<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ________
Commission file number 000-26331
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PALWEB CORPORATION
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(Exact name of small business issuer as specified 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)
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: OCTOBER 6, 2000 - 242,528,244 COMMON
SHARES, $0.10 PAR VALUE OF WHICH 43,500,000 ARE OWNED BY A SUBSIDIARY OF PALWEB.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(CHECK ONE):
Yes No X
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<PAGE>
PALWEB CORPORATION
FORM 10-QSB
FOR THE PERIOD ENDED AUGUST 31, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Statements of Operations
For the Three Month Periods Ended
August 31, 2000 and 1999 1
Balance Sheets as of August 31,
2000 and May 31, 1999 2
Statements of Cash Flows for the
Three Month Periods Ended August 31,
2000 and 1999 4
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 6
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 8
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 9
ITEM 5. OTHER INFORMATION 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended From Inception
August 31, (November 20,
------------------------- 1995) to
2000 1999 AUG.31, 2000
------------ ----------- --------------
<S> <C> <C> <C>
MANUFACTURING:
Sales $ 13,579 $ - $ 120,286
Expenses:
Research and development - - 406,943
Salaries and benefits 64,646 67,747 1,415,978
General and administrative
expenses 300,299 732,728 9,058,007
Depreciation expense 54,198 37,840 668,117
Impairment - - 3,456,231
Interest expense 64,410 38,383 716,423
----------- ----------- ------------
Total expenses 483,553 876,698 15,721,699
----------- ----------- ------------
Other income (expense):
Gain on settlement
of liabilities - - 57,479
Other - (6,337) 272,308
----------- ----------- ------------
Total other income (expense) - (6,337) 329,787
----------- ----------- ------------
LOSS FROM MANUFACTURING
OPERATIONS (469,974) (883,035) (15,271,626)
FINANCE AND REAL ESTATE:
Revenues -
Interest and fees on loans 88,211 - 157,117
Rental income 50,938 - 79,470
Other income 1,171 - 1,757
Gain (loss) on sale of assets (240) - (1,490)
----------- ----------- ------------
Total Revenues 140,080 - 236,854
----------- ----------- ------------
Expenses -
Interest on thrift accounts and
time certificates 112,908 - 185,422
Interest on notes payable 21,313 - 38,804
Salaries and benefits 22,131 - 38,995
Other operating expenses 119,147 - 279,565
Provision for credit losses - - 180,000
Depreciation and amortization 204,102 - 314,806
----------- ----------- ------------
Total expenses 479,601 - 1,037,592
----------- ----------- ------------
LOSS FROM FINANCE AND REAL
ESTATE OPERATIONS (339,521) - (800,738)
----------- ----------- ------------
LOSS FROM TOTAL OPERATIONS (809,495) (883,035) (16,072,364)
LOSS FROM DISCONTINUED OPERATION - (857,061)
EXTRAORDINARY GAIN - 68,616
----------- ----------- ------------
NET LOSS $ (809,495) $ (883,035) $(16,860,809)
=========== =========== ============
LOSS PER COMMON SHARE $ (0.01) $ (0.01)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 242,528,000 217,981,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
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PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
MANUFACTURING:
Current Assets:
Cash $ 2,852 $ 4,797
Accounts receivable 487 800
Inventory 15,608 13,723
Prepaid Expenses 73,696 82,164
----------- -----------
Total current assets 92,643 101,484
Property, plant and equipment 2,327,498 2,327,498
Accumulated depreciation (588,268) (538,069)
----------- -----------
Total property, plant and equipment 1,739,230 1,789,429
Other Assets 82,926 86,924
----------- -----------
TOTAL MANUFACTURING ASSETS 1,914,799 1,977,837
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FINANCE AND REAL ESTATE:
Cash 320,355 263,085
Loans receivable, net of allowance for
doubtful accounts 2,128,775 2,368,154
Property and equipment, net of
allowance for depreciation 1,466,650 1,474,404
Other assets 513,867 710,442
----------- -----------
TOTAL FINANCE AND REAL ESTATE ASSETS 4,429,647 4,816,085
----------- -----------
TOTAL ASSETS $ 6,344,446 $ 6,793,922
=========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
2
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PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, May 31,
