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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 6
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
PALWEB CORPORATION
(Name of small business issuer in its charter)
DELAWARE 75-1984048
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1607 WEST COMMERCE STREET DALLAS, TEXAS 75208
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(Address of principal executive offices) (City, State, and Zip Code)
(214) 698-8330
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(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
NONE NONE
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Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $0.10 PAR VALUE
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(Title of class)
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This Amendment No. 6 is being filed to amend Part I, Items 1, 2, 3, 4
and 7, Part II, Item 2, Part F/S and Part III of PalWeb's Form 10-SB.
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PALWEB CORPORATION
FORM 10-SB/A
AMENDMENT NO. 6
INDEX
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Page
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PART I
Item 1. Description of Business......................................................4
Item 2. Management's Discussion and Analysis or Plan of Operation...................19
Item 3. Description of Property.....................................................27
Item 4. Security Ownership of Certain Beneficial Owners and Management..............27
Item 7. Certain Relationships and Related Transactions..............................28
PART II
Item 2. Legal Proceedings..........................................................29
PART F/S....................................................................................31
PART III
Item 1. Index to Exhibits...........................................................31
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INFORMATION REQUIRED IN
REGISTRATION STATEMENT
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This registration statement on Form 10-SB contains "forward-looking"
statements regarding potential future events and developments affecting the
business of PalWeb Corporation, a Delaware corporation ("PalWeb"). Such
statements relate to, among other things: future operations of PalWeb, the
development of distribution channels and product sales and the introduction
of new products into the market. Forward-looking statements may be indicated
by the words "expects," "estimates," "anticipates," "intends," "predicts,"
"believes" or other similar expressions. Forward-looking statements appear in
a number of places in this Form 10-SB and may address the intent, belief or
current expectations of PalWeb and its Board of Directors and management with
respect to PalWeb and its business. The forward-looking statements are
subject to various risks and uncertainties described in this Form 10-SB. For
these reasons, PalWeb's actual results may vary materially from the
forward-looking statements.
RISK FACTORS
PALWEB IS A DEVELOPMENT STAGE COMPANY AND MAY NOT ACHIEVE PROFITABILITY.
PalWeb was incorporated on February 24, 1969. From April 1993 to
December 1997, PalWeb was primarily engaged in various businesses, including
the business of exploration, production, and development of oil and gas
properties in the continental United States and the operation of related
service business. In December 1997, PalWeb acquired all of the issued and
outstanding stock of Plastic Pallet Production, Inc. and its principal
business changed to selling plastic pallets and plastic injection molding
machines. As of August 28, 2000, PalWeb was using a prototype plastic
injection molding machine to produce plastic pallets. PalWeb is still in the
process of building a fully operational plastic injection molding machine.
PalWeb is in the development stage, it has incurred significant losses from
operations and there is no assurance that it will achieve profitability or
obtain funds to finance continued operations.
PALWEB HAS LIMITED EXPERIENCE IN MANUFACTURING AND MARKETING.
PalWeb's business strategy relies primarily on its success in
manufacturing and marketing, an area in which PalWeb has limited experience.
The success of its business strategy should be considered in light of the
risks, expenses and difficulties frequently encountered in entering into
industries characterized by intense competition. There can be no assurance
that PalWeb will be able to manufacture or market its products or proposed
products, maintain or expand its market share or achieve commercial revenues
from its products or proposed products
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in the future. In addition, certain aspects of PalWeb's business strategy can
only be implemented if PalWeb successfully secures additional capital. Some
of the foregoing factors are not within PalWeb's control, and there can be no
assurance that PalWeb will be able to implement its business strategy, or
that PalWeb's business strategy will result in profitability.
PALWEB'S BUSINESS AND ITS OFFICERS COULD BE ADVERSELY AFFECTED BY AN
INVESTIGATION OF PALWEB'S INDIRECT WHOLLY OWNED SUBSIDIARY, PACECO FINANCIAL
SERVICES, INC. ("PFS"), BEING CONDUCTED BY THE OKLAHOMA SECURITIES DEPARTMENT.
After a March 1999 examination of PFS by the Oklahoma Securities
Department, the Department proposed that PFS terminate its status as an
"investment certificate issuer." As of August 24, 2000, PFS and the Oklahoma
Securities Department were negotiating an agreed order that would preclude
PFS from making further sales of investment certificates to new or existing
holders and would require PFS to repay all holders of investment
certificates. If and when this agreed order is finalized, it is possible that
PFS would not have sufficient assets to pay the holders of investment
certificates that are outstanding unless the PalWeb Common Stock owned by PFS
appreciates significantly in value and PFS is able to sell such shares. The
liquidation of PFS could have a material adverse affect on the businesses of
both PFS and PalWeb. The Oklahoma Securities Department has not proposed to
take any enforcement actions, but it is possible it could do so, and such
enforcement actions could have a material adverse affect on the businesses of
both PFS and PalWeb.
PALWEB'S BUSINESS COULD BE AFFECTED BY CHANGES IN AVAILABILITY OF RAW
MATERIALS.
PalWeb uses a proprietary mix of raw materials to produce its plastic
pallets. Such raw materials are generally readily available and some may be
obtained from recycled plastic containers. At the present time, these
materials are being purchased from local suppliers. The availability of
PalWeb's raw materials could change at any time for various reasons. For
example, the market demand for PalWeb's raw materials could suddenly increase
or the rate at which plastic materials are recycled could decrease, affecting
both availability and price. Additionally, the laws and regulations governing
the production of plastics and the recycling of plastic containers could
change and, as a result, affect the supply of PalWeb's raw materials. Any
interruption in the supply of raw materials or components could have a
material adverse effect on PalWeb. Furthermore, certain potential alternative
suppliers may have pre-existing exclusive relationships with competitors of
PalWeb and others that may preclude PalWeb from obtaining its raw materials
from such suppliers.
THE MARKET MAY NOT ACCEPT PALWEB'S PRODUCTS.
Any unexpected developmental, regulatory or manufacturing problems
could delay the commercialization of PalWeb's proposed products and may have
a material adverse effect on PalWeb and its prospects. In addition, the
market acceptance of any of PalWeb's plastic pallets will be substantially
dependent on the ability of PalWeb to demonstrate to the business
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community the capabilities and benefits of PalWeb's plastic pallets as well
as to sell commercial quantities of the plastic pallets at acceptable prices.
There can be no assurance that PalWeb will be able to gain market acceptance
for its plastic pallets.
PALWEB MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING NECESSARY TO SUSTAIN
AND GROW ITS OPERATIONS.
PalWeb's financial statements have been qualified on a going concern
basis principally due to lack of long term financing to achieve its goal of
producing and marketing plastic pallets to compete with wood pallets. PalWeb
has funded its operations to date primarily through equity and debt
financings. PalWeb may need additional debt or capital in order to begin
generating a sufficient cash flow to sustain operations for the foreseeable
future. PalWeb will need to raise substantial additional funds to continue to
fund operating expenses or its expansion strategy. There can be no assurance
that additional financing will be available, or, if available, that such
financing will be on terms favorable to PalWeb. Failure to obtain such
additional financing would have a material adverse effect on PalWeb. In
addition, PalWeb acquired an indirect wholly owned subsidiary in April of
2000 which issues thrift accounts and savings certificates to investors. As
of August 28, 2000, the subsidiary did not have sufficient assets to
liquidate investors' thrift accounts and savings certificates.
PALWEB'S BUSINESS COULD BE AFFECTED BY COMPETITION AND RAPID TECHNOLOGICAL
CHANGE.
PalWeb currently faces competition from many companies that produce
wooden pallets at prices that are substantially lower than the prices PalWeb
charges for its plastic pallets. It is anticipated that the plastic pallet
industry will be subject to intense competition and rapid technological
change. PalWeb could potentially face competition from recycling and plastics
companies, many of which have substantially greater financial and other
resources than PalWeb and, therefore, are able to spend more than PalWeb in
areas such as product development, manufacturing and marketing. Although a
company with greater resources will not necessarily be able to bring a new
product to market before its smaller competitors, substantial resources
enable a company to support many new products simultaneously, thereby
improving the likelihood of at least some of its new products being among the
first to make it to market. PalWeb's revenues and profitability could be
adversely affected by technological change. Competitors may develop products
that render PalWeb's products or proposed products uneconomical or result in
products being commercialized that may be superior to PalWeb's products. In
addition, alternatives to plastic pallets could be developed, which would
have a material adverse effect on PalWeb.
PALWEB MAY NOT BE ABLE TO EFFECTIVELY PROTECT ITS PATENTS AND PROPRIETARY
RIGHTS.
PalWeb relies on a combination of patents and trade secrets to
protect its proprietary technology, rights and know-how. There can be no
assurance that such patent rights will not be infringed upon, that PalWeb's
trade secrets will not otherwise become known to or independently
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developed by competitors, that non-disclosure agreements will not be
breached, or that PalWeb would have adequate remedies for any such
infringement or breach. Litigation may be necessary to enforce proprietary
rights of PalWeb or to defend PalWeb against third-party claims of
infringement. Such litigation could result in substantial cost to, and a
diversion of effort by, PalWeb and its management and may have a material
adverse effect on PalWeb. PalWeb's success and potential competitive
advantage is dependent upon its ability to exploit the technology under these
patents. There can be no assurance that PalWeb will be able to exploit the
technology covered by these patents or that it will be able to do so
exclusively. PalWeb currently has certain patent applications pending. There
can be no assurance that patent applications will result in patents being
issued, or that, if issued, the patents will afford protection against
competitors with similar technology.
Although PalWeb is not aware of any claim against it for
infringement, there can be no assurances that parties will not bring claims
against PalWeb for infringement in the future. PalWeb's ability to
commercialize its products and proposed products depends, in part, on its
ability to avoid claims for infringement brought by other parties. Laws
regarding the enforceability of intellectual property vary from jurisdiction
to jurisdiction. There can be no assurance that intellectual property issues
will be uniformly resolved, or that local laws will provide PalWeb with
consistent rights and benefits. In addition, there can be no assurance that
competitors will not be issued patents that may prevent the manufacturing or
marketing of PalWeb's products or proposed products.
PALWEB'S BUSINESS COULD BE AFFECTED BY NEW LEGISLATION REGARDING
ENVIRONMENTAL MATTERS.
The business operations of PalWeb and the ownership and operations of
real property by PalWeb are subject to extensive and 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 PalWeb's properties or
any associated off-site disposal location, or if contamination from prior
activities is discovered at any of PalWeb's properties, PalWeb may be held
liable. No assurances can be given that additional environmental issues will
not require future expenditures.
Both the plastics industry, in general, and PalWeb are subject to
existing and potential federal, state, local and foreign legislation designed
to reduce solid wastes by requiring, among other things, plastics to be
degradable in landfills, minimum levels of recycled content, various
recycling requirements, disposal fees and limits on the use of plastic
products. In addition, various consumer and special interest groups have
lobbied from time to time for the implementation of these and other such
similar measures. Although PalWeb believes that the legislation promulgated
to date and such initiatives to date have not had a material adverse effect
on PalWeb, there can be no assurance that any such future legislative or
regulatory efforts or future initiatives would not have a material adverse
effect on PalWeb.
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PALWEB'S BUSINESS WILL BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
The testing, manufacturing and marketing of PalWeb's products and
proposed products involve the inherent risks of product liability claims or
similar legal theories against PalWeb, some of which may cause PalWeb to
incur significant defense costs. Although PalWeb currently maintains product
liability insurance coverage that it believes is adequate, there can be no
assurance that the coverage limits of its insurance are adequate or that all
such claims will be covered by insurance. In addition, these policies
generally must be renewed every year. While PalWeb has been able to obtain
product liability insurance in the past, there can be no assurance it will be
able to obtain insurance in the future on its products or proposed products.
Product liability insurance varies in cost, is difficult to obtain and may
not be available in the future on terms acceptable to PalWeb, if at all. A
successful product liability claim or other judgment against PalWeb in excess
of its insurance coverage could have a material adverse effect upon PalWeb.
PALWEB CURRENTLY DEPENDS ON CERTAIN KEY PERSONNEL.
PalWeb is dependent on the experience, abilities and continued
services of its current management personnel. In particular, Mr. Kruger, its
Chairman of the Board and President, has played a significant role in the
development and management of PalWeb. The loss or reduction of services of
Mr. Kruger or any other key employee could have a material adverse effect on
PalWeb. There is no assurance that additional managerial assistance will not
be required.
PalWeb's future success depends in part upon its ability to attract
and retain highly qualified personnel. On July 13, 2000, Ron Hale, the former
Vice President (Engineering), Secretary and Treasurer of PalWeb and the
former President of PalWeb's wholly owned subsidiary, Plastic Pallet
Production, Inc., resigned from all of his positions within PalWeb and
Plastic Pallet Production, Inc. PalWeb's future success depends in part on
its ability to attract and retain an individual with engineering and
managerial expertise similar to Mr. Hale's expertise. PalWeb faces
competition for such personnel from other companies and organizations, many
of which have significantly greater resources than PalWeb. There can be no
assurance that PalWeb will be able to attract and retain the necessary
personnel on acceptable terms or at all.
PALWEB'S STOCK TRADES IN A LIMITED PUBLIC MARKET, IS SUBJECT TO PRICE
VOLATILITY AND THERE CAN BE NO ASSURANCE THAT AN ACTIVE TRADING MARKET WILL
BE SUSTAINED.
There has been a limited public trading market for PalWeb's Common
Stock and there can be no assurance that an active trading market will be
sustained. There can be no assurance that the Common Stock will trade at or
above any particular price in the public market, if at all. The trading price
of the Common Stock could be subject to significant fluctuations in response
to variations in quarterly operating results or even mild expressions of
interest on a given day. Accordingly, the Common Stock should be expected to
experience substantial price changes in
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short periods of time. Even if PalWeb is performing according to its plan and
there is no legitimate company-specific financial basis for this volatility,
it must still be expected that substantial percentage price swings will occur
in PalWeb's securities for the foreseeable future.
CERTAIN RESTRICTED SHARES OF PALWEB WILL BE ELIGIBLE FOR SALE IN THE FUTURE
AND COULD AFFECT THE PREVAILING MARKET PRICE OF PALWEB'S COMMON STOCK.
Certain of the outstanding shares of Common Stock are "restricted
securities" under Rule 144 of the Securities Act, and (except for shares
purchased by "affiliates" of PalWeb as such term is defined in Rule 144)
would be eligible for sale as the applicable holding periods expire. In the
future, these shares may be sold only pursuant to a registration statement
under the Securities Act or an applicable exemption, including pursuant to
Rule 144. Under Rule 144, a person who has owned Common Stock for at least
one year may, under certain circumstances, sell within any three-month period
a number of shares of Common Stock that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading
volume during the four calendar weeks prior to such sale. In addition, a
person who is not deemed to have been an affiliate of PalWeb at any time
during the three months preceding a sale, and who has beneficially owned the
restricted securities for the last two years is entitled to sell all such
shares without regard to the volume limitations, current public information
requirements, manner of sale provisions and notice requirements. Sales or the
expectation of sales of a substantial number of shares of Common Stock in the
public market by selling stockholders could adversely affect the prevailing
market price of the Common Stock, possibly having a depressive effect on any
trading market for the Common Stock, and may impair PalWeb's ability to raise
capital at that time through additional sale of its equity securities.
PALWEB DOES NOT EXPECT TO DECLARE OR PAY ANY DIVIDENDS IN THE FORESEEABLE
FUTURE.
PalWeb has not declared or paid any dividends on its Common Stock.
PalWeb currently intends to retain future earnings to fund the development
and growth of its businesses, to repay indebtedness and for general corporate
purposes, and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.
PALWEB'S COMMON STOCK MAY BE SUBJECT TO SECONDARY TRADING RESTRICTIONS
RELATED TO PENNY STOCKS.
Certain transactions involving the purchase or sale of Common Stock
of PalWeb may be affected by a Securities and Exchange Commission rule for
"penny stocks" that imposes additional sales practice burdens and
requirements upon broker-dealers that purchase or sell such securities. For
transactions covered by this penny stock rule, broker-dealers must make
certain disclosures to purchasers prior to the purchase or sale.
Consequently, the penny stock rule may impede the ability of broker-dealers
to purchase or sell PalWeb's securities for their customers and the ability
of persons now owning or subsequently acquiring PalWeb's securities to resell
such securities.
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THE RESULTS OF PENDING LITIGATION AGAINST PALWEB MAY HAVE AN ADVERSE AFFECT
ON ITS FINANCIAL CONDITION OR BUSINESS PROSPECTS.
PalWeb is a party to various pending legal proceedings that involve
claims or potential claims against PalWeb and if resolved unfavorably to
PalWeb could have an adverse affect on PalWeb's financial condition or other
effects on PalWeb. There is no assurance these proceedings will be resolved
favorably.
HISTORY
PalWeb Corporation is a Delaware corporation that was incorporated on
February 24, 1969 under the name Permaspray Manufacturing Corporation. It
changed its name to Browning Enterprises Inc. in April of 1982, to Cabec
Energy Corp. in June of 1993 and became PalWeb Corporation in April of 1999.
From April 1993 to December 1997 PalWeb was engaged in various
businesses, including the business of exploration, production and development
of oil and gas properties in the continental United States and the operation
of related service businesses. In December 1997, PalWeb acquired all of the
issued and outstanding stock of Plastic Pallet Production, Inc. or "PPP," a
Texas corporation, in exchange for a majority of the issued and outstanding
stock of PalWeb. Pursuant to the terms of the reverse acquisition contract,
all of the assets, contract rights and liabilities of PalWeb that related in
any way to the oil and gas business were transferred to The Union Group,
Inc., a Nevada corporation (the "Union Group"). In November 1998, PalWeb
distributed all of the issued and outstanding stock of the Union Group to its
stockholders (other than the former shareholders of Plastic Pallet
Production, Inc.).
Since the acquisition of all of the issued and outstanding stock of
Plastic Pallet Production, Inc., PalWeb's primary business is (i)
manufacturing and selling plastic pallets, and (ii) the custom design,
manufacture and sale of large plastic injection molding machines and systems.
PalWeb is currently a development stage company. As of June 30, 2000, PalWeb
has not sold any plastic injection molding machines and sales of plastic
pallets have been limited.
Michael John served as Chairman of the Board and President of PPP
prior to its acquisition by PalWeb in December 1997 and continued to serve as
Chairman and President of PalWeb thereafter. In October 1998, PPP entered
into an agreement for sale of a plastic injection molding machine with Pace
Plastic Pallets, Inc. ("Pace") that was intended to provide for the sale of
specified machinery to Pace to permit Pace to manufacture pallets for sale to
PPP for further distribution by PPP under patent licenses granted by PPP to
Pace. In exchange for Pace's agreement to purchase the machinery and make an
earnest money deposit of $300,000, 10 million shares of PalWeb were
transferred by Michael John to Pace. At the time of this transaction, Pace
was principally owned by Paul Kruger; however, neither Paul Kruger nor any of
his related entities, including Pace, were affiliated with or related to
PalWeb or any of its subsidiaries. The terms of this transaction were entered
into on an arm's length negotiated basis.
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PPP encountered difficulties in connection with the manufacturing of
the machinery required by this agreement due to the absence of available
funding and other reasons. As a result, in January 1999, PalWeb and PPP
entered into a consulting agreement with Paceco Financial Services, Inc.
