PALLET MANAGEMENT SYSTEMS, INC.
One S. Ocean Boulevard #305
Boca Raton, Florida 33432
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 7, 1999
To the Shareholders of
Pallet Management Systems, Inc.
Notice is hereby given that the Annual Meeting of Shareholders of
Pallet Management Systems, Inc., a Florida corporation (the "Company"), will be
held at the Hyatt Regency Hotel, 9300 Airport Blvd., Orlando, Florida 32827
on Thursday, January 7, 1999, at the hour of 4:00 p.m.
local time for the following purposes:
(1) To elect the Board of Directors.
(2) To approve the Company's 1998 Omnibus Stock Option Plan.
(3) To ratify the selection of Kaufman, Rossin & Co., independent
certified public accountants, as the Company's independent
auditor for the year ending June 30, 1999.
(4) To transact any other business that properly comes before the
meeting or any adjournments or postponements of the meeting.
Only shareholders of record at the close of business on November 25,
1998 are entitled to notice of and to vote at the meeting or any adjournment
thereof.
By Order of the Board of Directors
Zachary Richardson, Secretary
November 25, 1998
IF YOU WISH TO VOTE IN FAVOR OF EACH OF THE PROPOSAL AND FOR THE
NOMINEES PRESENTED, CHECK THE APPROPRIATE BOX AND SIGN, DATE AND RETURN
THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE
IF MAILED IN THE UNITED STATES. IN ANY EVENT, YOUR PROMPT RETURN OF A
SIGNED AND DATED PROXY WILL BE APPRECIATED.
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SPECIAL MEETING OF STOCKHOLDERS
OF
PALLET MANAGEMENT SYSTEMS, INC.
January 7, 1999
PROXY STATEMENT
GENERAL INFORMATION
Proxy Solicitation
This Proxy Statement is furnished to the holders of Common
Stock $.001 par value per share ("Common Stock"), of Pallet Management Systems,
Inc. ("Company") in connection with the solicitation of proxies on behalf of the
Board of Directors of the Company for use at the Special Meeting of the
Stockholders ("Special Meeting") to be held on January 7, 1999, or at any
continuation or adjournment thereof, pursuant to the accompanying Notice of
Special Meeting of Stockholders. The purpose of the meeting and the matters to
be acted upon are set forth in the accompanying Notice of Special Meeting of
Stockholders. The Board of Directors knows of no other business which will come
before the meeting.
Proxies for use at the meeting will be mailed to stockholders
on or about December 5, 1998 and will be solicited chiefly by mail, but
additional solicitation may be made by telephone, telegram or other means of
telecommunications by directors, officers, consultants or regular employees of
the Company. The Company may enlist the assistance of brokerage houses,
fiduciaries, custodians and other like parties in soliciting proxies. All
solicitation expenses, including costs of preparing, assembling and mailing the
proxy material, will be borne by the Company.
Revocability and Voting of Proxy
A form of proxy for use at the meeting and a return envelope
for the proxy are enclosed. Stockholders may revoke the authority granted by
their execution of proxies at any time before their effective exercise by filing
with the Secretary of the Company a written revocation or duly executed proxy
bearing a later date or by voting in person at the meeting. Shares represented
by executed and unrevoked proxies will be voted in accordance with the choice or
instructions specified thereon. If no specifications are given, the proxies
intend to vote "FOR" each of the nominees for director as described in Proposal
No. 1 and "FOR" proposals 2 and 3. Proxies marked as abstaining will be treated
as present for purposes of determining a quorum for the Special Meeting, but
will not be counted as voting in respect of any matter as to which abstinence is
indicated. If any other matters properly comes before the meeting or any
continuation or adjournment thereof, the proxies intend to vote in accordance
with their best judgment.
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Record Date and Voting Rights
Only stockholders of record at the close of business on
November 25, 1998 are entitled to notice of and to vote at the Special Meeting
of Shareholders or any continuation or adjournment thereof. Each share of Common
Stock is entitled to one vote per share. Any share of Common Stock held of
record on November 25, 1998 shall be assumed, by the Board of Directors, to be
owned beneficially by the record holder thereof for the period shown on the
Company's stockholder records. The affirmative vote of a majority of the
shareholders present in person or by proxy at the meeting is required for the
election of the directors to be elected by such shares.
PROPOSAL NUMBER 1
ELECTION OF FIVE DIRECTORS
Five directors (constituting the entire Board of Directors) are to be
elected at the Annual Meeting. Unless otherwise specified, the enclosed proxy
will be voted in favor of the persons named below to serve until the next annual
meeting of shareholders and until their successors have been duly elected and
qualified. If any of these nominees becomes unavailable for any reason, or if a
vacancy should occur before the election, the shares represented by the proxy
will be voted for the person, if any, who is designated by the Board of
Directors to replace the nominee or to fill the vacancy on the Board. All
nominees have consented to be named and have indicated their intent to serve if
elected. The Board of Directors has no reason to believe that any of the
nominees will be unable to serve or that any vacancy on the Board of Directors
will occur.
The nominees, their ages and their positions with the Company are as
follows:
Name Age Position
John C. Lucy, III 40 Chairman, CEO,
Secretary, Director
Zachary M. Richardson 43 President, Treasurer,
. Director
John C. Lucy, Jr. 64 Director
Donald Radcliffe 53 Director
David W. Sass 62 Director
Each nominee's business experience during the past five years is
described below:
John C. Lucy, III joined Abell Lumber Corporation ("Abell") on a
full-time basis in 1980 after graduating from Virginia Tech with a BS in
business. For the past two years, Mr. Lucy has
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served as Chairman and CEO of the Company. Five years prior, Mr. Lucy was the
president of Abell. 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,
and an officer and director of the Company, he is President of Clary Lumber Co.
Inc. ("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. He was elected Chairman and CEO of the Company on June 29,
1995.
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 21 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 Officers,
Executive Vice President and Director of WorldWide Business Centers, a company
which provides businesses with office space and facilities. From June 1970
through June 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.
David W. Sass was appointed a director in July 1998. Mr. Sass has, for
the past 38 years, been a practicing attorney in New York City and is currently
a senior partner in the law firm of McLaughlin & Stern, LLP and is legal counsel
to the Company. Mr. Sass is a director of The Harmat Organization, Inc., a real
estate development company; a director of Genisys Reservation Systems, Inc., a
company engaged in the development of a computerized limousine reservation
system; an officer of Westbury Metals Group, Inc., a company engaged in the
refining of precious
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metals; an officer of Pioneer Commercial Fund Corp., a company engaged as a
mortgage warehouse lender providing short term financing to mortgage banks and a
member and Vice Chairman of the Board of Trustees of Ithaca College.
BENEFICIAL OWNERSHIP OF COMMON STOCK BY
CERTAIN STOCKHOLDERS AND MANAGEMENT
The following table sets forth information as of October 1, 1998,
regarding the beneficial ownership of the Company's Common Stock of (i) each
person known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock, (ii) each director of the Company, and (iii) all
directors and officers of the Company as a group. Except as otherwise specified,
the named beneficial owner has sole voting and investment power. As of October
1, 1998 there were 3,917,612 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding.
Name and Amount and
Address of Nature of
Beneficial Beneficial
Owner Ownership Percent of Class
John C. Lucy III(1,3,8) 184,818 4.7%
Pallet Management Systems, Inc.
One S. Ocean Boulevard #305
Boca Raton, Florida 33432
Zachary Richardson(1,4,8) 188,077 4.8%
Pallet Management Systems, Inc.
One S. Ocean Boulevard #305
Boca Raton, Florida 33432
John C. Lucy, Jr.(2,5,8) 670,052 17.1%
Pallet Management Systems, Inc.
One S. Ocean Boulevard #305
Boca Raton, Florida 33432
Donald Radcliffe (2,6,8) 12,750 *
Pallet Management Systems, Inc.