2000 1999
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
MANUFACTURING:
Current Liabilities:
Current portion of long term debt $ 493,347 $ 502,500
Accounts payable 693,655 522,266
Payable to related parties 479,700 235,000
----------- -----------
Total current liabilities 1,666,702 1,259,766
Lease Finance Obligation 1,766,958 1,766,958
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TOTAL MANUFACTURING LIABILITIES 3,433,660 3,026,724
----------- -----------
FINANCE AND REAL ESTATE:
Thrift accounts and time certificates 6,630,388 6,663,489
Accrued interest payable
and other liabilities 242,783 242,490
Notes payable 1,200,601 1,214,710
----------- -----------
TOTAL FINANCE AND REAL ESTATE LIABILITIES 8,073,772 8,120,689
----------- -----------
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.0001 par, 20,000,000 shares
authorized - outstanding - 2,525,000 & 2,775,000 253 278
Common stock, $.10 par value, 250,000,000
authorized, outstanding - 242,528,244 & 242,278,244 24,252,824 24,227,825
Additional paid-in capital 9,723,687 9,748,661
Deficit accumulated during development stage (34,589,484) (33,779,989)
----------- -----------
(612,720) 196,775
Treasury stock, 43,500,000 shares common (4,550,266) (4,550,266)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIENCY (5,162,986) (4,353,491)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 6,344,446 6,793,922
=========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
3
<PAGE>
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended From Inception
August 31, (November 20,
--------------------- 1995) to
2000 1999 Aug.31, 2000
--------- --------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used)
operating activities (121,617) $ 40,181 $ (32,761)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,074) (57,827) (3,454,696)
Net liabilities from acquisition
of finance and real estate - - 230,724
Proceeds from sale of equipment - 18,000 94,456
Decrease in loans receivable 239,379 - 328,862
Proceeds from lease finance obligation - - 149,517
----------- ----------- ------------
Net cash provided by (used)
investing activities 233,305 (39,827) (2,651,137)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - - 1,466,307
Payments on notes payable (23,262) - (272,367)
Decrease in savings certificates (33,101) - (28,811)
Proceeds from mortgage payable -
related party - - 1,350,000
Proceeds from issuance of common stock - - 491,976
----------- ----------- ------------
Net cash provided (used) by
financing activities (56,363) - 3,007,105
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH 55,325 354 323,207
CASH, beginning of period 267,882 710 -
----------- ----------- ------------
CASH, end of period $ 323,207 $ 1,064 $ 323,207
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
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<PAGE>
PALWEB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments and reclassifications,
which are of a normal recurring nature, necessary to present fairly its
financial position as of August 31, 2000, and the results of its
operations and its cash flows for the three month periods ended August
31, 2000 and 1999. These consolidated financial statements should be
read in conjunction with the consolidated financial statements as of
and for the year ended May 31, 2000 and the notes thereto included in
the Company's Form 10-KSB.
2. The results of operations for the three month period ended August 31,
2000 is not necessarily indicative of the results to be expected for
the full year.
3. Segment of Business - The Company's business has three reportable
segments - manufacturing, finance and real estate. The manufacturing
segment is the production of plastic pallets and is separately
presented in the accompanying financial statements. The finance and
real estate segments were acquired on April 3, 1999. The finance
segment is the business of lending money. 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>
Three Months Ended August 31, 2000:
Revenues from external customers:
Interest income $ 88,211 $ - $ 88,211
Rental income 418 50,520 50,938
Interest Expense 117,897 16,324 134,221
Depreciation and amortization 196,919 7,183 204,102
Income (loss) before income taxes (355,964) 16,203 (339,521)
Total Assets 3,120,926 1,308,721 4,429,647
</TABLE>
4. During the three month period ended August 31, 2000, there were 250,000
shares of preferred stock converted to common stock.
