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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 4
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. 4 is being filed to amend Part I, Item 1, Part F/S
and Part III, Item 1 of Amendment No. 3 to PalWeb's Form 10-SB.
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PALWEB CORPORATION
FORM 10-SB/A
AMENDMENT NO. 4
INDEX
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Page
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PART I
Item 1. Description of Business................................................................4
PART F/S...............................................................................................17
PART III
Item 1. Index to Exhibits.....................................................................17
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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 registration statement. 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 January 1998, PalWeb spun off its oil and gas activities and 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 April 30, 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
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expand its market share or achieve commercial revenues from its products or
proposed products 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 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 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.
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PALWEB'S BUSINESS COULD BE AFFECTED BY COMPETITION AND RAPID TECHNOLOGICAL
CHANGE.
PalWeb currently faces competition from many companies that produce
wooden pallets at prices that are substantially lower than PalWeb anticipates
its plastic pallets will be priced. 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 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
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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.
PALWEB'S BUSINESS WILL BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
The testing, manufacturing and marketing of PalWeb's products and
proposed products involve the inherent risks of product liability claims or
similar legal theories against PalWeb, some of which may cause PalWeb to incur
significant defense costs. Although PalWeb currently maintains product liability
insurance coverage that it believes is adequate, there can be no assurance that
the coverage limits of its insurance are adequate or that all such claims will
be covered by insurance. In addition, these policies generally must be renewed
every year. While PalWeb has been able to obtain product liability insurance in
the past, there can be no assurance it will be able to obtain insurance in the
future on its products or proposed products. Product liability insurance varies
in cost, is difficult to obtain and may not be available in the future on terms
acceptable to PalWeb, if at all. A successful product liability claim or other
judgment against PalWeb in excess of its insurance coverage could have a
material adverse effect upon PalWeb.
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PALWEB CURRENTLY DEPENDS ON CERTAIN KEY PERSONNEL.
PalWeb is dependent on the experience, abilities and continued services
of its current management personnel. In particular, Mr. Kruger, its Chairman of
the Board and President, and Ron Hale, Vice President (Engineering), Secretary
and Treasurer of PalWeb and the President of PalWeb's wholly owned subsidiary,
Plastic Pallet Production, Inc., have played significant roles in the
development and management of PalWeb. The loss or reduction of services of Mr.
Kruger, Mr. Hale 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 large part upon its ability to
attract and retain highly qualified personnel. 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 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
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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.
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.).
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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 April 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. 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 to Pace.
At the time of this transaction, Pace was principally owned by Paul Kruger. The
terms of this transaction were entered into on an arm's length negotiated basis.
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, to engage PFS to provide comprehensive management
assistance to PPP in exchange for the issuance of 41 million shares of PalWeb
Common Stock.
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. 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 cash advances or consulting services and have been issued an
additional 15,375,000 shares of common stock.
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").
For information regarding Vimonta, please see the discussion under Marketing in
this Item. 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.
CURRENT BUSINESS
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
recently received approval for a patent relating to the original design of a
materials handling plastic pallet in April 2000.
PalWeb's plastic pallets are much more durable and sanitary than
traditional wood pallets. PalWeb's 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., Lenexa,
Kansas, an independent testing facility. Container Technologies Laboratory, Inc.
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 currently producing pallets with its prototype equipment at the
rate of approximately 500 pallets per month. It is anticipated that production
will increase to approximately 4,000 pallets within the first fiscal quarter of
2000. 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.
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
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permit PalWeb to expand its production of pallets. Should PalWeb successfully
increase its production levels, it will need to employ additional production and
supervisory employees.
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 its employees from Accord Human Resources,
Inc., an independent employee leasing company, including PalWeb's Vice President
in charge of Engineering & Design, Ronald G. Hale, who is also the President of
PPP. 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.
When 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.
