SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the fiscal year ended June 30,
1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from
__________ to __________.
Commission file number 2-99212-A
PALLET MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 59-2197020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One South Ocean Boulevard Suite 305
Boca Raton, Florida 33432
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (561) 338-7763
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
None.
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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $21,052,000
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of June 30, 1997 -
$1,212,000.
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Part I
Item 1. Description of Business.
Introduction
Pallet Management Systems, Inc. (the "Company") is engaged in the
manufacture, sale, repair and retrieval of wooden, plastic and metal pallets as
well as other product packaging required for the shipment of goods. The Company
was formed by the combination of several companies and has operations in Florida
and Virginia.
A pallet is a portable platform for the storing or moving of cargo or
freight. Most commonly made of wood, its standard size is approximately a four
feet square and is designed to be transported by a forklift. The pallet, a
little known entity to the consumer, is a key factor to retail and industrial
distribution. Without pallets, shipping by air, land and sea would be severely
hampered. The pallet industry in the United States has grown to more than a $6
billion ($6,000,000,000)industry and plays a vital roll in transportation today.
Many small, localized and/or specialized companies that usually have an
operational radius of less than 100 miles, none of which individually has any
appreciable market impact, characterize the industry.
The Company focuses on total solutions for its customers' pallet
requirements through comprehensive products and services including manufacturing
and distributing new and recycled pallets and pallet remediation. (Pallet
remediation is the systematic collection, repair, return and reuse of pallets
and other types of packaging.) Due to rising costs and increasing competition,
the Industry's gross profit for new pallets has decreased over the years.
Consequently, the Company is shifting its focus to remediation services.
History of the Company
The Company was incorporated in the State of Florida on June
10, 1982, under the name Air Bags, Inc. From inception through
October 7, 1994, when the Company merged with Pallet Recycling
Technologies, Inc. (PRTI), the Company was in a development stage,
expending funds investigating business opportunities. The Company
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changed its name to Pallet Management Systems, Inc. in November
1994.
On June 29, 1995, pursuant to a Merger Agreement and Plan of
Reorganization among Abell Lumber Corporation, a Virginia corporation (Abell)
and the Company, (i) the shareholders of Abell acquired 67.33% of the
outstanding shares of the Company's Common Stock and (ii) Abell became a wholly
owned subsidiary of the Company.
The Pallet Industry
The pallet industry is considered part of the overall transportation
packaging industry and is critical to global commerce. This industry is
extremely fragmented, substantially free from government regulation and has no
market dominator. Considered a "staple" industry, pallets are an integral part
of retail and industrial distribution. Nearly every item manufactured or
processed is shipped and/or stored on pallets.
According to the National Wooden Pallet and Container Association
(NWPCA), in 1995, there were approximately 411 million new wood pallets produced
in the United States with hundreds of millions sold on a used or recycled basis.
New pallet sales are in excess of $4 billion annually. Sales of recycled pallets
have increased substantially over the past few years as this segment of the
pallet industry continues to develop.
Due to the high cost of plastics and other materials, wood is the
preferred and more environmentally conscious material for pallets. However, some
customers require plastic pallets for closed loop supply systems where pallet
sanitation is critical and accountability can be controlled. According to a
NWPCA survey, 99% of all pallet users reported using wood pallets. Of the 99%
respondents, only 2.5% of those surveyed reported using a material other than
wood.
PRIMARY INDUSTRY USERS OF PALLETS:
1) food and beverage 3) steel and metal 5) chemical and fluid
2) paper and fiber 4) automotive 6) printing
The industry is highly fragmented with over 3,000 pallet
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companies scattered across the United States. Most of these companies attempt to
specialize in only one segment of the industry: new pallet production,
pallet sales or pallet rental. Pallet companies, except for those involved in
pallet rental, are generally small independent businesses that operate within a
limited radius from their facilities. The fragmentation of the industry has
become frustrating to pallet users. As their demand for service increases, they
become burdened by attempting to integrate independent companies to service
their logistical needs.
Customers are quickly recognizing the significant benefits of
returnable packaging and are searching for an integrated system that can
effectively manage and service these needs. One response to this demand for
service has been the development of pallet rental pools. However, this response
will only solve a small piece of the packaging industry dilemma.
Products and Services
The Company fulfills customer demands through a variety of products and
services.
Products
New Wood Pallets
The Company manufactures, sells, and distributes new pallets in large
quantities. New wood pallets are manufactured at the Company's Lawrenceville,
Virginia plant, with a capacity of 10,000 units per day. Due to rising
costs and increased competition, the Company's gross profit per pallet has
decreased over time.
Other Transport Packaging
The Company functions as a wholesale distributor of various returnable
transport packaging. These items include plastic and metal pallets; plastic,
collapsible bulk boxes; wood, plastic, and metal slave pallets; wooden boxes and
crates. Profits vary by item as these products are purchased in the market. Due
to lack of demand, sales of pallets made from materials other than wood are
minimal.
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Recycled Wood Pallets
Recycled pallets generally come from companies that are "end users".
These end users accumulate thousands of unwanted pallets, which the Company
retrieves, sorts, processes and are sold as recycled pallets, disassembled for
repair components or mulched.
Services
Third Party Pallet Management
The Company offers on-site pallet repair and sorting systems that
provide professional management and significant savings to large volume
customers. These operations can produce substantial savings for customers by
reducing their costs through better utilization of their pallet resources.
Pallet Retrieval
Provides customers with a system for lowering pallet cost-per-trip by
creating a closed-loop return system between the manufacturer, their customers,
and their vendors. The Company currently manages several retrieval programs on a
regional basis. Pallet retrieval is the primary focus of the Company's
expansion program.
Pallet Warehousing
At select locations, the Company sorts and stores pallets for customers
indoors to provide higher quality recycled pallets. Margins are low; however,
this service adds value and provides a competitive advantage.
Management anticipates that pallet warehousing will be in higher demand in the
future as pallet users increase demand for moisture controlled pallets.
Suppliers
There is adequate supply of the Company's raw material components. The
primary raw materials are hardwood, softwood, used lumber, used pallets and
nails. The Company has several principal suppliers, which are rotated depending
on availability. The Company currently buys approximately 25% of its lumber from
Clary Lumber Co., Inc.,("Clary") at or below market price. Clary is owned by
John C. Lucy, Jr., a majority shareholder and director of the Company.