("PFS"), an entity owned by Mr. Kruger, in which PFS provided $189,000 in
cash to PalWeb and agreed to provide comprehensive management assistance to
PPP in exchange for the issuance of 41 million shares of PalWeb Common Stock.
PalWeb recorded an expense of $4.1 million in connection with this
transaction, which was equal to the estimated fair value of the shares issued
at that time. At the time of this transaction, Mr. Kruger was not affiliated
with PalWeb. This was an arm's length negotiated transaction entered into
between PFS and the former management of PalWeb and PPP. This transaction was
negotiated at a time when PalWeb was in serious financial difficulty. The
services performed included strategic planning, marketing, general consulting
and management services, including recovery of shares issued to other parties
in transactions potentially detrimental to PalWeb. The number of shares
issued in this transaction is roughly equal to the number of shares owned by
Wolfgang Ullrich and Rosarin Chaisayan, which were recovered by PalWeb under
Mr. Kruger's supervision as described below.
On July 9, 1999, Paul Kruger became Chairman of PalWeb and Michael
John resigned as Chairman and as an executive officer. Subsequent to that
date, Mr. Kruger has been actively involved in the day to day management of
PalWeb and PPP in order to further its business plan. Also subsequent to that
date through August 28, 2000, Mr. Kruger or his affiliated entities have
provided in excess of $1,500,000 in funding for the operation of PalWeb in
the form of $1,187,479 in cash advances and $350,021 in consulting services
and have been issued an additional 15,375,000 shares of Common Stock. On June
1, 2000, an affiliate of Paul Kruger provided PalWeb a $400,000 line of
credit payable on December 1, 2000 with interest at 18%. The loan is secured
by inventory, equipment, patents and the Vimonta stock. The funds were used
to satisfy existing obligations and to provide short term operating capital
until such time as PalWeb could refinance. As of June 29, 2000, PalWeb had
$65,000 of the proceeds from the loan remaining.
Subsequent to becoming more active in management, Mr. Kruger
discovered various transactions and agreements that had been entered into by
prior management that were detrimental to PalWeb. One of these involved the
issuance of 41,443,308 shares of PalWeb Common Stock to Wolfgang Ullrich and
Rosarin Chaisayan in January 1998 for consideration that was never received.
In January 1999, PalWeb initiated an action against these parties in the
District Court of Dallas County, Texas, seeking a judgment for monetary
damages and cancellation of the shares issued to them. On September 16, 1999,
PalWeb was granted a default judgment awarding damages in the amount of $20
million and ordering the return and cancellation of the stock certificates
for the 41,443,308 shares issued as well as awarding attorney's fees. Such
shares have been canceled on PalWeb's books.
In another action in the District Court of Dallas County, Texas,
PalWeb and PPP obtained a default judgment against affiliated entities of
Wolfgang Ullrich named Chartex AG and New
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Inter HKB, AG ("NIH") on March 17, 2000. Chartex AG was issued 6 million
shares of Common Stock in PalWeb as additional consideration for an alleged
$1.35 million loan made to PPP by Chartex. In addition, PPP had an obligation
of $1.6 million to NIH and had issued 7,413,384 shares to NIH in PalWeb. As a
result of the relationship between Ullrich and Chartex AG and NIH, the Court
ordered that PPP could offset $1.6 million owed to NIH against the $20
million judgment against Ullrich and also ordered that defendants Chartex AG
and NIH return to PalWeb a total of 13,413,384 shares of PalWeb Common Stock
and ordered that PPP's liability to Chartex in the amount of $1.35 million
secured by a mortgage be canceled. These shares have been reflected as
canceled on the Company's records as of March 31, 2000. PalWeb does not
expect that any of the money damages will be recovered.
Another transaction that prior management entered into that could be
detrimental to PalWeb involves Vimonta AG, a Swiss based company ("Vimonta").
PalWeb and PPP have commenced litigation against Vimonta to determine the
rights of the parties. For information regarding Vimonta, please see Part II,
Item 2, Legal Proceedings. The current management of PalWeb is reviewing and
will continue to review other past transactions involving PalWeb to determine
if any corrective actions need to be taken for the benefit of PalWeb's
shareholders. Michael John, the former President of PalWeb, has instituted
two lawsuits against PalWeb making claims for damages. PalWeb has asserted
counterclaims for breach of fiduciary duty and mismanagement. See Part II,
Item 2, Legal Proceedings.
ACQUISITION OF PACECO FINANCIAL
On April 3, 2000, PalWeb acquired Paceco Financial Services, Inc.
("PFS") by means of a merger of PFS's parent company, Pace Holding, Inc.,
into a wholly owned subsidiary of PalWeb, PP Financial, Inc. In the
acquisition, PalWeb issued 50 million shares of its Common Stock in exchange
for all the outstanding stock of Pace Holding and PFS became an indirect
wholly owned subsidiary of PalWeb. All of the outstanding stock of Pace
Holding was owned by Paul Kruger, the Chairman and Chief Executive Officer of
PalWeb. Mr. Kruger acquired Pace Holding for $81,250 in cash. Mr. Kruger
subsequently contributed approximately $150,000 in cash and $150,000 in
preferred stock of Paceco Financial Services, Inc. to Pace Holding, Inc. PFS,
in addition to its other assets, owned 43.5 million shares of PalWeb Common
Stock, which by virtue of the acquisition, are treated as treasury stock on
PalWeb's records and, accordingly, the acquisition resulted in the issuance
of an additional 6.5 million shares of PalWeb Common Stock.
The 50 million shares of PalWeb's Common Stock that PalWeb exchanged
for all of the outstanding stock of Pace Holding was authorized and approved
by unaffiliated directors of PalWeb, Mark Kidd and Lyle Miller. The 6.5
million incremental shares of PalWeb's Common Stock that were issued in the
acquisition of Pace Holding represented the value attributable to Paceco's
business, other than the ownership of PalWeb Common Stock.
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PFS has been in business since 1952 and is engaged in the business of
making consumer and small business loans primarily in Oklahoma and is
regulated as an "investment certificate issuer" by the Oklahoma Securities
Department. For its last fiscal year ended September 30, 1999, Pace Holding,
Inc. had revenues of $790,000, net loss of $2,300,000 and total assets and
stockholder's deficiency of $7,000,000 and $1,700,000, respectively. For the
six months ended March 31, 2000, Pace Holding, Inc. had revenues of $370,000,
net loss of $800,000 and at such date had total assets of $5,500,000 and
stockholder's deficiency of $2,400,000.
In connection with an examination of Paceco Financial Services in
March 1999, the Oklahoma Department of Securities determined that certain of
PFS's activities, including the ownership of real estate and the ownership of
equity securities, did not comply with the provisions of the Oklahoma
Securities Act relating to the permissible activities of investment
certificate issuers. As a result of such determination, PFS ceased making any
new investments not permissible to investment certificate issuers. Since that
time PFS and the Oklahoma Securities Department have been negotiating an
agreed order for the ultimate liquidation of the impermissible assets and
repayment of the investment certificates. PFS's ability to fund repayment of
investment certificates is substantially dependent on PFS's ability to sell
or otherwise receive funding related to its PalWeb stock. If this cannot be
achieved, PFS would likely not have sufficient assets to pay the holders of
the investment certificates. At March 31, 2000, PFS had $6,700,000 in
investment certificates outstanding
If PFS and PalWeb are unsuccessful in negotiating an agreement with
the Oklahoma Securities Department, the Department may take enforcement
actions against PFS that could have a material adverse effect on PFS and
PalWeb.
In addition to the general authority available to the Administrator
of the Oklahoma Securities Department to issue cease and desist orders, place
limitations on activities or functions and seek civil monetary remedies, both
in an administrative forum or in Oklahoma District Court, the Oklahoma
Securities Administrator has the additional authority with respect to
investment certificate issuers to (i) remove officers, directors or employees
found to be dishonest, reckless, unfit to participate in the conduct of the
affairs of the institution or practicing continuing disregard or violation of
laws, rules, regulations or orders which are likely to cause substantial loss
to the company or likely to seriously weaken the condition of the company;
(ii) assess the shareholders of an investment certificate issuer for cash to
remedy an impairment of capital and if such assessment is not paid within
ninety (90) days, cause the shares of the defaulting stockholders to be sold
at public auction for a price not less than the amount of the assessment; or
(iii) apply for the appointment of a conservator or liquidator. As of August
25, 2000, the Oklahoma Securities Department had not indicated to PFS an
intention to pursue enforcement remedies, but such enforcement actions could
occur in the future.
CURRENT BUSINESS
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PalWeb's principal subsidiary, Plastic Pallet Production, Inc. or
"PPP", is the entity through which PalWeb conducts its business of selling
plastic pallets and plastic injection molding machines. PPP holds several
patents for the original design of various types of plastic pallets, and has
received notice that a patent relating to the original design of a materials
handling plastic pallet will be granted on August 29, 2000 under U.S. Patent
No. 6,109,190.
PalWeb's plastic pallets are much more durable and sanitary than
traditional wood pallets. At PalWeb's request, its new plastic pallet design
has been subjected to standard industry tests known as ASTM (American Society
for Testing and Materials) Standard D 1185-98a (a strength test) and D
4728-91 (a vibration test), which were conducted by Container Technologies
Laboratory, Inc. ("Container Technologies"), Lenexa, Kansas, a nationally
recognized independent testing facility. Container Technologies is certified
as a Performance Oriented Packaging (POP) Laboratory by the U.S. Department
of Transportation. Container Technologies is also an International Safe
Transit Association (ISTA) Qualified Test Laboratory and a National Motor
Freight Classification (NMFC) Association Certified Laboratory. Container
Technologies certified PalWeb's plastic pallet as having passed the above
referenced tests. The testing procedures found the pallet to be stronger and
more versatile than the typical hardwood pallet.
PPP has fabricated an operational prototype plastic injection molding
system. PPP is continually modifying and improving its equipment. PPP began
utilizing the prototype equipment by running a 10 hour shift 4 days per week.
As of June 1, 2000, PPP has sold 440 pallets and has 278 rackable and 329
floor (non-rackable) pallets in inventory. As of August 24, 2000, PPP is in
the process of increasing production by adding a second shift. Two shifts
utilizing the current equipment 5 days per week can produce approximately
1232 rackable and 196 floor pallets per month. With the addition of the third
shift and the planned modifications to its machinery, as described in Part I,
Item 2, Management's Discussion and Analysis or Plan of Operation, PPP
anticipates that production will increase to approximately 4,000 pallets per
month. PPP expects to reach this production level if and when PalWeb secures
the funds that are necessary to make the adjustments to the machinery. 4,000
pallets per month is the maximum capacity of PPP's research/prototype plastic
injection molding system.
PalWeb is currently exploring methods to raise funds through various
means including, but not limited to, the private placement of equity
securities, private loans, commercial loans or technology licensing
arrangements. Any loans to PalWeb will likely be required to be secured and
guaranteed by Paul Kruger. PalWeb is dependent upon Mr. Kruger to provide
and/or secure additional debt financing. Mr Kruger has no obligation to
provide additional debt financing to PalWeb or secure such financing on
PalWeb's behalf and there is no assurance that Mr. Kruger will do so. PalWeb
plans to use future funding to fabricate a plastic injection molding system
comprised of multiple plastic injection molding machines with integrated
material feed lines. If successful, the addition of these machines will
permit PalWeb to expand its production of pallets. Should PalWeb successfully
increase its production levels, it will need to employ additional
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production and supervisory employees, as described in this section. See Part
I, Item 2, Plan of Operations and Liquidity for additional information.
In the past two years, approximately $2 million has been spent on the
development of PalWeb's business by designing plastic pallets and building
prototypes of the plastic injection molding machines that will be
manufactured by PalWeb for its own use in manufacturing plastic pallets and
for resale to industrial users of plastic injection molding systems.
Carving a niche in an industry as competitive as the pallet business
will require more than just capital and equipment. PalWeb's future success
will depend in large part on the strategic planning of its management. PalWeb
has received very strong indications of interest from a number of extremely
large users of pallets now that the material handling pallet has been
successfully tested under applicable industry standards. This has
substantially increased the level of interest and has greatly increased the
viability of PalWeb's pallet being a large volume seller. However, there is
no assurance that PalWeb or PPP will be successful in marketing the pallets
commercially.
The principal raw materials used in manufacturing PalWeb'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 and the supply is readily available.
PALLET INDUSTRY
According to the U.S. Forest Service, as printed in the National
Wooden Pallet and Container Association publication, approximately 400
million new wood 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/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%-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.
The pallet industry has experienced significant change and growth
during the past several years. These changes are partly due to the focus of
large and small businesses on improving the logistical efficiency of their
manufacturing and distribution systems, including the use of just-in-
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time procurement, manufacturing and distribution systems. With the adoption
of these systems, expedited product movement has become increasingly
important and the demand has increased for a high-quality source of pallets
distributed through an efficient, more sophisticated system. The June 1996
issue of Modern Material Handling states that product damage resulting from
faulty wood pallets is between $1 - $2 billion annually. This damage is
caused by pallets breaking under load, splinters and nails from the pallets,
worker injury and other causes. In addition, environmental concerns (plastic
is recyclable) and product sanitation concerns (plastic pallets can be
sanitized, wood pallets cannot) have created a strong potential demand for
cost-effective plastic pallets.
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. 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.
Pallets come in a wide range of shapes and sizes. However, the
grocery industry, which accounts for about one-third of the demand for new
pallets, uses a standard 40 inch by 48 inch pallet and this has become the
standard pallet size in most industries in the United States. Some
industries, however, have developed specialized pallet sizes. PalWeb's pallet
is 40 inches by 48 inches in size.
Block edge, rackable pallets are heavy duty pallets with 9 blocks
between the pallet decks, to allow true four-way entry by forklifts, pallet
trucks and pallet jacks. Block edge, rackable pallets are often used to
transport goods from manufacturers to distribution centers.
Nestable pallets have "feet" on them so that they can be easily
stacked. Nestable pallets are often used to transport goods between
distribution centers and retail stores.
Until very recently, plastic pallets had not penetrated the market
significantly, due in part to their cost. Heavy duty plastic pallets cost
$46-$100, heavy duty wood pallets typically cost approximately $26, and less
sturdy wood pallets typically cost $8-$11. As stated in an article in the
July 1996 issue of Material Handling Engineering, wood pallets have an
estimated useful life of 7-10 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.
The trend that appears to be emerging is a switch from wood to
plastic, with the only limiting factor being price. Therefore, PalWeb will
target both wood and plastic pallet users during its market introduction
phase.
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PalWeb intends to stay on the "cutting edge" of the market by
constantly conducting research on pallet design, plastic injection molding
system design and the materials used to make the plastic pallets.
EMPLOYEES
PalWeb through PPP leases six full time employees from Accord Human
Resources, Inc., an independent employee leasing company. PalWeb decided to
lease its employees because, considering the small number of employees
currently required by PalWeb's level of operations, it is more cost effective
than hiring its own employees. PalWeb's management has determined that
leasing the present number of employees saves approximately $1,500 per month.
The cost of leasing the employees from Accord Human Resources, Inc., over and
above the actual cost of payroll, is approximately 2.0% of payroll, which is
approximately $500 per month. If PalWeb decided to hire its own employees, it
would also need to hire a full-time human resource employee, which would cost
approximately $2,000 per month. After management made this determination,
PalWeb's former President, Michael John, negotiated the Employee Lease
Agreement with Accord Human Resources, Inc. and executed such agreement on
behalf of PPP.
If PalWeb increases production levels to 4,000 pallets per month, it
will need to employ a total of eleven to thirteen production employees and
three to four supervisory/staff employees. Should PalWeb successfully
increase its production levels to 50,000 pallets per month, it will need to
employ a total of twenty to thirty production employees and five to seven
supervisory/staff employees. If PalWeb successfully increases its production
levels to 100,000 pallets per month, it will need to employ a total of
thirty-five to forty production employees and ten to fifteen
supervisory/staff employees.
MARKETING
PPP plans to distribute its pallets and its plastic injection molding
systems through a combination of a network of independent contractor
distributors and sales by PalWeb officers and employees. PalWeb believes that
PPP's patents on its plastic pallet designs and its plastic injection molding
machines, along with appropriate pricing of its products, should give PalWeb
a sales advantage with respect to its competition. PalWeb hopes to gain
product acceptance by marketing the concept that the widespread use of
plastic pallets could greatly reduce the destruction of trees on a worldwide
basis.
PATENTS
PPP currently holds the following patents:
1. Interlocking Modular Pallet Application and Method of
Construction
Application No. 08/779,372
Filing Date: November 26, 1996
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U.S. Patent No. 5,860,369 issued on January 19, 1999
Expiration Date: January 18, 2016
2. Modular Pallet with Interlocking Apparatus Application No.
08/795,856 Filing Date: February 6, 1997 U.S. Patent No.
5,887,529 issued on March 30, 1999 Expiration Date: March 29,
2016
3. Vertical Interlocking Modular Pallet Application and Method of
Construction
Application No. 08/796,571
Filing Date: February 6, 1997
U.S. Patent No. 5,809,905 issued on September 22, 1998
Expiration Date: September 21, 2015
4. Modular Pallet System
Application No. 08/735,802
Filing Date: September 21, 1996
U.S. Patent No. 5,791,261 issued on August 11, 1998
Expiration Date: August 10, 2015
PPP is currently in the process of securing a patent on its new
materials handling pallet. The application for the patent on this materials
handling pallet was filed on October 19, 1999 under application No.
09/421,766 and was allowed in April 2000 but has not been granted. PPP has
been notified that the patent will be granted on August 29, 2000 under U.S.
Patent No. 6,109,190.
PPP also has a patent pending on a new concept in the construction of
functional, operational plastic injection molding machines. These machines
are approximately 20% to 30% of the length of a traditional style plastic
injection molding machine, use approximately one-third of the electricity
used by a traditional style machine, use approximately 10% of the oil
(circulated) used by a traditional style machine, and can be profitably sold
to the end user at a cost that is substantially less than the cost of a
traditional style machine. However, it must be noted that there is no
assurance that PalWeb will be able to sell any of the newly designed plastic
injection molding machines. Under United States patent law, patents that are
approved are valid for 17 years from the date of issuance unless they are
amended and extended.
PPP's pallets and plastic injection molding machines have a broad
spectrum of possible applications. As a result, it is not foreseen that sales
will be dependent on one or a few major customers.
SUBSIDIARIES
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PalWeb has six wholly owned subsidiaries and one indirect wholly
owned subsidiary. All of the subsidiaries, except PPP and PP Financial, Inc.,
currently are inactive and have no employees. The inactive subsidiaries were
formed as part of the business planning process so they would be in existence
at the time that they become needed. A list of PalWeb's subsidiaries is set
forth below:
Plastic Pallet Production, Inc., a Texas corporation;
Plastic Pallet Support Equipment, Inc., a Texas corporation;
Modular Plastic Pallets, Inc., a Texas corporation;
PP Financial, Inc., a Texas corporation;
Paceco Financial Services, Inc., a wholly owned subsidiary of PP
Financial, Inc.;
PP Transport, Inc., a Texas corporation; and
PP Systrans, Inc., a Texas corporation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATIONS AND LIQUIDITY
In November 1998, PalWeb transferred all of its energy services
related assets, contract rights and liabilities to the Union Group. Shortly
following this transfer, all of the issued and outstanding stock of the Union
Group was distributed to the stockholders of PalWeb (other than the former
shareholders of PPP) as a dividend. As a result, PalWeb is essentially in the
position of being a start-up business by and through its wholly owned
subsidiary, PPP. As stated above, PPP is engaged in the design, development
and marketing of a new style of plastic pallet that will compete with
traditional wood pallets, and the design, development and marketing of a new
style of plastic injection molding machine that is smaller and more efficient
than a traditional style of plastic injection molding machine.