One S. Ocean Boulevard #305
Boca Raton, Florida 33432
David W. Sass(2,7,8) 1,500 *
McLaughlin & Stern, LLP
260 Madison Avenue
New York, NY 10016
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All Directors as a Group (five persons)(1-8) 1,057,197 27%
* less than 1%
(1) An officer and director
(2) Director only
(3) Includes 9,100 shares owned; 23,000 shares held in custody for children;
2,718 five year warrants having a $2.00 per share exercise price, expire in
December 2001 and 69,000 ten year stock options granted on July 1, 1997 having a
$2.00 per share exercise price and expire July 2007. (4) Includes 110,327 shares
owned; 8,750 five year warrants having a $2.00 per share exercise price, expire
in December 2001 and 69,000 ten year stock options on July 1, 1997 having a
$2.00 per share exercise price and expire July 2007. (5) Includes 440,696 shares
owned; 50,000 shares owned by Clary; 75,000 and 50,000 five year warrants having
a $2.00 per share exercise price, owned by Mr. Lucy and Clary respectively,
expire in December 2001 and 54,356 ten year stock options granted on July 1,
1997 having a $2.00 per share exercise price and expire July 2007. (6) Includes
5,250 shares owned; 3,750 five year warrants having a $2.00 per share exercise
price, expire in December 2001 and 3,750 ten year stock options granted on July
1, 1997 having a $2.00 per share exercise price and expire July 2007. (7)
Includes 1,500 ten year stock options granted on July 1, 1997 having a $2.00 per
share exercise price and expire July 2007. (8) Does not include performance
options.
Compliance With Section 16(a) of the Exchange Act
Under United States securities laws, the Company's directors and
officers and persons who own more than ten percent of the Company's Common Stock
are required to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission. Based solely on its
review of copies of such reports received or written representations from
certain reporting persons, the Company believes that during the fiscal year
ended June 30, 1998, all filing requirements under section 16(a) of the
Securities Exchange Act of 1934 applicable to its directors and officers and
holders of more than 10% Common Stock were complied with.
Board of Directors Meetings
During the fiscal year ended June 30, 1998 there were 6 meetings of the
Company's Board of Directors. Each of the directors attended all such meetings.
The Board of Directors has a standing audit, nominating and compensation
committees. Mr. Radcliffe and John C. Lucy, III are members of the audit
committee and Messrs. Sass, Radcliffe and Lucy, Jr. are members of the
nominating and compensation committees. Approval of the annual audit is
completed by management and the Board of Directors. Nominations are made by the
Board
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of Directors as a whole. Any Shareholder interest in nominating a director
should see "Submission of Shareholder Proposals" below.
Executive Compensation
The following table reflects the aggregate cash compensation, including
bonuses and deferred compensation, for services in all capacities to the Company
during the fiscal years ended June 27, 1998, 1997 and 1996 for the Chief
Executive Officer of the Company. No other executive officer of the Company had
aggregate remuneration exceeding $100,000.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLES
Name and Principal Year Annual Long-Term
Position Compensation Compensation
Awards Payouts
Salary Bonus($) Othe Restricted Option LTI All
($)(2) ($) Stock Awards SARs(4) Other
John C. Lucy, III 1998 58,546 69,000
Chairman(1), (3) 1997 56,883
1996 86,800
Zachary M. 1998 58,104 69,000
Richardson, 1997 57,480
President, 1996 100,117
Director(3)
</TABLE>
(1) Mr. Lucy was elected Chairman of the Company on June 29, 1995.
(2) Includes medical insurance reimbursements.
(3) Messrs. Lucy and Richardson reduced their annualized salaries from
$95,000 to $52,000 in Jun 1996. In July 1998 Messrs. Lucy and
Richardson restored their salaries to their $95,000 contracted amount.
This was not made retroactive.
(4) 9,000 Incentive Stock Options and 60,000 non-qualified options with a
$2 exercise price. These options have a four-year vesting period. Does
not include 345,535 performance options with exercise prices from $1.50
to $2.25.
Director's Compensation
Directors who are not members of management or affiliates thereof
receive $1,000 for each Board meeting attended and $500 for special conference
telephone meetings, plus out-of-pocket expenses incurred in connection with such
attendance. No compensation has been paid to any director for his or her
services during fiscal 1998 or years prior.
Certain Relationship 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
$2,721,000 and $2,895,000 which is 22% and 25% of Abell's lumber purchases for
the years fiscal 1998 and 1997 respectively. Abell sold approximately $10,000 of
lumber of Clary in fiscal year 1997. 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
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1998 of which all has been repaid. The Company has paid $58,500 in salary
reimbursement to Clary for compensation to John C. Lucy III who performs
services for both Clary and the Company.
In conjunction with the November private placement, 1,000,000 options
were granted to Messrs. Lucy and Richardson. These options have an exercise
restriction based on income performance before taxes, depreciation and
amortization. Messrs. Lucy and Richardson allocated approximately one-third of
these options to company management. The Company achieved the first threshold
thus releasing 325,000 options (145,000 with exercise price of $1.50, 90,000
with exercise price of $1.75, and 90,000 with exercise price of $2.25). The next
threshold is corporate income of $400,000 for the first half of fiscal year 1999
(360,000 options - 110,000 with exercise price of $1.50, 160,000 with exercise
price of $1.75, and 90,000 with exercise price of $2.25). The last threshold is
corporate income of $1,000,000 for fiscal year 1999. (315,000 options - 145,000
with exercise price of $1.50, 120,000 with exercise price of $1.75, and 50,000
with exercise price of $2.25).
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT YOU VOTE "FOR"
THE ELECTION OF ALL FIVE NOMINEES FOR DIRECTOR.
PROPOSAL NO. 2
APPROVAL OF 1998 OMNIBUS STOCK OPTION PLAN
Shareholders will be asked to approve the Company's 1998 Omnibus Stock
Option Plan (the "Plan"). The Plan became effective on September 1, 1998 for the
purpose of furthering the long-term stability, continuing growth and financial
success of the Company by retaining and attracting key employees, directors and
selected advisors of the Company through the use of stock incentives. An
aggregate of 500,000 shares of the Company's Common Stock shall be reserved for
issuance under the Plan. A copy is attached hereto as Exhibit A.
Pursuant to the Company's 1997 Omnibus Stock Option Plan, the Company
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 provides 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 is reserved for issuance upon exercise of
options to be granted from time-to-time. As of June 27th, 1998, 217,000 options
had been granted with an exercise price of $2.00. These options will be fully
vested July 1, 2001 and expire June 30th, 2007. Therefore, the Board of
Directors have deemed it to be in the best interest of the Company to establish
a 1998 Stock Option plan to further the benefits intended by the 1997 Omnibus
Stock Option Plan.
Incentive Awards may be granted under the Plan in the form of Options,
Stock Appreciation Rights, Restricted Stock, and Performance Awards. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options.
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If not sooner terminated by the Board, the 1998 Plan shall terminate at
the close of business on August 31, 2008. No Incentive Awards shall be granted
under the Plan after its termination. The Board may terminate the Plan or may
amend the Plan in such respects as it shall deem advisable. The Board may
unilaterally amend the Plan and Incentive Awards as it deems appropriate to
ensure compliance with Rule 16b-3 and to cause Incentive Awards to meet the
requirements of the Code, including Code section 422, and regulations
thereunder. Except as provided, in the preceding sentence, a termination or
amendment of the Plan shall not, without the consent of the Participant,
adversely affect a Participant's rights under an Incentive Award previously
granted to him.
The title of the securities to be offered pursuant to the Plan is the
Common Stock, $.001 par value, of the Company. For the Plan, an aggregate of
500,000 shares of Company Stock, shall be authorized but unissued shares. No
more than 50,000 shares of Company Stock may be allocated to Incentive Awards
and no more than 300,000 shares of Company Common Stock may be allocated to
Non-Incentive Awards that are granted to any one Employee during a single
calendar year.
All present and future employees of the Company or of any parent or
subsidiary of the Company ("Employee") and any person retained to provide
services to the Company (other than as an Employee, a member of the Board of
Directors or a member of the board of directors of any subsidiary or parent of
the Company), and who is selected by the Committee (as defined in the Plan) to
be eligible to receive Incentive Awards under the Plan ("Selected Advisors").
The Committee shall have the power and complete discretion, as provided in
Section 15 of the Plan, to select which Employees and Selected Advisors shall
receive Incentive Awards and to determine for each such Participant the terms,
conditions and nature of the award, and the number of shares to be allocated to
each Participant as part of each Incentive Award.
All present and future Non-Employee Directors shall be eligible to
receive options that do not meet the requirements of Code section 422 or, even
if meeting the requirements of Code section 422, is not intended to be an
Incentive Stock Options and is so designated ("Non-Statutory Options") under the
Plan. Non-Employee Directors shall not be entitled to receive any other form of
Incentive Award under the Plan.