End users are the principal suppliers of used pallets.
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Depending on the season and other circumstances, used pallet supplies vary in
cycles from region to region.
Operations
Operations are grouped into the Mid Atlantic and South Eastern regions,
which consist of geographical areas encompassing several states. These regions
manage local operations and include manufacturing, inventory, transportation,
manpower, customer pallet usage, handling systems, program costs, pricing
structure and payroll. Accounting functions are centralized in Lawrenceville,
VA. All functions are reviewed and monitored at the corporate office in Boca
Raton, Florida.
The Company services customers with two different types of
operational facilities: Repair Depots and Manufacturing Plant.
Repair Depots
The Company has regional Repair Depots in Virginia and Florida. These
facilities are a minimum of 40,000 sq. ft. of covered workspace with indoor
storage and up to 8 acres of outside storage. The Repair Depot is designed to
sort, repair and store pallets. It is automated, employs approximately 75 people
and is located in markets where existing customers have major distribution
centers and pallet retrieval systems. The Repair Depot in Florida has several
satellite operations that provide pallet repair and pallet storage.
Manufacturing Plant
The Company currently has one manufacturing plant located in Virginia.
This facility is capital intensive with "state of the art" automation for new
pallet construction. The plant has approximately 125 employees and maintains a
transportation fleet for product delivery and repair service.
Marketing and Distribution
The Company has a customer base of over 350 customers, many of which
are Fortune 500 companies, including Allied Signal, Chep USA, Coca-Cola, Dupont,
Food Lion, Metal Container, Wal-Mart, Walt Disney World, Winn-Dixie and various
governmental agencies.
The marketing plan of the Company focuses on service, and the
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related cost savings for our customers. Service, no longer means just delivering
pallets on time, it also means helping customers manage their packaging needs.
One value-added aspect of this service is the Company's ability to process
rental, non-rental and odd sized pallets. Normally a pallet inventory of varying
sizes is a logistical problem for the customer.
Seasonality
Sales remain relatively constant with minor fluctuations around major
holidays and during the summer months.
Competition
Competition consists mainly of small, single-location pallet companies
with limited resources; however, there are several large pallet
manufacturing/distribution plants. During 1997, two larger manufacturing
companies and a recycling company merged to form a public company.
Employees
The Company has approximately 240 employees including: production
workers, drivers, facility management, sales, customer service, administrative
support and executive personnel.
Government Regulations
There are no government regulations applicable to the manufacture and
recycling of wooden pallets.
Item 2. Description of Properties
Lakeland, FL, Repair Depot: 2420 New Tampa Hwy. This facility was
opened in April 1996 at a 63,000 sq. ft. facility on five acres
with a five-year lease terminating in March 2001. It employs
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seventy-five people and can process all types of pallets on the
automated line. This facility supports two satellite operations
located in Citra and Orlando, Florida. These satellite operations
contain a 5,000 sq. ft. building on five acres leased for five
years and a 15,000 sq. ft. building on three acres leased for
eight years. These leases expire July, 2000, and August, 2004,
respectively.
Lawrenceville, VA, Manufacturing Plant: 10324 Liberty Road.
Substantially all new pallet manufacturing is performed at this
company owned facility on automated equipment. In addition,
pallet recycling and repair services occur at this location which
has 60,000 sq. ft. of manufacturing buildings located on 70 acres,
a 3,000 sq. ft. office building and employs over 125 people.
Petersburg, VA, Repair Depot: 1925 Puddledock Road. This facility
has the capacity to process, repair, and store all types of
pallets. It contains a 40,000 sq. ft. warehouse on eight acres of
Company-owned property. At June 30, 1997, this property is subject
to a $417,000, 2% above prime mortgage that matures in October
2005. There are approximately forty people employed at this
facility which contains "state of the art" automated equipment.
Corporate Offices are located at One South Ocean Boulevard, Suite
305, Boca Raton, Florida. The Company leases 1,009 sq. ft. of
office space which expires in May 2000.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on April 30,
1997. The following people were re-elected to the Board of
Directors for a one year term: M. Bruce Adelberg, John C. Lucy,
Jr., John C. Lucy, III, Donald Radcliffe, Zachary M. Richardson,
Thomas Rohman, Esq., CPA and Jack Simon. Each board member
received 3,472,385 votes in favor and 22,666 votes against. The
remaining issues are as follows:
Ratification of Appointment of Independent Auditors
3,515,001(For) 6,000(Opposed) 4,000(Abstained)
Approval of the Company's Omnibus Stock Plan dated April 1, 1997.
3,489,277(For) 25,324(Opposed) 10,400(Abstained)
Approval to Amend the Company's Articles of Incorporation to
authorize 7,500,000 shares of Preferred Stock
3,497,277(For) 7,324(Opposed) 400(Abstained)
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No other matters were submitted to a vote of shareholders at this annual
meeting.
Effective September 1997, M. Bruce Adelberg, Thomas Rohamn, Esq., CPA and Jack
Simon have resingned from the Board of Directors. These gentlemen have
resigned siting insufficient Director and Officer's Insurance coverage.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the NASD electronic bulletin
board under the symbol PALT. The following provides each quarterly high and low
bid quotations reported for the Company's Common Stock during the two fiscal
years ended June 30, 1997 and 1996:
Bid Prices
Period High Low
Fiscal Year 1997
First Qtr. (9/96) 3 1/2
Second Qtr. (12/96) 1 1/16 1/4
Third Qtr. (3/97) 3/4 1/2
Fourth Qtr. (6/97) 13/16 7/16
Fiscal Year 1996
First Qtr. (9/95) 10 3/4 10 1/2
Second Qtr. (12/95) 10 1/2 8
Third Qtr. (3/96) 8 7
Fourth Qtr. (6/96) 7 1/4 5/8
The quotations in the foregoing table represent prices between dealers
and do not include retail markup, markdown, or commissions paid and may not
represent actual transactions. Such quotations are not necessarily
representative of actual transactions or of the value of the Company's
securities.