PalWeb's financial statements have been qualified on a going concern
basis principally due to lack of long term financing to achieve its goal of
producing and marketing plastic pallets to compete with wood pallets. In
addition, PalWeb has acquired an indirect wholly owned subsidiary in April of
2000 which issues thrift accounts and savings certificates to investors. As
of August 28, 2000, the subsidiary did not have sufficient assets to
liquidate investors' thrift accounts and savings certificates. During the
period from January 1999 to December 1999, the cash needed by PalWeb to fund
its operations came from cash advances from Paul A. Kruger and entities
affiliated with him, totaling $882,479, and $300,000 received by PPP as a
down payment
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on the sale of a plastic injection molding system to Pace Plastic Pallets,
Inc., an Oklahoma corporation ("Pace").
The total sale price under the terms of the contract between PPP and
Pace was $3,408,000. Subsequent to entering into this contract, Pace was
dissolved and all of its assets were assigned to Hildalgo Trading Co., L.C.,
a Florida limited liability company ("Hildalgo"), which is 100% owned by Paul
A. Kruger. The agreement for the sale of the plastic injection molding system
to Pace by PPP was entered into in October 1998. At such time, neither Paul
Kruger nor any of his related entities, including Pace, were affiliated with
or related to PalWeb or any of its subsidiaries. However, in April 1999, Mr.
Kruger, through several of his closely held entities, acquired a significant
ownership position in PalWeb's Common Stock, which caused him to then be
classified as a related party with respect to PalWeb. Mr. Kruger became the
Chairman of the Board of PalWeb on July 9, 1999 and became President on
January 22, 2000. The value of the plastic injection molding system was
determined through negotiations between the former President of PalWeb and
the management of Pace and the terms of this transaction were entered into on
an arm's length negotiated basis. No gain has been recognized on the sale of
equipment to Pace as the sale has never been consummated due to the fact that
PalWeb has not yet begun commercially producing plastic injection molding
systems. In January 2000, PalWeb issued 3,000,000 shares to Hildalgo in
exchange for Hildalgo's cancellation of the $300,000 of indebtedness related
to the down payment on the sale of the plastic injection molding system and
the contract between PalWeb and Hildalgo was canceled.
On December 1, 1999, PalWeb obtained a $500,000 line of credit loan
for its operations from Ralph Curton, Jr., an individual that is not an
officer or director of PalWeb or otherwise related to PalWeb, but who does
own 2.2% of the issued and outstanding shares of Common Stock of PalWeb. In
exchange for the $500,000 line of credit loan, PalWeb issued Mr. Curton a
convertible debenture that grants Mr. Curton the right, on or after June 1,
2000, to convert the principal of the convertible debenture into fully paid
and non-assessable shares of PalWeb's Common Stock at the rate of one share
for each $0.10 of the principal amount that is then due and owing by PalWeb
to Mr. Curton at the time of such conversion. The loan interest rate is 8.5%
per annum and the maturity date is December 1, 2001. Funds from the credit
line were available at the rate of $100,000 per month beginning December
1999. As of August 25, 2000, $47,500 of available credit remained on the line
of credit loan but as a result of an alleged default by Mr. Curton, it is
unlikely that these funds will be advanced. See Part II, Item 2, Legal
Proceedings.
On June 1, 2000, an affiliate of Paul Kruger provided a $400,000 line
of credit to PalWeb payable on December 1, 2000 with interest at 18%. The
loan is secured by inventory, equipment, patents and the Vimonta stock. The
funds were used to satisfy existing obligations and to provide short term
operating capital until such time as PalWeb could refinance. As of June 29,
2000, PalWeb had $65,000 of the proceeds from the loan remaining.
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The molds needed for PalWeb to manufacture plastic pallets were
completed in October 1999 and necessary fine-tuning modifications to the
molds were completed in late December 1999. PalWeb plans to continue to
review the performance of the prototype equipment and make any improvements
that are possible and economical. PalWeb expects that approximately $100,000
of capital expenditures will be required to complete the installation of a
hot runner system and adjust the hydraulic system on its prototype plastic
pallet injection molding machine. These adjustments will enable the prototype
plastic pallet injection molding machine to operate at a production capacity
of approximately 4,000 pallets per month. 4,000 pallets per month is the
maximum production capacity of prototype equipment. Once this level is
achieved, it is believed that sales of products will generate sufficient cash
flow to sustain current operations. In the meantime, PalWeb will need to
secure funds for the adjustments to the machinery and operations.
If PalWeb secures the funding for the adjustments to the machinery,
it expects to begin producing approximately 4000 pallets per month by the end
of October. The Company anticipates that funds required for the adjustments
to the machinery and operations until such adjustments are made will be
provided by loans from Paul Kruger or financial institutions. PalWeb is in
preliminary negotiations with a bank to secure a loan of approximately
$500,000 to $900,000. If PalWeb is successful in securing a loan, a portion
of the loan will be used to pay $335,000 that PalWeb owes Paul Kruger. A bank
will likely require that any loans to PalWeb be guaranteed by Paul Kruger.
PalWeb is dependent upon Mr. Kruger to provide and/or secure additional debt
financing and there is no assurance that Mr. Kruger will do so. Accordingly,
there is no assurance that funding will be available. If the Company fails to
secure the funding necessary to complete the installation of a hot runner
system and adjust the hydraulic system on its prototype plastic pallet
injection molding machine, PalWeb may have to suspend or terminate its
operations and/or consider bankruptcy.
PalWeb owns 100% of the outstanding common stock of PP Financial,
Inc. which in April of 2000 acquired 100% of the outstanding common stock of
Pace Holding, Inc. and its wholly owned subsidiary, Paceco Financial Services
("PFS"). The acquisition was accounted for as a purchase of an entity under
common control and the net assets of Pace Holding, Inc. have been recorded at
cost as of the date of acquisition. PFS is a regulated "investment
certificate issuer" under the Oklahoma Securities Act, headquartered in
Duncan, Oklahoma. Its activities consist of the sale of investment
certificates and making of loans and other investments. For its fiscal year
ended September 30, 1999, Pace Holding had revenues of $790,000, net loss of
$2,300,000, total assets of $7,000,000, total liabilities of $8,600,000
including, $6,900,000 in investment certificates outstanding, and
stockholder's deficiency of $1,700,000. For the six months ended March 31,
2000, PFS had revenues of $370,000, net loss of $800,000, total assets of
$5,500,000, total liabilities of $8,000,000, including, $6,700,000 in
investment certificates outstanding, and stockholder's deficiency of
$2,400,000.
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The purpose of the acquisition was to acquire an entity that might be
used as a vehicle to offer financing to buyers of PalWeb's plastic pallets
and injection molding equipment. However, the ability of PFS to do so is
dependent upon it resolving certain pending issues with the Oklahoma
Securities Department with respect to continued sale of investment
certificates as more fully described in Part I, Item 1, Description of
Business.
PalWeb has not entered into any conditions, commitments or
requirements with the Oklahoma Securities Department that would require it to
fund or otherwise be financially responsible for the liabilities of PFS.
PFS's ability to fund repayment of investment certificates is substantially
dependent on PFS's ability to sell or otherwise receive funding relating to
approximately 40,000,000 shares of PalWeb Common Stock owned by PFS. PalWeb
estimates that such stock must be sold for a value of at least $0.12 per
share in order for PFS to have sufficient funds to pay the holders of the
outstanding investment certificates. PFS has been and expects to continue to
be operated independently of PalWeb and PalWeb is not currently contractually
or otherwise liable to provide funding to PFS for purposes of funding the
repayment of investment certificates. However, if PFS is unable to make
payment to investment certificate holders as such investment certificates
mature, it is possible that holders of investment certificates may assert
claims against PalWeb that it is liable for the liabilities of PFS under
legal theories relating to piercing the corporate veil or otherwise. In such
event, PalWeb might incur additional costs to contest such claims and could
ultimately be found to be liable. The effect of any such claims being made
against PalWeb could also have an adverse effect on the value of PalWeb's
Common Stock and make it even more difficult for PFS to fund the repayment of
its investment certificate liability from liquidation of the PalWeb Common
Stock owned by it. Accordingly, PalWeb may be adversely affected if PFS is
unable to meet its obligations as they mature.
PalWeb is a party to various pending legal proceedings that involve
claims or potential claims against PalWeb and if resolved unfavorably to
PalWeb could have an adverse affect on PalWeb's financial condition or other
effects on PalWeb. There is no assurance these proceedings will be resolved
favorably. See Part II, Item 2, Legal Proceedings.
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RESULTS OF OPERATIONS
GENERAL
Sales reflected for all periods presented prior to November 1999 are
occasional sales of prototype plastic pallets of a design that did not meet
development standards. Sales after November 1999 represent initial sales of
PalWeb's tested product. However, as June 15, 2000, PalWeb has not commenced
commercial production of plastic pallets. PalWeb has for the most part
completed the development of its plastic pallet that will compete with wood
pallets. PalWeb is in the final stages of development of its injection
molding system to produce its plastic pallets. PalWeb is seeking both
short-term financing to meet its working capital needs and long-term
financing to acquire the equipment needed to produce plastic pallets on a
large-scale commercial basis.
The basic development of PalWeb's prototype plastic injection molding
system is complete and it is fully functional as of April 30, 2000. However,
the injection molding system's full capacity of 4,000 pallets per month will
not be reached until the hot runner system is installed and tested.
Management anticipates that continued engineering updates and refinements of
all plastic injection molding systems will be necessary to maintain high
efficiency levels and plans for this to be an ongoing process.
PalWeb has from time to time engaged the services of professionals to
perform various services through the issuance of both Common and Preferred
Stock (see Part II, Item 4, Recent Sales of Unregistered Securities of
PalWeb's Form 10-SB, Amendment No. 5, filed on July 20, 2000). The services
paid for in this fashion have primarily included business transaction
origination and brokerage services, accounting services unrelated to audits
of PalWeb, legal services, and marketing and financing consulting services.
PalWeb has been compelled to use both Common and Preferred stock to secure
these services due to its limited sources of cash. The consideration was
largely based on a negotiated number of shares in relation to the type of
service and the nature of the restricted stock rather than specific dollar
amounts. Accordingly, management determined that the most reasonable method
of valuing the services is the stock value.
For all periods presented, PalWeb's effective tax rate is 0%. PalWeb
has generated net operating losses since inception that would normally
reflect a tax benefit in the statement of operations and a deferred asset on
the balance sheet. However, because of the current uncertainty as to PalWeb's
ability to achieve profitability, a valuation reserve has been established
that offsets the amount of any tax benefit available for each period
presented in the consolidated statement of operations.
PROSPECTS FOR FUTURE
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Management anticipates that upon completion of all refinements to its
prototype equipment operating losses will cease due to the sales revenue that
will be generated. As of July 5, 2000, Management was trying to secure the
financing necessary to complete the modifications to the machinery.
Management does not have an exact date as to when such modifications will be
completed.
As stated above, the United States market for new pallets is, at
minimum, approximately 400,000,000 annually. Management's initial sales
projections of 4,000 pallets per month, or 48,000 pallets per year, is less
than 1/100th of 1% of the total new pallet market, and it appears that the
market trend is moving toward the use and purchase of plastic pallets. If
PalWeb's sales projections are accurate, management estimates operating
losses will cease if and when PalWeb completes the modifications to the
machinery, as discussed above. It is anticipated that approximately 4% - 5%
of annual gross revenues will be expended for product research, development
and marketing.
NINE MONTH PERIOD ENDED FEBRUARY 29, 2000 COMPARED TO THE NINE MONTH PERIOD
ENDED FEBRUARY 28, 1999
General and administrative expenses for the nine months ended
February 29, 2000 decreased $2,907,522 over February 28, 1999 primarily due
to a lower cost of consulting services. Consulting costs were $1,596,000 for
the nine months ended February 29, 2000, which is a decrease of $2,767,000
from the nine months ended February 28, 1999.
Interest expense declined $61,338 from $199,287 for the nine months
ended February 28, 1999 to $137,949 for the nine months ended February 29,
2000. The decrease is attributable to the reduction in notes payable.
Management negotiated a settlement of certain delinquent notes payable in the
prior period through foreclosure proceedings, cash payments or part cash,
part Common Stock.
Other income in the nine months ended February 28, 1999 was primarily
rental income from leasing a portion of its plant facilities. The plant was
sold to a related party in April 1999 and PalWeb leases back only that
portion of the facility it utilizes. Because PalWeb holds an option expiring
April 2002 to repurchase the property, the transaction was recorded as a
financing arrangement wherein the plant remains an asset on the balance sheet
until such time as the option expires without being exercised. The
significant item in other income in the nine months ended February 29, 2000,
is a gain on settlement of outstanding liabilities.
Principally as a result of the above, PalWeb had a net loss of
$2,245,228 for the nine months ended February 29, 2000 compared to $5,140,432
for the nine months ended February 28, 1999, a decrease of $2,895,204.
YEAR ENDED MAY 31, 1999 COMPARED TO THE YEAR ENDED MAY 31, 1998
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Salaries and benefits were $298,414 in 1999 compared to $448,176 in
1998, for a decrease of $149,762. The decrease is principally due to the
termination of a marketing person who was employed during 1998. Other general
and administrative expenses increased $4,801,226 from $660,383 in 1998 to
$5,461,643 in 1999. This increase is primarily due to consulting costs which
were $5,013,000 in 1999, including $4,100,000 paid to an affiliate of the
Chairman and President, and $222,000 in 1998 for an increase of $4,791,000.
Consulting costs were payments principally through the issuance of common
stock to individuals to assist the company in attaining its goals of product
development and the financing to achieve commercial production levels.
Consulting costs in 1999 were incurred to address difficulties in
connection with a contract to provide manufacturing equipment to a
third-party customer due to the absence of available funding and other
reasons. As a result, in January 1999, PalWeb and PPP entered into a
consulting agreement with Paceco Financial Services, Inc. ("PFS"), an entity
owned by Paul Kruger, in which PFS provided $189,000 in cash to PalWeb and
agreed to provide comprehensive management assistance to PPP in exchange for
the issuance of 41 million shares of PalWeb Common Stock. PalWeb recorded an
expense of $4.1 million in connection with this transaction, which was equal
to the estimated fair value of the shares issued at that time. The entire
amount was expensed in 1999 as there was no contractual requirement as to
term and PalWeb's need for services and financial support was immediate to
continue its operations. This transaction was entered into between PFS and
the former management of PalWeb and PPP and was an arms length negotiated
transaction. This transaction was negotiated at a time when PalWeb was in
serious financial difficulty. The services performed included strategic
planning, marketing, general consulting and management services, including
recovery of shares issued to other parties in transactions potentially
detrimental to PalWeb.
In 1998, the Company incurred a charge to operations to write down
certain investments due to impairment for a total of $3,456,231. There was no
corresponding charge in 1999.
Interest expense increased $52,237 from $189,527 in 1998, to $241,764
in 1999. The increase is primarily due to the issuance of long-term notes
payable for the acquisition of the plant and other real estate.
Because of the above, the loss before discontinued operations and
extraordinary gain increased $1,223,538 from a loss of $4,807,184 in 1998 to
a loss of $6,030,725 in 1999.
In December 1997, PalWeb acquired PPP in a reverse acquisition
whereby the stockholders of PPP gained majority control of PalWeb through the
exchange of stock. Under the terms of the reverse acquisition contract, the
prior assets of PalWeb, primarily engaged in the business of energy services,
were to be spun off to the previous stockholders of PalWeb. PPP was engaged
in the development of plastic pallets and plastic injection molding systems
and the primary interest in the acquisition was to acquire a shell
corporation that was publicly held. However, the energy services were
distributed to PalWeb's stockholders, by a distribution of the
25
<PAGE>
stock of the Union Group on a pro rata basis, on November 10, 1998. Because
the operation of energy services was a different segment from the continuing
operations of PalWeb/PPP, the operations of energy services is classified as
discontinued operations. The loss for 1998 totaled $849,761 which, included
estimated closing costs of $130,688.
PalWeb was obligated on two promissory notes payable totaling
$830,057 as of May 31, 1998. During 1999, PalWeb negotiated settlements on
these debts through cash payments, issuance of Common Stock, and foreclosure
resulting in a gain of $68,616. This gain is classified as an extraordinary
gain.
As a result of all of the foregoing, the net loss of $5,969,409 in
1999 was an increase of $312,464 over the net loss of $5,656,945 in 1998.
YEAR ENDED MAY 31,1998 COMPARED TO THE PERIOD FROM INCEPTION (NOVEMBER 20,
1995) TO MAY 31, 1997
Research and development expenses were $406,943 in 1997 and $0 in
1998. In 1997, PPP engaged a design engineer to design and oversee the
development of an injection molding system process including molds to produce
plastic pallets. This phase was complete as of May 31, 1997.
Salaries and benefits in 1998 totaled $448,176, compared to $247,516
in 1997, an increase of $200,660. The increase was primarily attributable to
the addition of a marketing person.
Depreciation expense in 1998 was $157,656, compared to $96,871 in
1997, an increase of $60,785. The expense in 1997 generally reflects a
one-half year's depreciation since it is the primary acquisition year.
Other general and administrative expenses for 1998 and 1997 were
$660,383 and $685,695, respectively. The net change was not significant.
In 1998, PalWeb recognized impairment losses of $3,456,231.
Management determined that the molds for the original pallet design were
obsolete due to design deficiencies in the product and recognized an
impairment charge of $184,982 to operations. In addition, a loss in the
amount of $126,249 was recognized to write down a milling machine that was
sold in June 1998 to net realizable value. PalWeb also recognized impairment
in the amount of $3,145,000 on its investment in 20% of the issued and
outstanding stock of Vimonta AG, a Swiss corporation, that is a marketing
logistics company. This adjustment was made after current management reviewed
this acquisition and determined that Vimonta AG was a startup company with no
material assets or tangible net worth. The original valuation of the stock of
Vimonta AG, made by PalWeb's prior management at the time of the acquisition,
was based on Vimonta's income potential, as perceived by the Board of
Directors at that time.
26
<PAGE>
Primarily because of all of the foregoing factors, loss before
discontinued operations increased $3,477,666, from $1,329,518 in 1997 to
$4,807,184 in 1998.
ITEM 3. DESCRIPTION OF PROPERTY
PalWeb, through PPP, currently leases approximately five acres of
land in an industrial area of Dallas, Texas that is improved with 119,000
square feet of manufacturing and warehouse space, and approximately 6,500
square feet of office space. This leased space was originally owned by PPP,
which acquired it in September 19, 1997 for approximately $1,444,000. When
this space was owned by PPP, portions of the property were used for PPP's
operations while other parts of the property were leased to other businesses.
In April 1999, Onward, L.L.C. ("Onward "), an entity 100% owned by Paul A.
Kruger, purchased the current property owned by PPP in order to avoid loss of
the property to a lien creditor. Onward paid $150,000 in cash and acquired
the property subject to a mortgage payable in the amount of $1,350,000. At
the same time, PPP issued 2 million shares of common stock to the lien
creditor and conveyed a portion of the property, worth approximately
$193,000, in partial satisfaction of the debt. At the time the property was
purchased by Onward, the property was appraised by an independent appraiser
for approximately $1,150,000. In 2000, the mortgage payable by Onward was
cancelled as described in Part I, Item 1. For more information on the
transaction, see Note 5 and Note 9 to the Consolidated Financial Statements
of PalWeb. At the time the property was sold to Onward, Paul Kruger was not
an officer or director of PalWeb or PPP.