5. The computation of earnings per share is based on the weighted average
shares outstanding. For the three month periods ended August 31, 2000
and 1999, the average shares outstanding are 242,528,000 and
217,981,000, respectively. Convertible preferred stock is not
considered as their effect is antidilutive.
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<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
GENERAL TO ALL PERIODS
Sales for the three months ended August 31, 2000 represent sales of the
PalWeb Corporation's ("PalWeb" or the "Company") tested product. However, PalWeb
has not commenced commercial production. As of August 31, 2000, PalWeb has for
the most part completed development of its plastic pallet to compete with wood
pallets and is in the final stages of modifications and adjustments of the
prototype injection molding systems to produce the plastic pallet for commercial
sales.
Production utilizing prototype production equipment began in June 2000
starting at approximately 500 pallets per month. The current production capacity
of the prototype machine is approximately 4000 pallets per month. Management
expects to begin producing approximately 4000 pallets per month when and if the
Company receives orders for pallets that justify that production level. There is
no assurance that the Company will receive orders for pallets that justify any
significant increase to the Company's current production level.
For all periods presented, PalWeb's effective tax rate is 0%. PalWeb
has generated net operating losses since inception which would normally reflect
a tax benefit in the statement of operations and a deferred asset on the balance
sheet. However, because of the current uncertainty as to PalWeb's ability to
achieve profitability, a valuation reserve has been established which offsets
the amount of any tax benefit available for each period presented in the
consolidated statement of operations.
THREE MONTH PERIOD ENDED AUGUST 31, 2000 TO THREE MONTH PERIOD ENDED
AUGUST 31, 1999
The consolidated statements include PalWeb Corporation and its
wholly-owned active subsidiaries Plastic Pallet Production, Inc. ("PPP") and
Paceco Financial Services, Inc. ("PFS"). PPP represents the manufacturing
segment of PalWeb and PFS represents the financial and real estate segments.
Manufacturing
The general and administrative expenses for the manufacturing segment
for 2000 and 1999 was $300,299 and $732,728, respectively, for a decrease of
$432,429. The reduction is primarily due to consulting fees of $628,000 in 1999
compared to none in 2000, offset by a noncash charge in the amount of $175,000
in 2000 relating to the value of the shares of PalWeb common stock required to
be issued as a penalty resulting from the Company's failure to register shares
issued as consulting fees in December 1999. The Company disputes its obligation
to issue such shares because the consultants have failed to perform their
obligations.
Interest expense is $64,410 and $38,383 in 2000 and 1999, respectively.
The increase is due to the increase in notes payable and payables to related
parties.
The loss from the manufacturing segment in 2000 and 1999 is $469,974
and $883,035, respectively. The decrease from 1999 to 2000 of $413,061 is
primarily due to the reasons discussed above.
Finance and Real Estate
The net loss represented by the finance and real estate segments for
2000 was $339,521 of which the financial segment had a loss of $355,724
including a non-cash charge for amortization of goodwill in the amount of
$190,274.
6
<PAGE>
The real estate segment had income of $16,203 for the period. These segments
relate to operations of PFS, which was acquired in April of 2000 and,
accordingly, its results are excluded from the three months ended August 31,
1999.
Combined
As a result of the above the consolidated net loss for 2000 was
$809,495 while the net loss for 1999 was $883,035. This is a decrease of
$73,540.