As of June 30, 1997, there were 120 holders of record of the Company's
Common Stock. The Company has not declared or paid any dividend on its Common
Stock in the last two fiscal years.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
(000) (000) (000)
Net Sales $21,052 $16,848 $29,444
Net Loss 883 1,778 51
Net Loss per common share .19 .42 .01
Total assets 5,783 5,905 N/A
Long Term Obligations 1,209 1,746 N/A
</TABLE>
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Item 7. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis should be read in conjunction
with the Financial Statements appearing elsewhere in this Report.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996:
For the year ended June 30, 1997 net sales increased 25% to $21,052,000
from $16,848,000 for the prior year. This increase was due to an increase in new
pallet sales, which accounted for 68% of net revenues, as opposed to 59% of net
revenues the previous year. The increase in new pallet sales resulted from a
significant increase from one major customer, which accounted for approximately
44% of 1997 net sales.
Cost of sales for 1997 was $19,554,000 (93 % of net sales) as compared
to $15,981,000 (95% of net sales) for 1996. This percentage decrease is
attributable to efficiencies gained in new pallet production, a result of larger
"production runs" and cost containment. During 1997, the Company experienced
rising cost of lumber which resulted in increased product cost that could not be
entirely passed onto the customer.
Selling, general and administrative expenses were $1,939,000 (9% of net
sales) in 1997 as compared to $2,816,000 (17% of net sales) in 1996. This
decrease is due to cost savings realized through consolidation of both
operational and administrative functions.
Interest expense decreased to $365,000 in 1997 from $401,000 in 1996.
This decrease is due to improved cash flow from new pallet operations,
remediation in Florida, the conversion of $607,000 of debt to equity and a
tax refund of $518,000.
The net loss for 1997 was $883,000 compared to $1,778,000 for 1996.
This reduction in loss was due to increased sales volume, improved operational
efficiencies and cost containment strategies implemented by management.
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In 1997, the Company wrote-off $100,000 of costs associated with an
attempted debt restructuring and private placement; debt conversion expense was
recorded in the amount of $72,000 and $102,000 gain on the sale of rental
property to a related party was treated as additional paid in capital. Hence,
the Company's net loss exclusive of these items was $609,000.
Liquidity and Capital Resources:
The Company's financing needs depend primarily upon sales volume and
controllable variable expenses. During 1997, the Company financed its working
capital needs through new borrowings.
The Company had cash on hand of $237,000 at the end of 1997, versus
$17,000 at the beginning of the fiscal year. This cash increase is attributable
to the receipt of an income tax receivable of $518,000, decreases in
inventory by $118,000, prepaid expenses by $46,000, other assets by $10,000,
an increase in accounts payable by $191,000, proceeds from sale of
property, plant and equipment of $206,000 and $524,000 net proceeds from
lenders. These cash increases were offset by decreases in accounts
receivable by $573,000 and decreases in accrued liabilities by $31,000,
deferred taxes by $97,000 and purchase of property, plant and equipment by
$387,000.
The Company completed a new financing agreement with NationsBank on
September 30, 1995 which increased the line of credit available to the Company
to $2.5 million, from the former $1.2 million line, at an interest rate of prime
plus 2% and is secured by priority lien upon substantially all the assets of
Abell and is guaranteed by the majority stockholder. Advances are based on 80%
of eligible accounts receivable and 50% of inventory. The line of credit has a
three-year term with provisions for annual renewals thereafter. In addition, the
Company obtained a $500,000 ten year term loan from NationsBank for the
Petersburg, Virginia facility at prime plus 2%. The proceeds of this loan were
used to repay short-term indebtedness. The Company is current with this loan as
the loan is to be repaid in equal monthly installments of principal plus
interest. At June 30, 1997, the Company is in violation of certain debt
covenants on the line of credit and term loan. Consequently, NationBank debt is
classified as current debt on the Company's financial statements.
The Company is in the process of seeking a replacement lending institution.
The Company believes that it will have sufficient capital and borrowing
power to sustain operations as it seeks new financing
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due to significant cost cutting measures and increased sales volums through
June 30, 1998.
During 1997, unprofitable operations were closed in Douglas, Georgia
and Hartford, Connecticut. Operations in the Baltimore, Maryland have been
turned over to an affiliated company. As a result of these actions, the Company
eliminated a layer of management infrastructure and changed focus to operational
efficiency measures. In addition, the Company's Chairman and CEO and its'
President have each reduced their salaries to $52,000 annually and assumed the
operational responsibilities of the COO who resigned at the beginning of 1997 to
pursue other non-pallet interests.
Automation has been installed at the Lakeland facility, which has
resulted in reduced labor costs and increased sales capacity. The Orlando
facility increased sales capacity by building a 15,000 sq. ft. repair and
storage building for a major customer while attempting to develop the used
pallet market.
Item 8. Financial Statements
(i) Report of Independent Certified Public
Accountants June 30, 1997..............................F-1
(ii) Report of Independent Certified Public
Accountants June 30, 1996......................... ..F-2
(iii) Consolidated Balance Sheet as of
June 30, 1997...................................... .F-3
(iv) Consolidated Statements of Operations
for the years ended June 30, 1997 and 1996........ .F-4
(v) Consolidated Statement of Stockholders'
Equity for the years ended June 30, 1997 and 1996......F-5
(vi) Consolidated Statements of Cash Flows for
the years ended June 30, 1997 and 1996................ F-6
(vii) Notes to Consolidated Financial Statements..............F-7
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Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
On June 12, 1997, the Company notified Grant Thornton LLP, that it was
changing auditors. The change in auditors was approved by the Company's Board of
Directors. The reason for the change of auditors at this time is that the
Company desired to reduce its auditing costs in order to conserve cash. The
change is part of a general cost reduction program begun by the Company. There
were no disagreements on any manner of accounting principles or practices of
financial statement disclosure or audit scope or procedure. None of the events
listed in paragraphs (A) through (D) of Item 304 (a) (1) (v) occurred. The new
auditors engaged by the Company are Kaufman Rossin & Co.
There were no disagreements on any manner of accounting principles or
practices of financial statement disclosure during the most recent financial
statements included herein.
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PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
As of June 30, 1997, the executive officers and directors of the
Company were as follows:
Name and Address Age Position
John C. Lucy, III 39 Chairman of the Board
Of Directors and CEO
Zachary M. Richardson 42 President, Secretary,
Treasurer and Director
John C. Lucy, Jr. 63 Director
Doanald Radcliffe 52 Director
Each director will serve until the next annual meeting of shareholders
and until his or her successor is duly elected and qualifies. Each officer will
serve until the first meeting of the Board of Directors following the next
annual meeting of the shareholders and until his or her successor is duly
elected and qualifies.