In 1998 and 1999, prior management of PalWeb entered into various
alleged agreements with Vimonta AG, a Swiss based company ("Vimonta"), and with
certain shareholders of Vimonta. In connection with the alleged agreements with
shareholders of Vimonta, PalWeb
14
<PAGE>
issued 15 million of its shares of Common Stock and received in exchange what is
represented to be a 20% interest in Vimonta. As of April 30, 2000, existing
management had met with the Vimonta representatives on two occasions and had
requested financial information on Vimonta, and copies of all documents which
Vimonta alleges comprise the agreement between PalWeb and Vimonta. As of May 31,
2000, Vimonta had delivered some of the requested information, but PalWeb still
does not believe the information delivered is complete. As of May 31, 2000,
PalWeb was continuing to review the documents relating to the transaction with
Vimonta and was in discussions with representatives from Vimonta to determine
what obligations, if any, PalWeb has to Vimonta. However, pursuant to the
alleged agreements with Vimonta, Vimonta apparently contends 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. PalWeb considers the European market to be a significant market for
plastic pallets due to the regulations proposed by the European economic
community to require the use of plastic pallets in such market.
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
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
PalWeb 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 and granted in April 2000 but has not been finalized.
15
<PAGE>
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.
ACQUISITION OF PACECO FINANCIAL
On January 21, 2000, PalWeb entered into an agreement to acquire 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.
This acquisition was consummated on April 3, 2000. 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. 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.
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, PFS 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, PFS 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.
PFS expects to enter into an agreement with the Oklahoma Securities
Department pursuant to which the status of PFS as an "investment certificates
issuer" will be terminated within two years. This agreement will require that
during such period PFS find additional sources of funding for its activities
other than the sale of investment certificates. At March 31, 2000, PFS had
$6,700,000 in investment certificates outstanding.
PalWeb intends to use PFS as a vehicle to offer financing to buyers of
its plastic pallets and injection molding equipment.
16
<PAGE>
SUBSIDIARIES
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.
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 immediately
following the financial statements.
17
<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
*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
*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.
18
<PAGE>
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
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF PALWEB CORPORATION
<TABLE>
<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-29
Consolidated Balance Sheets....................................................................................F-30
Consolidated Statements of Operations..........................................................................F-32
Consolidated Statements of Stockholder's Deficiency............................................................F-34
20
<PAGE>
Consolidated Statements of Cash Flows..........................................................................F-36
Notes to Consolidated Financial Statements.....................................................................F-41
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>
21
<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 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.
F-1
<PAGE>
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> <S> <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 (LOSS) 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:
F-7
<PAGE>
Loss before discontinued
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 Additional Total
------------------------ ------------------------- Paid-in Accumulated Stockholders
Shares Amount Shares Amount Capital Deficit Deficiency
----------- ----------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, November 20, 1995 - $ - - $ - $ - $ - $ -
Proceeds from sale of stock - - 119,145,725 11,914,572 - (11,422,596) 491,976
Net Loss - - - (1,329,518) (1,329,518)
----------- ----------- ----------- ------------ ------------ ------------ ------------
BALANCES, May 31, 1997 - - 119,145,725 11,914,572 - (12,752,114) (837,542)
Common stock held by minority
stockholders of PalWeb in
connection with reverse acquisition 530,000 53 31,960,321 3,196,033 - (2,582,586) 613,500
Issuance of stock for services 600,000 60,000 162,000 - 222,000
Issuance of stock for investment - - 15,000,000 1,500,000 1,650,000 - 3,150,000
Preferred stock converted to common (150,000) (15) 150,000 15,000 (14,985) - -
Net loss - - - - - (5,656,945) (5,656,945)
---------- ----------- ------------ ------------ ------------ ------------ -----------
BALANCES, May 31, 1998, as adjusted
(Note 14) 380,000 38 166,856,046 16,685,605 1,797,015 (20,991,645) (2,508,987)
Issuance of stock for services 500,000 50 48,125,000 4,812,500 200,450 - 5,013,000
Stock issued for debt - - 3,000,000 300,000 30,000 - 330,000
Distribution of energy services
segment to minority stockholders - - - - - (238,395) (238,395)
F-9
<PAGE>
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) 880,000 88 217,981,046 21,798,105 2,027,465 (27,391,427) (3,565,769)
Issuance of stock for services and
equipment* 125,000 13 14,500,210 1,450,021 18,737 - 1,468,771
Contribution of debt to capital - - - - 189,000 - 189,000
Stock issued in satisfaction of
debt* 3,963,890 396 12,334,790 1,233,479 627,538 - 1,861,413
Preferred stock converted to common* (2,083,890) (208) 2,083,890 208,389 (208,181) - -
Cancellation of common stock* - - (41,443,308) (4,144,331) 4,144,331 - -
Net loss* - - - - - (2,245,228) (2,245,228)
---------- ----------- ------------ ------------ ------------ ------------ ------------
BALANCES, February 29, 2000* 2,885,000 289 205,456,628 $ 20,545,663 $ 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 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. Goodwill of approximately $1,233,000 is
amortized by the straight line method over 40 years. 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, including the aforementioned goodwill, 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.