Restricted Stock Awards for Employees and Selected Advisors
(A)Whenever the Committee deems it appropriate to grant a Restricted Stock
Award, notice shall be given to the Participant stating the number of shares of
Restricted Stock for which the Restricted Stock Award is granted and the terms
and conditions to which the Restricted Stock Award is subject. This notice, when
accepted in between the Company and the writing by the Participant, shall become
an award agreement between the Company and the Participant. A Restricted Stock
Award may be made by the Committee in its discretion without cash consideration.
Stock Options for Employees and Selected Advisors:
(A) Whenever the Committee deems it appropriate to grant
Options, notice shall be given to the eligible Employee or Selected Advisor
stating the number of shares for which Options are granted, the Option price per
share, whether the Options are Incentive Stock Options or Nonstatutory Stock
Options, the extent, if any, to which Stock Appreciation Rights are granted, and
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the conditions to which the grant and exercise of the Options are subject. This
notice, when duly accepted in writing by the Participant, shall become a stock
option agreement between the Company and the Participant.
(B) Incentive Stock Options may only be awarded to Employees
of the Company. "Tandem stock options" (where two stock options are issued
together and the exercise of one option affects the right to exercise the other
option) may not be issued in connection with Incentive Stock Options. The
exercise price of shares of Company Stock covered by an Incentive Stock Option
shall be not less than 100% of the Fair Market Value of such shares on the Date
of Grant; provided that if an Incentive Stock Option is granted to an Employee
who, at the time of the grant, is a 10% Shareholder, then the exercise price of
the shares covered by the Incentive Stock Option shall be not less than 110 % of
the Fair Market Value of such shares on the Date of Grant.
(C) The exercise price of shares of Company Stock covered by a
Nonstatutory Stock Option shall be not less than 85 % of the Fair Market Value
of such shares on the Date of Grant. Notwithstanding the foregoing, Nonstatutory
Stock Options shall not be less than 100% of the Fair Market Value of such
shares on the Date of Grant if the Committee intends for such Options to qualify
under Code section 162(m).
(D) Options may be exercised in whole or in part at such times
as may be specified by the Committee in the Participant's stock option
agreement; provided that the exercise provisions for Incentive Stock Options
shall in all events not be more liberal than the following provisions:
(1) No Incentive Stock Option may be exercised after the first
to occur of:
(x) Ten years (or, in the case of an incentive Stock Option granted to a 10%
Shareholder, five years) from the Date of Grant,
(y) Three months following the date of the Participant's termination of
employment with the Company and any Parent or Subsidiary of the Company for
reasons other than death or Disability; or
(z) One year following the date of the Participant's
termination of employment
by reason of death or Disability.
Stock Appreciation Rights and Performance Awards for Employees and Selected
Advisors.
(A) Whenever the Committee deems it appropriate, Stock
Appreciation Rights may be granted in connection with all or any part of an
Option, either concurrently with the grant of the Option or, if the Option is a
Nonstatutory Stock Option, by an amendment to the Option at any time thereafter
during the term of the Option. Stock Appreciation Rights may be exercised in
whole or in part at such times and under such conditions as may be specified by
the Committee in the Participant's stock option agreement. The following
provisions apply to all Stock Appreciation Rights that are granted in connection
with Options:
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(1) Stock Appreciation rights shall entitle the Participant,
upon exercise of all or any part of the Stock Appreciation Rights, to surrender
to the Company unexercised that portion of the underlying Option relating to the
same number of shares of Company Stock as is covered by the Stock Appreciation
Rights (or the portion of the Stock Appreciation Rights so exercised) and to
receive in exchange from the Company an amount equal to the excess of (x) the
Fair Market Value on the date of exercise of the Company Stock covered by the
surrendered portion of the underlying Option over (y) the exercise price of the
Company Stock covered by the surrendered portion of the underlying Option. The
Committee may limit the amount that the Participant will be entitled to receive
upon exercise of the Stock Appreciation Right.
(2) Upon the exercise of a Stock Appreciation Right and
surrender of the related portion of the underlying Option, the Option, to the
extent it surrendered, shall not thereafter be exercisable.
(3) The Committee may, in its discretion, grant Stock
Appreciation Rights in connection with Options which by their terms become fully
exercisable upon a Change of Control, which Stock Appreciation Rights shall only
be exercisable following a Change of Control. The underlying Option may provide
that such Stock Appreciation Rights shall be payable solely in cash. The terms
of the underlying Option shall provide the method by which fair market value of
the Company Stock on the date of exercise shall be calculated based on one of
the following alternatives:
(x) the Fair Market Value of the Company Stock as of the business day
immediately preceding the day of exercise;
(y) the highest Fair Market Value of the Company Stock during the 90 days
immediately preceding the Change of Control; or
(z) the greater of (x) or (y).
(4) Subject to any further conditions upon exercise imposed by
the Committee, a Stock Appreciation Right shall be exercisable only to the
extent that the related Option is exercisable, and shall expire no later than
the date on which the related Option expires.
(5) A Stock Appreciation Right may only be exercised at a time
when the fair market value of the Company Stock covered by the Stock
Appreciation Right exceeds the exercise price of the Company Stock covered by
the underlying Option.
Tax Effects of Plan Participation.
Whenever under the Plan shares are to be issued in satisfaction of
stock options granted hereunder, the Company shall have the right to require the
Eligible Participant to remit to the Company an amount sufficient to satisfy
federal, state and local withholding tax requirements prior to the delivery of
any certificate or certificates for such shares or at such later time as when
the Company may determine that such taxes are due. Whenever under the Plan
payments are to be made
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in cash, such payment shall be net of an amount sufficient to satisfy federal,
state and local withholding tax requirements.
Supplemental Information: The shares offered in the Plan will be
registered pursuant to the filing of a Form S-8 with the Securities and Exchange
Commission. Such filing shall take place on or about January 1999.
THE BOARD OF DIRECTORS OF THE COMPANY DEEMS PROPOSAL NUMBER 2 TO BE
IN THE BEST INTEREST OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS A VOTE
"FOR" ITS APPROVAL.
PROPOSAL NUMBER 3
ELECTION OF AUDITORS
The Shareholders will be asked to ratify the appointment of
the firm of Kaufman, Rossin & Co., independent certified public accountants, as
auditors of the Company for the fiscal year ended June 30, 1999. A
representative of Kaufman, Rossin & Co., will not be present at the Annual
Meeting.
THE BOARD OF DIRECTORS OF THE COMPANY DEEMS PROPOSAL NUMBER 3 TO BE
IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS A VOTE
"FOR" ITS APPROVAL.
ANNUAL REPORT TO STOCKHOLDERS
The Annual Report to Stockholders for the year ended June 30, 1998 is
being mailed to stockholders with this Proxy Statement.
STOCKHOLDER PROPOSAL - 1999 ANNUAL MEETING
Any stockholder proposals to be considered by the Company for
inclusion in the proxy material for the 1999 Annual Meeting of Stockholders must
be received by the Company at its principal executive offices by December 31,
1998.
The prompt return of your proxy will be appreciated and helpful in
obtaining the necessary vote. Therefore, whether or not you expect to attend the
meeting, please sign the proxy and return it in the enclosed envelope.
BY ORDER OF
THE BOARD OF DIRECTORS
Zachary Richardson, Secretary
New York, New York
November 25, 1998
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PALLET MANAGEMENT SYSTEMS, INC.
P R O X Y
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Lucy, III and Zachary M. Richardson as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all the shares of the common
stock of Pallet Management Systems, Inc. held of record by the undersigned on
November 25, 1998, at the annual meeting of shareholders to be held on January
7, 1999, or any adjournment thereof.
1. TO APPROVE the Company's 1998 Omnibus Stock Option Plan.
[] FOR [] AGAINST [] ABSTAIN
2. ELECTION OF DIRECTORS
For all nominees listed below Withhold Authority to
(Except as Marked to the Vote All Nominees Listed
Contrary) Below
John C. Lucy, Jr., John C. Lucy, III, Zachary M. Richardson, Donald Radcliffe
and David W. Sass.
3. TO APPROVE and ratify the selection of Kaufman, Rossin & Co.,
independent certified public accountants, as the Company's independent
auditors for the year ending June 30, 1999.