John C. Lucy, III joined Abell on a full-time basis in 1980 after
graduating from Virginia Tech with a B.S. in business. Since June 29, 1995,
Mr. Lucy has served as Chairman and CEO of the Company. Five years prior, Mr.
Lucy was the president of Abell Industries. He has extensive experience in
pallet and lumber manufacturing and has spent many years with Abell focusing on
sales and marketing to large, national customers. In addition to being President
of Abell, an officer and director of the Company, he is President of Clary, a
hardwood lumber sawmill located in Gaston, North Carolina, and is Vice-President
of Blacksburg Enterprises, Inc., which operates Baskin-Robbins and Sub-Station
II franchises in Blacksburg, Virginia. Mr. Lucy has completed a two year term as
Chair of the National Wooden Pallet and Container Association (NWPCA) Military
Packing Task Force and three years as Chair of its Research Steering Committee.
<PAGE>
Zachary Richardson during the past nine years has been president of the
Company or one of its predecessor companies. He founded Skeezix Communications,
Inc., a professional consulting firm, in 1988 and PMSI of America, a pallet
company, in January 1992. Mr. Richardson became President and a Director of the
Company on October 7, 1994 when the Company merged with PRTI. Mr. Richardson has
been involved with management and sales for over 20 years. After graduating from
Franklin and Marshall College in 1977, he was commissioned in the United States
Navy and designated a Naval Aviator. He maintained his reserve status in the
Navy and retired from the reserves in 1997. Mr. Richardson is an active member
of the NWPCA and serves on the Recyclers Council Executive Committee.
John C. Lucy, Jr. founded Abell in 1966 after having worked in a family
lumber and pallet manufacturing business for approximately ten years. In 1969,
he acquired Clary to supply lumber to Abell, and remains the chairman of Clary.
In 1976, he acquired Shelbyville Enterprises that operated a motel/restaurant in
Shelbyville, Tennessee (sold in 1996). In 1980 he formed Blacksburg Enterprises
to operate food service operations in Blacksburg, Virginia. He attended Richmond
Polytechnic Institute for two years prior to serving two years in the military.
Donald Radcliffe has been a director of the Company since
April 25, 1985. Since June 1984, Mr. Radcliffe has served as the
Chief Operating Officer, Executive Vice President and Director of
World Wide Business Centers, a company which provides businesses
with office space and facilities. From June 1970 through June
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1984, Mr. Radcliffe was a partner in the accounting firm of Main Hurdman. In
addition, Mr. Radcliffe has served as President and Director of Radcliffe
Enterprises, Inc., a financial consulting company, since May 1982. Mr. Radcliffe
received his Bachelor of Science degree with honors from Lehigh University in
1967, and a Masters in Business Administration degree, with distinction, from
the Amos Tuck School, Dartmouth College. Mr. Radcliffe is also a certified
public accountant in the State of New York. Mr. Radcliffe intends to devote less
than 5% of his time to the affairs of the Company.
Item 11. Executive Compensation.
The following table sets forth the cash and cash equivalents paid
during the fiscal years ended June 30, 1995, 1996 and 1997 to all individuals
serving as the Company's executive officers during the last fiscal year.
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SUMMARY COMPENSATION TABLES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Name and Principal Position Year Annual Long-term
Compensation Compensation
Awards
Payouts
Salary Bonus Other Restricted Options LTIP All
($) (3) ($) ($) Stock Awards /SARs Other
------------------ ---------
John C. Lucy, III, 1997 56,883
1996 86,800
1995 114,758 64,000
Chairman (1) (4)
Zachary M. Richardson, 1997 57,480
1996 100,117
1995 81,453
President, Director (2) (4)
================================ ========= ================== =========
</TABLE>
(1) Mr. Lucy's compensation was paid to him by Abell, which became a
subsidiary of the Company on June 29, 1995. He was elected Chairman
and CEO of the Company on June 29, 1995.
(2) The compensation paid to Mr. Richardson was paid by PRTI and its
predecessors prior to the Company's merger with PRTI on October 7,
1994.
(3) Includes medical insurance reimbursements.
(4) Messrs. Lucy and Richardson reduced their annualized salaries from
$95,000 to $52,000 in June 1996.
The Company has a Compensation Committee that determines the basis for
the value of an officer or a contracted service to the Company. Compensation
paid by other like size companies for comparable services is used as a
benchmark. However, other factors specific to each determination have an impact
on the executive's compensation. The Company has an audit committee, which will
select the independent certified public accountants who audit the Financial
Statements at year-end and review the internal controls of the Company. The
findings of the independent certified public accountants will be communicated in
a formal report to the audit committee.
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The Company has entered into similar five-year employment agreements
expiring on June 30, 2000 with John C. Lucy, III, and Zachary M. Richardson.
These agreements provide for an annual base salary of $95,000. In addition, the
agreements are anticipated to provide certain allowances and entitlements. These
entitlements include, but will not be limited to, an automobile, accident and
health insurance, disability insurance, and contributions to retirement plans.
Messrs. Lucy and Richardson have elected to temporarily reduce their
salary to an annualized $52,000 for the unforeseeable future.
The Company has key man life insurance on John C. Lucy, III, and
Zachary M. Richardson. The Company has no key man insurance on the life of
any other officer or director.
The Company has entered into a consulting agreement with John C. Lucy,
Jr. to provide consulting services to the Company. This agreement provides for a
consultant fee of $104,000 per year, an automobile allowance and reimbursement
of reasonable out-of-pocket expenses incurred in connection with any activities
under this agreement. In February 1996, the agreement and services were
temporarily suspended through June 30, 1997 by mutual consent; accordingly,
no payments were made during that time. Management is currently reviewing this
agreement.
No compensation is paid to any director for his or her services.
However, the Company may authorize travel expenses for attendance at each
meeting of the Board. Under the Company's Articles of Incorporation and By-Laws,
the Directors may set their own compensation for service as officers.