F-17
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT COSTS
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
F-18
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$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
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>
February 29, May 31,
------------ -----------------------------------
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.
F-21
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. FEDERAL INCOME TAXES
Deferred taxes as of May 31, are as follows:
<TABLE>
<CAPTION>
February 29, May 31,
------------ ----------------------------------
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> <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>
F-23
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<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 and the buyer assumed the mortgage payable -
related party 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> <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. Management believes
that the resolution of this lawsuit will not have a material effect on
PalWeb's financial condition, results of operation or cash flows.
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.
F-28
<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.
HULME RAHHAL HENDERSON, INC.
Ardmore, Oklahoma
February 10, 2000
F-29
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999 1998
----------- ---------- -----------
ASSETS (unaudited)
<S> <C> <C> <C>
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
Real estate held for investment and
other real estate owned (Notes F) 1,336,877 1,574,043 7,772,583
Furniture, equipment, and leasehold
improvements, net (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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
------------------------
F-36
<PAGE>
PACE HOLDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
2000 1999
----------- -----------
Cash flows from financing 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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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):
</TABLE>
F-44
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
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-45
<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
========== ========== ==========
</TABLE>
F-46
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
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:
<TABLE>
<S> <C>
Condensed Statement of Operations:
Sales $ 51,250
Net Loss 5,969,409
</TABLE>
F-47
<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 Held for Investment and Other Real Estate Owned
Real estate held for investment and other real estate owned are as
follows:
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999 1998
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Real estate held for investment $1,337,616 $1,561,360 $7,774,377
Accumulated depreciation (34,428) (20,645) (55,648)
---------- ---------- ----------
1,303,188 1,540,715 7,718,729
---------- ---------- ----------
Other real estate owned 35,222 35,222 55,503
Accumulated depreciation (1,533) (1,894) (1,649)
---------- ---------- ----------
33,689 33,328 53,854
---------- ---------- ----------
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>
F-48
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H - Other Assets
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
---------- ---------- ----------
<S> <C> <C> <C>
Thrift accounts: (unaudited)
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
</TABLE>
F-49
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
12-month certificates
(weighted average rate at
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> <S>
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>
F-50
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - Notes and Mortgages Payable
Notes payable are as follows:
<TABLE>
<CAPTION>
March 31, September 30,
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>
F-51
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Regulatory Requirement
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 has approved and adopted a plan to liquidate the investment and
savings certificates and the Oklahoma Department of Securities has
indicated that it will issue an order for implementation of the plan.
Pursuant to the order, 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.
F-52
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
purposes. Significant components of the Company's deferred tax assets
are as follows:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets: (unaudited)
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)
F-53
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<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
F-54
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
F-55
<PAGE>
PACE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
F-56
<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.
F-57
<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
</TABLE>
F-58
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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) - (2,811,449)
------------- ----------- ------------ -----------
(2,291,813) (1,943,365) 4,131,916 (103,262)
Less: Treasury stock, 43,500,000
shares - - (4,455,845)(A) (4,455,845)
------------- ----------- ------------ -----------
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-65
<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-66
