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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 7
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. 7 is being filed to amend Part I, Items 1 and 2 of
PalWeb's Form 10-SB.
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PALWEB CORPORATION
FORM 10-SB/A
AMENDMENT NO. 7
INDEX
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Page
PART I
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Item 1. Description of Business........................................................................4
Item 2. Management's Discussion and Analysis or Plan of Operation.....................................19
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INFORMATION REQUIRED IN
REGISTRATION STATEMENT
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This registration statement on Form 10-SB contains "forward-looking"
statements regarding potential future events and developments affecting the
business of PalWeb Corporation, a Delaware corporation ("PalWeb"). Such
statements relate to, among other things: future operations of PalWeb, the
development of distribution channels and product sales and the introduction
of new products into the market. Forward-looking statements may be indicated
by the words "expects," "estimates," "anticipates," "intends," "predicts,"
"believes" or other similar expressions. Forward-looking statements appear in
a number of places in this Form 10-SB and may address the intent, belief or
current expectations of PalWeb and its Board of Directors and management with
respect to PalWeb and its business. The forward-looking statements are
subject to various risks and uncertainties described in this Form 10-SB. For
these reasons, PalWeb's actual results may vary materially from the
forward-looking statements.
RISK FACTORS
PALWEB IS A DEVELOPMENT STAGE COMPANY AND MAY NOT ACHIEVE PROFITABILITY.
PalWeb was incorporated on February 24, 1969. From April 1993 to
December 1997, PalWeb was primarily engaged in various businesses, including
the business of exploration, production, and development of oil and gas
properties in the continental United States and the operation of related
service business. In December 1997, PalWeb acquired all of the issued and
outstanding stock of Plastic Pallet Production, Inc. and its principal
business changed to selling plastic pallets and plastic injection molding
machines. As of August 28, 2000, PalWeb was using a prototype plastic
injection molding machine to produce plastic pallets. PalWeb is still in the
process of building a fully operational plastic injection molding machine.
PalWeb is in the development stage, it has incurred significant losses from
operations and there is no assurance that it will achieve profitability or
obtain funds to finance continued operations.
PALWEB HAS LIMITED EXPERIENCE IN MANUFACTURING AND MARKETING.
PalWeb's business strategy relies primarily on its success in
manufacturing and marketing, an area in which PalWeb has limited experience.
The success of its business strategy should be considered in light of the
risks, expenses and difficulties frequently encountered in entering into
industries characterized by intense competition. There can be no assurance
that PalWeb will be able to manufacture or market its products or proposed
products, maintain or expand its market share or achieve commercial revenues
from its products or proposed products
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in the future. In addition, certain aspects of PalWeb's business strategy can
only be implemented if PalWeb successfully secures additional capital. Some
of the foregoing factors are not within PalWeb's control, and there can be no
assurance that PalWeb will be able to implement its business strategy, or
that PalWeb's business strategy will result in profitability.
PALWEB'S BUSINESS AND ITS OFFICERS COULD BE ADVERSELY AFFECTED BY AN
INVESTIGATION OF PALWEB'S INDIRECT WHOLLY OWNED SUBSIDIARY, PACECO FINANCIAL
SERVICES, INC. ("PFS"), BEING CONDUCTED BY THE OKLAHOMA SECURITIES DEPARTMENT.
After a March 1999 examination of PFS by the Oklahoma Securities
Department, the Department proposed that PFS terminate its status as an
"investment certificate issuer." As of August 24, 2000, PFS and the Oklahoma
Securities Department were negotiating an agreed order that would preclude
PFS from making further sales of investment certificates to new or existing
holders and would require PFS to repay all holders of investment
certificates. If and when this agreed order is finalized, it is possible that
PFS would not have sufficient assets to pay the holders of investment
certificates that are outstanding unless the PalWeb Common Stock owned by PFS
appreciates significantly in value and PFS is able to sell such shares. The
liquidation of PFS could have a material adverse affect on the businesses of
both PFS and PalWeb. The Oklahoma Securities Department has not proposed to
take any enforcement actions, but it is possible it could do so, and such
enforcement actions could have a material adverse affect on the businesses of
both PFS and PalWeb.
PALWEB'S BUSINESS COULD BE AFFECTED BY CHANGES IN AVAILABILITY OF RAW
MATERIALS.
PalWeb uses a proprietary mix of raw materials to produce its
plastic pallets. Such raw materials are generally readily available and some
may be obtained from recycled plastic containers. At the present time, these
materials are being purchased from local suppliers. The availability of
PalWeb's raw materials could change at any time for various reasons. For
example, the market demand for PalWeb's raw materials could suddenly increase
or the rate at which plastic materials are recycled could decrease, affecting
both availability and price. Additionally, the laws and regulations governing
the production of plastics and the recycling of plastic containers could
change and, as a result, affect the supply of PalWeb's raw materials. Any
interruption in the supply of raw materials or components could have a
material adverse effect on PalWeb. Furthermore, certain potential alternative
suppliers may have pre-existing exclusive relationships with competitors of
PalWeb and others that may preclude PalWeb from obtaining its raw materials
from such suppliers.
THE MARKET MAY NOT ACCEPT PALWEB'S PRODUCTS.
Any unexpected developmental, regulatory or manufacturing problems
could delay the commercialization of PalWeb's proposed products and may have
a material adverse effect on PalWeb and its prospects. In addition, the
market acceptance of any of PalWeb's plastic pallets will be substantially
dependent on the ability of PalWeb to demonstrate to the business community
the capabilities and benefits of PalWeb's plastic pallets as well as to sell
commercial
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quantities of the plastic pallets at acceptable prices. There can be no
assurance that PalWeb will be able to gain market acceptance for its plastic
pallets.
PALWEB MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING NECESSARY TO SUSTAIN
AND GROW ITS OPERATIONS.
PalWeb's financial statements have been qualified on a going concern
basis principally due to lack of long term financing to achieve its goal of
producing and marketing plastic pallets to compete with wood pallets. PalWeb
has funded its operations to date primarily through equity and debt
financings. PalWeb may need additional debt or capital in order to begin
generating a sufficient cash flow to sustain operations for the foreseeable
future. PalWeb will need to raise substantial additional funds to continue to
fund operating expenses or its expansion strategy. There can be no assurance
that additional financing will be available, or, if available, that such
financing will be on terms favorable to PalWeb. Failure to obtain such
additional financing would have a material adverse effect on PalWeb. In
addition, PalWeb acquired an indirect wholly owned subsidiary in April of
2000 which issues thrift accounts and savings certificates to investors. As
of August 28, 2000, the subsidiary did not have sufficient assets to
liquidate investors' thrift accounts and savings certificates.
PALWEB'S BUSINESS COULD BE AFFECTED BY COMPETITION AND RAPID TECHNOLOGICAL
CHANGE.