The Company has adopted a combined stock option and appreciation rights
plan to attract and to induce officers, directors and key employees of the
Company to remain with the Company. The plan will provide for options which will
qualify as incentive stock options under Section 422(a) of the Internal Revenue
Code of 1986, as amended, as well as for options which do not so qualify. No
more than fifteen percent (15%) of the Common Stock outstanding will be reserved
for issuance upon exercise of options to be granted from time-to-time. On July
1, 1997, the Company granted 783,825 ten year stock options with an exercise
price of $.50 per share. These options vest over a four-year period and expire
in ten years or three months after separation of service, whichever occurs
earlier. 549,400 of the options granted were granted to Mr. Lucy, III and Mr.
Richardson. 479,400 of the options granted to these key executives are
non-qualified stock options. The remaining 234,425 options were granted to other
key personnel.
19
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The table below sets forth information with respect to the beneficial
ownership of the Common Stock by (i) each person who is known to the Company to
be the beneficial owner of more than five percent of the Common Stock, (ii) all
directors and nominees, (iii) each executive officer, and (iv) all directors and
executive officers as a group. Unless otherwise indicated, the Company believes
that the beneficial owner has sole voting and investment power over such shares.
The Company does not believe that any shareholders act as a "group", as that
term is defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended. Currently, the Company had issued and outstanding 4,849,956 shares of
Common Stock and as of June 30, 1997,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Amount and
Name and Address Nature of Percent
Of Beneficial Owner (1) Beneficial Of Class
Ownership
John C. Lucy, III (2&4) 513,259 9.29%
Zachary Richardson (2&5) 548,898 9.94%
John C. Lucy, Jr. (3&6) 2,466,447 44.60%
Donald Radcliffe (3&7) 75,000 1.36%
All officers and Directors 3,600,604 65.19%
Directors as a group (1-7)
Dawn LaPuasa (8) 436,519 7.90%
____________ _______
4,037,123 73.09%
(1) The address of all beneficial owners in this table is Suite 305, One
S. Ocean Boulevard, Boca Raton, Florida 33432.
(2) An officer and director.
(3) Director only.
(4) Includes 355,389 shares owned; 92,000 shares held in custody
for children; 10,870 five year warrants with $1.25 exercise
price, expire in December 2001 and 55,000 ten year stock
options granted on July, 1, 1997 with $.50 exercise price and
expire July 2007.
(5) Includes 458,898 shares owned; 35,000 five year warrants with $1.25
exercise price, expire in December 2001 and 55,000 ten year stock
options granted on July, 1, 1997 with $.50 exercise price and expire
July 2007.
Includes 35,000 shares owned; 25,000 five year warrants with $1.25
exercise price, expire in December 2001 and 3,000 ten year stock
options granted on July, 1, 1997 with $.50 exercise price and expire
July 2007.
(6) Includes 1,762,761 shares owned; 400,000 shares owned by
Clary; 300,000 and 200,000 five year warrants with $1.25
exercise price, owned by Mr. Lucy and Clary respectively,
expire in December 2001 and 3,000 ten year stock options
granted on July, 1, 1997 with $.50 exercise price and expire
July 2007.
(7) Includes 57,000 shares owned; 15,000 five year warrants with
$1.25 exercise price, expire in December 2001 and 3,000 ten
year stock options granted on July, 1, 1997 with $.50 exercise
price and expire July 2007.
</TABLE>
20
<PAGE>
(8) Includes 344,519 shares owned and 92,000 shares held in
custody for children (Not an officer or director)
Item 13. Certain Relationships and Related Transactions.
Clary, which is owned by the family of John C. Lucy, Jr., a Director
and principal shareholder of the Company, sold lumber to Abell in the amounts of
$2,895,000 and $2,178,000 which is 25% and 32% of Abell's lumber purchases for
the years ended June 30, 1997 and 1996 respectively. Abell sold approximately
$10,000 and $159,000 of lumber to Clary in the years ended June 30, 1997 and
1996 respectively. The Company believes that these transactions were made at or
below market prices in the ordinary course of business. Clary has loaned the
Company money to acquire property and provide additional working capital during
1997. As of June 30, 1997, Clary converted $437,000 of trade debt into a 2 year
12% note. The Company has paid $57,000 in salary reimbursement to Clary for
compensation to John C. Lucy III who performs services for both Clary and the
Company. In August 1996, Abell sold to Clary real estate at the market price
of $200,000 to increase working capital of the Company. Book value of the
real estate was approximately $98,000 net of depreciation at the date of the
sale. The $102,000 gain was recorded as additional paid in capital.
The majority shareholder has personally guaranteed to NationsBank both
the $2.5M Line of Credit and the $500,000 mortgage note on the Petersburg, VA
building.
On September 27, 1996 the board of directors approved a 2 for 1 stock
split to shareholders of record dated October 3, 1996, payable as of November
15, 1996. Prior to the declaration of the split, certain inside shareholders who
held in excess of 65% of the outstanding shares waived their rights to receive
additional shares from this stock split.
The Company's board of directors approved on December 3, 1996, a dollar
for dollar exchange of outstanding notes into newly formed "A Units". Each A
Unit consists of one share of the Company's common stock, and one two-year
warrant to purchase one share of the Company's common stock at an exercise price
of $1.25. At the time of the offer, the Company had notes valued at $682,000 and
a commitment from the majority shareholder to invest an additional $300,000 into
the Company prior to the end of the calendar year. From the $982,000 eligible
for this exchange offer, $607,000 was converted into 607,000 A Units. $577,000
of the debt converted was held by Company board members.
21
<PAGE>
Item 14. Exhibits and Reports on Form 8-K
Exhibits
(I) Form 8-K Changes in Registrant's Certifying Accountant filed June
17, 1997
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this Annual Report and any
subsequent amendments thereto to be signed on its behalf by the undersigned,
thereunto duly authorized.
PALLET MANAGEMENT SYSTEMS, INC.,
a Florida corporation
By:
John C. Lucy, III, Chairman
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed below by the following persons in their respective capacities
with the Registrant and on the dates indicated.
Signatures Title Date
Chairman,
John C. Lucy, III CEO and Director
President,
Zachary M. Richardson Secretary, Treasurer
and Director
John C. Lucy, Jr. Director
Director
Donald Radcliffe
23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Pallet Management Systems, Inc.
We have audited the accompanying consolidated balance sheet of Pallet Management
Systems, Inc. and Subsidiaries as of June 30, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pallet Management
Systems, Inc. and Subsidiaries as of June 30, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B, the Company is
in default of certain debt covenants which could result in the lender demanding
payment under the Company's long-term debt agreements, raising substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note B. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KAUFMAN ROSSIN & CO.