[] FOR [] AGAINST [] ABSTAIN
4. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. THE FAILURE TO FILL IN THE CHOICES
INDICATED ABOVE WILL AUTHORIZE THE PROXIES TO VOTE FOR THE PROPOSALS TO BE
BROUGHT BEFORE THE MEETING.
Please sign name exactly as appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, as executor, administrator,
trustee or guardian, please given full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated: _________________________, 1998
_________________________________________
Signature
_________________________________________
Signature, if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY USING THE ENCLOSED ENVELOPE
If you have had a change of address, please print or type your new address(s)
on the line below
_______________________________
<PAGE>
EXHIBIT A
PALLET MANAGEMENT SYSTEMS, INC.
1998 OMNIBUS STOCK INCENTIVE PLAN
Effective as of September 1, 1998
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PALLET MANAGEMENT SYSTEMS, INC,
1998 OMNIBUS STOCK INCENTIVE PLAN
Effective as of September 1, 1998
Table of Contents
Page
Purpose...............................................................3
Definitions.........................................................3-6
General...............................................................6
Stock.................................................................6
Eligibility.........................................................6-7
Restricted Stock Awards for Employees and Selected
Advisors......................................................... 7-8
Stock Options for Employees and Selected Advisors 8-10
Stock Appreciation Rights and Performance
Awards for Employees and
Selected Advisors...................................................10-12
Method of Exercise of Options
and Stock Appreciation Rights.....................................12-14
Nontransferability of Incentive Awards...............................14
Effective Date of the Plan...........................................14
Termination, Modification, Change....................................14
Change in Capital Structure..........................................14
Administration of the Plan........................................14-16
Notice...............................................................15
Prototype Plan Document............................................16-18
Interpretation.......................................................18
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PALLET MANAGEMENT SYSTEMS, INC,
1998 OMNIBUS STOCK INCENTIVE PLAN
1. Purpose. The purpose of the Pallet Management Systems, Inc. 1998
Omnibus Stock Incentive Plan (the "Plan") is to further the long-term stability,
continuing growth and financial success of Pallet Management Systems, Inc. (the
"Company") by attracting and retaining key employees, directors and selected
advisors of the Company through the use of stock incentives. It is believed that
ownership of Company Stock will stimulate the efforts of those employees,
directors and selected advisors upon whose judgment and interest the Company is
and will be largely dependent for the successful conduct of its business. It is
also believed that Incentive Awards granted to eligible persons under this Plan
will strengthen their desire to remain with the Company and will further the
identification of those persons' interests with those of the Company's
shareholders.
2. Definitions. As used in the Plan, the following terms have the
meanings indicated:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Applicable Withholding Taxes" means the aggregate amounts of
federal, state and local income and payroll taxes that the Company is required
to withhold in connection with any exercise of a Nonstatutory Stock Option or
Stock Appreciation Right, or the award of Restricted Stock,
(c) "Board" means the Board of Directors of the Company.
(d) "Change of Control" means the occurrence of either of the following events:
(i) a third person, including a "group" as defined in Section 13(d)(3) of the
Act, becomes, or obtains the right to become, the beneficial owner of Company
securities having 20% or more of the combined voting, power of the then
outstanding securities of the Company that may be cast for the election of
directors to the Board of the Company (other than as a result of an issuance of
securities initiated by the Company in the ordinary course of business); or (ii)
as the result of, or in connection with, any cash tender or exchange offer,
merger or other business combination, sale of assets or contested election, or
any combination,. of the foregoing, transactions, the persons who were directors
of the Company before such transactions shall cease to constitute a majority of
the Board or of the board of directors of any
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successor to the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means the committee appointed by the Board as described
under Section 15.
(g) "Company" means Pallet Management Systems, Inc., a Florida
corporation.
(h) "Company Stock" means shares of voting common stock of the Company
subject to adjustment as provided in Section 14.
(i) "Date of Grant" means the date on which an Incentive Award is
granted by the Committee.
(j) "Disability" or "Disabled" means, as to an Incentive Stock Option,
a Disability within the meaning of Code section 22(e)(3). As to all other forms
of Incentive Awards, the Committee shall determine whether a Disability exists
and such determination shall be conclusive.
(k) "Employee" means an employee of the Company, or of any Parent or
Subsidiary of the Company.
(1) "Fair Market Value" means, as of a relevant date, (i) if the
Company Stock is traded on an exchange, the closing price of the Company Stock
on such day on the exchange on which it generally has the greatest trading
volume, (ii) if the Company Stock is traded on the over-the-counter market, the
average between the closing bid and asked prices on such day as reported by
NASDAQ, or (iii) if sales prices or bid and asked prices are not available for
such day, the fair market value shall be determined by the Committee using any
reasonable method in good faith.
(m) "Incentive Award" means, collectively, the award of an Option,
Stock Appreciation Right, Restricted Stock, or Performance Award under the Plan.
(n) "Incentive Stock Option" means an Option intended to meet the
requirements of, and qualify for favorable federal income tax treatment under,
Code section 422.
(o) "Insider" means a person subject to section 16 of the Act.
(p) "Non-Employee Director" means a member of the Board who is not an
Employee.
(q) "Nonstatutory Stock Option" means an Option that does not meet the
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requirements of Code section 422 or, even if meeting the requirements of Code
section 422, is not intended to be an Incentive Stock Option and is so
designated.
(r) "Option" means a right to purchase Company Stock granted under the
Plan, at a price determined in accordance with the Plan.
(s) "Parent" means, with respect to any corporation, a parent of that
corporation within the meaning of Code section 424(e).
(t) "Participant" means any Employee, Non-Employee Director or Selected
Advisor who receives an Incentive Award under the Plan.
(u) "Performance Award" means an award which is contingent upon the
performance of the Company or which is contingent upon the individual
performance of the Participant.
(v) "Reload Feature" means a feature of an Option described in a
Participant's stock option agreement that authorizes the automatic grant of a
Reload Option in accordance with the provisions of Section 10(e).
(w) "Reload Option" means an Option automatically granted to a
Participant equal to the number of shares of already owned Company Stock
delivered by the Participant in payment of the exercise price of an Option
having a Reload Feature.
(x) "Restricted Stock" means Company Stock awarded upon the terms and
subject to the restrictions set forth in Section 6.
(y) "Restricted Stock Award" means an award of Restricted Stock granted
under the Plan.
(z) "Rule 16b-3" means Rule 16b-3 adopted pursuant to section 16(b) of
the Act. A reference in the Plan to Rule 16b-3 shall include a reference to any
corresponding rule (or number redesignation) of any amendments to Rule 16b-3
adopted after the effective date of the Plan's adoption.
(aa) "Selected Advisor" means any person who has been retained
to provide services to the Company (other than as an Employee, a member of the
Board or a member of the board of directors of any Subsidiary or Parent of the
Company), and who is selected by the Committee to be eligible to receive
Incentive Awards under the Plan.
(bb) "Stock Appreciation Right" means a right to receive
amounts from the Company awarded upon the terms and subject to the restrictions
set forth in Section 10.
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(cc) "Subsidiary" means, with respect to any corporation, a
subsidiary of that corporation within the meaning of Code section 424(f).
(dd) "10% Shareholder" means a person who owns, directly or
indirectly, stock possessing more than 10 % of the total combined voting power
of all classes of stock of the Company or any Parent or Subsidiary of the
Company. Indirect ownership of stock shall be determined in accordance with Code
section 424(d).
3. General. Incentive Awards may be granted under the Plan in the form
of Options, Stock Appreciation Rights, Restricted Stock, and Performance Awards.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options. The provisions of the Plan referring to Insiders or Rule 16b-3
shall apply only to Participants who are subject to section 16 of the Act.
4. Stock. Subject to Section 14 of the Plan, there shall be reserved
for Issuance under the Plan an aggregate of 500,000 shares of Company Stock,
which shall be authorized but unissued shares. No more than 50,000 shares of
Company Stock may be allocated to Incentive Awards and no more than 300,000
shares of Company Common Stock may be allocated to Non-Incentive Awards that are
granted to any one Employee during a single calendar year. Shares that have not
been issued and shares allocable to options or portions thereof that expire or
otherwise terminate unexercised after the effective date of the PMSI Omnibus
Stock Plan - 1995 or the 1997 Omnibus Stock Incentive Plan may be added as an
Incentive Award under this Plan. Shares that have not been issued under this
Plan and that are allocable to Incentive Awards or portions thereof that expire
or otherwise terminate unexercised may again be subjected to an Incentive Award
under this Plan. Similarly, if any shares of Restricted Stock issued pursuant to
the Plan are reacquired by the Company as a result of a forfeiture of such
shares pursuant to the Plan, such shares may than be subjected to an Incentive
Award under the Plan. For purposes of determining the number of shares that are
available for Incentive Awards under this Plan, such number shall include the
number of shares surrendered by an optionee or retained by the Company in
payment of Applicable Withholding Taxes upon exercise of an Option.
