, Mr. Rosene
advanced and additional amount of $1,578,249. Effective December 15, 2005,
Greystone entered into a loan agreement with Mr. Rosene to convert
$2,066,000 of the advances into a note payable at 7.5% interest and payable
in three equal installments of principal and accrued interest beginning
January 15, 2008 through January 15, 2010.
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 16, Commitments and Contingencies, for further discussion of the
licensing fee.
OTHER TRANSACTIONS
See also Note 9, "Stockholders' Equity."
F-13
NOTE 8. FEDERAL INCOME TAXES
Deferred taxes as of May 31, 2006 and 2005 are as follows:
2006 2005
------------ ------------
Deferred Tax Assets:
Net operating loss $ 9,358,497 $ 8,407,180
Amortization of intangibles 1,725,005 1,862,650
Capital loss carryover 1,059,440 1,057,740
Accrued expenses 145,349 10,526
Allowance for doubtful accounts -- 64,724
------------ ------------
Total deferred tax assets 12,288,291 11,402,820
Deferred Tax Liabilities:
Depreciation of property and equipment,
Tax in excess of financial reporting (5,455) (45,636)
------------ ------------
12,282,836 11,357,184
Less: Valuation allowance (12,282,836) (11,357,184)
------------ ------------
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 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:
2006 2005
----------- -----------
Net operating loss $ 951,317 $ 1,832,089
Depreciation of property and equipment 40,181 199,170
Amortization of intangibles (137,645) 1,779,956
Accrued expenses 14,123 (140,622)
Loss on investments 1,700
Allowance for doubtful accounts (64,724) 41,017
Change in valuation allowance (804,952) (3,711,610)
----------- -----------
Total $ -- $ --
=========== ===========
Greystone's effective tax rate for the year ended May 31, differs from the
federal statutory rate as follows:
F-14
2006 2005
----------- -----------
Tax benefit using statutory rates $ 772,171 $ 4,837,970
Net change in valuation allowance (804,952) (4,854,860)
Other 32,781 16,890
----------- -----------
Tax benefit, per financial statements $ -- $ --
=========== ===========
Greystone has a net operating loss (NOL) for Federal income tax purposes as
of May 31, 2006 of $27,525,000 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
2,798,000 2026
Pursuant to Internal Revenue Code Section 382 and due to a change in
control of Greystone, the amount of operating loss which may be applied in
any one year will be substantially limited.
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
Warren Kruger, Vice Chairman and 1,473,347 $515,671 77,837 64,864 55,598
Director(1)
F-15
Robert Nelson, 285,714 $100,000 15,094 12,579 10,782
Chief Financial Officer
Westgate Capital, LLC(1)(2) 1,142,857 $400,000 60,377 50,314 43,127
All Others 6,910,261 $2,418,592 365,073 304,228 260,768
--------- ---------- ------- ------- -------
Total 11,240,750 3,934,263 593,853 494,878 242,183
========== ========== ======= ======= =======
(1) Warren Kruger exchanged debt and accrued interest for the common stock
and warrants.
(2) Warren Kruger is a member of Westgate Capital, LLC.
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 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.
A summary of outstanding warrants for the years ending May 31 is as
follows:
2005 2006
--------------------- ---------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
--------- -------- --------- --------
Beginning of year -- $ -- 5,012,914 $ 0.585
Additions 5,012,914 0.585 -- --
End of year 5,012,914 $ 0.585 5,012,914 $0.585
F-16
All warrants issued and outstanding have a term of five years.
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.