Miami, Florida
August 29, 1997
F-1
<PAGE>
GRANT THORNTON
Suite 1200
777 Brickell Avenue
Miami, Fl 33131-2867
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Pallet Management Systems, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Pallet Management Systems, Inc. and
Subsidiaries (a Florida corporation) for the year ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Pallet Management Systems, Inc. and Subsidiaries for the year ended June 30,
1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B, the Company is
in default of certain debt covenants which could result in the lender demanding
payment under the Company's long-term debt agreements, raising substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note B. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Grant Thornton LLP
Miami, Florida
September 4, 1996
F-2
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash $237,447
Accounts receivable, net of allowance for doubtful 1,724,957
accounts of $37,123
Inventories 902,396
Prepaid expenses 98,079
Total current assets 2,962,879
Property, plant and equipment - net 2,780,882
Other assets 39,666
$ 5,783,427
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $
2,507,648
Accounts payable 1,215,076
Accrued liabilities 583,966
Total current liabilities 4,306,690
LONG-TERM LIABILITIES
Deferred income taxes 70,888
Long-term debt 1,137,976
1,208,864
STOCKHOLDERS' EQUITY
Preferred stock, authorized 7,500,000 shares at $.001 par
value; no shares issued and outstanding -
Common stock, authorized 10,000,000 shares at $.001 par
value; issued and outstanding 4,849,956 shares 4,850
Additional paid-in capital 2,821,368
Accumulated Deficit (2,558,345)
____________
267,873
_____________
$ 5,783,427
The accompanying notes are an integral part of these statements.
F - 3
</TABLE>
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
Net sales $21,051,818 $16,847,597
Cost of goods sold 19,553,853 15,980,771
Gross profit 1,497,965 866,826
Selling, general and administrative 1,938,548 2,816,045
expenses
Operating loss (440,583) (1,949,219)
Other income (expense)
Other income 23,878 82,738
Other expense (563,356) (400,773)
Other income (expense) (539,478) (318,035)
Loss before income taxes (980,061) (2,267,254)
Income tax benefit 97,084 489,049
Net loss ($882,977) ($1,778,205)
Net loss per common share ($.19) ($.42)
</TABLE>
The accompanying notes are an integral part of these statements.
F - 4
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Retained
Additional Earnings
Common Stock Paid-In (Accumul-
ated
Shares Amount Capital Deficit) Total
Balance at July 1, 4,099,216 $4,099 $1,611,499 $102,837 $1,718,435
1995
Issuance of common 144,000 144 429,888 - 430,032
stock
Net loss - - - (1,778,205) (1,778,205)
Balance at June 4,243,216 4,243 2,041,387 (1,675,368) 370,262
30, 1996
Contributed
capital on sale of
building to - - 102,326 - 102,326
related party
Conversion of debt
to
common stock 606,740 607 677,655 - 678,262
Net loss - - - (882,977) (882,977)
Balance at June 4,849,956 4,850 $2,821,368 ($ 2,558,345) $ 267,873
30, 1997
</TABLE>
The accompanying notes are an integral part of these statements.
F - 5
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
Cash flows from operating activities:
Net loss ($882,977) ($1,778,205)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 417,331 384,077
Loss on sale and abandonment of 61,283 -
property, plant and equipment
Bad debt expense 28,736 51,542
Debt conversion expense 71,522 -
(Increase) decrease in operating
assets:
Accounts receivable (572,625) 336,052
Inventories 117,847 554,630
Prepaid expenses 46,118 (119,271)
Income tax receivable 517,771 (517,771)
Other assets 9,673 36,276
Increase (decrease) in operating liabilities:
Accounts payable 191,485 (416,125)
Accrued liabilities (30,880) 334,094
Income taxes - (2,346)
Deferred income taxes (97,084) 19,171
Net cash used in operating activities (121,800) (1,117,876)
Cash flows from investing activities:
Purchase of fixed assets (386,967) (801,500)
Proceeds from sale of property, plant 103,318 -
and equipment
Net cash used in investing activities (283,649) (801,500)
Cash flows from financing activities:
Proceeds under line of credit, net 420,172 258,691
Proceeds from lenders 836,555 1,919,019
Repayments to lenders (733,048) (1,120,147)
Issuance of stock - 430,032
Contributed capital 102,326 -
Net cash provided by financing activities 626,005 1,487,595
Increase (decrease) in cash 220,556 (431,781)
Cash at beginning of period 16,891 448,672
Cash at end of period $ 237,447 $ 16,891
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 353,008 $ 404,054
Income taxes $ - $ -
Schedule of non-cash investing and financing activities:
In December 1996, the Company converted $606,740 of long-term debt to
common stock. Debt conversion expense of $71,522 was recognized as a result
of this transaction.
The accompanying notes are an integral part of these statements.
</TABLE>
F - 6
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows:
1. Nature of Operations
Pallet Management Systems, Inc. and Subsidiaries (the "Company"/"Pallet") is
principally engaged in the manufacture and repair of wooden pallets in
Florida and Virginia. The Company's revenues are derived primarily from the
sale of new and used pallets. The Company allows its customers
uncollateralized credit for various periods of time.
2. Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries Pallet
Recycling Technology, Inc. ("PRTI") and Abell Lumber, Inc.
("Abell"). Intercompany balances and transactions are eliminated
in consolidation.
3. Accounts Receivable
Trade receivable accounts are primarily located on the Eastern coast of the
United States and are principally comprised of large distributors, national
retail chains and major manufacturers. The Company evaluates each account
receivable balance to establish an estimate for uncollectible accounts.
4. Inventories
Inventories, consisting of raw materials, work in process, and finished
goods, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
5. Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Major renewals and improvements are capitalized. Repairs and
maintenance are expensed as incurred. Depreciation is computed by using the
straight-line method over the expected useful lives of the related assets
which are as follows:
Years
Machinery and equipment 5 - 15
Vehicles 5 - 10
Buildings and improvements 3 - 40
Furniture and equipment 3 - 10
F-7
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Estimates
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts and disclosures of assets and liabilities at the
date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The Company has recorded a deferred tax asset of approximately $1,082,000 at
June 30, 1997 which is offset by a valuation allowance of approximately
$960,000. Realization of the deferred tax asset is dependent on generating
sufficient taxable income in the future. The amount of the deferred tax
asset considered realizable could change in the near term if estimates of
future taxable income are increased.