PalWeb currently faces competition from many companies that produce
wooden pallets at prices that are substantially lower than the prices PalWeb
charges for its plastic pallets. It is anticipated that the plastic pallet
industry will be subject to intense competition and rapid technological
change. PalWeb could potentially face competition from recycling and plastics
companies, many of which have substantially greater financial and other
resources than PalWeb and, therefore, are able to spend more than PalWeb in
areas such as product development, manufacturing and marketing. Although a
company with greater resources will not necessarily be able to bring a new
product to market before its smaller competitors, substantial resources
enable a company to support many new products simultaneously, thereby
improving the likelihood of at least some of its new products being among the
first to make it to market. PalWeb's revenues and profitability could be
adversely affected by technological change. Competitors may develop products
that render PalWeb's products or proposed products uneconomical or result in
products being commercialized that may be superior to PalWeb's products. In
addition, alternatives to plastic pallets could be developed, which would
have a material adverse effect on PalWeb.
PALWEB MAY NOT BE ABLE TO EFFECTIVELY PROTECT ITS PATENTS AND PROPRIETARY
RIGHTS.
PalWeb relies on a combination of patents and trade secrets to
protect its proprietary technology, rights and know-how. There can be no
assurance that such patent rights will not be infringed upon, that PalWeb's
trade secrets will not otherwise become known to or independently 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
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infringement. Such litigation could result in substantial cost to, and a
diversion of effort by, PalWeb and its management and may have a material
adverse effect on PalWeb. PalWeb's success and potential competitive
advantage is dependent upon its ability to exploit the technology under these
patents. There can be no assurance that PalWeb will be able to exploit the
technology covered by these patents or that it will be able to do so
exclusively. PalWeb currently has certain patent applications pending. There
can be no assurance that patent applications will result in patents being
issued, or that, if issued, the patents will afford protection against
competitors with similar technology.
Although PalWeb is not aware of any claim against it for
infringement, there can be no assurances that parties will not bring claims
against PalWeb for infringement in the future. PalWeb's ability to
commercialize its products and proposed products depends, in part, on its
ability to avoid claims for infringement brought by other parties. Laws
regarding the enforceability of intellectual property vary from jurisdiction
to jurisdiction. There can be no assurance that intellectual property issues
will be uniformly resolved, or that local laws will provide PalWeb with
consistent rights and benefits. In addition, there can be no assurance that
competitors will not be issued patents that may prevent the manufacturing or
marketing of PalWeb's products or proposed products.
PALWEB'S BUSINESS COULD BE AFFECTED BY NEW LEGISLATION REGARDING
ENVIRONMENTAL MATTERS.
The business operations of PalWeb and the ownership and operations
of real property by PalWeb are subject to extensive and changing federal,
state and local environmental laws and regulations pertaining to the
discharge of materials into the environment, the handling and disposition of
wastes (including solid and hazardous wastes) or otherwise relating to the
protection of the environment. As is the case with manufacturers in general,
if a release of hazardous substances occurs on or from PalWeb's properties or
any associated off-site disposal location, or if contamination from prior
activities is discovered at any of PalWeb's properties, PalWeb may be held
liable. No assurances can be given that additional environmental issues will
not require future expenditures.
Both the plastics industry, in general, and PalWeb are subject to
existing and potential federal, state, local and foreign legislation designed
to reduce solid wastes by requiring, among other things, plastics to be
degradable in landfills, minimum levels of recycled content, various
recycling requirements, disposal fees and limits on the use of plastic
products. In addition, various consumer and special interest groups have
lobbied from time to time for the implementation of these and other such
similar measures. Although PalWeb believes that the legislation promulgated
to date and such initiatives to date have not had a material adverse effect
on PalWeb, there can be no assurance that any such future legislative or
regulatory efforts or future initiatives would not have a material adverse
effect on PalWeb.
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,
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some of which may cause PalWeb to incur significant defense costs. Although
PalWeb currently maintains product liability insurance coverage that it
believes is adequate, there can be no assurance that the coverage limits of
its insurance are adequate or that all such claims will be covered by
insurance. In addition, these policies generally must be renewed every year.
While PalWeb has been able to obtain product liability insurance in the past,
there can be no assurance it will be able to obtain insurance in the future
on its products or proposed products. Product liability insurance varies in
cost, is difficult to obtain and may not be available in the future on terms
acceptable to PalWeb, if at all. A successful product liability claim or
other judgment against PalWeb in excess of its insurance coverage could have
a material adverse effect upon PalWeb.
PALWEB CURRENTLY DEPENDS ON CERTAIN KEY PERSONNEL.
PalWeb is dependent on the experience, abilities and continued
services of its current management personnel. In particular, Mr. Kruger, its
Chairman of the Board and President, has played a significant role in the
development and management of PalWeb. The loss or reduction of services of
Mr. Kruger or any other key employee could have a material adverse effect on
PalWeb. There is no assurance that additional managerial assistance will not
be required.
PalWeb's future success depends in part upon its ability to attract
and retain highly qualified personnel. On July 13, 2000, Ron Hale, the former
Vice President (Engineering), Secretary and Treasurer of PalWeb and the
former President of PalWeb's wholly owned subsidiary, Plastic Pallet
Production, Inc., resigned from all of his positions within PalWeb and
Plastic Pallet Production, Inc. PalWeb's future success depends in part on
its ability to attract and retain an individual with engineering and
managerial expertise similar to Mr. Hale's expertise. PalWeb faces
competition for such personnel from other companies and organizations, many
of which have significantly greater resources than PalWeb. There can be no
assurance that PalWeb will be able to attract and retain the necessary
personnel on acceptable terms or at all.
PALWEB'S STOCK TRADES IN A LIMITED PUBLIC MARKET, IS SUBJECT TO PRICE
VOLATILITY AND THERE CAN BE NO ASSURANCE THAT AN ACTIVE TRADING MARKET WILL
BE SUSTAINED.
There has been a limited public trading market for PalWeb's Common
Stock and there can be no assurance that an active trading market will be
sustained. There can be no assurance that the Common Stock will trade at or
above any particular price in the public market, if at all. The trading price
of the Common Stock could be subject to significant fluctuations in response
to variations in quarterly operating results or even mild expressions of
interest on a given day. Accordingly, the Common Stock should be expected to
experience substantial price changes in 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.
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CERTAIN RESTRICTED SHARES OF PALWEB WILL BE ELIGIBLE FOR SALE IN THE FUTURE
AND COULD AFFECT THE PREVAILING MARKET PRICE OF PALWEB'S COMMON STOCK.