5. Eligibility.
(a) All present and future Employees and Selected Advisors shall be
eligible to receive Incentive Awards under the Plan. The Committee shall have
the power and complete discretion, as provided in Section 15, to select which
Employees and Selected Advisors shall receive Incentive Awards and to determine
for each such Participant the terms, conditions and nature of the award, and the
number of shares to be allocated to each Participant as part of each Incentive
Award.
(b) All present and future Non-Employee Directors shall be eligible
to receive Non- Statutory Options under the Plan. Non-Employee Directors shall
not be entitled to receive any other form of Incentive Award under the Plan.
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(c) The grant of an Incentive Award shall not obligate the Company or
any Parent or Subsidiary of the Company to pay a Participant any particular
amount of remuneration, to continue the employment or other service relationship
of the Participant after the grant, or to make further grants to the Participant
at any time thereafter.
6. Restricted Stock Awards for Employees and Selected Advisors.
(a) Whenever the Committee deems it appropriate to grant a Restricted
Stock Award, notice shall be given to the Participant stating the number of
shares of Restricted Stock for which the Restricted Stock Award is granted and
the terms and conditions to which the Restricted Stock Award is subject. This
notice, when accepted in between the Company and the writing by the Participant,
shall become an award agreement between the Company and the Participant. A
Restricted Stock Award may be made by the Committee in its discretion without
cash consideration.
(b) Restricted Stock issued pursuant to the Plan shall be subject to
the following restrictions:
(i) None of such shares may be sold, assigned, transferred,
pledged, hypothecated, or otherwise encumbered or disposed of until the
restrictions on such shares shall have lapsed or shall have been removed
pursuant to paragraph (d) or (e) below.
(ii) The restrictions on such shares must remain in effect and
may not lapse for a period of two years beginning on the Date of Grant, except
as provided under paragraph (d) or (e) in the case of Disability, death or a
Change in Control.
(iii) If a Participant ceases to be employed by the Company or
a Parent or Subsidiary of the Company, the Participant shall forfeit to the
Company any shares of Restricted Stock, the restrictions on which shall not have
lapsed or shall not have been removed pursuant to paragraph (d) or (e) below, on
the date such Participant shall cease to be so employed.
(iv) The Committee may establish such other restrictions on
such shares that the Committee deems appropriate, including, without limitation,
events of forfeiture.
(c) Upon the acceptance by a Participant of a Restricted Stock Award,
such Participant shall, subject to the restrictions set forth in paragraph (b)
above, have all the rights of a shareholder with respect to the shares of
Restricted Stock subject to such Restricted Stock Award, including, but not
limited to, the right to vote such shares of Restricted Stock and the right to
receive all dividends and other distributions paid thereon. Certificates
representing Restricted Stock shall bear a legend referring to the restrictions
set forth in the Plan and the Participant's award agreement.
(d) The Committee shall establish as to each Restricted Stock Award
the terms and
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conditions upon which the restrictions set forth in paragraph (b) above shall
lapse. Such terms and conditions may include, without limitation, the lapsing of
such restrictions as a result of the Disability or death of the Participant, or
the occurrence of a Change of Control.
(e) Notwithstanding the forfeiture provisions of paragraph (b)(iii)
above, the Committee may at any time, in its sole discretion, accelerate the
time at which any or all restrictions will lapse or remove any and all such
restrictions.
(f) Each Participant shall agree at the time his Restricted Stock
Award is granted, and as a condition thereof, that the Company shall deduct from
any payments of any kind otherwise due from the Company to such Participant the
aggregate amount of any Applicable Withholding Taxes with respect to the shares
of Restricted Stock subject to the Restricted Stock Award or that such
Participant will pay to the Company, or make arrangements satisfactory to the
Company regarding the payment to the Company of, the aggregate amount of any
such taxes. Arrangements satisfactory to the Company may, in the sole discretion
of the Company, include the obtaining of a loan from the Company to pay such
taxes. Until such amount has been paid or arrangements satisfactory to the
Company have been made, no stock certificates free of a legend reflecting the
restrictions set forth in paragraph (b) above shall be issued to such
Participant. If Restricted Stock is being issued to a Participant without the
use of a stock certificate, the restrictions set forth in paragraph (b) shall be
communicated to the Participant in the manner required by law.
(g) As an alternative to making a cash payment to the Company to
satisfy Applicable Withholding Taxes, the Committee may establish procedures
permitting the Participant to elect to (a) deliver shares of already owned
Company Stock or (b) have the Company retain that number of shares of Company
Stock that would satisfy all or a specified portion of the Applicable
Withholding Taxes arising in the year the Incentive Award becomes subject to
tax. Any such election shall be made only in accordance with procedures
established by the Committee. The Committee has the express authority to change
any election procedure it establishes at any time.
7. Stock Options for Employees and Selected Advisors.
(a) Whenever the Committee deems it appropriate to grant Options,
notice shall be given to the eligible Employee or Selected Advisor stating the
number of shares for which Options are granted, the Option price per share,
whether the Options are Incentive Stock Options or Nonstatutory Stock Options,
the extent, if any, to which Stock Appreciation Rights are granted, and the
conditions to which the grant and exercise of the Options are subject. This
notice, when duly accepted in writing by the Participant, shall become a stock
option agreement between the Company and the Participant.
(b) Incentive Stock Options may only be awarded to Employees of the
Company. "Tandem stock options" (where two stock options are issued together and
the exercise of one option affects the right to exercise the other option) may
not be issued in connection with Incentive Stock Options. The exercise price of
shares of Company Stock covered by an Incentive
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Stock Option shall be not less than 100% of the Fair Market Value of such shares
on the Date of Grant; provided that if an Incentive Stock Option is granted to
an Employee who, at the time of the grant, is a 10% Shareholder, then the
exercise price of the shares covered by the Incentive Stock Option shall be not
less than 110 % of the Fair Market Value of such shares on the Date of Grant.
(c) The exercise price of shares of Company Stock covered by a
Nonstatutory Stock Option shall be not less than 85 % of the Fair Market Value
of such shares on the Date of Grant. Notwithstanding the foregoing, Nonstatutory
Stock Options shall not be less than 100% of the Fair Market Value of such
shares on the Date of Grant if the Committee intends for such Options to qualify
under Code section 162(m).
(d) Options may be exercised in whole or in part at such times as may
be specified by the Committee in the Participant's stock option agreement;
provided that the exercise provisions for Incentive Stock Options shall in all
events not be more liberal than the following provisions:
(i) No Incentive Stock Option may be exercised after the first to occur of:
(x) Ten years (or, in the case of an incentive Stock Option granted to a 10%
Shareholder, five years) from the Date of Grant,
(y) Three months following the date of the Participant's termination of
employment with the Company and any Parent or Subsidiary of the Company for
reasons other than death or Disability; or
(z) One year following the date of the Participant's
termination of
employment by reason of death or Disability.
(ii) Except as otherwise provided in this paragraph, no
Incentive Stock Option may be exercised unless the Participant is employed by
the Company or a Parent or Subsidiary of the Company at the time of the exercise
and has been so employed at all times since the Date of Grant. If a
Participant's employment is terminated other than by reason of death or
Disability at a time when the Participant holds an Incentive Stock Option that
is exercisable (in whole or in part), the Participant may exercise any or all of
the exercisable portion of the Incentive Stock Option (to the extent exercisable
on the date of such termination) within three months after the Participant's
termination of employment. If a Participant's employment is terminated by reason
of his Disability at a time when the Participant holds an Incentive Stock Option
that is exercisable (in whole or in part), the Participant may exercise any or
all of the exercisable portion of the Incentive Stock Option (to the extent
exercisable on the date of Disability) within one year after the Participant's
termination of employment. If a Participant's employment is terminated by reason
of his death at a time when the Participant holds an Incentive Stock Option that
is Exercisable (in whole or in part), the Incentive Stock Option may be
exercised (to the extent exercisable on the date of death) within one year after
the Participant's death by the person to whom the Participant's rights under
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the Incentive Stock Option shall have passed by will or by the laws of descent
and distribution.