The portion of the facility needed for operations has been leased
back from Onward, L.L.C.. The lease contains a 3-year option to repurchase
the property for $2.7 million. For accounting purposes, this property is
still treated as being owned by PPP and carried on its books as an asset.
This accounting treatment will continue until the option to repurchase is
exercised, canceled or expires.
PalWeb has sufficient office equipment, such as computers, printers,
copiers, etc., to operate effectively. PalWeb has six computer stations, five
printers, and two copy machines in good working order.
The warehouse/manufacturing facility is sufficiently equipped and
designed to accommodate the manufacturing of plastic pallets and plastic
injection molding systems. The ceilings are very high, which will allow for
the use of cranes, if needed. The warehouse currently has four heavy duty
cranes installed above the work areas, and is situated on an operational
railroad spur. Further, the warehouse has three-phase (heavy-duty), 240 volt
electrical wiring.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
shares of Common Stock and the shares of original issue Preferred Stock
beneficially owned as of August 28, 2000, by (i)
27
<PAGE>
each person known by PalWeb to beneficially own five percent (5%) or more of
the outstanding Common Stock or Preferred Stock, (ii) each current director
and executive officer and (iii) all current directors and executive officers
as a group. The original issue Preferred Stock is considered the equivalent
of Common Stock, since it is voting and convertible into Common Stock on a
share for share basis. As of August 28, 2000, PalWeb had 242,168,244 shares
of Common Stock, including 43,500,000 shares classified as treasury stock
owned by PalWeb's indirect wholly owned subsidiary, Paceco Financial
Services, Inc., and 2,885,000 of Preferred Stock outstanding.
<TABLE>
<CAPTION>
SHARES PERCENT
NAME BENEFICIALLY OWNED OWNED(1)
---- ------------------ --------
<S> <C> <C>
Paul A. Kruger, Chairman of the Board and
President ......................................... 76,955,000(2) 38.18%
Lyle W. Miller, Director and Vice President
(Marketing) ....................................... 7,500,000 3.72%
Mark R. Kidd, Director ............................ 500,000 0.25%
All Directors & Officers as a Group (4 persons) 84,955,000(2) 42.15%
</TABLE>
----------------------------
(1) Percent owned calculated based on combined total shares of Common Stock and
Preferred Stock outstanding, excluding 43,500,000 shares classified as treasury
stock owned by PalWeb's indirect wholly owned subsidiary, Paceco Financial
Services, Inc., because such shares are not entitled to be voted.
(2) Total includes 10,250,000 shares of Common Stock of which Mr. Kruger only
holds the power to vote pursuant to a proxy granted by Michael John; however, as
of July 31, 2000, Michael John has publicly claimed that he only owns 240,000
shares of Common Stock. Total also includes 500,000 shares of Common Stock that
Mr. Kruger holds on behalf of his minor children.
There are currently no plans for any arrangement or acquisition which
would change ownership of a controlling interest in the common stock of
PalWeb.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a related party transaction that occurred in February 2000 in
connection with PalWeb's acquisition of Paceco Financial Services, Inc., see
Part I, Items 1 and 2, of this Form 10-SB.
On January 10, 2000, PalWeb issued the following number of shares of
unregistered Common Stock to the following parties as consideration for the
cancellation of the debt set forth opposite of such parties' name:
28
<PAGE>
<TABLE>
<CAPTION>
DEBT OWED NO. OF SHARES ISSUED IN
PARTIES' NAME BY PALWEB CANCELLATION OF SUCH DEBT
------------- ---------- -------------------------
<S> <C> <C>
Hildalgo Trading Co., L.C. $701,000 7,010,000
Onward, L.L.C. 312,429 3,124,786
Paul A. Kruger 174,000 1,740,000
</TABLE>
Hildalgo Trading Co., L.C. and Onward, L.L.C. are wholly owned by Paul A.
Kruger.
Also on January 10, 2000, PalWeb issued 3,500,210 shares of
unregistered Common Stock of PalWeb to Hildalgo Trading Co., L.C. as
consideration for consulting services provided to PalWeb by Hildalgo Trading
Co., L.C.
In a related party transaction in April 1999, Paceco distributed
8,500,000 shares of Common Stock it received pursuant to an Agreement for
Sale of Machinery by and between Plastic Pallet Production, Inc. and Pace
Plastic Pallets, Inc. to certain parties employed by or associated with Paul
A. Kruger, including Ron Hale, the former President of PPP, and Mark Kidd.
For a related party transaction involving Onward, L.L.C, an affiliate
of Mr. Kruger, see Part I, Item 3 and Note 5 and Note 9 to the Consolidated
Financial Statements of this Form 10-SB.
For certain related party transactions whereby PalWeb issued Common
and Preferred Stock to officers and directors in exchange for such officers'
and directors' management services as well as for consideration in other
transactions, see Part II, Item 4, Recent Sales of Unregistered Securities of
PalWeb's Form 10-SB, Amendment No. 5, filed on July 20, 2000.
For a related party transaction involving an affiliate of Paul Kruger
that extended PalWeb a $400,000 line of credit payable on December 1, 2000
with interest at 18%, see Part I, Item 2.
PART II
ITEM 2. LEGAL PROCEEDINGS
There are five material legal proceedings pending against or on
behalf of PalWeb.
The first lawsuit is a third party cross action filed by Cooper
Manufacturing Corp., an Oklahoma corporation ("Cooper Oklahoma"), against
Cooper Manufacturing Corp., a Texas corporation ("Cooper Texas"), and Cabec
Energy Corp. n/k/a PalWeb Corporation, Case No. 98- 7935-NO(D), filed in the
46th Judicial Circuit Court of Otsego County, Michigan on October 14, 1999,
and styled JAMES DUNEVANT AND SHANDA DUNEVANT, JAMES DUNEVANT, JR., KAYLYNN
DUNEVANT, AND KATIE DUNEVANT, MINORS, BY THEIR NEXT FRIEND, SHANDA DUNEVANT,
PLAINTIFFS, VS. WELLTECH EASTERN, INC. D/B/A KEY ENERGY DRILLING, A DELAWARE
CORPORATION, MERCURY EXPLORATION COMPANY,
29
<PAGE>
INC., A TEXAS CORPORATION, AND COOPER MANUFACTURING CORP., AN OKLAHOMA
CORPORATION. The Plaintiffs' claim is based on an injury suffered by James
Dunevant that was allegedly caused, among other things, by a design flaw in
an oil well drilling rig allegedly built by Cooper Oklahoma. Cooper
Oklahoma's third party cross action against PalWeb is based on a contractual
indemnity claim. It is PalWeb's position that Cooper Oklahoma is not entitled
to be indemnified from loss by PalWeb in this matter. Further, even if PalWeb
is liable to the Plaintiffs, the Union Group is contractually obligated to
indemnify PalWeb from any loss it may incur in connection with any energy
related matter. However, the collection of an indemnity claim from the Union
Group could prove to be difficult, if not impossible.
PalWeb's former President and Chairman of the Board, Michael John,
has filed two PRO SE lawsuits against PalWeb and others. The first lawsuit
styled MICHAEL JOHN VS. PALWEB CORPORATION AND PAUL KRUGER, No. 00-3465, was
filed in the 191st Judicial District of the District Court, Dallas County,
Texas, on May 10, 2000. Mr. John claims he is entitled to unspecified damages
resulting from defamation, intentional infliction of emotional distress and
interference with business relations as a result of a letter written by Paul
Kruger, who is now President and Chairman of the Board of PalWeb. PalWeb
plans to vigorously defend the lawsuit and has asserted counterclaims for
mismanagement and breach of fiduciary duty against Michael John. The second
PRO SE lawsuit styled MICHAEL JOHN VS. PALWEB CORPORATION, PAUL KRUGER AND
LYLE MILLER, No 003467, was filed by Mr. John in the 116th Judicial District
of the District Court, Dallas County, Texas, on May 12, 2000. In this second
lawsuit, Mr. John alleges claims based on the alleged breach of an agreement
providing for the purchase of certain shares of stock registered in the name
of Margarete Jung. John contends he is entitled to receive the proceeds of
the sale of Ms. Jung's stock which have not been paid in full to him. He
asserts claims for breach of contract and securities fraud in connection with
the alleged transaction. PalWeb answered denying the claims and filed a
motion seeking transfer of the second case and consolidation of the two
cases. On August 11, 2000, over the objection of Mr. John, the District Court
of Dallas County granted PalWeb's motion and ruled that the second case
should be transferred to the assigned judge in the first case and that the
cases should be consolidated through discovery with the issue of
consolidation for trial reserved for determination at a later date. The
District Court is preparing a written order which has not yet been entered.
The fourth lawsuit is styled RALPH CURTON, JR. VS. PALWEB
CORPORATION, CV 00-8683-C, and was filed in the County Court at Law No. 3,
Dallas County, Texas on July 27, 2000. Ralph Curton, Jr. is the former
President, Secretary and Chairman of the Board of PalWeb. PalWeb obtained a
$500,000 line of credit loan for its operations through a Promissory Note by
and between PalWeb and Ralph Curton, Jr. dated December 1, 1999 (the "Note"),
at a time when Mr. Curton was no longer an officer or director of PalWeb or
otherwise related to PalWeb. The loan interest rate is 8.5% per annum,
payable in quarterly installments on March 1, June 1, September 1 and
December 1 of each year, and the maturity date is December 1, 2001. In his
lawsuit, Mr. Curton alleges that PalWeb failed to pay the March 1 and June 1,
2000 quarterly interest payments and is in default of its obligations
provided for in the Note. Mr. Curton claims that under the terms of the Note
he is entitled to immediately collect the principal balance of the Note and
all accrued interest thereon. Mr. Curton also claims he is entitled to
attorney fees and costs incurred in connection with enforcing his
30
<PAGE>
rights under the Note. PalWeb disputes the allegations and contends it has
defenses to payment of the Note.
The fifth lawsuit is pending against another party. On June 26, 2000,
PalWeb and Plastic Pallet Production, Inc. ("PPP") filed suit against Vimonta
AG ("Vimonta") in the United States District Court for the Northern District
of Texas in a case styled PALWEB CORPORATION, INC. AND PLASTIC PALLET
PRODUCTION, INC., PLAINTIFFS V. VIMONTA AG, DEFENDANTS, Case no.
3-00CV1388-P. Service was made on Vimonta on August 14, 2000. PalWeb and PPP
allege that Vimonta claims that it is entitled to exclusive rights in all of
PalWeb's technology and formulas for plastic pallet production in Europe,
Asia, the territories of the former USSR and South America; that it is
entitled to immediately receive all of the valuable patents and proprietary
information of PalWeb and PPP; that PalWeb and PPP must ship products to
Vimonta at cost and without profit or margins of any kind and that PalWeb and
PPP's only rights are to receive whatever benefits PalWeb derives from being
a 20% shareholder of Vimonta.
Vimonta bases its claims on certain alleged agreements that were
purportedly signed by PalWeb's former Chief Executive Officer, Michael John.
PalWeb and PPP contend that the purported agreements upon which Vimonta
relies to assert its claims are vague and incomplete and do not contain the
requisite information to form a valid contract. PalWeb and PPP have requested
declaratory judgment determining that Vimonta has no enforceable rights to
the patents, technology and other proprietary information and that the
alleged agreements are unenforceable and void. In addition, PalWeb and PPP
contend that Vimonta and Michael John, PalWeb's former Chief Executive
Officer, have acted in concert to deprive PalWeb and PPP of their valuable
rights by creating documents that purport to be binding agreements but which
are unclear, incomplete and full of confusion and which purport to convey
valuable rights to Vimonta without consideration. As a result, PalWeb and PPP
have incurred damages in their business and expenses due to these unfounded
claims which they seek to recover from Vimonta.
PART F/S
Set forth beginning at page F-1 are the financial statements required
for Form 10-SB.
PART III
ITEM 1. INDEX TO EXHIBITS
The following exhibits are filed as a part of this report:
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
* 2.1 Stock Exchange Agreement dated September 26, 1997 by and among
Plastic Pallet Production, Inc., the shareholders of Plastic
Pallet Production, Inc. and Cabec Energy Corp., as amended
* 2.2 Agreement and Plan of Reorganization by and among PalWeb
Corporation, PP Financial, Inc. and Pace Holding, Inc. dated
January 21, 2000
* 3.1 Certificate of Incorporation of PalWeb Corporation
* 3.2 By-laws of PalWeb Corporation
* 4.1 Certificate of Designation, Preferences and Rights of Preferred
Stock Providing for an Issue of Preferred Stock Designated
"Convertible Preferred Stock"
*10.1 Loan Agreement by and between Mr. Ralph Curton, Jr. and PalWeb
Corporation dated December 1, 1999
*10.2 Personnel Staffing Agreement by and between Accord Human
Resources, Inc. and Plastic Pallet Production Company, Inc.
dated January 19, 1999
*10.3 First Supplement to the Stock Purchase Exchange Agreement of
March 11, 1998 dated August 3, 1998 and Executive Agreement
between Plastic Pallet Production, Inc. and Vimonta AG dated
December 10, 1998 (both documents were translated from German to
English)
*10.3(a) First Supplement to the Executive Agreement between Plastic
Pallet Production, Inc. and Vimonta AG dated May 19, 1999 (this
document was translated from German to English)
*10.4 Stock Purchase/Exchange Agreement by and among Dr. Michael
Hoenig, Margaret Jung and Cabec Energy Corp. dated March 11,
1998
*10.5 Lease Agreement by and between Onward, L.L.C. and Plastic Pallet
Production, Inc. dated April 5, 1999
*10.6 Indemnity Agreement by and between The Union Group, Inc. and
Cabec Energy Corp. dated August 31, 1998
*10.7 Pallet Test #714 prepared dated November 24, 1999 for Plastic
Pallet Production, Inc. prepared by Container Technology
Laboratory, Inc.
*10.8 Promissory Note in the amount of $400,000 payable to Hildalgo
Trading Company, L.C. dated July 27, 2000
*10.9 Security Agreement by and between PalWeb Corporation and
Hildalgo Trading Company, L.C. dated July 27, 2000
32
<PAGE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
*10.10 Security Agreement by and between Plastic Pallet Production,
Inc. and Hildalgo Trading Company, L.C. dated July 27, 2000
*21.1 Subsidiaries of PalWeb Corporation
*99.1 Default Judgment for CABEC ENERGY CORP VS. WOLFGANG ULLRICH AND
ROSARIN CHAISAYAN, No. DV-99-00110-E, District Court, Dallas
County, Texas, 101st Judicial District
*99.2 Default Judgment for PALLET PRODUCTION, INC., PALWEB CORPORATION
AND ONWARD, L.L.C. VS. CHARTEX AG AND NEW INTER HKB AG, No.
99-10249-B, District Court, Dallas County, Texas, 44th Judicial
District
</TABLE>
------------------
*Previously filed.
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
PALWEB CORPORATION
By: /s/ PAUL A. KRUGER
-----------------------------------
Paul A. Kruger
Chairman of the Board and President
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF PALWEB CORPORATION
<S> <C>
Independent Auditor's Report...............................................................F-1
Consolidated Balance Sheet.................................................................F-3
Consolidated Statements of Operations (Unaudited)..........................................F-5
Consolidated Statements of Operations......................................................F-7
Consolidated Statements of Changes in Stockholders' Deficiency.............................F-9
Consolidated Statements of Cash Flows (Unaudited).........................................F-11
Consolidated Statements of Cash Flows.....................................................F-13
Notes to Consolidated Financial Statements................................................F-15
FINANCIAL STATEMENTS OF PACE HOLDING, INC.
Report of Independent Certified Public Accountants........................................F-30
Consolidated Balance Sheets...............................................................F-31
Consolidated Statements of Operations.....................................................F-33
Consolidated Statements of Stockholder's Deficiency.......................................F-35
Consolidated Statements of Cash Flows.....................................................F-37
34
<PAGE>
Notes to Consolidated Financial Statements................................................F-42
PRO FORMA FINANCIAL INFORMATION
Background Information....................................................................F-58
Consolidated Statement of Operations......................................................F-59
Consolidated Balance Sheet................................................................F-63
Notes to Pro Forma Statements.............................................................F-67
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
PalWeb Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheets of PalWeb
Corporation and subsidiaries as of May 31, 1999, 1998, and 1997 and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the years ended May 31, 1999 and 1998 and the period from inception
(November 20, 1995) to May 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 financial statements referred to above present fairly, in
all material aspects, the financial position of PalWeb Corporation and
subsidiaries as of May 31, 1999, 1998, and 1997 and the results of their
operations and their cash flows for the years ended May 31, 1999 and 1998 and
the period from inception (November 20, 1995) to May 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage and 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, 1999, raise substantial doubt about its
ability to continue as a going concern. Management's
F-1
<PAGE>
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 this uncertainty.
HULME RAHHAL HENDERSON,INC.