Certain of the outstanding shares of Common Stock are "restricted
securities" under Rule 144 of the Securities Act, and (except for shares
purchased by "affiliates" of PalWeb as such term is defined in Rule 144)
would be eligible for sale as the applicable holding periods expire. In the
future, these shares may be sold only pursuant to a registration statement
under the Securities Act or an applicable exemption, including pursuant to
Rule 144. Under Rule 144, a person who has owned Common Stock for at least
one year may, under certain circumstances, sell within any three-month period
a number of shares of Common Stock that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading
volume during the four calendar weeks prior to such sale. In addition, a
person who is not deemed to have been an affiliate of PalWeb at any time
during the three months preceding a sale, and who has beneficially owned the
restricted securities for the last two years is entitled to sell all such
shares without regard to the volume limitations, current public information
requirements, manner of sale provisions and notice requirements. Sales or the
expectation of sales of a substantial number of shares of Common Stock in the
public market by selling stockholders could adversely affect the prevailing
market price of the Common Stock, possibly having a depressive effect on any
trading market for the Common Stock, and may impair PalWeb's ability to raise
capital at that time through additional sale of its equity securities.
PALWEB DOES NOT EXPECT TO DECLARE OR PAY ANY DIVIDENDS IN THE FORESEEABLE
FUTURE.
PalWeb has not declared or paid any dividends on its Common Stock.
PalWeb currently intends to retain future earnings to fund the development
and growth of its businesses, to repay indebtedness and for general corporate
purposes, and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.
PALWEB'S COMMON STOCK MAY BE SUBJECT TO SECONDARY TRADING RESTRICTIONS
RELATED TO PENNY STOCKS.
Certain transactions involving the purchase or sale of Common Stock
of PalWeb may be affected by a Securities and Exchange Commission rule for
"penny stocks" that imposes additional sales practice burdens and
requirements upon broker-dealers that purchase or sell such securities. For
transactions covered by this penny stock rule, broker-dealers must make
certain disclosures to purchasers prior to the purchase or sale.
Consequently, the penny stock rule may impede the ability of broker-dealers
to purchase or sell PalWeb's securities for their customers and the ability
of persons now owning or subsequently acquiring PalWeb's securities to resell
such securities.
THE RESULTS OF PENDING LITIGATION AGAINST PALWEB MAY HAVE AN ADVERSE AFFECT
ON ITS FINANCIAL CONDITION OR BUSINESS PROSPECTS.
PalWeb is a party to various pending legal proceedings that involve
claims or potential claims against PalWeb and if resolved unfavorably to
PalWeb could have an adverse affect on
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PalWeb's financial condition or other effects on PalWeb. There is no
assurance these proceedings will be resolved favorably.
HISTORY
PalWeb Corporation is a Delaware corporation that was incorporated
on February 24, 1969 under the name Permaspray Manufacturing Corporation. It
changed its name to Browning Enterprises Inc. in April of 1982, to Cabec
Energy Corp. in June of 1993 and became PalWeb Corporation in April of 1999.
From April 1993 to December 1997 PalWeb was engaged in various
businesses, including the business of exploration, production and development
of oil and gas properties in the continental United States and the operation
of related service businesses. In December 1997, PalWeb acquired all of the
issued and outstanding stock of Plastic Pallet Production, Inc. or "PPP," a
Texas corporation, in exchange for a majority of the issued and outstanding
stock of PalWeb. Pursuant to the terms of the reverse acquisition contract,
all of the assets, contract rights and liabilities of PalWeb that related in
any way to the oil and gas business were transferred to The Union Group,
Inc., a Nevada corporation (the "Union Group"). In November 1998, PalWeb
distributed all of the issued and outstanding stock of the Union Group to its
stockholders (other than the former shareholders of Plastic Pallet
Production, Inc.).
Since the acquisition of all of the issued and outstanding stock of
Plastic Pallet Production, Inc., PalWeb's primary business is (i)
manufacturing and selling plastic pallets, and (ii) the custom design,
manufacture and sale of large plastic injection molding machines and systems.
PalWeb is currently a development stage company. As of June 30, 2000, PalWeb
has not sold any plastic injection molding machines and sales of plastic
pallets have been limited.
Michael John served as Chairman of the Board and President of PPP
prior to its acquisition by PalWeb in December 1997 and continued to serve as
Chairman and President of PalWeb thereafter. In October 1998, PPP entered
into an agreement for sale of a plastic injection molding machine with Pace
Plastic Pallets, Inc. ("Pace") that was intended to provide for the sale of
specified machinery to Pace to permit Pace to manufacture pallets for sale to
PPP for further distribution by PPP under patent licenses granted by PPP to
Pace. In exchange for Pace's agreement to purchase the machinery and make an
earnest money deposit of $300,000, 10 million shares of PalWeb were
transferred by Michael John to Pace. At the time of this transaction, Pace
was principally owned by Paul Kruger; however, neither Paul Kruger nor any of
his related entities, including Pace, were affiliated with or related to
PalWeb or any of its subsidiaries. The terms of this transaction were entered
into on an arm's length negotiated basis.
PPP encountered difficulties in connection with the manufacturing of
the machinery required by this agreement due to the absence of available
funding and other reasons. As a result, in January 1999, PalWeb and PPP
entered into a consulting agreement with Paceco Financial Services, Inc.
("PFS"), an entity owned by Mr. Kruger, in which PFS provided $189,000 in
cash to PalWeb and agreed to provide comprehensive management assistance to
PPP in exchange for the issuance of 41 million shares of PalWeb Common Stock.
PalWeb recorded
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an expense of $4.1 million in connection with this transaction, which was
equal to the estimated fair value of the shares issued at that time. At the
time of this transaction, Mr. Kruger was not affiliated with PalWeb. This was
an arm's length negotiated transaction entered into between PFS and the
former management of PalWeb and PPP. This transaction was negotiated at a
time when PalWeb was in serious financial difficulty. The services performed
included strategic planning, marketing, general consulting and management
services, including recovery of shares issued to other parties in
transactions potentially detrimental to PalWeb. The number of shares issued
in this transaction is roughly equal to the number of shares owned by
Wolfgang Ullrich and Rosarin Chaisayan, which were recovered by PalWeb under
Mr. Kruger's supervision as described below.
On July 9, 1999, Paul Kruger became Chairman of PalWeb and Michael
John resigned as Chairman and as an executive officer. Subsequent to that
date, Mr. Kruger has been actively involved in the day to day management of
PalWeb and PPP in order to further its business plan. Also subsequent to that
date through August 28, 2000, Mr. Kruger or his affiliated entities have
provided in excess of $1,500,000 in funding for the operation of PalWeb in
the form of $1,187,479 in cash advances and $350,021 in consulting services
and have been issued an additional 15,375,000 shares of Common Stock.