(iii) An Incentive Stock Option, by its terms, shall be
exercisable in any calendar year only to the extent that the aggregate Fair
Market Value (determined at the Date of Grant) of the Company Stock with respect
to which Incentive Stock Options are exercisable by the Participant for the
first time during the calendar year does not exceed $100,000 (the "Limitation
Amount"). The foregoing Limitation Amount shall be adjusted to the extent
required by any amendment to or modification of Code section 422. Incentive
Stock Options granted after December 31, 1986 under the Plan and all other plans
of the Company and any Parent or Subsidiary of the Company shall be aggregated
for purposes of determining whether the Limitation Amount has been exceeded. The
Committee may impose such conditions as it deems appropriate on an Incentive
Stock Option to ensure that the foregoing requirement is met. If Incentive Stock
Options exercisable by the Participant for the first time during any calendar
year exceed the Limitation Amount, the excess Options will be treated as
Nonstatutory Stock Options to the extent permitted by law.
(e) The Committee may, in its discretion, provide that an Option
granted to an Insider will not be exercisable by the Insider within the first
six months after it is granted.
(f) The Committee may, in its discretion, grant Options that by their
terms become fully exercisable upon a Change of Control notwithstanding other
conditions or, exercisability in the stock option agreement, and, in such event,
paragraph (e) shall not apply.
8. Stock Appreciation Rights and Performance Awards for Employees and
Selected Advisors.
(a) Whenever the Committee deems it appropriate, Stock Appreciation
Rights may be granted in connection with all or any part of an Option, either
concurrently with the grant of the Option or, if the Option is a Nonstatutory
Stock Option, by an amendment to the Option at any time thereafter during the
term of the Option. Stock Appreciation Rights may be exercised in whole or in
part at such times and under such conditions as may be specified by the
Committee in the Participant's stock option agreement. The following provisions
apply to all Stock Appreciation Rights that are granted in connection with
Options:
(i) Stock Appreciation rights shall entitle the Participant,
upon exercise of all or any part of the Stock Appreciation Rights, to surrender
to the Company unexercised that portion of the underlying Option relating to the
same number of shares of Company Stock as is covered by the Stock Appreciation
Rights (or the portion of the Stock Appreciation Rights so exercised) and to
receive in exchange from the Company an amount equal to the excess of (x) the
Fair Market Value on the date of exercise of the Company Stock covered by the
surrendered portion of the underlying Option over (y) the exercise price of the
Company Stock covered by the surrendered portion of the underlying Option. The
Committee may limit the amount that the Participant will be entitled to receive
upon exercise of the Stock Appreciation Right.
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(ii) Upon the exercise of a Stock Appreciation Right and
surrender of the related portion of the underlying Option, the Option, to the
extent it surrendered, shall not thereafter be exercisable.
(iii) The Committee may, in its discretion, grant Stock
Appreciation Rights in connection with Options which by their terms become fully
exercisable upon a Change of Control, which Stock Appreciation Rights shall only
be exercisable following a Change of Control. The underlying Option may provide
that such Stock Appreciation Rights shall be payable solely in cash. The terms
of the underlying Option shall provide the method by which fair market value of
the Company Stock on the date of exercise shall be calculated based on one of
the following alternatives:
(x) the Fair Market Value of the Company Stock as of the business day
immediately preceding the day of exercise;
(y) the highest Fair Market Value of the Company Stock during the 90 days
immediately preceding the Change of Control; or
(z) the greater of (x) or (y).
(iv) Subject to any further conditions upon exercise imposed
by the Committee, a Stock Appreciation Right shall be exercisable only to the
extent that the related Option is exercisable, and shall expire no later than
the date on which the related Option expires.
(v) A Stock Appreciation Right may only be exercised at a time
when the fair market value of the Company Stock covered by the Stock
Appreciation Right exceeds the exercise price of the Company Stock covered by
the underlying Option.
(b) Whenever the Committee deems it appropriate, Stock Appreciation Rights may
be granted without related Options. The terms and conditions of the award shall
be set forth in a stock appreciation rights agreement between the Company and
the Participant. The following provisions apply to all Stock Appreciation Rights
that are granted without related Options:
(i) Stock Appreciation Rights shall entitle the Participant, upon the exercise
of all or any part of the Stock Appreciation Rights, to receive from the Company
an amount equal to the excess of (x) the Fair Market Value on the date of
exercise of the Company Stock covered by the Stock Appreciation Rights over (y)
the Fair Market Value on the Date of Grant of the Company Stock covered by the
Stock Appreciation Rights. The Committee may limit the amount that the
Participant may be entitled to receive upon exercise of the Stock Appreciation
Right.
(ii) Stock Appreciation Rights shall be
exercisable, in whole or
in part, at such times as the Committee shall specify in the Participant's stock
appreciation rights agreement.
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(c) The manner in which the Company's obligation arising upon the
exercise of a Stock Appreciation Right shall be paid shall be determined by the
Committee and shall be set forth in the Participant's stock option agreement (if
the Stock Appreciation Rights are related to an Option) or stock appreciation
rights agreement. The Committee may provide for payment in Company Stock or
cash, or a fixed combination of Company Stock or cash, or the Committee may
reserve the right to determine the manner of payment at the time the Stock
Appreciation Right is exercised. Shares of Company Stock issued upon the
exercise of a Stock Appreciation Right shall be valued at their Fair Market
Value on the date of exercise.
(d) Performance Awards may be granted to Employees and Selected
Advisors under this Plan from time to time based on such terms and conditions as
the Committee deems appropriate provided that such awards shall not be
inconsistent with the terms and purposes of this Plan. Performance Awards are
awards which are contingent upon the performance of the Company or which are
contingent upon the individual performance of the Participant. Performance
Awards may be in the form of performance units, performance shares, and such
other forms of performance awards which the Committee shall determine. The
Committee shall determine the performance measurements and criteria for such
performance awards.
9. Method of Exercise of Options and Stock Appreciation Rights.
(a) Options and Stock Appreciation Rights may be exercised by the
Participant giving written notice of the exercise to the Company stating the
number of shares the Participant has elected to purchase under the Option or the
number of Stock Appreciation Rights he has elected to exercise. ln the case of a
purchase of shares under an Option, such notice shall be effective only if
accompanied by the exercise price in full paid in cash; provided that, if the
terms of an Option so permit, the Participant may (i) deliver shares of Company
Stock (valued at their Fair Market Value on the date of exercise) in
satisfaction of all or any part of the exercise price, (ii) deliver a properly
executed exercise notice together with irrevocable instructions to a broker to
deliver promptly to the Company, from the sale or loan proceeds with respect to
the sale of Company Stock or a loan secured by Company Stock, the amount
necessary to pay the exercise price and, if required by the Committee,
Applicable Withholding, Taxes, or (iii) deliver an interest bearing promissory
note, payable to the Company, in payment of all or part of the exercise price
together with such collateral as may be required by the Committee at the time of
exercise. The interest rate under any such promissory note shall be equal to the
minimum interest rate required at the time to avoid imputed interest under the
Code.
(b) The Company may place on any certificate representing Company
Stock issued upon the exercise of an Option or a Stock Appreciation Right any
legend deemed desirable by the Company's counsel to comply with federal or state
securities laws, and the Company may require of the Participant a customary
written indication of his investment intent. Until the Participant has made any
required payment, including any Applicable Withholding Taxes, and has had issued
to him a certificate for the shares of Company Stock acquired, he shall possess
no shareholder rights with respect to the shares.
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(c) As an alternative to making a cash payment to the Company to
satisfy Applicable Withholding Taxes, the Committee may establish procedures
permitting the Participant to elect to (a) deliver shares of already owned
Company Stock or (b) have the Company retain that number of shares of Company
Stock that would satisfy all or a specified portion of the Applicable
Withholding Taxes of the Participant arising in the year the Incentive Award
becomes subject to tax. Any such election shall be made only in accordance with
procedures established by the Committee. The Committee has the express authority
to change any election procedure it establishes at any time.
(d) Notwithstanding anything herein to the contrary, if the Company
is subject to section 16 of the Act, Options and Stock Appreciation Rights shall
always be granted and exercised in such a manner as necessary to conform to the
provisions of Rule 16b-3.