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, 2006. 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,
2006:
Weighted
Average
Shares Exercise
(000's) Price
------ ------
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
------ ------
F-17
Options outstanding at May 31, 2005 3,960 1.01
Options cancelled (350) 0.62
------ ------
Options outstanding at May 31, 2006 3,610 $ 1.06
====== ======
Exercisable as of May 31, 2004 1,131 $ 2.16
====== ======
Exercisable as of May 31, 2005 2,045 $ 1.41
====== ======
Exercisable as of May 31, 2006 2,404 $ 1.33
====== ======
With respect to options outstanding at May 31, 2006:
Weighted
Options Weighted Average
Range Outstanding Average Life Price Exercisable
----- ----------- ------------ ----- -----------
$0.50-$0.55 2,700,000 7.1 years $0.51 1,512,250
$1.60 185,000 5.9 years $1.60 166,250
$2.00 135,000 3.4 years $2.00 135,000
$3.125-$4.00 590,000 6.4 years $3.18 590,000
--------- ---------
Total 3,610,000 6.3 years $1.06 2,403,500
For fiscal year 2005 and for the period from June 1, 2005 through February
28, 2006, Greystone applied APB Opinion No. 25 in accounting for its stock
options and, accordingly, no compensation cost was recognized for its stock
options in the financial statements. As discussed in Note 1, Greystone
adopted SFAS No. 31, and, accordingly, recorded compensation expense in the
amount of $64,062 in the financials statements for the period from March 1,
2006 through May 31, 2006. Had Greystone, prior to March 1, 2006,
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:
2006 2005
----------- -----------
Net loss to common shareholders:
As reported $(2,849,091) $(10,421,825)
Pro forma $(3,055,960) $(10,436,825)
F-18
Per share:
As reported $ (0.12) $ (0.60)
Pro Forma $ (0.13) $ (0.60)
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 136%
Risk Free Interest Rate 4%
Expected Holding Period 5 years
The total future costs under existing stock options agreements as of May
31, 2006 was $314,282.
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, 2006 and 2005.
NOTE 12. SUPPLEMENTAL INFORMATION OF CASH FLOWS
Supplemental information of cash flows for the years ended May 31:
2006 2005
---------- ----------
Non-cash activities
Common stock issuances:
Retirement of debt $ -- $2,100,163
Capital lease -- 1,205,475
Retirement of debt in exchange for
property and equipment -- 259,000
Sale of equipment for debt 20,000 --
Interest paid 893,129 844,646
Taxes paid -- --
NOTE 13. OPERATING LEASES
Rental expense on operating leases totaled $725,522 and $421,860 during
2006 and 2005,
F-19
respectively. Commitments for operating leases for the five years after May
31, 2006 are $786,000, $786,000, $786,000, $786,000, and $786,000 and
$1,878,000 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 "Transactions
with Greystone Properties, LLC," for the industrial lease.
NOTE 14. 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, 2006, Greystone's bank balances did not
exceed federally insured limits.
NOTE 15. 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
F-20
$1,648,124 to write off the remaining unamortized balance of the intangible
costs of the customer contract.
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 16. COMMITMENTS AND CONTINGENCIES
In April 2001, Greystone entered into a Licensing Agreement with Westgate
Capital, LLC ("WCC"), an entity owned by Warren Kruger and William
Pritchard, providing Greystone the exclusive right and license to use fire
retardant 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 Greystone's common stock
in January 2002. Under the agreement, Greystone 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
Greystone subject to the 2.5% royalty payment. Subsequent to the execution
of the original agreement which provided for a "coating" process
technology, the fire retardant process changed to a chemical additive which
WCC and Greystone incorporated in the manufacturing process and used to
successfully obtain the UL listing. WCC has not asserted that Greystone is
in default under the license agreement. In lieu of default Greystone
entered into a new licensing agreement with WCC whereby Greystone has a
paid up licensing agreement unless Greystone is either insolvent or there
is a change in control. During the year ended May 31, 2005, Greystone
accrued $400,000 under the new licensing agreement arrangement. WCC elected
to exchange the $400,000 for common stock and warrants in connection with
Greystone's stock offering as discussed in Note 9, "Stockholders' Equity."
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 2006 sales totaling approximately $13,719,000 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.
Greystone entered into an employment agreement with Greystone's
Non-Executive Chairman which was effective as of August 1, 2004, and has a
term that ends on July 13, 2007. The employment agreement provides for a
base salary $15,000 per month plus an annual bonus determined by
Greystone's Board of Directors in an amount not less than 50% of the annual
bonus to be received by Greystone's Chief Executive Officer. Beginning
February 23, 2006, Greystone suspended payment or accrual of salary pending
further review by the Board of Directors as to performance of duties under
the contract.
F-21