On June 1, 2000, an affiliate of Paul Kruger provided PalWeb a
$400,000 line of credit payable on December 1, 2000 with interest at 18%. The
loan is secured by assets of PPP with a net book value of $727,288 as of May
31, 2000, including all items of inventory, equipment, patents and the
Vimonta stock. The funds were used to satisfy existing obligations and to
provide short term operating capital until such time as PalWeb could
refinance. Due to its development stage status, PalWeb's attemps for bank
financing have all been contingent on personal guarantees from its president,
Mr. Kruger. Accordingly, Mr. Kruger has elected to provide financing direct
from his affiliated entities and has requested and received security
equivalent to that which a bank would require. It is Mr. Kruger's intention
to eventually retire any loans from his affiliates with the proceeds from
future bank financing once PalWeb can qualify on its own merit. As of June
29, 2000, PalWeb had $65,000 of the proceeds from the loan remaining.
Subsequent to becoming more active in management, Mr. Kruger
discovered various transactions and agreements that had been entered into by
prior management that were detrimental to PalWeb. One of these involved the
issuance of 41,443,308 shares of PalWeb Common Stock to Wolfgang Ullrich and
Rosarin Chaisayan in January 1998 for consideration that was never received.
In January 1999, PalWeb initiated an action against these parties in the
District Court of Dallas County, Texas, seeking a judgment for monetary
damages and cancellation of the shares issued to them. On September 16, 1999,
PalWeb was granted a default judgment awarding damages in the amount of $20
million and ordering the return and cancellation of the stock certificates
for the 41,443,308 shares issued as well as awarding attorney's fees. Such
shares have been canceled on PalWeb's books.
In another action in the District Court of Dallas County, Texas,
PalWeb and PPP obtained a default judgment against affiliated entities of
Wolfgang Ullrich named Chartex AG and New
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Inter HKB, AG ("NIH") on March 17, 2000. Chartex AG was issued 6 million
shares of Common Stock in PalWeb as additional consideration for an alleged
$1.35 million loan made to PPP by Chartex. In addition, PPP had an obligation
of $1.6 million to NIH and had issued 7,413,384 shares to NIH in PalWeb. As a
result of the relationship between Ullrich and Chartex AG and NIH, the Court
ordered that PPP could offset $1.6 million owed to NIH against the $20
million judgment against Ullrich and also ordered that defendants Chartex AG
and NIH return to PalWeb a total of 13,413,384 shares of PalWeb Common Stock
and ordered that PPP's liability to Chartex in the amount of $1.35 million
secured by a mortgage be canceled. These shares have been reflected as
canceled on the Company's records as of March 31, 2000. PalWeb does not
expect that any of the money damages will be recovered.
Another transaction that prior management entered into that could be
detrimental to PalWeb involves Vimonta AG, a Swiss based company ("Vimonta").
PalWeb and PPP have commenced litigation against Vimonta to determine the
rights of the parties. For information regarding Vimonta, please see Part II,
Item 2, Legal Proceedings of PalWeb's Form 10-SB/A, Amendment No. 6, filed on
September 7, 2000. The current management of PalWeb is reviewing and will
continue to review other past transactions involving PalWeb to determine if
any corrective actions need to be taken for the benefit of PalWeb's
shareholders. Michael John, the former President of PalWeb, has instituted
two lawsuits against PalWeb making claims for damages. PalWeb has asserted
counterclaims for breach of fiduciary duty and mismanagement. See Part II,
Item 2, Legal Proceedings of PalWeb's Form 10-SB/A, Amendment No. 6, filed on
September 7, 2000.
ACQUISITION OF PACECO FINANCIAL
On April 3, 2000, PalWeb acquired Paceco Financial Services, Inc.
("PFS") by means of a merger of PFS's parent company, Pace Holding, Inc.,
into a wholly owned subsidiary of PalWeb, PP Financial, Inc. In the
acquisition, PalWeb issued 50 million shares of its Common Stock in exchange
for all the outstanding stock of Pace Holding, Inc. and PFS became an
indirect wholly owned subsidiary of PalWeb. All of the outstanding stock of
Pace Holding, Inc. was owned by Paul Kruger, the Chairman and Chief Executive
Officer of PalWeb. Mr. Kruger acquired Pace Holding, Inc. for $81,250 in
cash. Mr. Kruger subsequently contributed approximately $150,000 in cash and
$150,000 in preferred stock of PFS to Pace Holding, Inc. PFS, in addition to
its other assets, owned 43.5 million shares of PalWeb Common Stock, which by
virtue of the acquisition, are treated as treasury stock on PalWeb's records
and, accordingly, the acquisition resulted in the issuance of an additional
6.5 million shares of PalWeb Common Stock.
The 50 million shares of PalWeb's Common Stock that PalWeb exchanged
for all of the outstanding stock of Pace Holding, Inc. was authorized and
approved by unaffiliated directors of PalWeb, Mark Kidd and Lyle Miller. The
6.5 million incremental shares of PalWeb's Common Stock that were issued in
the acquisition of Pace Holding, Inc. represented the value attributable to
PFS's business, other than the ownership of PalWeb Common Stock. The 6.5
million incremental shares reflected the subjective business judgement of the
parties relating to the value of PFS in excess of the 43.5 million shares of
PalWeb acquired in the transaction. There was no fairness opinion obtained
and the number of incremental shares issued was not based on any objective or
precise valuation criteria.
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PFS has been in business since 1952 and is engaged in the business of
making consumer and small business loans primarily in Oklahoma and is regulated
as an "investment certificate issuer" by the Oklahoma Securities Department. For
its last fiscal year ended September 30, 1999, Pace Holding, Inc. had revenues
of $790,000, net loss of $2,300,000 and total assets and stockholder's
deficiency of $7,000,000 and $1,700,000, respectively. For the six months ended
March 31, 2000, Pace Holding, Inc. had revenues of $370,000, net loss of
$800,000 and at such date had total assets of $5,500,000 and stockholder's
deficiency of $2,400,000.
In connection with an examination of Paceco Financial Services in March
1999, the Oklahoma Department of Securities determined that certain of PFS's
activities, including the ownership of real estate and the ownership of equity
securities, did not comply with the provisions of the Oklahoma Securities Act
relating to the permissible activities of investment certificate issuers. As a
result of such determination, PFS ceased making any new investments not
permissible to investment certificate issuers. Since that time PFS and the
Oklahoma Securities Department have been negotiating an agreed order for the
ultimate liquidation of the impermissible assets and repayment of the investment
certificates. PFS's ability to fund repayment of investment certificates is
substantially dependent on PFS's ability to sell or otherwise receive funding
related to its PalWeb stock. If this cannot be achieved, PFS would likely not
have sufficient assets to pay the holders of the investment certificates. At
March 31, 2000, PFS had $6,700,000 in investment certificates outstanding.
If PFS and PalWeb are unsuccessful in negotiating an agreement with the
Oklahoma Securities Department, the Department may take enforcement actions
against PFS that could have a material adverse effect on PFS and PalWeb.