(e) If a Participant exercises an Option that has a Reload Feature by
delivering already owned shares of Company Stock in payment of the exercise
price, the Participant shall automatically be granted a Reload Option. At the
time the Option with a Reload Feature is awarded, the Committee may impose such
restrictions on the Reload Option as it deems appropriate, but in any event the
Reload Option shall be subject to the following restrictions:
(i) The exercise price of shares of Company Stock covered by a
Reload Option shall be not less than 100% of the Fair Market Value of such
shares on the Date of Grant of the Reload Option;
(ii) If and to the extent required by Rule 16b-3, or if so
provided inthe option agreement, a Reload Option shall not be exercisable within
the first six months after it is granted; provided that, subject to the terms of
the Participant's stock option agreement, this restriction shall not apply if
the Participant becomes Disabled or dies during the six-month period;
(iii) The Reload Option shall be subject to the same
restrictions on exercisability imposed on the underlying Option (possessing file
Reload Feature) that was exercised unless the Committee specifies different
limitations;
(iv) The Reload Option shall not be exercisable until the
expiration of any retention holding period imposed on the disposition of any
shares of Company Stock covered by the underlying Option (possessing the Reload
Feature) that was exercised;
(v) The Reload Option shall not have a Reload Feature. The
Participant shall not be entitled to make payment of the exercise price other
than in cash unless provisions for an alternative payment method are included in
the Participant's stock option agreement or are agreed to in writing by the
Company with the approval of the Committee prior to the exercise of the Option.
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10. Nontransferability of Incentive Awards. Incentive Awards shall
not be transferrable unless so provided in the award agreement or an amendment
to the award agreement.
11. Effective Date of the Plan. This Plan shall be effective as of
September 1, 1998 and shall be submitted to the shareholders of the Company for
approval. No Option or Stock Appreciation Right shall be exercisable and no
Company Stock shall be 'issued under the Plan until (i) the Plan has been
approved by the Company's shareholders, (ii) shares issuable under the Plan have
been registered with the Securities and Exchange Commission, and (iii) the
requirements of any applicable state securities laws have been met.
12. Termination, Modification, Change. If not sooner terminated by
the Board, this Plan shall terminate at the close of business on August 31, 2008
. No Incentive Awards shall be granted under the Plan after its termination. The
Board may terminate the Plan or may amend the Plan in such respects as it shall
deem advisable. The Board may unilaterally amend the Plan and Incentive Awards
as it deems appropriate to ensure compliance with Rule 16b-3 and to cause
Incentive Awards to meet the requirements of the Code, including Code section
422, and regulations thereunder. Except as provided, in the preceding sentence,
a termination or amendment of the Plan shall not, without the consent of the
Participant, adversely affect a Participant's rights under an Incentive Award
previously granted to him.
13. Change in Capital Structure.
(a) The number of shares reserved for issuance under the Plan,
the terms of Incentive Awards, and all computations under the Plan shall be
appropriately adjusted by the Committee should the Company effect one or more
stock dividends, stock splits, subdivisions or consolidations of shares, or
other similar changes in capitalization, or if the par value of Company Stock is
altered. If the adjustment would produce fractional shares with respect to any
unexercised Option, the Committee may adjust appropriately the number of shares
covered by the Option so as to eliminate the fractional shares.
(b) If the Company is a party to a consolidation or merger in
which the Company is not the surviving corporation, a transaction that results
in the acquisition of substantially all of the Company's outstanding stock by a
single person or entity, or a sale or transfer of substantially all of the
Company's assets, the Committee may take such actions with respect to
outstanding Incentive Awards as the Committee deems appropriate.
(c) Any determination made or action taken under this Section
14 by the Committee shall be final and conclusive and may be made or taken
without the consent of any Participant.
14. Administration of the Plan. The Plan shall be administered by a
Committee, which shall be appointed by the Board, and which shall consist of not
less than two such members of the Board. Each member of the Committee shall
qualify as a "non-employee director" for
14
<PAGE>
purposes of Rule 16b-3 and as an "outside director" for purposes of Code section
162(m) and the regulations thereunder. The Committee shall have general
authority to construe and interpret the terms of the Plan and the respective
award agreements under the Plan, to impose any limitation or condition upon an
Incentive Award that the Committee deems appropriate to achieve the objectives
of the Incentive Award and the Plan. The determination of the Committee with
respect to any matter under the Plan to be acted upon by the Committee shall be
conclusive and binding. Without limitation and in addition to powers set forth
elsewhere in the Plan, the Committee shall have the following specific
authority:
(a) The Committee shall have the power and complete discretion
to determine (i) which eligible Employees and Selected Advisors shall receive an
Incentive Award and the nature of the Incentive Award, (ii) the number of shares
of Company Stock to be covered by each Incentive Award, (iii) whether Options
shall be Incentive Stock Options or Nonstatutory Stock Options, (iv) when,
whether and to what extent Stock Appreciation Rights shall be granted in
connection with Options, (v) the Fair Market Value of Company Stock, (vi) the
time or times when an Incentive Award shall be granted, (vii) whether an
Incentive Award shall become vested over a period of time and when it shall be
fully vested, (viii) when Options and Stock Appreciation Rights may be
exercised, (x) whether a Disability exists, (x) the manner in which payment will
be made upon the exercise of Options or Stock Appreciation Rights, (xi)
conditions relating to the length of time before disposition of Company Stock
received upon the exercise of Options or Stock Appreciation Rights is permitted,
(xii) procedures for the withholding or delivery of Company Stock to satisfy
Applicable Withholding Taxes, (xiii) the terms and conditions applicable to
Restricted Stock Awards, (xiv) the terms and conditions on which restrictions
upon Restricted Stock shall lapse, (xv) whether to accelerate the time at which
any or all restrictions with respect to Restricted Stock will lapse or be
removed, (xvi) notice provisions relating to the sale of Company Stock acquired
under the Plan, and (xvii) any additional requirements relating to Incentive
Awards that the Committee deems appropriate. The Committee shall have the power
to amend the terms of previously granted Incentive Awards so long as the terms
as amended are consistent with the terms of the Plan and provided that the
consent of the Participant is obtained with respect to any amendment that would
be detrimental to the Participant, except that such consent will not be required
if such amendment is for the purpose of complying with Rule 16b-3 or any
requirement of the Code applicable to the Incentive Award.
(b) The Committee may adopt rules and regulations for
carrying out the Plan. The interpretation and construction of any rules or
regulations adopted by the Committee shall be final and conclusive. The
Committee may consult with counsel, who may be counsel to the Company, and shall
not incur any liability for any action taken in good faith in reliance upon the
advice of counsel.
(c) The Committee may delegate to the officers or employees of
the Company and deliver such instruments and documents, to do all such acts and
things, and to take all such other steps deemed necessary, advisable or
convenient for the effective administration of the Plan in accordance with its
terms and purpose, except that the Committee may not delegate any
15
<PAGE>
discretionary authority with respect 'to substantive decisions or functions
regarding the Plan, nor as to Incentive Awards thereunder as those relate to
Insiders, including but not limited to decisions regarding the timing,
eligibility, pricing, amount or other material term of such Awards.
(d) A majority of the members of the Committee shall
constitute a quorum, and all actions of the Committee shall be taken by a
majority of the members present Any action may be taken by a written instrument
signed by all of the members, and any action so taken shall be fully effective
as if it had been taken at a meeting (e) The Board from time to time may appoint
members previously appointed and may fill vacancies, however caused, in the
Committee.
Notwithstanding this Section 15 or any other provision of the Plan to the
contrary, any action required or permitted to be performed by the Committee may
be performed by the entire Board to the extent necessary or appropriate to
satisfy Rule 16b-3, as determined in the discretion of the Board.
15. Notice. All notices and other communications required or permitted to
be given under this Plan shall be in writing and shall be deemed to have been
duly given if delivered personally or mailed first class, postage prepaid, as
follows:
(a) if to the Company - at its principal business address to the attention of
the Secretary;
(b) if to any Participant - at the last address of the
Participant known to the sender at the time the notice or other communication is
sent.
16. Prototype Plan Document. The Company has adopted The Institutional
Prototype Profit Sharing Section 401(k) Plan (the 'Prototype Plan Document") and
the related Adoption Agreement (the 'Adoption Agreement") (the Prototype Plan
Document and the Adoption Agreement are collectively referred to as the
"Prototype Documents"), for the benefit of its eligible employees, known as the
Pallet Management Systems ,Inc. Profit Sharing 401 (k) Plan (the " Profit
Plan").