7. Income Taxes
The Company accounts for income taxes under the liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statements carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
8. Earnings Per Share
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding. The total number of
such weighted average shares outstanding was 4,597,148 and 4,200,754 for the
years ended June 30, 1997 and 1996, respectively.
For the years ended June 30, 1997 and 1996 outstanding stock options were
not considered in the calculation of weighted average number of shares
outstanding as their effect would have been antidilutive.
9. Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure of
the estimated fair value of financial instruments. The carrying values of
cash, accounts receivable and accounts payable approximate fair value due to
the short-term maturities of these instruments. The carrying value of debt
approximates fair value due to the length of the maturities, the interest
rates being tied to market indices and/or due to the interest rates not
being significantly different from the current market rates available or
offered to the Company.
10. Stock Options (SFAS 123)
Options granted under the Company's Stock Option Plan are accounted for
under APB Opinion 25, Accounting for Stock Issued to Employees and related
interpretations. In October 1995, the Financial Accounting Standards Board
issued Statement No. 123, Accounting for Stock-Based Compensation (SFAS
123), which defines a fair value based method of accounting for employee
stock options. The new accounting standards prescribed by SFAS 123 are
optional and companies may continue to account for employee stock options
under the intrinsic value method specified in APB 25. Currently, the Company
does not expect to adopt the new standards, consequently, SFAS 123 will not
have a material impact on the Company's results of operations or financial
position. However, pro forma disclosures of net earnings and earnings per
share must be made as if the SFAS 123 accounting standards had been adopted.
F -8
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 11.
Reclassification Certain prior year amounts within the accompanying
financial statements have been reclassified to conform to the current year
presentation.
12. Concentration of Credit
The Company, from time to time, maintains deposits at financial
institutions in excess of federally insured limits.
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. Currently, the Company is
not in compliance with certain financial covenants under the bank loan
agreements ("Debt"). Accordingly, the debt is classified as current in the
accompanying consolidated balance sheet. The debt is secured by
substantially all of the assets of the Company.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to meet
its financing requirements on a continuing basis, to maintain present
financing, and to succeed in its future operations. The financial
statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts and classification
of liabilities that might be necessary should the Company be unable to
continue in existence.
Management has taken steps to reduce its operating expenses and streamline
its operations. In addition, a shareholder loaned $500,000 to the Company
for working capital. This and other loans were converted to common stock
in December 1996. The Company continues to seek alternative sources of
financing and capital. Management believes the aforementioned steps are
sufficient to provide the company with sufficient cash flow to meet its
operating needs.
NOTE C - INVENTORIES
Inventories consist of the following at June 30, 1997:
Raw materials $ 362,173
Work in process 280,030
Finished goods 260,193
-------------
$ 902,396
F - 9
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30, 1997:
Machinery and equipment $ 2,900,503
Building and improvements 1,512,145
Vehicles 882,429
Furniture and equipment 191,855
Land 136,044
5,622,976
Less: Accumulated depreciation
and amortization 2,842,094
$ 2,780,882
Depreciation and amortization expense was $417,331 and $384,077 in 1997
and 1996, respectively, and is included in "cost of goods sold" and
"selling, general and administrative" expenses in the accompanying
consolidated financial statements.
NOTE E - INCOME TAXES
The income tax benefit consists of the following:
Years Ended June 30
1997 1996
Current:
Federal $ - ($ 425,109)
State - ( 83,111 )
-------------- ----------------
- ( 508,220 )
-------------- ----------------
Deferred:
Federal ( 87,719) 16,369
State ( 9,365) 2,802
--------------- -------------
( 97,084) 19,171
--------------- -------------
($ 97,084) ($ 489,049)
=============== =============
F - 10
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE E - INCOME TAXES - Continued
Deferred income taxes were recognized in the consolidated balance sheet at
June 30, 1997 due to the tax effect of temporary differences and loss
carryforwards as follows:
Deferred tax assets:
Net operating loss $1,046,359
carryforwards
Other 36,095
-----------------
1,082,454
Valuation Allowance (959,951)
------------------
122,503
Deferred tax liabilities:
Depreciation 193,391
Net deferred tax liability $70,888
================
The major elements contributing to the difference between the income tax
provision and the amount computed by applying the federal statutory tax rate
of 34% to loss before income taxes are as follows:
Years Ended June 30
1997 1996
Statutory rate ($333,220) ($770,866)
State or local income (28,018) (80,309)
taxes
Increase in valuation 184,812 357,461
allowance
Permanent differences and 79,342 4,665
other
($97,084) ($489,049)
=================== ===========
As of June 30, 1997, the Company had net operating loss carryforwards of
approximately $2,781,000 which expire in various years through June 30,
2012. Approximately $1,109,000 of these net operating losses are subject to
substantial restrictions imposed under the change in ownership and separate
return limitation year rules.
F - 11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE F - DEBT
$2,500,000 revolving credit agreement with a bank. The agreement expires on
September 30, 1998 and includes interest at the bank's prime rate plus 2.0%
(10.5% at June 30, 1997). The line is collateralized by substantially all
the assets of the Company. The loan is guaranteed by a majority stockholder.
Advances are based on 80% of eligible accounts receivable and 50% of
eligible inventories. The revolving credit agreement contains certain
restrictive covenants as defined. The Company had zero borrowing
availability as of June 30, 1997. The Company was in violation of certain
restrictive covenants, accordingly, the loan is subject to demand by the
bank and has been classified as current at June 30, 1997. $ 1,746,841
Related party note payable, interest payable monthly at 12%; subordinated to
all non-trade debt and uncollateralized. Principal due July 1999.
437,424
Bank note payable in monthly installments of $4,166, plus interest at prime
plus 2% (10.5% at June 30, 1997). Final payment due October 2005,
collateralized by substantially all the assets of the Company and subjected
to the same restrictive covenants as the related revolving credit agreement.
Accordingly, the loan has been classified as current at June 30, 1997 and is
subject to demand by the bank. The loan is guaranteed by a majority
stockholder. 416,667
Note payable in monthly installments of $5,327, plus interest at 10.25%.
Final payment due October 2001, collateralized by various machinery and
equipment.