LIQUIDITY AND CAPITAL RESOURCES
Reference is made to the section above titled "General to All Periods"
regarding the need for long term financing to acquire production equipment to
attain commercial production levels. As discussed therein, PalWeb incurred
delays in completing its prototype injection molding system which has limited
its ability to achieve its anticipated production level of 4,000 pallets per
month. PalWeb management projects that the sale of approximately 4,000 pallets
per month will provide sufficient cash flow to maintain operations. The Company
is currently trying to secure orders that justify increasing production to 4000
pallets per month; however, there is no assurance that the Company will do so.
The Company has accumulated a working capital deficit of $1,574,059 in
connection with its manufacturing operations. This deficit reflects the
uncertain financial condition of the Company resulting from its inability to
obtain long term financing to progress beyond the development stage. There is no
assurance that the Company will secure such financing.
In connection with an examination of PFS in March 1999, the Oklahoma
Department of Securities determined that certain of PFS's activities, including
the ownership of real estate and the ownership of equity securities, did not
comply with the provisions of the Oklahoma Securities Act relating to the
permissible activities of investment certificate issuers. As a result of such
determination, PFS ceased making any new investments not permissible to
investment certificate issuers. Since that time PFS and the Oklahoma Securities
Department have been negotiating an agreed order for the ultimate liquidation of
the impermissible assets and repayment of the investment certificates.
Subsequent to the three months ended August 31, 2000, PFS sent a notice
to its depositors stating that, at current market values, the net assets of PFS
were inadequate to redeem 100% of the depositors' passbook savings accounts and
time certificates (collectively referred to herein as "Deposits") as they come
due. Effective October 5, 2000, PFS exercised its right to suspend redemptions
of time certificates and withdrawals of passbook savings accounts and has ceased
accepting any Deposits. A plan to liquidate assets and partially redeem Deposits
has been proposed by PFS and is under consideration by the Oklahoma Department
of Securities. PalWeb anticipates that the consent of the Department of
Securities to the terms of the proposal is imminent. For a more information
regarding the plan of liquidation, see Item 5 of this Form 10-QSB.
PalWeb has not entered into any conditions, commitments or requirements
with the Oklahoma Securities Department that would require it to fund or
otherwise be financially responsible for the liabilities of PFS. PFS's ability
to fund repayment of investment certificates is substantially dependent on PFS's
ability to sell or otherwise receive funding relating to approximately
40,000,000 shares of PalWeb common stock owned by PFS. PalWeb estimates that
such stock must be sold for a value of at least $0.12 per share in order for PFS
to have sufficient funds to pay the holders of the outstanding investment
certificates. PalWeb is not currently contractually or otherwise liable to
provide funding to PFS for purposes of funding the repayment of investment
certificates. However, because, as of October 13, 2000, PFS was unable to make
payment to investment certificate holders as such investment certificates
mature, it is possible that holders of investment certificates may assert claims
against PalWeb that it is liable for the liabilities of PFS under legal theories
relating to piercing the corporate veil or otherwise. In such event, PalWeb
might incur
7
<PAGE>
additional costs to contest such claims and could ultimately be found to be
liable. The effect of any such claims being made against PalWeb could also have
an adverse effect on the value of PalWeb's common stock and make it even more
difficult for PFS to fund the repayment of its investment certificate liability
from liquidation of the PalWeb common stock owned by it. Accordingly, PalWeb may
be adversely affected if PFS is unable to meet its obligations.
MATERIAL RISKS
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. For other material risks, see
PalWeb's Form 10-KSB for the period ended May 31, 2000, which was filed on
August 29, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of the material legal proceedings pending against or
on behalf of PalWeb, see Part I, Item 3 of PalWeb's Form 10-KSB for the period
ended May 31, 2000, which was filed on August 29, 2000. During the three months
ended August 31, 2000, the following legal proceeding filed by PalWeb had
material developments:
On June 26, 2000, PalWeb and Plastic Pallet Production, Inc. ("PPP")
filed suit against Vimonta AG ("Vimonta") in the United States District Court
for the Northern District of Texas in a case styled PALWEB CORPORATION, INC. AND
PLASTIC PALLET PRODUCTION, INC., PLAINTIFFS V. VIMONTA AG, DEFENDANTS, Case no.