In addition to the general authority available to the Administrator of
the Oklahoma Securities Department to issue cease and desist orders, place
limitations on activities or functions and seek civil monetary remedies, both in
an administrative forum or in Oklahoma District Court, the Oklahoma Securities
Administrator has the additional authority with respect to investment
certificate issuers to (i) remove officers, directors or employees found to be
dishonest, reckless, unfit to participate in the conduct of the affairs of the
institution or practicing continuing disregard or violation of laws, rules,
regulations or orders which are likely to cause substantial loss to the company
or likely to seriously weaken the condition of the company; (ii) assess the
shareholders of an investment certificate issuer for cash to remedy an
impairment of capital and if such assessment is not paid within ninety (90)
days, cause the shares of the defaulting stockholders to be sold at public
auction for a price not less than the amount of the assessment; or (iii) apply
for the appointment of a conservator or liquidator. As of August 25, 2000, the
Oklahoma Securities Department had not indicated to PFS an intention to pursue
enforcement remedies, but such enforcement actions could occur in the future.
CURRENT BUSINESS
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
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pallets, and has received notice that a patent relating to the original
design of a materials handling plastic pallet will be granted on August 29,
2000 under U.S. Patent No. 6,109,190.
PalWeb's plastic pallets are much more durable and sanitary than
traditional wood pallets. At PalWeb's request, its new plastic pallet design
has been subjected to standard industry tests known as ASTM (American Society
for Testing and Materials) Standard D 1185-98a (a strength test) and D
4728-91 (a vibration test), which were conducted by Container Technologies
Laboratory, Inc. ("Container Technologies"), Lenexa, Kansas, a nationally
recognized independent testing facility. Container Technologies is certified
as a Performance Oriented Packaging (POP) Laboratory by the U.S. Department
of Transportation. Container Technologies is also an International Safe
Transit Association (ISTA) Qualified Test Laboratory and a National Motor
Freight Classification (NMFC) Association Certified Laboratory. Container
Technologies certified PalWeb's plastic pallet as having passed the above
referenced tests. The testing procedures found the pallet to be stronger and
more versatile than the typical hardwood pallet.
PPP has fabricated an operational prototype plastic injection
molding system. PPP is continually modifying and improving its equipment. PPP
began utilizing the prototype equipment by running a 10 hour shift 4 days per
week. As of June 1, 2000, PPP has sold 440 pallets and has 278 rackable and
329 floor (non-rackable) pallets in inventory. As of August 24, 2000, PPP is
in the process of increasing production by adding a second shift. Two shifts
utilizing the current equipment 5 days per week can produce approximately
1232 rackable and 196 floor pallets per month. With the addition of the third
shift and the planned modifications to its machinery, as described in Part I,
Item 2, Management's Discussion and Analysis or Plan of Operation, PPP
anticipates that production will increase to approximately 4,000 pallets per
month. PPP expects to reach this production level if and when PalWeb secures
the funds that are necessary to make the adjustments to the machinery. 4,000
pallets per month is the maximum capacity of PPP's research/prototype plastic
injection molding system.
PalWeb is currently exploring methods to raise funds through various
means including, but not limited to, the private placement of equity
securities, private loans, commercial loans or technology licensing
arrangements. Any loans to PalWeb will likely be required to be secured and
guaranteed by Paul Kruger. PalWeb is dependent upon Mr. Kruger to provide
and/or secure additional debt financing. Mr Kruger has no obligation to
provide additional debt financing to PalWeb or secure such financing on
PalWeb's behalf and there is no assurance that Mr. Kruger will do so. PalWeb
plans to use future funding to fabricate a plastic injection molding system
comprised of multiple plastic injection molding machines with integrated
material feed lines. If successful, the addition of these machines will
permit PalWeb to expand its production of pallets. Should PalWeb successfully
increase its production levels, it will need to employ additional production
and supervisory employees, as described in this section. See Part I, Item 2,
Plan of Operations and Liquidity for additional information.
In the past two years, approximately $2 million has been spent on the
development of PalWeb's business by designing plastic pallets and building
prototypes of the plastic injection
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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-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
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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.
PalWeb intends to stay on the "cutting edge" of the market by
constantly conducting research on pallet design, plastic injection molding
system design and the materials used to make the plastic pallets.
EMPLOYEES
PalWeb through PPP leases six full time employees from Accord Human
Resources, Inc., an independent employee leasing company. PalWeb decided to
lease its employees because, considering the small number of employees
currently required by PalWeb's level of operations, it is more cost effective
than hiring its own employees. PalWeb's management has determined
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that leasing the present number of employees saves approximately $1,500 per
month. The cost of leasing the employees from Accord Human Resources, Inc.,
over and above the actual cost of payroll, is approximately 2.0% of payroll,
which is approximately $500 per month. If PalWeb decided to hire its own
employees, it would also need to hire a full-time human resource employee,
which would cost approximately $2,000 per month. After management made this
determination, PalWeb's former President, Michael John, negotiated the
Employee Lease Agreement with Accord Human Resources, Inc. and executed such
agreement on behalf of PPP.
If PalWeb increases production levels to 4,000 pallets per month, it
will need to employ a total of eleven to thirteen production employees and three
to four supervisory/staff employees. Should PalWeb successfully increase its
production levels to 50,000 pallets per month, it will need to employ a total of
twenty to thirty production employees and five to seven supervisory/staff
employees. If PalWeb successfully increases its production levels to 100,000
pallets per month, it will need to employ a total of thirty-five to forty
production employees and ten to fifteen supervisory/staff employees.
MARKETING
PPP plans to distribute its pallets and its plastic injection molding
systems through a combination of a network of independent contractor
distributors and sales by PalWeb officers and employees. PalWeb believes that
PPP's patents on its plastic pallet designs and its plastic injection molding
machines, along with appropriate pricing of its products, should give PalWeb a
sales advantage with respect to its competition. PalWeb hopes to gain product
acceptance by marketing the concept that the widespread use of plastic pallets
could greatly reduce the destruction of trees on a worldwide basis.
PATENTS
PPP currently holds the following patents:
1. Interlocking Modular Pallet Application and Method of
Construction Application No. 08/779,372 Filing Date:
November 26, 1996 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
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Filing Date: February 6, 1997
U.S. Patent No. 5,809,905 issued on September 22, 1998
Expiration Date: September 21, 2015
4. Modular Pallet System
Application No. 08/735,802
Filing Date: September 21, 1996
U.S. Patent No. 5,791,261 issued on August 11, 1998
Expiration Date: August 10, 2015
PPP is in the final stages of securing a patent on its new materials
handling pallet. The application for the patent on this materials handling
pallet was filed on October 19, 1999 under application No. 09/421,766 and was
allowed in April 2000. PPP was notified that the patent was granted on August
29, 2000 under U.S. Patent No. 6,109,190.
PPP also has a patent pending on a new concept in the construction of
functional, operational plastic injection molding machines. These machines are
approximately 20% to 30% of the length of a traditional style plastic injection
molding machine, use approximately one-third of the electricity used by a
traditional style machine, use approximately 10% of the oil (circulated) used by
a traditional style machine, and can be profitably sold to the end user at a
cost that is substantially less than the cost of a traditional style machine.