September 15, 1999,
except for Note 14,
as to which the date
is January 24, 2000
Ardmore, Oklahoma
F-2
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
February 29, -------------------------------------
ASSETS 2000 1999 1998 1997
------ ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 322 $ 710 $ - $ 6,641
Accounts receivable 3,852 - - -
Inventory 9,778 9,938 33,687 54,068
Assets held for resale - - 74,995 -
----------- ----------- ----------- -----------
Total current assets 13,952 10,648 108,682 60,709
PROPERTY, PLANT AND EQUIPMENT, NET
of accumulated depreciation 1,835,472 1,819,216 2,437,900 1,408,649
OTHER ASSETS:
Net assets, discontinued operations - 437,673 -
Patent costs, net 57,749 60,749 56,072 31,731
Deposits and other 30,173 30,173 29,353 24,000
----------- ----------- ----------- -----------
Total other assets 87,922 90,922 523,098 55,731
----------- ----------- ----------- -----------
TOTAL ASSETS $ 1,937,346 $ 1,920,786 $ 3,069,680 $ 1,525,089
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable $ 50,000 $ 50,000 $ 963,807 $ 472,827
Mortgage payable - related party - - 1,350,000 -
Accounts payable 343,273 1,026,667 1,102,458 295,308
Accrued expenses 118,506 119,938 349,779 53,996
Payable to related parties 1,619,422 2,222,992 1,812,623 1,540,500
Customer deposits - 300,000 - -
----------- ----------- ----------- -----------
Total current liabilities 2,131,201 3,719,597 5,578,667 2,362,631
LONG-TERM DEBT 340,000 - - -
LEASE FINANCE OBLIGATION 1,757,958 1,766,958 - -
STOCKHOLDERS' DEFICIENCY:
F-3
<PAGE>
Preferred stock, $.0001 par,
20,000,000 shares authorized -
outstanding - 2,885,000, 880,000,
380,000 and -0-, respectively 289 88 38 -
Common stock, $.10 par value,
250,000,000 authorized, outstanding -
205,456,628, 217,981,046, 166,856,046
and 119,145,725, respectively 20,545,663 21,798,105 16,685,605 11,914,572
Additional paid-in capital 6,798,890 2,027,465 1,797,015 -
Deficit accumulated during
development stage (29,636,655) (27,391,427) (20,991,645) (12,752,114)
----------- ------------ ----------- -----------
Total stockholders' deficiency (2,291,813) (3,565,769) (2,508,987) (837,542)
----------- ------------ ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS DEFICIENCY $ 1,937,346 $ 1,920,786 $ 3,069,680 $ 1,525,089
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-4
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
From Inception
Nine Month Period (November 20, 1995)
Ended February 29/28, to February 29,
--------------------------- ---------------
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
SALES $ 6,091 $ 41,510 $ 98,785
EXPENSES:
Research and development - - 406,943
General and administrative
expenses 2,050,117 4,957,639 9,851,944
Depreciation expense 131,943 115,555 541,057
Impairment - - 3,456,231
Interest expense 137,949 199,287 601,140
------------ ------------ ------------
Total expenses 2,320,009 5,272,481 14,857,315
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Gain on settlement of
liabilities 75,027 - 75,027
Other (6,337) 51,573 270,848
------------ ------------ ------------
Total other income (expense) 68,690 51,573 345,875
------------ ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS
AND EXTRAORDINARY ITEMS (2,245,228) (5,179,398) (14,412,655)
LOSS FROM DISCONTINUED OPERATION (7,300) (857,061)
EXTRAORDINARY GAIN - 46,266 68,616
------------ ------------ ------------
NET LOSS $ (2,245,228) $ (5,140,432) $(15,201,100)
============ ============ ============
LOSS PER COMMON SHARE:
Loss before discontinued operations
and extraordinary loss $ (0.01) (0.03)
Loss from discontinued operation - -
Extraordinary loss - -
------------ ------------
F-5
<PAGE>
Loss per common share $ (0.01) $ (0.03)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 184,316,000 174,998,000
============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-6
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From Inception
(November 20, 1995) to
--------------------------
Year Ended May 31, May 31, May 31,
-------------------------- ------------ ------------
1999 1998 1997 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $ 51,510 $ 37,863 $ 3,321 $ 92,694
EXPENSES:
Research and development - - 406,943 406,943
Salaries and benefits 298,414 448,176 247,516 994,106
Depreciation and
amortization 154,587 157,656 96,871 409,114
Other general and
administrative 5,461,643 660,383 685,695 6,807,721
Impairment of investment - 3,456,231 - 3,456,231
Interest expense 241,764 189,527 31,900 463,191
------------ ------------ ------------ ------------
Total expense 6,156,408 4,911,973 1,468,925 12,537,306
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Scrap sales and other 3,573 7,486 92,346 103,405
Rental income 70,600 59,440 43,740 173,780
------------ ------------ ------------ ------------
Total other income 74,173 66,926 136,086 277,185
------------ ------------ ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS
AND EXTRAORDINARY ITEMS (6,030,725) (4,807,184) (1,329,518) (12,167,427)
LOSS FROM DISCONTINUED OPERATIONS (7,300) (367,805) - (375,105)
EXTRAORDINARY GAIN 68,616 - - 68,616
------------ ------------ ------------ ------------
NET LOSS, as previously reported (5,969,409) (5,174,989) (1,329,518) (12,473,916)
PRIOR PERIOD ADJUSTMENT (Note 13) - (481,956) (481,956)
------------ ------------ ------------ ------------
NET LOSS $ (5,969,409) $ (5,656,945) $ (1,329,518) $(12,955,872)
============ ============ ============ ============
LOSS PER COMMON SHARE:
Loss before discontinued
F-7
<PAGE>
operations & extraordinary gain $ (.03) $ (.04) $ (.01)
Discontinued operations - (.01) -
Extraordinary gain - - -
------------ ------------ ------------
Total $ (.03) $ (.05) $ (.01)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 183,189,000 127,020,000 119,145,725
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-8
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCES, November 20, 1995 - $ - - $ -
Proceeds from sale of stock - - 119,145,725 11,914,572
Net Loss - - - -
------------ ------------ ------------ ------------
BALANCES, May 31, 1997 - - 119,145,725 11,914,572
Common stock held by minority stockholders
of PalWeb in connection with reverse acquisition 530,000 53 31,960,321 3,196,033
Issuance of stock for services 600,000 60,000 162,000 -
Issuance of stock for investment - - 15,000,000 1,500,000
Preferred stock converted to common (150,000) (15) 150,000 15,000
Net loss - - - -
------------ ------------ ------------ ------------
Balances, May 31, 1998, as adjusted (Note 14) 380,000 38 166,856,046 16,685,605
Issuance of stock for services 500,000 50 48,125,000 4,812,500
Stock issued for debt (Note 10) - - 3,000,000 300,000
Distribution of energy services
segment to minority stockholders - - - -
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficiency
------------ ------------ ------------
<S> <C> <C> <C>
BALANCES, November 20, 1995 $ - $ - $ -
Proceeds from sale of stock - (11,422,596) 491,976
Net Loss - (1,329,518) (1,329,518)
------------ ------------ ------------
BALANCES, May 31, 1997 - (12,752,114) (837,542)
Common stock held by minority stockholders
of PalWeb in connection with reverse acquisition - (2,582,586) 613,500
Issuance of stock for services 222,000
Issuance of stock for investment 1,650,000 - 3,150,000
Preferred stock converted to common (14,985) - -
Net loss - (5,656,945) (5,656,945)
------------ ------------ ------------
Balances, May 31, 1998, as adjusted (Note 14) 1,797,015 (20,991,645) (2,508,987)
Issuance of stock for services 200,450 - 5,013,000
Stock issued for debt (Note 10) 30,000 - 330,000
Distribution of energy services
segment to minority stockholders - (238,395) (238,395)
F-9
<PAGE>
Prior period adjustment (Note 14) - - - -
Net loss - - - -
------------ ------------ ------------ ------------
BALANCES, May 31, 1999, as adjusted (Note 14) 880,000 88 217,981,046 21,798,105
Issuance of stock for services and equipment* 125,000 13 14,500,210 1,450,021
Contribution of debt to capital - - - -
Stock issued in satisfaction of debt* 3,963,890 396 12,334,790 1,233,479
Preferred stock converted to common* (2,083,890) (208) 2,083,890 208,389
Cancellation of common stock* - - (41,443,308) (4,144,331)
Net loss* - - - -
------------ ------------ ------------ ------------
BALANCES, February 29, 2000* 2,885,000 289 205,456,628 $ 20,545,663
============ ============ ============ ============
Prior period adjustment (Note 14) - (191,978) (191,978)
Net loss - (5,969,409) (5,969,409)
------------ ------------ ------------
BALANCES, May 31, 1999, as adjusted (Note 14) 2,027,465 (27,391,427) (3,565,769)
Issuance of stock for services and equipment* 18,737 - 1,468,771
Contribution of debt to capital 189,000 - 189,000
Stock issued in satisfaction of debt* 627,538 - 1,861,413
Preferred stock converted to common* (208,181) - -
Cancellation of common stock* 4,144,331 - -
Net loss* - (2,245,228) (2,245,228)
------------ ------------ ------------
BALANCES, February 29, 2000* $ 6,798,890 $(29,636,655) $ (2,291,813)
============ ============ ============
</TABLE>
* Denotes unaudited transactions.
The accompanying notes are an integral part of this consolidated financial
statement.
F-10
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Month Period From Inception
Ended February 29/28, (November 20, 1995)
--------------------- to February 29,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,245,228) $ (5,140,432) $(15,201,100)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation and amortization 131,943 115,554 571,857
Extraordinary gain on debt retirement - (46,266) (67,616)
Consulting services paid by
issuance of common stock 1,468,771 4,363,000 6,703,771
Impairment of investment - - 3,145,000
Loss of disposition of property 6,337 - 317,568
Changes in accounts receivable (3,852) - (3,852)
Changes in inventory 160 14,999 (9,778)
Changes in other assets - (820) (85,837)
Changes in payable - related party 375,030 208,614 2,598,022
Changes in accounts payable
and accrued expenses 86,987 369,759 1,928,851
Increase in customer deposits - 300,000 300,000
------------ ------------ ------------
Net Cash Provided by (Used)
Operating Activities (179,852) 184,408 195,886
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (169,536) (115,653) (3,385,109)
Proceeds from sale of equipment 18,000 74,995 92,995
Proceeds from lease finance
obligation - - 149,517
------------ ------------ ------------
Net cash used by Investing Activities (151,536) (40,658) (3,142,597)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and mortgages payable 340,000 - 1,353,807
Payments on notes payable - (143,750) (239,750)
Proceeds from mortgage note - related party - - 1,350,000
Proceeds from issuance of common stock - - 491,976
Other (9,000) - (9,000)
------------ ------------ ------------
Net cash provided by (Used)
financing activities 331,000 (143,750) 2,947,033
------------ ------------ ------------
F-11
<PAGE>
NET INCREASE (DECREASE) IN CASH (388) - 322
CASH, beginning of period 710 - -
------------ ------------ ------------
CASH, end of period $ 322 $ - $ 322
============ ============ ============
SUPPLEMENTAL INFORMATION:
Non-cash investing activities -
Property released in foreclosure $ - $ 415,232
Net discontinued assets distri-
buted to certain stockholders - 430,373
Non-cash financing activities -
Common and preferred stock
issued for services & equipment 1,468,771 4,363,000
Common and preferred stock
issued for debt 673,934 100,000
Common stock issued for debt
of related party 1,187,479 -
Common stock issued on con-
version of preferred stock 208,389 -
Debt contributed to additional
paid in capital by related party 189,000 -
Common stock held by related party
canceled by default judgement 4,144,331 -
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-12
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From Inception
(November 20, 1995) to
------------------------------
Year Ended May 31, May 31, May 31,
------------------------------ ------------ ------------
1999 1998 1997 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,969,409) $ (5,656,945) $ (1,329,518) $(12,955,872)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation and amortization 154,587 188,456 96,871 439,914
Extraordinary gain on debt retirement (68,616) - - (68,616)
Consulting services paid by
issuance of common stock 5,013,000 222,000 - 5,235,000
Impairment of investment - 3,145,000 - 3,145,000
Loss of disposition of property - 311,231 - 311,231
Changes in inventory 23,749 20,381 (54,068) (9,938)
Changes in other assets (1,426) (26,380) (58,031) (85,837)
Changes in payable - related party 410,369 272,123 1,540,500 2,222,992
Changes in accounts payable
and accrued expenses 244,600 1,247,960 349,304 1,841,864
Increase in customer deposits 300,000 - - 300,000
------------ ------------ ------------ ------------
Net cash provided by (used)
operating activities 106,854 (276,174) 545,058 375,738
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (140,906) (1,571,447) (1,503,220) (3,215,573)
Proceeds from sale of equipment 74,995 - - 74,995
Proceeds from lease finance obligation 149,517 - - 149,517
------------ ------------ ------------ ------------
Net cash provided by (used)
investing activities 83,606 (1,571,447) (1,503,220) (2,991,061)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 50,000 490,980 472,827 1,013,807
Payments on notes payable (239,750) - - (239,750)
Proceeds from mortgage payable -
related party - 1,350,000 - 1,350,000
Proceeds from issuance of common stock - - 491,976 491,976
------------ ------------ ------------ ------------
Net cash provided (used) by
financing activities (189,750) 1,840,980 964,803 2,616,033
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 710 (6,641) 6,641 710
F-13
<PAGE>
CASH, beginning of period - 6,641 - -
------------ ------------ ------------ ------------
CASH, end of period $ 710 $ - $ 6,641 $ 710
============ ============ ============ ============
</TABLE>
SUPPLEMENTAL INFORMATION (Note 10)
The accompanying notes are an integral part of this consolidated financial
statement.
F-14
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Effective December 12, 1997, PalWeb Corporation ("PalWeb"), formerly
Cabec Energy Corporation, was acquired in a reverse acquisition by the
stockholders of Plastic Pallet Production, Inc.("PPP") whereby the
stockholders of PPP became majority owners of PalWeb. Pursuant to the
agreement, PalWeb exchanged its common stock for the outstanding common
stock of PPP and the assets and liabilities of PalWeb and its
subsidiaries as of the effective date were to be transferred into a new
company whose stock was to be distributed to the stockholders of PalWeb,
other than the new stockholders resulting from the PPP stock transfer.
This latter distribution was effected November 10, 1998.
PPP shareholders received 119,145,725 shares of common stock for an
ownership of approximately 78% of PalWeb in exchange for its shares of
PPP. The outstanding shares of PalWeb just prior to the acquisition were
31,960,321 shares of common stock and 530,000 shares of convertible
preferred stock resulting in an ownership of PalWeb retained by the
pre-acquisition shareholders of PalWeb of approximately 22%. The basis
for the number of PalWeb common shares issued to the PPP shareholders
was to effect the agreed upon interest ownership levels based on the
then outstanding shares of PalWeb.
The business of PalWeb as of December 12, 1997 is principally involved
in energy services. The accounting for the reverse acquisition is a
purchase and the net assets of PalWeb acquired are valued at fair value
of the of the underlying assets for a total of $613,500 based on
managements assessment therein. The principal asset consists of a
wholly-owned subsidiary, Wyoming Pipe & Tool Corp., a service company to
oil and gas drilling companies. The operating results for the period
from June 1, 1997 to December 12, 1997 is not significant. Since the
disposition of the energy services net assets was approved at the time
of approval of the PPP stock exchange, these net assets are accounted
for in the accompanying financial statements as discontinued operations.
Further, the distribution effected as of November 10, 1998 is accounted
for as a spin off in accordance with APB Opinion No. 29, "Accounting for
Nonmonetary Transactions."
The consolidated balance sheet and consolidated statements of operations
and cash flows as of and for the period ended May 31, 1997 are the
consolidated accounts of Plastic Pallet Production, Inc. and its
subsidiaries. Similarly, the activity for the period June 1, 1997
through December 12, 1997, the effective date of the reverse
acquisition, included in the consolidated statements of operations and
cash flows for the year ended May 31, 1998, represent the consolidated
accounts of PPP.
F-15
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PalWeb and its wholly owned subsidiary PPP will pursue the manufacture
and marketing of plastic pallets and the related injection molding
equipment necessary to produce plastic pallets.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of PalWeb and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
DEVELOPMENT STAGE COMPANY
PPP from its inception, November 20, 1995, has pursued the development
of a plastic pallet which will compete with traditional wood pallets.
Additionally, PPP has designed an injection molding machine which it
anticipates can be built and operated more economically than competitive
equipment. At May 31, 1999, both products are in the development stage.
PPP expects these products to become commercially marketable during the
next year.
STATEMENT OF CASH FLOWS
PalWeb considers all short-term investments with an original maturity of
three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of PalWeb's financial statements in conformity with
generally accepted accounting principles requires PalWeb's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ
materially from those estimates.
INVENTORY
Inventory consists of finished pallets and is stated at the lower of
cost (first-in, first-out) or market value.
PROPERTY, PLANT AND EQUIPMENT
PalWeb's property, plant and equipment is stated at cost. Depreciation
expense is computed on the straight-line method over the estimated
useful lives, as follows:
F-16
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Plant building 20 years
Plant improvements 7 years
Production machinery equipment 5-10 years
Office equipment & furniture & fixtures 3- 5 years
</TABLE>
Upon sale, retirement or other disposal, the related costs and
accumulated depreciation of items of property, plant or equipment are
removed from the related accounts and any gain or loss is recognized.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed comparing the estimated future
undiscounted cash flows associated with the asset to the assets carrying
amount. If the asset carrying amount exceeds the cash flows, a
write-down to market value or discounted cash flow value is required.
INVESTMENT IN VIMONTA AG
PalWeb's 20% ownership in Vimonta AG is valued at cost since management
has no board representation, financial information or other influence on
the operation of Vimonta AG.
PATENTS
Amortization expense for the costs incurred by PalWeb to obtain the
patents on the modular pallet system and accessories is computed on the
straight-line method over the estimated life of 17 years.
RECOGNITION OF REVENUES
Revenue is recognized when the product is shipped.
INCOME TAXES
PalWeb accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based in the difference between
the financial statements and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
RESEARCH AND DEVELOPMENT COSTS
F-17
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development costs are charged to operations in the period
incurred.
LOSS PER SHARE
Loss per share is computed based on weighted average number of shares
outstanding. Convertible preferred stock and stock options are not
considered as their effect is antidilutive.
ACCOUNTING CHANGES
During the year ended May 31, 1998, PalWeb adopted Statement of
Financial Accounting Standards 128, "Earnings per Share" and Statement
of Financial Accounting Standards 129 "Disclosure of Information About
an Entity's Capital Structure". Statement 128 provides for the
calculation of "basic" and "diluted" earnings per share. Basic earnings
per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The
implementation of these standards does not have a material effect on
PalWeb's consolidated financial statements.
During the year ended May 31, 1999, PalWeb adopted Statement of
Financial Accounting Standards 130, "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, Statement 130 requires that all items that are required to
be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. The
implementation of this standard does not have a material effect on
PalWeb's consolidated financial statements.
2. CONTINUATION AS A GOING CONCERN
The accompanying financial statements have been prepared assuming that
PalWeb will continue as a going concern. PalWeb is in the development
stage and has suffered significant losses from operations. To date,
PalWeb has received substantial advances from investors but will require
additional substantial funding in order to implement its business plan
and have an opportunity to achieve profitable operations. Management
plans to meet this funding need through a short term bank loan of
approximately $400,000 and the pursuit of a private placement of equity
securities. Neither the receipt of additional funding in adequate
amounts nor the successful implementation of its business plan can be
assured. The
F-18
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
combination of these factors raise substantial doubt about PalWeb's
ability to continue as a going concern. It is management's opinion that
the funding required to reach necessary production levels will be
obtained and, based upon expressions of interest from potential
customers, PalWeb will obtain adequate sales to reach a profitable
status, and will continue as a going concern.
3. PROPERTY, PLANT AND EQUIPMENT
A summary of the property, plant and equipment is as follows:
<TABLE>
<CAPTION>
May 31,
February 29, ---------------------------------------------
2000 1999 1998 1997
------------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Land $ 85,000 $ 85,000 $ 691,057 $ 412,057
Plant building 1,166,127 1,166,127 1,166,127 -
Plant improvements 141,791 141,791 141,791 131,296
Production machinery and equipment 175,410 254,367 254,368 600,115
Office equipment 94,282 94,282 73,941 66,098
Furniture and fixtures 33,654 33,654 33,654 33,654
Work in Progress 605,413 417,761 299,370 260,000
----------- ----------- ----------- -----------
2,301,677 2,192,982 2,660,308 1,503,220
Less: accumulated depreciation (466,205) (373,766) (222,408) (94,571)
----------- ----------- ----------- -----------
$ 1,835,472 $ 1,819,216 $ 2,437,900 $ 1,408,649
=========== =========== =========== ===========
</TABLE>
The work-in-progress consists of the construction of a prototype
injection molding machine and molds for the manufacture of plastic
pallets.
Depreciation expense from continuing operations for the years ended May
31, 1999, 1998 and 1997 is $151,358, $155,970 and $94,571, respectively
and $128,943 and $103,720 for the unaudited periods ended February
29/28, 2000 and 1999.