219,067
Notes payable to investors; interest payable quarterly at 9%; each $25,000
principal amount is convertible into 1% of PRTI's common stock, as defined;
subordinated to all non-trade debt and uncollateralized. Principal due
November 1998. 200,000
F - 13
</TABLE>
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE F - DEBT - Continued
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Notes payable to investors; interest payable quarterly at 10%; convertible to
21,875 shares of the Company's common stock; subordinated to all non-trade debt
and uncollateralized. Principal due April 1998. 175
Industrialized development notes payable; quarterly installments of $3,381
beginning December 1997; interest at 5.25%, maturing October 2017. 167
Bank notes payable in monthly installments ranging from $219 to $3,498;
including interest ranging from 8% to 14%; collateralized by equipment and
vehicles; maturing at various dates through January 2000. 115
Capital lease obligations payable in monthly installments of $267 to $2,634,
including interest ranging from 10% to 19%, collateralized by equipment and
vehicles; maturing at various dates through May 2001. 168,464
-------------
Total debt 3,645,624
Less: Current portion 2,507,648
$ 1,137,976
Interest expense for the years ended June 30, 1997 and 1996 amounted to $364,938
and $400,773, respectively and is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Scheduled maturities of long-term debt are as follows:
</TABLE>
Year Ended June 30,
1998 $ 2,507,648
1999 349,363
2000 536,317
2001 85,219
2002 27,141
Thereafter 139,936
----------------
$ 3,645,624
F - 13
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE G - ACCRUED LIABILITIES
Accrued liabilities consist of the following at June 30, 1997:
Accrued compensation $ 168,046
Other accrued liabilities 415,920
______________
$ 583,966
==================
NOTE H - COMMITMENTS
The Company leases office space, equipment and vehicles under
non-cancelable operating leases. The following is a schedule, by years, of
the minimum rental commitments remaining on leased property and equipment:
Year Ended June 30,
1998 $ 300,323
1999 292,019
2000 289,019
2001 258,598
2002 60,000
Thereafter 130,000
----------------
Total $ 1,329,959
================
Total rent expense was $594,322 and $583,783 for the years ended June 30,
1997 and 1996, respectively.
NOTE I - RELATED PARTY TRANSACTIONS
Clary Lumber, currently owned by an officer and directors of the Company,
loaned the Company money to facilitate the acquisition of property and to
supplement cash flow. The outstanding balance of the note at June 30,
1997, was $437,424. The Company paid approximately $57,000 during the year
ended June 30, 1997 to Clary Lumber for compensation of certain employees
who perform services for both Clary Lumber and the Company.
The Company purchased approximately $2,895,000 and $2,178,000 of lumber
from Clary Lumber in 1997 and 1996, respectively. This amounted to 25% and
32% of the Company's lumber purchases for the years ended June 30, 1997
and 1996, respectively.
The Company sold approximately $10,000 and $159,000 of lumber to Clary
Lumber for the years ended June 30, 1997 and 1996, respectively.
During August 1996, the Company sold a real estate investment to Clary
Lumber for $200,000 to increase its working capital. The net book value
was approximately $98,000 at the time of sale. The gain of $102,000 was
recorded as additional paid-in capital.
F - 14
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE J - EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment agreements with two senior executives that
provide for minimum annual compensation totaling $190,000 and additional
compensation as defined in the agreement. The contracts expire in June 30,
2000. Payments under these agreements for the years ended June 30, 1997
and 1996 totaled $114,363 and $201,758, respectively. The Company's
remaining commitments at June 30, 1997 under such contracts is $570,000.
The Company entered into a Consulting, Non-competition and Confidentiality
Agreement (the Agreement) with a majority shareholder and director. The
Agreement provides for, among other things, payment of a consulting fee of
$2,000 per week. In February 1996, the Agreement and services were
temporarily suspended through June 30, 1997 by mutual consent of the
parties.
NOTE K - STOCKHOLDERS' EQUITY
Common Stock Offering
In September 1995, the Company completed a private placement offering for
144,000 shares of its common stock. The stock was sold to unrelated
investors at an offering price of $3.50 per share. The net proceeds of
this transaction increased the Company's equity by $430,032.
Stock Split
The Company's Common Stock was split two-for-one on October 3, 1996.
Certain shareholders, consisting primarily of officers and directors,
waived their right to this split resulting in an increase of 814,286
shares. All stock data and per share amounts in the consolidated financial
statements have been restated to give effect to the stock split.
Debt Conversion
In December 1996, a majority shareholder and director loaned $500,000 to
the Company for working capital. This and other loans of $106,740 were
converted into newly formed "A Units" at a rate of $1 of note value for
each unit. A unit consists of one share of common stock and a five year
warrant to purchase one share of common stock at $1.25.
Stock Option Plan
In July 1995, the Company established a Stock Option Plan which authorizes
the Company to issue options to employees, directors and outside
consultants of the Company. The issuance and form of the options shall be
at the discretion of the Company's board of directors, except that the
exercise price may not be less than 85% of the fair market value at the
time of grant. No options had been granted as of June 30, 1997.
F-15
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE L - SIGNIFICANT CUSTOMERS
The Company had sales to one significant customer which represented
approximately 44% and 27% of net sales for the years ended June 30, 1997
and 1996, respectively.
At June 30, 1997 two customers accounted for approximately 51% of trade
accounts receivable.
NOTE N - SUBSEQUENT EVENT
In July 1997, the Company granted to various employees, directors and
outside consultants, options to purchase 783,825 shares of common stock at
an exercise price of $.50 per share. The options vest over a four year
period and expire in ten years or three months after separation of
service, whichever occurs earlier.
F - 16
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,762,080
<ALLOWANCES> 37,123
<INVENTORY> 902,396
<CURRENT-ASSETS> 2,962,879
<PP&E> 2,780,882
<DEPRECIATION> 417,331
<TOTAL-ASSETS> 5,783,427
<CURRENT-LIABILITIES> 4,306,690
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0
0
<COMMON> 4,850
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<TOTAL-LIABILITY-AND-EQUITY> 5,783,427
<SALES> 21,051,818
<TOTAL-REVENUES> 21,051,810
<CGS> 19,553,853
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<OTHER-EXPENSES> 539,478
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (980,061)
<INCOME-TAX> 97,084
<INCOME-CONTINUING> (882,977)
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<NET-INCOME> (882,977)
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