However, it must be noted that there is no assurance that PalWeb will be able to
sell any of the newly designed plastic injection molding machines. Under United
States patent law, patents that are approved are valid for 17 years from the
date of issuance unless they are amended and extended.
PPP's pallets and plastic injection molding machines have a broad
spectrum of possible applications. As a result, it is not foreseen that sales
will be dependent on one or a few major customers.
SUBSIDIARIES
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;
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Paceco Financial Services, Inc., a wholly owned
subsidiary of PP Financial, Inc.;
PP Transport, Inc., a Texas corporation; and
PP Systrans, Inc., a Texas corporation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATIONS AND LIQUIDITY
In November 1998, PalWeb transferred all of its energy services
related assets, contract rights and liabilities to the Union Group. Shortly
following this transfer, all of the issued and outstanding stock of the Union
Group was distributed to the stockholders of PalWeb (other than the former
shareholders of PPP) as a dividend. As a result, PalWeb is essentially in the
position of being a start-up business by and through its wholly owned
subsidiary, PPP. As stated above, PPP is engaged in the design, development
and marketing of a new style of plastic pallet that will compete with
traditional wood pallets, and the design, development and marketing of a new
style of plastic injection molding machine that is smaller and more efficient
than a traditional style of plastic injection molding machine.
PalWeb's financial statements have been qualified on a going concern
basis principally due to lack of long term financing to achieve its goal of
producing and marketing plastic pallets to compete with wood pallets. In
addition, PalWeb has acquired an indirect wholly owned subsidiary in April of
2000 which issues thrift accounts and savings certificates to investors. As
of August 28, 2000, the subsidiary did not have sufficient assets to
liquidate investors' thrift accounts and savings certificates. During the
period from January 1999 to December 1999, the cash needed by PalWeb to fund
its operations came from cash advances from Paul A. Kruger and entities
affiliated with him, totaling $882,479, and $300,000 received by PPP as a
down payment on the sale of a plastic injection molding system to Pace
Plastic Pallets, Inc., an Oklahoma corporation ("Pace").
The total sale price under the terms of the contract between PPP and
Pace was $3,408,000. Subsequent to entering into this contract, Pace was
dissolved and all of its assets were assigned to Hildalgo Trading Co., L.C.,
a Florida limited liability company ("Hildalgo"), which is 100% owned by Paul
A. Kruger. The agreement for the sale of the plastic injection molding system
to Pace by PPP was entered into in October 1998. At such time, neither Paul
Kruger nor any of his related entities, including Pace, were affiliated with
or related to PalWeb or any of its subsidiaries. However, in April 1999, Mr.
Kruger, through several of his closely held entities, acquired a significant
ownership position in PalWeb's Common Stock, which caused him to then be
classified as a related party with respect to PalWeb. Mr. Kruger became the
Chairman of the Board of PalWeb on July 9, 1999 and became President on
January 22, 2000. The value of the plastic injection molding system was
determined through negotiations between the former President of PalWeb and
the management of Pace and the terms of this transaction were entered into on
an arm's length negotiated basis. No gain has been recognized on the sale
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of equipment to Pace as the sale has never been consummated due to the fact
that PalWeb has not yet begun commercially producing plastic injection
molding systems. In January 2000, PalWeb issued 3,000,000 shares to Hildalgo
in exchange for Hildalgo's cancellation of the $300,000 of indebtedness
related to the down payment on the sale of the plastic injection molding
system and the contract between PalWeb and Hildalgo was canceled.
On December 1, 1999, PalWeb obtained a $500,000 line of credit loan
for its operations from Ralph Curton, Jr., an individual that is not an
officer or director of PalWeb or otherwise related to PalWeb, but who does
own 2.2% of the issued and outstanding shares of Common Stock of PalWeb. In
exchange for the $500,000 line of credit loan, PalWeb issued Mr. Curton a
convertible debenture that grants Mr. Curton the right, on or after June 1,
2000, to convert the principal of the convertible debenture into fully paid
and non-assessable shares of PalWeb's Common Stock at the rate of one share
for each $0.10 of the principal amount that is then due and owing by PalWeb
to Mr. Curton at the time of such conversion. The loan interest rate is 8.5%
per annum and the maturity date is December 1, 2001. Funds from the credit
line were available at the rate of $100,000 per month beginning December
1999. As of August 25, 2000, $47,500 of available credit remained on the line
of credit loan but as a result of an alleged default by Mr. Curton, it is
unlikely that these funds will be advanced. See Part II, Item 2, Legal
Proceedings of PalWeb's Form 10-SB/A, Amendment No. 6, filed on September 7,
2000.
On June 1, 2000, an affiliate of Paul Kruger provided a $400,000
line of credit to PalWeb payable on December 1, 2000 with interest at 18%.
The loan is secured by assets of PPP with a net book value of $727,288 as of
May 31, 2000, including all items of inventory, equipment, patents and the
Vimonta stock. The funds were used to satisfy existing obligations and to
provide short term operating capital until such time as PalWeb could
refinance. Due to its development stage status, PalWeb's attemps for bank
financing have all been contingent on personal guarantees from its president,
Mr. Kruger. Accordingly, Mr. Kruger has elected to provide financing direct
from his affiliated entities and has requested and received security
equivalent to that which a bank would require. It is Mr. Kruger's intention
to eventually retire any loans from his affiliates with the proceeds from
future bank financing once PalWeb can qualify on its own merit. As of June
29, 2000, PalWeb had $65,000 of the proceeds from the loan remaining.
The molds needed for PalWeb to manufacture plastic pallets were
completed in October 1999 and necessary fine-tuning modifications to the
molds were completed in late December 1999. PalWeb plans to continue to
review the performance of the prototype equipment and make any improvements
that are possible and economical. PalWeb expects that approximately $100,000
of capital expenditures will be required to complete the installation of a
hot runner system and adjust the hydraulic system on its prototype plastic
pallet injection molding machine. These adjustments will enable the prototype
plastic pallet injection molding machine to operate at a production capacity
of approximately 4,000 pallets per month. 4,000 pallets per month is the
maximum production capacity of prototype equipment. Once this level is
achieved, it is believed that sales of products will generate sufficient cash
flow to sustain current operations. In the meantime, PalWeb will need to
secure funds for the adjustments to the machinery and operations.
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If PalWeb secures the funding for the adjustments to the machinery,
it expects to begin producing approximately 4000 pallets per month by the end
of October. The Company anticipates that funds required for the adjustments
to the machinery and operations until such adjustments are made will be
provided by loans from Paul Kruger or financial institutions. PalWeb is in
preliminary negotiations with a bank to secure a loan of approximately
$500,000 to $900,000. If PalWeb is successful in securing a loan, a portion
of the loan will be used to pay $335,000 that PalWeb owes Paul Kruger. A bank
will likely require that any loans to PalWeb be guaranteed by Paul Kruger.