F-19
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES PAYABLE
A summary of the notes payable as of May 31 are as follows:
<TABLE>
<CAPTION> MAY 31,
February 29, --------------------------------
2000 1999 1998 1997
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Note payable to bank, interest at 2% over
prime, due May 2000 $ 50,000 $ 50,000 $ - $ -
Note payable to individual under a
$500,000 line of credit, interest at
8.5%, due December 1, 2001 340,000 - - -
Note payable to several organizations and
individuals, interest at 8.5%, principal
and accrued interest due at maturity of
December 1997, collateralized by land - - 339,077 339,077
Note payable to finance company, interest at 10%, principal and accrued
interest due at maturity of January 1998, collateralized
by certain production machinery and equipment - - 133,750 133,750
Note payable to individual, interest imputed at 10%, principal and
interest, due in November 1998, collateralized by mortgages on certain
portions of the plant building
and land and a guarantee by a stockholder - - 490,980 -
-------- -------- -------- --------
390,000 50,000 963,807 472,827
Current portion 50,000 50,000 963,807 472,827
-------- -------- -------- --------
Long-term debt $340,000 $ - $ - $ -
======== ======== ======== ========
</TABLE>
The note payable in the amount of $339,077 at May 31, 1998 and secured
by land was in default. During 1999 the creditor foreclosed on the land
in satisfaction of the debt. A loss of $76,155 resulted from the
foreclosure which is classified as an extraordinary item.
F-20
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1999, PalWeb negotiated a settlement on the note payable to
individual in the amount of $490,980 at May 31, 1998, plus accrued
interest, by issuance of 2,000,000 shares of its common stock, cash
payment of $110,000 and transfer of title to certain undeveloped land
valued at approximately $193,000. The result is classified as an
extraordinary gain of $22,350.
5. RELATED PARTY TRANSACTIONS
PalWeb's subsidiary PPP has received substantial funding from certain
investors. The investors advanced operating funds totaling $2,222,922,
$1,812,623 and $1,540,500 as of May 31, 1999, 1998, and 1997. These
advances are non-interest bearing.
As of May 31, 1998, PalWeb had a mortgage payable to the investor of
$1,350,000 which bears interest at 12.35% and is due on demand. This
note is collateralized by a first mortgage on a portion of the plant and
land in Dallas, Texas.
6. EXTRAORDINARY GAIN
During 1999, PalWeb negotiated settlement and incurred foreclosure on
certain notes payable, see note 4. Additionally, PalWeb issued 1,000,000
shares of common stock in settlement of an account payable totaling
$183,993. The net gain from these transactions totaled $68,616.
7. IMPAIRMENT OF INVESTMENT
In March 1998, PalWeb issued 15,000,000 of common stock for a 20%
investment in Vimonta AG valued at $3,150,000 based on the market value
of the Company's common stock. The transaction was principally to assist
PalWeb in marketing its products in Europe. Management has been unable
to obtain reliable financial information regarding Vimonta AG and does
not believe Vimonta has material assets or net worth. Accordingly,
PalWeb has recorded a charge to income in the amount of $3,145,000.
During the year ended May 31, 1998, PalWeb recorded an impairment loss
in the amount of $126,249 on certain plant equipment designated for
resale to reduce the carrying value to the asset's net realizable value.
Additionally, certain molds for plastic products were deemed obsolete
and an impairment charge in the amount of $184,982 was recorded in the
year ended May 31,1998.
8. FEDERAL INCOME TAXES
Deferred taxes as of May 31, are as follows:
F-21
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
May 31,
February 29, ---------------------------------
2000 1999 1998 1997
---------- ---------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net operating loss $3,915,986 $3,093,355 $ 944,407 $ 471,963
Loss on impairment
of investment 1,151,070 1,151,070 1,151,070 -
Accrued liabilities - - 83,852 -
Gain on sale of plant
for tax purposes 160,681 160,681 - -
Loss on equipment - - 46,207 -
---------- ---------- ---------- ---------
5,227,737 4,405,106 2,225,536 471,963
Less: Valuation
allowance (5,227,737) (4,405,106) (2,225,536) (471,963)
---------- ---------- ---------- ---------
Total $ - $ - $ - $ -
========== ========== ========== =========
</TABLE>
Management has provided a valuation allowance for the full amount of the
deferred tax asset as PalWeb has yet to progress beyond the development
stage of its operations. While management projects that the products
being developed will be profitable and the deferred asset will
ultimately be realized, PalWeb has not yet reached such stage in its
development to place reasonable reliability on product acceptance and
marketability.
The net change in deferred taxes is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended February 29/28,
------------------------
2000 1999
---------- ----------
(unaudited) (unaudited)
<S> <C> <C>
Net operating loss $ 822,631 $ 1,883,454
Loss on impairment of
investment - (83,852)
Accrued liabilities -
Gain on sale of plant
for tax purposes - -
Loss on sale of equipment - (46,207)
Change in Valuation
allowance (822,631) (1,753,395)
---------- ----------
Tax Benefit $ - $ -
========== ==========
</TABLE>
F-22
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------
1999 1998 1997
---------- ----------- --------
<S> <C> <C>
Net operating loss $2,148,948 $ 472,444 $471,963
Loss on impairment of
investment - 1,151,070 -
Accrued liabilities (83,852) 83,852
Gain on sale of plant
for tax purposes 160,681 - -
Loss on sale of equipment (46,207) 46,207 -
Change in Valuation
allowance (2,179,570) (1,753,573) (471,963)
---------- ----------- --------
Tax Benefit $ - $ - $ -
========== =========== ========
</TABLE>
PalWeb's effective tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
Nine Months
Ended February 29/28,
----------------------
2000 1999
---------- ----------
(unaudited) (unaudited)
<S> <C> <C>
Tax benefit using statutory
tax rate $ 763,377 $1,747,747
Effect of state tax rates 59,254 135,707
Net change in valuation
allowance (822,631) (1,883,454)
---------- ----------
Tax benefit, per financial
statements $ - $ -
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Tax benefit using statutory
tax rate $2,029,599 $1,759,496 $ 452,036
Effect of state tax rates 155,015 146,105 34,567
Net change in valuation
allowance (2,179,570) (1,753,573) (471,963)
Other deductions (5,044) (152,028) (14,640)
---------- ---------- ----------
Tax benefit, per financial
statements $ - $ - $ -
========== ========== ==========
</TABLE>
PalWeb has a net operating loss (NOL) for Federal income tax purposes as
of May 31, 1999, 1998, and 1997 of $8,451,791 as follows:
F-23
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Amount Expiration
---------- ----------
<S> <C>
$1,289,518 2012
$1,290,830 2018
$5,871,443 2019
</TABLE>
9. LEASE FINANCING OBLIGATION
In April 1999, a related party acquired PalWeb's plant in Dallas, Texas
based on an appraisal of $1,150,000 and the buyer assumed the mortgage
payable in the amount of $1,350,000. PalWeb executed a one year lease at
$12,235 per month to occupy the facility. Management expects to rent the
property on a month to month basis at the same rate after the expiration
of the initial term.
PalWeb also has a three year option to purchase the property for
$2,700,000. Due to the existence of PalWeb's option to repurchase the
property, the transaction has been accounted for as a financing
arrangement whereby the plant with a net book value of $1,049,515 at May
31, 1999, continues to be maintained as an asset and depreciated and the
related debt in the amount of $1,766,958 at May 31, 1999 (including the
mortgage payable of $1,350,000), is classified as lease financing
obligation in the balance sheet during the term of the option.
10. STOCKHOLDERS' EQUITY
PalWeb issued 3,000,000 shares of common stock to retire certain
liabilities during the year ended May 31, 1999, as discussed in Notes 4
and 6.
During the years ended May 31, 1999 and 1998, PalWeb also issued shares
of common stock and preferred stock for services. The services were
valued at the market value of the common stock as the preferred is
convertible into common on a one-to-one basis.
Preferred stock is convertible into common stock at a ratio of one to
one. Preferred stock converted into common stock during the period ended
May 31, 1998 totaled 150,000.
At the time of the reverse acquisition by PPP, there were outstanding
certain options to purchase common stock of PalWeb. At May 31, 1999 and
1998, the outstanding options are as follows (PPP had no options
outstanding as of May 31, 1997):
F-24
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Price
Number of Shares Per Share Expiration Date
--------------------- --------- ---------------
<S> <C> <C>
120,000 $.10 July 31, 2003
160,000 .10 July 31, 2004
200,000 .10 July 31, 2005
240,000 .10 July 31, 2006
600,000 .50 None
1,000,000 .10 August 31, 2002
</TABLE>
11. FINANCIAL INSTRUMENTS
PalWeb's financial instruments consist principally of accounts payable,
accrued liabilities and notes and mortgages payable. Management
estimates the market value of the notes and mortgage payable based on
expected cash flows and believes these market values approximate
carrying values at May 31,1999, 1998 and 1997.
12. DISCONTINUED OPERATIONS
Information relating to discontinued operations is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net sales $ 381,330 $ 542,012
Cost of sales 219,894 268,133
---------- ----------
Gross profit 161,436 273,879
Operating costs 169,854 511,737
Costs of disposal - 130,688
Nonoperating income 1,118 741
---------- ----------
Loss, as previously reported (7,300) (367,805)
Prior period adjustment (481,956)
---------- ----------
Net loss $ (7,300) $ (849,761)
========== ==========
</TABLE>
F-25
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUPPLEMENTAL INFORMATION OF CASH FLOWS
Non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Property and equipment released
in foreclosure or negotiated
settlement of debt $ 608,232 $ - $ -
Common stock issuances in exchange for:
Reverse acquisition of PalWeb Corporation - 613,500 -
Consulting services 5,013,000 222,000 -
Retirement of debt through
issuance of common stock 330,000 - -
Investment in securities - 3,150,000 -
Conversion of preferred stock - 15,000 -
Reduction of debt and accrued interest
through foreclosure, negotiated settle-
ment or issuance of common stock 1,006,848 - -
Distribution of energy services
segment to minority stockholders 430,373 - -
Interest paid - - -
</TABLE>
14. PRIOR PERIOD ADJUSTMENT
The financial statements have been restated to reflect the effects of a
prior period adjustment to correct the effects of an error in accounting
for discontinued operations. In July, 1999 and August, 1999, the company
issued preferred and common stock as compensation for consulting
services. Further information indicated that the services related to
settlement of liabilities accrued, $191,978, as well as liabilities
occurring during the year ended May 31, 1998 and not accrued, $481,956.
The adjustment does not
F-26
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
affect income before extraordinary items and discontinued operations.
The effect on the deficit account is as follows:
<TABLE>
<CAPTION>
May 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Deficit, as previously
reported $(26,717,493) $(20,509,689) $(12,752,114)
Prior period adjustment (673,934) (481,956) -
------------ ------------ ------------
Deficit, as adjusted $(27,391,427) $(20,991,645) $(12,752,114)
============ ============ ============
</TABLE>
15. SUBSEQUENT EVENTS
The following events occurred subsequent to May 31, 1999 not otherwise
disclosed herein:
In September 1999, PalWeb obtained a $20,000,000 default judgement
against a stockholder/investor. Additionally, the judgement canceled
41,443,308 shares of common stock held by the investor. The investor has
four years from the date of judgement to file an action seeking to set
aside the judgement.
In March 2000, PalWeb obtained a default judgement against certain
related parties, Chartex AG and New Inter HKB AG, causing the
cancellation of 13,413,384 shares of common stock and a $1,619,422 loan
classified in the financial statements as "Loans from related party."
PalWeb issued shares of preferred and common stock as follows:
<TABLE>
<CAPTION>
Date Type No. Shares Purpose
---------- --------- ---------- -------------
<S> <C> <C> <C>
July, 1999 Preferred 3,963,890 Satisfaction of
Liabilities
July, 1999 Preferred 125,000 Services
August, 1999 Common 460,000 Satisfaction of
Liabilities
December, 1999 Common 11,000,000 Services
January, 2000 Common 11,874,790 Satisfaction of
Liabilities
January, 2000 Common 3,500,210 Equipment and Services
</TABLE>
F-27
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1999, the outstanding stock options to purchase PalWeb's common
stock were canceled.
PalWeb is named in a lawsuit against Cooper Manufacturing Corporation,
an investment distributed in the spin off as discussed in Note 1,
Organization. The claim is based on product liability and PalWeb is
named based on a contractual indemnity claim. Management is unable to
estimate the amount of any possible loss. Further, management does not
believe that Cooper Manufacturing is entitled to be indemnified from any
loss. In addition, The Union Group, Inc., being the spin off company for
energy services, is contractually obligated to indemnify PalWeb for any
loss of an energy related matter.
PalWeb is named in two lawsuits by the former chairman, Michael John.
Mr. John claims unspecified damages resulting from defamation and
intentional infliction of emotional distress allegedly caused by PalWeb
and Paul Kruger and damages associated with certain stock transfers.
PalWeb plans to vigorously defend the lawsuit and has asserted
counterclaims for mismanagement and breach of fiduciary duty.
PalWeb and its subsidiary, Plastic Pallet Production, Inc. (PPP), have
filed suit against Vimonta to terminate its rights under a certain
marketing agreement and to avoid any claims Vimonta alleges it has under
such marketing agreement including that it is entitled to exclusive
rights in all of PalWeb's technology and formulas for plastic pallet
production in Europe, Asia, the territories of the former USSR and South
America; that it is entitled to immediately receive all of the valuable
patents and proprietary information of PalWeb and PPP; that PalWeb and
PPP must ship products to Vimonta at cost and without profit or margins
of any kind and that PalWeb and PPP's only rights are to receive
whatever benefits PalWeb derives from being a 20% shareholder of
Vimonta. PalWeb and PPP have requested declaratory judgment determining
that Vimonta has no enforceable rights to the patents, technology and
other proprietary information and that the alleged agreements are
unenforceable and void. In addition, PalWeb and PPP contend that Vimonta
and Michael John, PalWeb's former Chief Executive Officer, have acted in
concert to deprive PalWeb and PPP of their valuable rights by creating
documents that purport to be binding agreements but which are unclear,
incomplete and full of confusion and which purport to convey valuable
rights to Vimonta without consideration. As a result, PalWeb and PPP
have incurred damages in their business and expenses due to these
unfounded claims which they seek to recover from Vimonta.
Management believes that the resolution of the lawsuits in the previous
three paragraphs will not have a material effect on PalWeb's financial
condition, results of operation or cash flows.
F-28
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective December 1, 1999, PalWeb entered into a line of credit with
Ralph Curton, Jr., an individual that is not a related party, in the
amount of $500,000 with an interest rate of 8.5%, payable December 1,
2001.
Effective April 3, 2000, PalWeb acquired Pace Holding, Inc. and its
wholly-owned subsidiary Paceco Financial Services, Inc. through a stock
a stock exchange with the chairman of PalWeb board of directors whereby
PalWeb issued 50,000,000 shares of its common stock in exchange for the
outstanding common stock of Pace Holding, Inc.
On December 1, 1999, PalWeb entered into consulting agreements with
Crescent Road Corporation and Consolidated Capital Group, Inc. for
services in exchange for 11,000,000 shares of PalWeb common stock. The
agreements require PalWeb to take such action by June 1, 2000, necessary
to make the common stock freely tradeable or pay a penalty by issuance
of an additional 1,750,000 shares of common stock. Management intends to
contest the issuance of additional shares due to failure by the
consultants to complete specified performance under the agreements.
F-29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Pace Holding, Inc.
Duncan, Oklahoma
We have audited the accompanying consolidated balance sheets of Pace Holding,
Inc. (an Oklahoma corporation) and subsidiaries as of September 30, 1999 and
1998, and the related consolidated statements of operations, stockholder's
deficiency, and cash flows for the years then ended. The 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. 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 financial position of Pace
Holding, Inc. and its subsidiaries as of September 30, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note M, the Company
is developing a plan to repay its obligations to investors of thrift accounts
and savings certificates. Due to the net capital deficiency resulting from
recurring operating losses, the Company will be required to dispose of its
holdings of PalWeb common stock to accomodate the plan for which a minimum
price of approximately $.12 per share must be attained. As discussed in Note
R, the market value of PalWeb common stock has declined to a level where the
fair value of the Company's assets are not sufficient to liquidate these
obligations. Management's plans in regard to these matters are described in
Note R. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
HULME RAHHAL HENDERSON, INC.
Ardmore, Oklahoma
February 10, 2000
except for Note R
as to which the date
is September 1, 2000
F-30
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
March 31, ------------------------
2000 1999 1998
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash $ 174,550 $ 351,219 $ 107,923
Loans (Note D) 2,675,149 3,033,424 3,459,883
Investments (Note E) 40,314 444,789 135,630
Property and equipment, net:
Real estate (Notes F) 1,336,877 1,574,043 7,772,583
Furniture, equipment, and
leasehold improvements (Note G) 142,749 155,426 245,646
Other assets (Note H) 815,783 1,199,670 429,160
Deferred tax asset, net of valuation
allowance (Note M) 335,482 227,315 -
----------- ----------- -----------
Total Assets $ 5,520,904 $ 6,985,886 $12,150,825
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Liabilities:
Thrift accounts and time
certificates (Note I) $ 6,659,199 $ 6,929,244 $ 6,048,640
Accrued interest payable and
other liabilities (Note J) 79,983 177,723 463,770
Notes payable (Note K) 1,224,065 1,518,612 3,900,000
----------- ----------- -----------
Total Liabilities 7,963,247 8,625,579 10,412,410
Minority interest in subsidiary - - 150,000
Contingencies (Notes L, O and P)
Stockholder's deficiency (Note N):
Preferred stock, Class A convertible,
$10 par, 100,000 shares
authorized, none outstanding - - -
Common stock -
Class B, $2 par, nonvoting, 500,000
F-31
<PAGE>
shares authorized, none issued - - -
Class A, $2 par, voting, 100,000
shares authorized, 76,305
shares outstanding 152,610 152,610 152,610
Additional paid-in capital 715,474 715,474 2,852,105
Accumulated deficit (3,310,427) (2,507,777) (1,416,300)
----------- ----------- -----------
Total stockholder's deficiency (2,442,343) (1,639,693) 1,588,415
----------- ----------- -----------
Total Liabilities and
Stockholder's Deficiency $ 5,520,904 $ 6,985,886 $12,150,825
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Income:
Interest and fees on
installment loans $ 200,244 $ 251,060
Other interest income 483 477
Rental income 95,427 216,153
Other income 1,260 16,514
Loss on sale of assets and
unrealized loss on securities 74,106 (37,529)
----------- -----------
Total income 371,520 446,675
Expenses:
Interest on thrift accounts
and time certificates 235,030 215,584
Interest on notes and
mortgages payable 68,619 106,060
Salaries and benefits 68,659 124,976
Provision for credit losses - -
Depreciation and amortization 331,683 233,520
Other operating expenses 186,991 453,158
Equity in loss of Pal Web Corporation 391,355 169,000
----------- -----------
Total expenses 1,282,337 1,302,298
----------- -----------
Loss before income taxes (910,817) (855,623)
Income tax benefit (Note M) 108,167 92,065
----------- -----------
Net loss $ (802,650) $ (763,558)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Income:
Interest and fees on
installment loans $ 438,940 $ 749,004
Other interest income 765 19,997
Rental income 309,365 256,059
Other income 84,489 40,517
Loss on sale of assets and
unrealized loss on securities (41,551) 93,517
----------- -----------
Total income 792,008 1,159,094
Expenses:
Interest on thrift accounts
and time certificates 457,615 362,945
Interest on notes and
mortgages payable 191,174 100,897
Salaries and benefits 210,445 471,211
Provision for credit losses 314,697 206,289
Depreciation and amortization 555,662 98,900
Other operating expenses 642,667 751,661
Equity in loss of Pal Web Corporation 896,387 -
----------- -----------
Total expenses 3,268,647 1,991,903
----------- -----------
Loss before income taxes (2,476,639) (832,809)
Income tax benefit (provision) (Note M) 163,358 (242,327)
----------- -----------
Net loss $(2,313,281) $(1,075,136)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIENCY
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
-------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance,
September 30, 1997 $152,610 $ 364,175 $ (632,660) $ (115,875)
Adjustment to apply
purchase accounting - - 309,496 309,496
Capital contribution - 2,487,930 - 2,487,930
Dividends on preferred
stock of subsidiary - - (18,000) (18,000)
Net loss - - (1,075,136) (1,075,136)
-------- ----------- ----------- -----------
Balance,
September 30,1998 152,610 2,852,105 (1,416,300) 1,588,415
-------- ----------- ----------- -----------
Rescission of prior year
contribution to capital - (2,487,930) - (2,487,930)
Dividends on preferred
stock of subsidiary - - (4,500) (4,500)
Adjustment to apply
purchase accounting - - 1,226,304 1,226,304
Contributions to
capital - 351,299 - 351,299
Net loss - - (2,313,281) (2,313,281)
-------- ----------- ----------- -----------
Balance,
September 30,1999 152,610 715,474 (2,507,777) (1,639,693)
F-35
<PAGE>
Net loss (unaudited) - - (802,650) (802,650)
-------- ----------- ----------- -----------
Balance (unaudited),
March 31, 2000 $152,610 $ 715,474 $(3,310,427) $(2,442,343)
======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
-------------------------
2000 1999
----------- -----------
Cash flows from operating activities: (Unaudited)
<S> <C> <C>
Net loss $ (802,650) $ (763,558)
Adjustments to reconcile net loss
to cash provided (used) by operating
activities:
Equity in loss of investee company 391,355 169,000
Increase in deferred tax asset (108,167) (92,065)
Depreciation and amortization 331,683 233,520
Gain on sale of assets & unrealized loss (74,105) 1,530
Increase in other assets 79,448 (7,865)
Decrease in other liabilities (97,740) (369,956)
----------- -----------
Net cash used by operating activities (280,176) (829,394)
----------- -----------
Cash flows from investing activities:
Net (increase) decrease in loans 358,275 (376,418)
Purchase of investment real estate (6,164) (422,424)
Purchase of furniture, equipment, and
improvements - -
Purchases of securities - (315,837)
Proceeds from sale of securities 14,888 85,630
Proceeds from sale of investment real estate 301,100 368,701
Proceeds from sale of furniture, equipment
and improvements - 19,995
----------- -----------
Net cash provided by (used in)
investing activities 668,099 (640,353)
----------- -----------
</TABLE>
F-37
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
-------------------------
2000 1999
----------- -----------
Cash flows from operating activities: (Unaudited)
<S> <C> <C>
Net increase (decrease) in thrift accounts
and time certificates $ (270,045) $ 1,181,107
Proceeds from borrowings - 300,000
Payments on notes and mortgages
payable (294,547) -
Capital contribution by shareholder - 201,299
Payment of preferred dividends on subsidiary - (4,500)
----------- -----------
Net cash provided by (used in)
financing activities (564,592) 1,677,906
----------- -----------
Net change in cash and cash equivalents (176,669) 208,159
Cash and cash equivalents, beginning of period 351,219 107,923
----------- -----------
Cash and cash equivalents, end of period $ 174,550 $ 316,082
=========== ===========
Supplemental schedule of noncash
investing and financing activities:
Assets exchanged for UniFin, Inc.