3-00CV1388-P. Service was made on Vimonta on August 14, 2000. PalWeb and PPP
allege that Vimonta claims that it is entitled to exclusive rights in all of
PalWeb's technology and formulas for plastic pallet production in Europe, Asia,
the territories of the former USSR and South America; that it is entitled to
immediately receive all of the valuable patents and proprietary information of
PalWeb and PPP; that PalWeb and PPP must ship products to Vimonta at cost and
without profit or margins of any kind and that PalWeb and PPP's only rights are
to receive whatever benefits PalWeb derives from being a 20% shareholder of
Vimonta.
Vimonta bases its claims on certain alleged agreements that were
purportedly signed by PalWeb's former Chief Executive Officer, Michael John.
PalWeb and PPP contend that the purported agreements upon which Vimonta relies
to assert its claims are vague and incomplete and do not contain the requisite
information to form a valid contract. PalWeb and PPP have requested declaratory
judgment determining that Vimonta has no enforceable rights to the patents,
technology and other proprietary information and that the alleged agreements are
unenforceable and void. In addition, PalWeb and PPP contend that Vimonta and
Michael John, PalWeb's former Chief Executive Officer, have acted in concert to
deprive PalWeb and PPP of their valuable rights by creating documents that
purport to be binding agreements but which are unclear, incomplete and full of
confusion and which purport to convey valuable rights to Vimonta without
consideration. As a result, PalWeb and PPP have incurred damages in their
business and expenses due to these unfounded claims which they seek to recover
from Vimonta.
On September 25, 2000, Vimonta filed a Motion to Dismiss for Lack of
Personal Jurisdiction contending, INTER ALIA, that the agreements between
Vimonta and PalWeb were negotiated and signed in Europe and that no
representative of Vimonta came to the United States until April 2000, after the
dispute between Vimonta and PalWeb arose. PalWeb disputes the allegations
regarding the purported lack of personal jurisdiction and is preparing an
objection to the jurisdictional motion.
For other events relating to legal proceedings, see Item 5 of this Form
10-QSB.
8
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
For description of a promissory note under which the holder claims that
PalWeb is in default, see Part I, Item 3 of PalWeb's Form 10-KSB for the period
ended May 31, 2000, which was filed on August 29, 2000. PalWeb disputes the
allegations that it has defaulted under such note.
ITEM 5. OTHER INFORMATION
On October 10, 2000, PFS sent a notice to its depositors stating that,
at current market values, the net assets of PFS were inadequate to redeem 100%
of the depositors' passbook savings accounts and time certificates (collectively
referred to herein as "Deposits") as they come due. Effective October 5, 2000,
PFS exercised its right to suspend redemptions of time certificates and
withdrawals of passbook savings accounts and has ceased accepting any Deposits.
A plan to liquidate assets and partially redeem Deposits has been
proposed by PFS and is under consideration by the Oklahoma Department of
Securities. PalWeb anticipates that the consent of the Department of Securities
to the terms of the proposal is imminent. For a description of the proposed
plan, see the Notice to Depositors of Paceco Financial Services, Inc. dated
October 10, 2000 attached as Exhibit 99.1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
11.1 Computation of Loss per Share is in Note 5 in the
Notes to the financial statements.
27.1 Financial Data Schedule.
99.1 Notice to Depositors of Paceco Financial Services,
Inc. dated October 10, 2000.
B. Reports on Form 8-K
No reports on Form 8-K were filed by PalWeb Corporation during
the three months ended August 31, 2000.
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be singed on its behalf by the undersigned, thereunto duly
authorized.
PALWEB CORPORATION
-----------------------------------
(Registrant)
Date 10/16/00 /s/ Paul A. Kruger
----------- -----------------------------------
Paul A. Kruger
Chairman of the Board and President
9