PalWeb is dependent upon Mr. Kruger to provide and/or secure additional debt
financing and there is no assurance that Mr. Kruger will do so. Accordingly,
there is no assurance that funding will be available. If the Company fails to
secure the funding necessary to complete the installation of a hot runner
system and adjust the hydraulic system on its prototype plastic pallet
injection molding machine, PalWeb may have to suspend or terminate its
operations and/or consider bankruptcy.
PalWeb owns 100% of the outstanding common stock of PP Financial,
Inc. which in April of 2000 acquired 100% of the outstanding common stock of
Pace Holding, Inc. and its wholly owned subsidiary, Paceco Financial Services
("PFS"). The acquisition was accounted for as a purchase of an entity under
common control and the net assets of Pace Holding, Inc. have been recorded at
cost as of the date of acquisition. PFS is a regulated "investment
certificate issuer" under the Oklahoma Securities Act, headquartered in
Duncan, Oklahoma. Its activities consist of the sale of investment
certificates and making of loans and other investments. For its fiscal year
ended September 30, 1999, Pace Holding had revenues of $790,000, net loss of
$2,300,000, total assets of $7,000,000, total liabilities of $8,600,000
including, $6,900,000 in investment certificates outstanding, and
stockholder's deficiency of $1,700,000. For the six months ended March 31,
2000, PFS had revenues of $370,000, net loss of $800,000, total assets of
$5,500,000, total liabilities of $8,000,000, including, $6,700,000 in
investment certificates outstanding, and stockholder's deficiency of
$2,400,000.
The purpose of the acquisition was to acquire an entity that might
be used as a vehicle to offer financing to buyers of PalWeb's plastic pallets
and injection molding equipment. However, the ability of PFS to do so is
dependent upon it resolving certain pending issues with the Oklahoma
Securities Department with respect to continued sale of investment
certificates as more fully described in Part I, Item 1, Description of
Business.
PalWeb has not entered into any conditions, commitments or
requirements with the Oklahoma Securities Department that would require it to
fund or otherwise be financially responsible for the liabilities of PFS.
PFS's ability to fund repayment of investment certificates is substantially
dependent on PFS's ability to sell or otherwise receive funding relating to
approximately 40,000,000 shares of PalWeb common stock owned by PFS. PalWeb
estimates that such stock must be sold for a value of at least $0.12 per
share in order for PFS to have sufficient funds to pay the holders of the
outstanding investment certificates. PFS has been and expects to continue to
be operated independently of PalWeb and PalWeb is not currently contractually
or otherwise liable to provide funding to PFS for purposes of funding the
repayment of investment certificates. However, if PFS is unable to make
payment to investment
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certificate holders as such investment certificates mature, it is possible
that holders of investment certificates may assert claims against PalWeb that
it is liable for the liabilities of PFS under legal theories relating to
piercing the corporate veil or otherwise. In such event, PalWeb might incur
additional costs to contest such claims and could ultimately be found to be
liable. The effect of any such claims being made against PalWeb could also
have an adverse effect on the value of PalWeb's common stock and make it even
more difficult for PFS to fund the repayment of its investment certificate
liability from liquidation of the PalWeb common stock owned by it.
Accordingly, PalWeb may be adversely affected if PFS is unable to meet its
obligations as they mature.
PalWeb is a party to various pending legal proceedings that involve
claims or potential claims against PalWeb and if resolved unfavorably to
PalWeb could have an adverse affect on PalWeb's financial condition or other
effects on PalWeb. There is no assurance these proceedings will be resolved
favorably. See Part II, Item 2, Legal Proceedings of PalWeb's Form 10-SB/A,
Amendment No. 6, filed on September 7, 2000.
RESULTS OF OPERATIONS
GENERAL
Sales reflected for all periods presented prior to November 1999 are
occasional sales of prototype plastic pallets of a design that did not meet
development standards. Sales after November 1999 represent initial sales of
PalWeb's tested product. However, as June 15, 2000, PalWeb has not commenced
commercial production of plastic pallets. PalWeb has for the most part
completed the development of its plastic pallet that will compete with wood
pallets. PalWeb is in the final stages of development of its injection
molding system to produce its plastic pallets. PalWeb is seeking both
short-term financing to meet its working capital needs and long-term
financing to acquire the equipment needed to produce plastic pallets on a
large-scale commercial basis.
The basic development of PalWeb's prototype plastic injection
molding system is complete and it is fully functional as of April 30, 2000.
However, the injection molding system's full capacity of 4,000 pallets per
month will not be reached until the hot runner system is installed and
tested. Management anticipates that continued engineering updates and
refinements of all plastic injection molding systems will be necessary to
maintain high efficiency levels and plans for this to be an ongoing process.
PalWeb has from time to time engaged the services of professionals
to perform various services through the issuance of both Common and Preferred
Stock (see Part II, Item 4, Recent Sales of Unregistered Securities of
PalWeb's Form 10-SB/A, Amendment No. 5, filed on July 20, 2000). The services
paid for in this fashion have primarily included business transaction
origination and brokerage services, accounting services unrelated to audits
of PalWeb, legal services, and marketing and financing consulting services.
PalWeb has been compelled to use both Common and Preferred stock to secure
these services due to its limited sources of cash. The consideration was
largely based on a negotiated number of shares in relation to the type of
service and the nature of the restricted stock rather than specific dollar
amounts. Accordingly,
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management determined that the most reasonable method of valuing the services
is the stock value.
For all periods presented, PalWeb's effective tax rate is 0%. PalWeb
has generated net operating losses since inception that would normally
reflect a tax benefit in the statement of operations and a deferred asset on
the balance sheet. However, because of the current uncertainty as to PalWeb's
ability to achieve profitability, a valuation reserve has been established
that offsets the amount of any tax benefit available for each period
presented in the consolidated statement of operations.
PROSPECTS FOR FUTURE
Management anticipates that upon completion of all refinements to
its prototype equipment operating losses will cease due to the sales revenue
that will be generated. As of July 5, 2000, Management was trying to secure
the financing necessary to complete the modifications to the machinery.
Management does not have an exact date as to when such modifications will be
completed.
As stated above, the United States market for new pallets is, at
minimum, approximately 400,000,000 annually. Management's initial sales
projections of 4,000 pallets per month, or 48,000 pallets per year, is less
than 1/100th of 1% of the total new pallet market, and it appears that the
market trend is moving toward the use and purchase of plastic pallets. If
PalWeb's sales projections are accurate, management estimates operating
losses will cease if and when PalWeb completes the modifications to the
machinery, as discussed above. It is anticipated that approximately 4% - 5%
of annual gross revenues will be expended for product research, development
and marketing.