preferred stock:
Loans receivable $ - $ 734,459
Furniture & fixtures - 118,704
Rescission of contributed capital:
Assets and liabilities rescinded -
Real estate investments - 6,210,295
Notes and mortgages payable - 2,450,000
Assets received during rescission -
Notes receivable from related parties - 1,174,400
F-38
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Investment in common stock - 40,000
Other 9,264
Preferred stock of subsidiary received
as contribution to capital - 150,000
Supplemental cash flow information:
Cash paid for interest expense $ 303,125 $ 318,974
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,313,281) $(1,075,136)
Adjustments to reconcile net loss
to cash provided (used) by operating
activities:
Equity in loss of investee company 896,387 -
(Increase) decrease in deferred tax asset (163,358) 242,327
Provision for credit losses 314,697 206,289
Depreciation and amortization 555,662 98,900
Loss on sale of assets & unrealized loss 40,761 85,142
Increase in other assets (100,108) (32,469)
Increase (decrease) in other liabilities (286,047) 394,364
----------- -----------
Net cash used by operating activities (1,055,287) (80,583)
----------- -----------
Cash flows from investing activities:
Net increase (decrease) in loans 261,762 (2,292,241)
Purchase of investment real estate (403,615) (1,903,403)
Purchase of furniture, equipment, and
improvements (50,306) (114,394)
F-39
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Purchases of securities (239,485) (220,772)
Proceeds from sale of securities 98,867 362,678
Proceeds from sale of investment real estate 368,701 -
Proceeds from sale of furniture, equipment
and improvements 116,644 -
----------- -----------
Net cash provided by (used in)
investing activities 152,568 (4,168,132)
----------- -----------
Cash flows from financing activities:
Net increase in thrift accounts
and time certificates $ 880,604 $ 1,132,957
Proceeds from borrowings 518,612 1,900,000
Payments on notes and mortgages
payable (450,000) -
Capital contribution by shareholder 201,299 -
Payment of preferred dividends on subsidiary (4,500) (18,000)
----------- -----------
Net cash provided by financing activities 1,146,015 3,014,957
----------- -----------
Net change in cash and cash equivalents 243,296 (1,233,758)
Cash and cash equivalents, beginning of period 107,923 1,341,681
----------- -----------
Cash and cash equivalents, end of period $ 351,219 $ 107,923
=========== ===========
Supplemental schedule of noncash
investing and financing activities:
Assets exchanged for Pal Web Corporation common stock:
Loans and accrued interest due from
related parties $ 1,071,266 $ -
Investment in common stock 40,000 -
F-40
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Contribution (Rescission) of contributed capital:
Assets and liabilities received (rescinded) -
Real estate investments (6,210,295) 5,652,330
Notes and mortgages payable (2,450,000) 2,000,000
Assets received (given) -
Notes receivable from related parties 1,174,400 (1,164,400)
Investment in common stock 40,000 -
Other 9,264 -
Preferred stock of subsidiary received
as contribution to capital - 150,000
Supplemental cash flow information:
Cash paid for interest expense $ 646,108 $ 455,637
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies
The accounting and reporting policies of Pace Holding, Inc. (the
Company) and its wholly-owned subsidiary Paceco Financial Services,
Inc., conform to generally accepted accounting principles and to general
practice within the finance industry where applicable. The following is
a description of the more significant of these policies which the
Company follows in preparing and presenting its consolidated financial
statements.
1. NATURE OF OPERATIONS AND CORPORATE STRUCTURE
The Company through its wholly-owned subsidiary Paceco Financial
Services, Inc. is in the business of lending money, investing in
securities and owning and operating real estate.
Effective November 1, 1997, the Company was acquired by Pace Acquisition
Co., an Oklahoma corporation. The transaction was accounted for by the
purchase method of accounting and the cost of the acquisition was
imputed to the acquired company, Pace Holding, Inc. utilizing the "push
down" basis of accounting. The purchase price was allocated to the net
assets of the Company based on the fair value as of the date of the
acquisition resulting in acquired goodwill of $350,110; however, the
Company's ownership changed as discussed in the next paragraph thereby
resulting in a subsequent allocation.
Effective December 31, 1998, the Company was acquired by an individual,
Mr. Paul Kruger, an unrelated party to the owners of Pace Acquisition
Co. This transaction was also accounted for by the purchase method of
accounting and the cost of the acquisition has been imputed to the
acquired company, Pace Holding, Inc. The purchase price was allocated to
the net assets based on the fair value at December 31, 1998, resulting
in acquired goodwill of $1,559,795 which is being amortized over 30
months.
2. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary Paceco Financial
Services, Inc. Affiliated companies (20 to 50 percent owned) are
accounted for on the equity method. All material intercompany balances
and transactions are eliminated.
F-42
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash in demand deposits, and time deposits.
4. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
5. LOANS
Installment loans are stated at the amount of unpaid principal and
interest, reduced by unearned interest and an allowance for credit
losses. Interest income is recognized when earned except where serious
doubt exists as to the ultimate collectibility of the interest in which
case no accrual of interest is made.
6. REAL ESTATE HELD FOR INVESTMENT AND OTHER REAL ESTATE OWNED
Real estate held for investment is stated at cost less accumulated
depreciation. Other real estate acquired through foreclosure, or
voluntary conveyance in lieu of foreclosure, is stated at the lower of
cost or market value, less accumulated depreciation.
7. ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level adequate to
absorb probable losses. Management determines the adequacy of the
allowance based upon reviews of the installment loans, recent loss
experience, current economic conditions, the risk characteristics of the
various categories of loans, and other pertinent factors. Loans deemed
uncollectible are charged to the allowance. Provisions for credit losses
and recoveries on loans previously charged off are added to the
allowance.
Loans to customers are primarily in Oklahoma of which $892,722 at
September 30, 1999 are loans to the rent-to-own retail furniture
industry. The Company performs ongoing credit valuations of customers
and generally requires collateralization of the loan. Allowances are
F-43
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
maintained for potential credit losses and such losses have been within
management's expectations.
8. FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Depreciation of furniture, equipment, and leasehold improvements is
provided by the use of the straight-line and accelerated methods over
the estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
Estimated Useful Life
---------------------
<S> <C>
Buildings 30 years
Leasehold improvements 10 - 39 years
Furniture and equipment 3 - 10 years
Vehicles 5 years
</TABLE>
Maintenance and repairs are charged to expense and improvements are
capitalized. The cost and accumulated depreciation applicable to assets
retired or otherwise disposed of are eliminated from the related
accounts and the gain or loss on disposition is credited or charged to
operations.
9. GOODWILL
The excess of cost over the value of net assets acquired (goodwill) is
being amortized on a straight-line basis over thirty months, except for
goodwill in connection with the PalWeb Corporation which is twenty
years.
10. MARKETABLE SECURITIES
Marketable securities consist of common stocks and are stated at market
value as determined by the most recently traded prices at the balance
sheet date. All marketable securities are defined as trading securities
under the provisions of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
The cost of investments sold is determined on the specific
identification method.
F-44
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The Company files a consolidated income tax return. Current and deferred
taxes are determined on the basis that the Company is a separate
taxpayer.
Note B - Segment of Business
The Company's business has two reportable segments - finance and real
estate. The finance segment is the business of lending money and
investing in securities. The real estate segment consists of owning and
operating real estate, principally commercial properties. The accounting
policies are the same as those described in the summary of significant
accounting policies. Intersegment transactions are not significant.
<TABLE>
<CAPTION>
Real
Finance Estate Total
----------- ---------- -----------
<S> <C> <C> <C>
Year Ended September 30, 1999:
Revenues from external customers:
Interest income $ 438,940 $ - $ 438,940
Rental income 10,502 298,863 309,365
Interest Expense 559,058 89,731 648,789
Depreciation and amortization 490,806 64,856 555,662
Equity in loss of PalWeb
Corporation-equity method 896,387 - 896,387
Loss before income taxes (2,425,172) (51,467) (2,476,639)
Year Ended September 30, 1998:
Revenues from external customers:
Interest income $ 749,004 $ - $ 749,004
Rental income 35,511 220,548 256,059
Interest Expense 388,938 74,904 463,842
Depreciation and amortization 46,863 52,037 98,900
Equity in loss of PalWeb
Corporation-equity method - - -
Loss before income taxes (705,884) (126,925) (832,809)
Six Months Ended March 31, 2000 (unaudited):
F-45
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues from external customers:
Interest income $ 200,244 $ - $ 200,244
Rental income 2,163 93,264 95,427
Interest Expense 252,676 50,973 303,649
Depreciation and amortization 317,899 13,784 331,683
Equity in loss of PalWeb
Corporation-equity method 391,355 - 391,355
Loss before income taxes (902,397) (8,420) (910,817)
Six Months Ended March 31, 1999 (unaudited):
Revenues from external customers:
Interest income $ 251,060 $ - $ 251,060
Rental income 7,865 208,288 216,153
Interest Expense 256,235 65,409 321,644
Depreciation and amortization 181,708 51,812 233,520
Equity in loss of PalWeb
Corporation-equity method 169,000 - 169,000
Loss before income taxes (810,097) (45,526) (855,623)
</TABLE>
Note C - Contribution to Additional Paid in Capital
During the year ended September 30, 1999, Mr. Paul Kruger made a capital
contribution of $351,299, consisting of $201,299 cash and $150,000 of
preferred stock of the Company's subsidiary, to additional paid in
capital of the Company.
Note D - Loans
Loans consist of the following:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Installment loans $2,996,170 $3,385,947 $3,674,922
Unearned interest (11,174) (32,676) (76,929)
Allowance for credit losses (309,847) (319,847) (138,110
---------- ---------- ----------
$2,675,149 $3,033,424 $3,459,883
========== ========== ==========
</TABLE>
F-46
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the allowance for credit losses for the periods are as
follows:
<TABLE>
<CAPTION>
Six Months Year Ended
Ended March 31, September 30,
-------------------- --------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 319,847 $ 138,110 $ 138,168 $ 530,946
Provision - - 314,697 206,289
Loans charged-off (10,484) (1,477) (134,866) (601,367)
Recoveries 484 651 1,848 2,242
--------- --------- --------- ---------
Balance, end of period $ 309,847 $ 137,284 $ 319,847 $ 138,110
========= ========= ========= =========
</TABLE>
Loans past due and on nonaccrual status at September 30, 1999 total
$336,962.
The installment loans, in order to reduce credit risk, are secured by
various forms of collateral, including first mortgages on real estate,
liens on personal property, savings deposits, etc. In the event of
default by the borrower, the Company would incur a loss to the extent
that the value of the collateral is less than the outstanding balance of
the loan.
NOTE E - Investments
Investments include investments accounted for by the equity of
accounting, PalWeb Corporation, and marketable securities (trading
securities). A summary of investments, unrealized gain (loss) at the end
of each period and the components of net change in unrealized gain
(loss) and realized gain (loss) are as follows:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Investment in PalWeb
Corporation $ 4,694 $ 396,049 $ -
Marketable securities 35,620 48,740 135,630
---------- ---------- ----------
Total investments $ 40,314 $ 444,789 $ 135,630
========== ========== ==========
F-47
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With respect to marketable securities:
Unrealized gain (loss) $ 828 $ (1,745) $ (85,142)
Net change in unrealized
gain (loss) 2,573 83,397 (85,142)
Realized gain (loss) 2,686 (121,906) 22,500
</TABLE>
In January, 1999, the Company acquired a 15.5% interest in PalWeb
Corporation, a development stage company which is developing a plastic
pallet to compete with wood pallets. PalWeb Corporation has incurred
significant operating losses and requires substantial funding to
progress beyond the development stage. Further, the interest received
was restricted common stock in exchange for services and release of
advances receivable in the amount of $189,000. Management believes that
the fair value of the common stock is not reasonably determinable due to
the restricted nature of the stock, the current financial condition of
PalWeb Corporation and the fact that the stock is very thinly traded.
Accordingly, the investment has been recorded at the value of the
exchanged asset.
In April, 1999, the Company increased its ownership in PalWeb
Corporation to 20.0% as discussed in Note N. Effective with the increase
in equity ownership to 20%, the equity method of accounting was adopted
retroactively to the initial investment date. PalWeb Corporation's net
assets reflect a deficiency and the Company's investment, net of equity
in losses from the investee company, is considered goodwill which is
being amortized over twenty years.
At September 30, 1999, the Company's investment based on market value is
$3,480,000. This market value is based on the average bid prices as of
September 30, 1999 which is a thinly traded market in relation to the
total outstanding shares of PalWeb Corporation.
Summary financial information for PalWeb Corporation as of its year end
of May 31, 1999 is as follows:
Condensed Statement of Operations:
<TABLE>
<S> <C>
Sales $ 51,250
Net Loss 5,969,409
</TABLE>
F-48
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Financial Position:
Current assets $ 10,648
Noncurrent assets 1,910,138
Current liabilities (3,719,597)
Noncurrent liabilities (1,766,958)
-----------
Net assets $(3,565,769)
===========
</TABLE>
Note F - Real Estate
Real estate is as follows:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Real estate $1,372,838 $1,596,582 $7,829,880
Accumulated depreciation (35,961) (22,539) (57,297)
---------- ---------- ----------
Total $1,336,877 $1,574,043 $7,772,583
========== ========== ==========
</TABLE>
Note G - Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are as follows:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Furniture and equipment $ 128,424 $ 128,424 $ 175,285
Leasehold improvements 22,892 22,892 26,233
Vehicles 16,170 16,170 59,234
---------- ---------- ----------
167,486 167,486 260,752
Less accumulated depreciation (24,737) (12,060) (15,106)
---------- ---------- ----------
$ 142,749 $ 155,426 $ 245,646
========== ========== ===========
</TABLE>
Note H - Other Assets
F-49
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of other assets consist of the following:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Other receivables $ 10,000 $ 91,250 $ -
Investments 10,500 10,500 10,500
Accrued interest on loans 35,061 33,034 22,917
Prepaid expenses 9,615 15,371 15,661
Goodwill, net 744,740 1,049,179 341,331
Other 5,867 336 38,751
---------- ---------- ----------
$ 815,783 $1,199,670 $ 429,160
========== ========== ==========
</TABLE>
Accumulated amortization of goodwill at September 30, 1999 and 1998 is
$446,659 and $8,936, respectively, and $751,098 (unaudited) at March 31,
2000.
Note I - Thrift Accounts and Time Certificates
The components of thrift accounts and time certificates are as follows:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Thrift accounts:
Passbook savings - 6 percent $2,179,743 $2,252,248 $2,025,088
Passbook savings - 8 percent 168,518 171,530 190,528
---------- ---------- ----------
2,348,261 2,423,778 2,215,616
---------- ---------- ----------
Time certificates:
6-month certificates
(weighted average rate at
September 30, 1999, was
6.25 percent) 560,266 640,238 605,002
12-month certificates
(weighted average rate at
F-50
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, was
6.50 percent) 1,680,920 1,466,511 1,403,421
30-month certificates
(weighted average rate at
September 30, 1999, was
7.62 percent) 2,069,752 2,398,717 1,824,600
---------- ---------- ----------
4,310,938 4,505,466 3,833,023
---------- ---------- ----------
$6,659,199 $6,929,244 $6,048,639
========== ========== ==========
</TABLE>
Annual maturities of time certificates as of September 30, 1999, are as
follows:
<TABLE>
<S> <C>
Maturing in one year or less $2,611,682
Maturing in two years or less but not less
than one year 1,430,161
Maturing in more than two years 463,623
----------
$4,505,466
==========
</TABLE>
Note J - Accrued Interest Payable and Other Liabilities
The components of accrued interest payable and other liabilities consist
of the following:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Accounts payable and
accrued expenses $ 43,703 $ 133,860 $ 430,694
Accrued interest payable 36,280 43,863 33,076
---------- ---------- ----------
Total $ 79,983 $ 177,723 $ 463,770
========== ========== ==========
</TABLE>
Note K - Notes and Mortgages Payable
F-51
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes payable are as follows:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Notes payable to bank, secured
by real estate mortgages,
prime interest rate from (7.5% at
9/30/99), due in installments
through July 1, 2004 $1,224,065 $1,250,000 $3,900,000
Note payable to bank, secured
by real estate mortgages,
prime interest rate (7.5% at
9/30/99) due July 1, 2000 - 268,612 -
---------- ---------- ----------
Total Notes Payable $1,224,065 $1,518,612 $3,900,000
========== ========== ==========
</TABLE>
The second note payable to bank described in the table is a line of
credit in the amount of $500,000 which is secured by assets of Onward,
L.L.C., owned by the sole stockholder of the Company's parent. At
September 30, 1999, the balance of the line had been withdrawn for the
benefit of one of the stockholder's affiliates. However, in December,
1999, Onward, L.L.C. assumed complete liability for the note releasing
the Company from any responsibility therein.