NINE MONTH PERIOD ENDED FEBRUARY 29, 2000 COMPARED TO THE NINE MONTH PERIOD
ENDED FEBRUARY 28, 1999
General and administrative expenses for the nine months ended
February 29, 2000 decreased $2,907,522 over February 28, 1999 primarily due
to a lower cost of consulting services. Consulting costs were $1,596,000 for
the nine months ended February 29, 2000, which is a decrease of $2,767,000
from the nine months ended February 28, 1999.
Interest expense declined $61,338 from $199,287 for the nine months
ended February 28, 1999 to $137,949 for the nine months ended February 29,
2000. The decrease is attributable to the reduction in notes payable.
Management negotiated a settlement of certain delinquent notes payable in the
prior period through foreclosure proceedings, cash payments or part cash,
part Common Stock.
Other income in the nine months ended February 28, 1999 was
primarily rental income from leasing a portion of its plant facilities. The
plant was sold to a related party in April 1999 and PalWeb leases back only
that portion of the facility it utilizes. Because PalWeb holds an option
expiring April 2002 to repurchase the property, the transaction was recorded
as a
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financing arrangement wherein the plant remains an asset on the balance sheet
until such time as the option expires without being exercised. The
significant item in other income in the nine months ended February 29, 2000,
is a gain on settlement of outstanding liabilities.
Principally as a result of the above, PalWeb had a net loss of
$2,245,228 for the nine months ended February 29, 2000 compared to $5,140,432
for the nine months ended February 28, 1999, a decrease of $2,895,204.
YEAR ENDED MAY 31, 1999 COMPARED TO THE YEAR ENDED MAY 31, 1998
Salaries and benefits were $298,414 in 1999 compared to $448,176 in
1998, for a decrease of $149,762. The decrease is principally due to the
termination of a marketing person who was employed during 1998. Other general
and administrative expenses increased $4,801,226 from $660,383 in 1998 to
$5,461,643 in 1999. This increase is primarily due to consulting costs which
were $5,013,000 in 1999, including $4,100,000 paid to an affiliate of the
Chairman and President, and $222,000 in 1998 for an increase of $4,791,000.
Consulting costs were payments principally through the issuance of common
stock to individuals to assist the company in attaining its goals of product
development and the financing to achieve commercial production levels.
Consulting costs in 1999 were incurred to address difficulties in
connection with a contract to provide manufacturing equipment to a
third-party customer due to the absence of available funding and other
reasons. As a result, in January 1999, PalWeb and PPP entered into a
consulting agreement with Paceco Financial Services, Inc. ("PFS"), an entity
owned by Paul Kruger, in which PFS provided $189,000 in cash to PalWeb and
agreed to provide comprehensive management assistance to PPP in exchange for
the issuance of 41 million shares of PalWeb Common Stock. PalWeb recorded an
expense of $4.1 million in connection with this transaction, which was equal
to the estimated fair value of the shares issued at that time. The entire
amount was expensed in 1999 as there was no contractual requirement as to
term and PalWeb's need for services and financial support was immediate to
continue its operations. This transaction was entered into between PFS and
the former management of PalWeb and PPP and was an arms length negotiated
transaction. This transaction was negotiated at a time when PalWeb was in
serious financial difficulty. The services performed included strategic
planning, marketing, general consulting and management services, including
recovery of shares issued to other parties in transactions potentially
detrimental to PalWeb.
In 1998, the Company incurred a charge to operations to write down
certain investments due to impairment for a total of $3,456,231. There was no
corresponding charge in 1999.
Interest expense increased $52,237 from $189,527 in 1998, to
$241,764 in 1999. The increase is primarily due to the issuance of long-term
notes payable for the acquisition of the plant and other real estate.
Because of the above, the loss before discontinued operations and
extraordinary gain increased $1,223,538 from a loss of $4,807,184 in 1998 to
a loss of $6,030,725 in 1999.
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In December 1997, PalWeb acquired PPP in a reverse acquisition
whereby the stockholders of PPP gained majority control of PalWeb through the
exchange of stock. Under the terms of the reverse acquisition contract, the
prior assets of PalWeb, primarily engaged in the business of energy services,
were to be spun off to the previous stockholders of PalWeb. PPP was engaged
in the development of plastic pallets and plastic injection molding systems
and the primary interest in the acquisition was to acquire a shell
corporation that was publicly held. However, the energy services were
distributed to PalWeb's stockholders, by a distribution of the stock of the
Union Group on a pro rata basis, on November 10, 1998. Because the operation
of energy services was a different segment from the continuing operations of
PalWeb/PPP, the operations of energy services is classified as discontinued
operations. The loss for 1998 totaled $849,761 which, included estimated
closing costs of $130,688.
PalWeb was obligated on two promissory notes payable totaling
$830,057 as of May 31, 1998. During 1999, PalWeb negotiated settlements on
these debts through cash payments, issuance of Common Stock, and foreclosure
resulting in a gain of $68,616. This gain is classified as an extraordinary
gain.
As a result of all of the foregoing, the net loss of $5,969,409 in
1999 was an increase of $312,464 over the net loss of $5,656,945 in 1998.
YEAR ENDED MAY 31, 1998 COMPARED TO THE PERIOD FROM INCEPTION (NOVEMBER 20,
1995) TO MAY 31, 1997
Research and development expenses were $406,943 in 1997 and $0 in
1998. In 1997, PPP engaged a design engineer to design and oversee the
development of an injection molding system process including molds to produce
plastic pallets. This phase was complete as of May 31, 1997.
Salaries and benefits in 1998 totaled $448,176, compared to $247,516
in 1997, an increase of $200,660. The increase was primarily attributable to
the addition of a marketing person.
Depreciation expense in 1998 was $157,656, compared to $96,871 in
1997, an increase of $60,785. The expense in 1997 generally reflects a
one-half year's depreciation since it is the primary acquisition year.
Other general and administrative expenses for 1998 and 1997 were
$660,383 and $685,695, respectively. The net change was not significant.
In 1998, PalWeb recognized impairment losses of $3,456,231.
Management determined that the molds for the original pallet design were
obsolete due to design deficiencies in the product and recognized an
impairment charge of $184,982 to operations. In addition, a loss in the
amount of $126,249 was recognized to write down a milling machine that was
sold in June 1998 to net realizable value. PalWeb also recognized impairment
in the amount of $3,145,000 on its investment in 20% of the issued and
outstanding stock of Vimonta AG, a Swiss
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corporation, that is a marketing logistics company. This adjustment was made
after current management reviewed this acquisition and determined that
Vimonta AG was a startup company with no material assets or tangible net
worth. The original valuation of the stock of Vimonta AG, made by PalWeb's
prior management at the time of the acquisition, was based on Vimonta's
income potential, as perceived by the Board of Directors at that time.
Primarily because of all of the foregoing factors, loss before
discontinued operations increased $3,477,666, from $1,329,518 in 1997 to
$4,807,184 in 1998.
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
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