Maturities of notes payable for years ended September 30 are as follows:
<TABLE>
<S> <C>
2000 333,697
2001 70,137
2002 75,583
2003 81,450
2004 957,745
</TABLE>
Note L - Regulatory Requirement
F-52
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's wholly-owned subsidiary, Paceco Financial Services, Inc.
(Paceco), is regulated by the Oklahoma Department of Securities. Under
the Oklahoma Securities Act, Paceco is required to maintain
stockholder's equity, which is defined as stockholder's equity plus the
allowance for credit losses and valuation allowances, if any, equal to
at least 10 percent of thrift accounts, time certificates, and accrued
interest payable thereon.
As of September 30, 1999, Paceco is not in compliance with the Act as it
pertains to the stockholder's equity requirement which is computed as
follows:
<TABLE>
<S> <C>
Adjusted stockholder's equity:
Stockholders deficiency $(1,293,336)
Allowance for credit losses 319,847
-----------
(973,489)
Amount required to be in compliance with the Act 692,924
-----------
Deficiency from amount required $(1,666,413)
===========
</TABLE>
Paceco maintains a cash account at a depository institution which is
pledged to the Oklahoma Department of Securities. The balance of the
account is $10,000 at September 30, 1999.
Paceco is working with the Oklahoma Department of Securities to develop
a plan to liquidate the investment and savings certificates. Generally,
Paceco will use its best efforts to liquidate the investment securities
over a twenty-four month period, refrain from issuing certificates to
new investors, may allow existing investors to renew certificates or
purchase additional certificates other than thirty month certificates,
and will notify the Department of any material transactions affecting
affiliates or the plan. Facilitation of the plan of liquidation will
require substantial liquidation of Paceco's assets, principally loans
and its investment in PalWeb Corporation.
Note M - Income Taxes
At September 30, 1999, the Company has net operating loss carryforwards
of approximately $600,000 for income tax purposes that expire in 2014.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
F-53
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purposes. Significant components of the Company's deferred tax assets
are as follows:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 121,542 $ 121,542 $ 52,482
Equity in loss of investee company 489,342 340,627 -
Net operating loss 271,525 189,816 339,300
---------- ---------- ----------
882,409 651,985 391,782
Valuation allowance for
deferred tax assets (546,927) (424,670) (391,782)
---------- ---------- ----------
Deferred tax assets $ 335,482 $ 227,315 $ -
========== ========== ==========
</TABLE>
The benefit for income taxes results from deferred income tax expense,
not current income tax expense. The components of the benefit for income
taxes is as follows:
<TABLE>
<CAPTION>
Six Months Year Ended
Ended March 31, September 30,
-------------------- --------------------
2000 1999 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Allowance for credit
losses $ - $ - $ 69,060 $(149,278)
Equity in loss of
investee company 148,715 64,220 340,627 -
Net operating loss 81,709 (304,315) (149,484) (14,611)
Change in valuation
allowance (122,257) 275,080 (32,888) (78,438)
--------- --------- --------- ---------
108,167 34,985 227,315 (242,327)
Less: Deferred tax from
purchase accounting - - 63,957 -
--------- --------- --------- ---------
Income tax benefit
(provision) $ 108,167 $ 34,985 $ 163,358 $(242,327)
========= ========= ========= =========
</TABLE>
The effective tax rate for the years ended September 30, 1999 differs
from the amounts computed by applying the federal income tax rate of 34
percent to income before income taxes because of the following:
F-54
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Six Months Year Ended
Ended March 31, September 30,
-------------------- --------------------
2000 1999 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income tax benefit computed
at statutory rates $ 309,678 $ 290,912 $ 842,057 $ 283,155
(Increase) decrease resulting from:
Valuation allowance (122,257) 275,080 (149,484) (14,611)
State tax benefit 36,433 34,225 88,678 32,979
Operating loss carryforwards
terminating from change
in ownership - (507,388) (173,531) (543,850)
Permanent differences (115,687) (57,844) (444,362) -
--------- --------- --------- ---------
Income tax benefit
(provision) $ 108,167 $ 34,985 $ 163,358 $(242,327)
========= ========= ========= =========
</TABLE>
NOTE N - Related Party Transactions
In December 1998 and January 1999, $1,000,000 of 8.5% preferred stock of
UniFin, Inc. was acquired in exchange for cash ($146,837), furniture,
fixtures and autos ($118,704) and loans and accrued interest receivable
from rent-to-own retail dealers at net book value of $734,459. In
September 1999, the $1,000,000 preferred stock and a $75,000 note
receivable of UniFin, Inc. were transferred back to UniFin, Inc. in
exchange for loans and accrued interest receivable at net book value of
$968,960, furniture and fixtures of $50,306 and cash and other net
current assets totaling $55,734. The president of UniFin, Inc. is also
an officer of Paceco Financial Services, Inc.
In April 1999, the Company exchanged notes receivable and related
accrued interest from Onward, LLC and Pace Plastic Pallets, Inc.
totaling $1,071,266 and its common stock investment in Pace Plastic
Pallets, Inc. of $40,000 for 11,000,000 shares of common stock of PalWeb
Corporation. The sole shareholder of Pace Holding, Inc., parent company,
is the owner of Onward, LLC and a stockholder of Pace Plastic Pallets,
Inc.
F-55
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reference is also made to Note P, issuance of a letter of credit on
behalf of entities which have a common officer with the Company and Note
K, utilization of line of credit by the stockholder of the Parent
Company.
Note O - Leases
The Company owns and leases buildings, primarily office space,
classified in the balance sheet as real estate held for investment (Note
E). Terms of leases generally range from one to five years. Future
minimum rental income for years subsequent to September 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
2000 $119,891
2001 85,258
2002 25,103
2003 2,092
</TABLE>
Rental expense on operating leases totaled $32,053.
Note P - Commitments and Contingencies
During the ordinary course of business, deposits of cash are made in
financial institutions in excess of the $100,000 limit insured by the
Federal Deposit Insurance Corporation (FDIC). At September 30, 1998,
cash deposits did not exceed the $100,000 limit.
In January 1999, Paceco Financial Services, Inc. issued an irrevocable
letter of credit in the amount of $500,000 with an expiration date of
January 31, 2004, receiving a fee of $10,000. The letter of credit was
issued to individuals on behalf of Universal Marketing Services, Inc.
(UMS) and Foresight, Inc. Subsequent to the issuance of the letter of
credit, certain officers of the Company were elected officers of
Foresight, Inc. The letter of credit is to guarantee payment of
commissions by UMS and Foresight. Management is of the opinion that
utilization of the letter of credit is remote.
CONCENTRATION OF CREDIT - As discussed in Note I, Paceco Financial
Services, Inc. has passbook savings accounts totaling $2,423,778 and
certificates of deposit maturing in one year or less of $2,611,682.
Failure of a substantial amount of the certificate of deposits to renew
or excessive withdrawal from the passbook savings accounts may cause the
F-56
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company to accelerate the liquidation of assets to fulfill its plan for
an orderly liquidation of deposit certificates.
Note Q - Financial Instruments
The Company's financial instruments consist principally of loans
receivable, deposit accounts and notes and mortgages payable. Management
estimates the market value of the loans receivable, deposit accounts and
notes and mortgages payable based on expected cash flows and believes
these market values approximate carrying value at September 30, 1999 and
1998.
NOTE R - CONTINUATION AS A GOING CONCERN
As discussed in Note L, Regulatory Requirements, Paceco is working with
the Oklahoma Department of Securities to adopt a plan to liquidate its
investment and savings certificates. To fully repay the obligations,
Paceco must sell its common stock holdings of PalWeb Corporation at a
minimum price of approximately $.12 per share. The price of the common
stock has declined from $.12 per share about May 8, 2000 to a low of
$.02 per share about July 25, 2000 and remains in the $.02 to $.04 range
from July 25, 2000 through September 1, 2000. Based on $.02 per share,
the deficit to fund the liquidation is approximately $3,543,000.
Management's plan for repayment of the obligation is primarily dependent
on PalWeb management's ability to enhance the value of its common stock
which generally will necessitate progressing beyond the development
stage, see Note E, through attainment of commercial production and
eventual profitability. PalWeb's audit report is qualified due to the
uncertainty of its ability to raise sufficient capital funding to attain
commercial production.
NOTE S - SUBSEQUENT EVENT
In July, 2000, the Company terminated a consulting agreement through a
se0tlement amounting to a payment of $55,000 cash and 3,250,000 shares
of PalWeb Corporation common stock. The settlement resulted in a charge
to operations, subsequent to March 31, 2000, in the amount of $120,000.
The PalWeb Corporation common shares were valued at $.02 per share,
being the market value on the date of settlement.
F-57
<PAGE>
BACKGROUND INFORMATION TO PRO FORMA FINANCIAL INFORMATION
Effective April 3, 2000, PalWeb Corporation acquired the outstanding common
stock of Pace Holding, Inc. through the issuance of 50,000,000 shares of its
common stock. The seller was Mr. Paul Kruger, Chairman and CEO of PalWeb
Corporation and Pace Holding, Inc. The transaction is accounted for as a
purchase and the net assets of Pace Holding, Inc. will be recorded at cost as
Mr. Kruger is considered a related party. The pro forma statements present the
consolidated financial position of PalWeb Corporation and Pace Holding, Inc. as
its wholly-owned subsidiary, and the consolidated results of their operations
utilizing historical financial statements of the entities. The pro forma
statements combine historical data as follows:
1. The balance sheet of PalWeb Corporation as of February 29, 2000 with
the consolidated balance sheet of Pace Holding, Inc. as of December 31,
1999(Pace Holding, Inc. has a fiscal year end of September 30 as
compared to a May 31 fiscal year end for PalWeb Corporation).
2. The statement of operations of PalWeb Corporation for the year ended
May 31, 1999 with the consolidated statement of operations of Pace
Holding, Inc. for the year ended March 31, 1999.
3. The statement of operations of PalWeb Corporation for the nine months
ended February 29, 2000 with the consolidated statement of operations of
Pace Holding, Inc. for the nine months ended December 31, 1999.
4. The historical statement of operations of PalWeb Corporation does not
include the operations of the discontinued segment or the extraordinary
gain.
F-58
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PalWeb
PalWeb Pace Corporation
Corporation Holding, Inc. Adjustments Pro Forma
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
MANUFACTURING:
Sales $ 6,091 $ - $ 6,091
Expenses:
General and administrative 2,050,117 - 2,050,117
Depreciation 131,943 - 131,943
Interest Expense 137,949 - 137,949
----------- ----------- -----------
Total Expenses 2,320,009 - 2,320,009
----------- ----------- -----------
Other income 68,690 - 68,690
----------- ----------- -----------
Loss before income taxes (2,245,228) - (2,245,228)
Provision for income taxes - - -
----------- ----------- -----------
LOSS FROM MANUFACTURING (2,245,228) - (2,245,228)
----------- ----------- -----------
FINANCE & REAL ESTATE:
Income -
Interest and fees on installment
loans 295,999 - 295,999
Other investment income 488 - 488
Rental income 133,498 - 133,498
Other income 68,719 - 68,719
Gain on sale of assets and
unrealized loss on securities 69,256 - 69,256
------------ ----------- -----------
Total income 567,960 - 567,960
Expenses:
Interest expense 479,571 - 479,571
F-59
<PAGE>
Salaries and benefits 123,386 - 123,386
Provision for credit losses 314,697 - 314,697
Depreciation and amortization 491,829 (7,831)(A) 483,998
Other operating expenses 309,167 - 309,167
Equity in loss of investee co. 799,506 (799,506)(A) -
------------ ----------- -----------
Total expenses 2,518,156 (807,337) 1,710,819
Loss before income taxes (1,950,196) 807,337 (1,142,859)
Benefit from income taxes 96,801 - 96,801
------------ ----------- -----------
LOSS FROM FINANCE & REAL ESTATE (1,853,395) 807,337 (1,046,058)
------------ ----------- ------------
NET LOSS $(2,245,228) $ (1,853,395) $ 807,337 $(3,291,286)
=========== ============ =========== ===========
NET LOSS PER COMMON SHARE $ (0.01)
===========
WEIGHTED AVERAGE SHARES OUTSTANDING 184,316,000 50,000,000 234,316,000
=========== =========== ===========
</TABLE>
See Notes to Pro Forma Statements
F-60
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1999
<TABLE>
<CAPTION>
PalWeb
PalWeb Pace Corporation
Corporation Holding, Inc. Adjustments Pro Forma
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
MANUFACTURING:
Sales $ 51,510 $ - $ 51,510
Expenses:
General and administrative 5,760,057 - 5,760,057
Depreciation 154,587 - 154,587
Interest Expense 241,764 - 241,764
----------- ----------- -----------
Total Expenses 6,156,408 - 6,156,408
----------- ----------- -----------
Other income 74,173 - 74,173
----------- ----------- -----------
Loss before income taxes (6,030,725) - (6,030,725)
Provision for income taxes - - -
----------- ----------- -----------
LOSS FROM MANUFACTURING (6,030,725) - (6,030,725)
----------- ----------- -----------
FINANCE & REAL ESTATE:
Income -
Interest and fees on installment
loans 521,207 - 521,207
Other investment income 9,333 - 9,333
Rental income 444,259 - 444,259
Other income 40,945 - 40,945
Gain on sale of assets and
unrealized loss on securities (181,703) - (181,703)
------------ ----------- -----------
Total income 834,041 - 834,041
Expenses -
Interest expense 642,144 - 642,144
F-61
<PAGE>
Salaries and benefits 346,867 - 346,867
Provision for credit losses 153,180 - 153,180
Depreciation and amortization 308,658 - 308,658
Other operating expenses 990,004 - 990,004
Equity in loss of investee co. 169,000 (169,000)(A) -
------------ ----------- -----------
Total expenses 2,609,853 (169,000) 2,440,853
------------ ----------- -----------
Loss before income taxes (1,775,812) 169,000 (1,606,812)
Benefit from income taxes 92,065 - 92,065
------------ ----------- -----------
LOSS FROM FINANCE & REAL ESTATE (1,683,747) 169,000 (1,514,747)
------------ ----------- -----------
NET LOSS $(6,030,725) $ (1,683,747) $ 169,000 $(7,545,472)
=========== ============ =========== ===========
NET LOSS PER COMMON SHARE $ (0.03)
===========
WEIGHTED AVERAGE SHARES OUTSTANDING 183,189,000 50,000,000 233,189,000
=========== =========== ===========
</TABLE>
See Notes to Pro Forma Statements
F-62
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
PRO FORMA CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PalWeb
PalWeb Pace Corporation
Corporation Holding, Inc. Adjustments Pro Forma
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
MANUFACTURING:
Current Assets:
Cash $ 322 $ - $ 322
Accounts receivable 3,852 - 3,852
Inventory 9,778 - 9,778
----------- ----------- -----------
Total current assets 13,952 - 13,952
Property, plant & equipment 2,301,677 - 2,301,677
Accumulated depreciation (466,205) - (466,205)
----------- ----------- -----------
1,835,472 - 1,835,472
Other assets 87,922 - 87,922
----------- ----------- -----------
Total Manufacturing Assets 1,937,346 - 1,937,346
----------- ----------- -----------
FINANCE & REAL ESTATE:
Cash 349,525 - 349,525
Loans, net of allowance for credit
losses of $309,847 2,878,047 - 2,878,047
Marketable securities 35,501 - 35,501
Investment in equity investee 323,929 (323,929)(A) -
Real estate held for investment and
other real estate owned 1,366,673 - 1,366,673
Furniture, equipment and leasehold
improvements 167,487 - 167,487
Accumulated depreciation (47,161) - (47,161)
F-63
<PAGE>
Goodwill, net of accumulated
amortization of $666,596 893,199 - 893,199
Deferred tax asset 252,823 - 252,823
Other assets 79,691 - 79,691
------------ ----------- -----------
TOTAL FINANCE & REAL ESTATE ASSETS 6,299,714 (323,929) 5,975,785
------------ ----------- -----------
TOTAL ASSETS $ 1,937,346 $ 6,299,714 $ (323,929) $ 7,913,131
=========== ============ =========== ===========
</TABLE>
See Notes to Pro Forma Statements
F-64
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
PRO FORMA CONSOLIDATED BALANCE SHEET
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PalWeb
PalWeb Pace Corporation
Corporation Holding, Inc. Adjustments Pro Forma
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
MANUFACTURING:
Current Liabilities:
Notes payable $ 50,000 $ - $ 50,000
Accounts payable 343,273 - 343,273
Accrued expenses 118,506 - 118,506
Payable to related parties 1,619,422 - 1,619,422
----------- ----------- -----------
Total current liabilities 2,131,201 - 2,131,201
Long-term Debt 340,000 - 340,000
Lease Finance Obligation 1,757,958 - 1,757,958
----------- ----------- -----------
Total Manufacturing Liabilities 4,229,159 - 4,229,159
----------- ----------- -----------
FINANCE & REAL ESTATE:
Thrift accounts and time deposits $ 6,917,704 - 6,917,704
Accrued interest payable and
other liabilities 91,697 - 91,697
Notes payable 1,233,678 - 1,233,678
----------- ------------ -----------
TOTAL FINANCE & REAL ESTATE LIABILITIES 8,243,079 - 8,243,079
----------- ------------ -----------
STOCKHOLDERS DEFICIENCY:
Preferred stock 289 - - 289
Common stock 20,545,663 152,610 4,847,390 (A) 25,545,663
F-65
<PAGE>
Additional paid in capital 6,798,890 715,474 (715,474)(A) 6,798,890
Deficit
Accumulated during development
stage (29,636,655) - - (29,636,655)
Other - (2,811,449) 94,421 (2,811,449)
------------- ----------- ------------ -----------
(2,291,813) (1,943,365) 4,226,337 (8,841)
Less: Treasury stock, 43,500,000
shares - - (4,550,266)(A) (4,550,266)
------------- ----------- ------------ -----------
TOTAL STOCKHOLDERS DEFICIENCY (2,291,813) (1,943,365) (323,929) (4,559,107)
------------- ----------- ------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ 1,937,346 $ 6,299,714 $ (323,929) $ 7,913,131
============= =========== ============ ===========
</TABLE>
See Notes to Pro Forma Statements
F-66
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO PRO FORMA STATEMENTS
Pace Holding, Inc. owns approximately 20% of the outstanding common stock of
PalWeb Corporation and accounts for its investment on the equity method. The
acquisition by and consolidation with PalWeb Corporation results in the
elimination of the common stock and additional paid in capital values of Pace
Holding, Inc., the reclassification of the investment and equity in loss of
investee company to treasury stock and the accounting for the 50,000,000 shares
of PalWeb Corporation common stock issued to acquire the outstanding common
stock of Pace Holding, Inc.
F-67