A . The Profit Plan shall henceforth consist of the Prototype
Documents and this Addendum, as the same may be amended from time to time. To
the extent of any conflict among such documents, the provisions of this Addendum
shall control.
B. Section 2.33 of the Prototype Plan Document is hereby amended by adding the
following, to the end thereof:
"'Permissible Investment' shall also include shares of Company Stock
which may be contributed to the Trust by the Company or purchased by the Trustee
at the direction of the Plan Administrator. Such purchases may be made, at the
discretion of the Trustee, from either the
16
<PAGE>
Company, any affiliate of the Company, the public market or any other source, at
prices which do not exceed the fair market value of the Company Stock as
determined in good faith by the Trustee. All shares of Company Stock and any
dividends received thereon shall be field in a separate fund which shall be
designated the Company Stock Fund. Assets allocated to the Company Stock Fund
shall be invested in shares of Company Stock and any short-term securities
issued or guaranteed by the United States of America, or in other investments of
a short-term nature.
C. Article II of the Prototype Plan Document is further amended by adding the
following Section 2,. at the end thereof:
"2.48 'Company Stock' means shares of publicly traded common
stock of the Company or any affiliate of the Company which constitute qualifying
Company securities (as that term is defined in Section 407 of the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'))."
D. Section 4.7 of the Prototype Plan Document is hereby
amended by adding the following at the end thereof."The Company may make Company
Contributions and Matching Contributions to the Trust in the form of shares of
Company Stock."
E. Section 5.9(b)(i) of the Prototype Plan Document is hereby amended by adding
the following sentence at the end thereof:
" Notwithstanding the foregoing, the Trustee shall manage the investment
of the Company Stock Fund at the direction of the Plan Administrator and the
Participants and Beneficiaries shall have no investment control over such Fund.
In no event shall assets held in Participants' Elective Deferral Accounts, After
tax Accounts and Rollover Accounts be permitted to be invested in the Company
Stock Fund."
F. Section 7.6 of the Prototype Plan Document is hereby amended by adding the
following subsection (h) at the end thereof:
"(h) All in-service distributions must be paid in cash only."
G. Section 7.7(a) of the Prototype Plan Document is hereby
amended by deleting Option A in its entirety and substituting the following in
lieu thereof. "Option A: (i) One lump sum payment in cash; (ii) one lump sum
payment consisting of all whole shares of Company Stock and the balance in cash;
(111) a total Direct Rollover of an ELIGIBLE Rollover Distribution; or (iv) a
partial lump sum in cash and a Direct Rollover of the remaining balances."
H. Section 10.2 of the Prototype Plan Document is hereby
amended by adding the following s-subsection (m) at the end of subsection (1):
17
<PAGE>
"(m) To acquire and hold securities which constitute qualifying Company
securities with respect to the Profit Plan (as such term is defined in Section
407 of ERISA); provided that the Trustee shall have no responsibility for
determining whether such acquisition or holding complies with ERISA; and
provided further that the Plan Administrator shall be responsible for filing all
reports required under federal or state securities laws with respect to the
Trust's ownership of qualifying Company securities (including without limitation
any reports required under Section 13 or 16 of the Securities Exchange Act of
1934, as amended) and shall immediately notify the Trustee in writing of any
requirement to stop purchases or sales of Company securities pending the filing
of any report, and the Trustee shall provide to the Plan Administrator such
information on the Trust's ownership of qualifying Company securities as the
Plan Administrator may reasonably request in order to comply with federal or
state securities laws and ERISA; "
I. Section 10.5 of the Prototype Plan Document is hereby amended by adding the
following at the end thereof:
"Voting instructions with respect to Company Stock shall be delivered
directly to the Trustee (or an agent of the Trustee) by the Participants and
Beneficiaries, and the Trustee shall maintain the confidentiality, and shall not
disclose the contents, of any such vote except as otherwise required by law or a
court of competent jurisdiction. The Trustee shall vote shares of Company Stock
or respond to a tender offer with regard to Company Stock only in accordance
with instructions from the Participants and Beneficiaries. Unless otherwise
required by law, the Trustee shall take no action with respect to shares of
Company Stock for which it has not received timely instructions from the
Par-ticipants and Beneficiaries."
17. Interpretation. The terms of this Plan are subject to all present and
future regulations and rulings of the Secretary of the Treasury or his delegate
relating to the qualification of Incentive Stock Options under the Code. If any
provision of the Plan conflicts with any such regulation or ruling, then that
provision of the Plan shall be void and of no effect. As to all Incentive Stock
Options and all Nonstatutory Stock Options with an exercise price of at least
100% of Fair Market Value of the Company Stock on the Date of Grant, this Plan
shall be interpreted for such Options to be excluded from applicable employee
remuneration for purposes of Code section 162(m).
IN WITNESS WHEREOF, the Company has caused the Plan to be executed this 1st
day of September 1, 1998.
PALLET MANAGEMENT SYSTEMS, INC.
By:
18
PALLET MANAGEMENT SYSTEMS, INC.
ANNUAL REPORT
FOR THE YEAR ENDED
JUNE 30, 1998
<PAGE>
Officers and Directors
Name Position
John C. Lucy, III Chairman, CEO,
Secretary, Director
Zachary M. Richardson President, Treasurer,
. Director
John C. Lucy, Jr. Director
Donald Radcliffe Director
David W. Sass Director
Transfer Agent
Jersey Transfer and Trust Co.
201 Bloomfield Avenue
PO Box 36
Verona, New Jersey 07044
Auditors
Kaufman, Rossin & Co.
2699 Bayshore Drive
Miami, Florida 33133-5486
Counsel
McLaughlin & Stern, LLP
260 Madison Avenue
New York, New York 10016
<PAGE>
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
27, 1998
( ) 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:
Common Stock
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: $23,214,020
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 September 22, 1998 - $4,818,139.
1
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [x]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
Aggregate market value of securities held by non-affiliates as of September 15,
1998-$8,258,700. Indicate the number of shares outstanding of each of the
registrant's class of common stock, as of the latest practicable date. At
September 15, 1998, there were 2,876,834 common shares, 235,000 Series A
Warrants, 612,300 Series B Warrants 142,935 Warrants and 100,000 Underwriters'
Warrants.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security-holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security-holders
for fiscal year ended December 24, 1980)
1. Part IV, Item 14, incorporated by reference the following Exhibits: 3.1, 3.2,
4.1, and 99.
Exhibit 3.1 Articles of Incorporation, Amendment to Articles
of Incorporation filed June 7, 1985, Amendment to
Articles of Incorporation filed July 10,1985,
Amendment to Articles of Incorporation filed October
12, 1994, Amendment to Articles of Incorporation filed
November 21, 1994.
Exhibit 3.2 Amended and Restated By-Laws
Exhibit 4.1 Sample stock certificate
Exhibit 99 PMSI Omnibus Stock Plan - 1995
2
<PAGE>
Part I
Item 1. Description of Business.
Introduction
Pallet Management Systems, Inc. (the "Company") provides the transport
packaging industry with pallet supplies, pallet retrieval, pallet repair, other
packaging components and packaging logistics management. The Company was formed
by the combination of several companies and has operations in Alabama, Florida
and Virginia.
The pallet is the base component for most packaging which allows goods
to be transported or warehoused economically by providing a foundation which
enables the use of forklifts and vertical storage. Most commonly associated with
a four-foot square wood platform, pallets are also engineered from various
materials in varying dimensions. The pallet, a little known entity to the
consumer, is a key factor to worldwide 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 approximately $6 billion
($6,000,000,000) and plays a vital roll in transportation and distribution
today. The industry is characterized by 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. There is no
industry dominator and it is free from government regulation.
The Company focuses on total solutions for its customers' pallet and
packaging requirements through comprehensive products and services, including
manufacturing and distributing new and recycled pallets as well as logistical
and remediation services. (Remediation being 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 typical four-foot
square wooden pallets has decreased over the years. Consequently, the company is
focused on manufacturing specially engineered pallets for niche markets and
transport packaging 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 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, as well as all
transport packaging, are an integral part of retail and industrial distribution.
Nearly every item manufactured or processed is shipped and/or stored on pallets
as they are packaged for distribution.
According to the National Wooden Pallet and Container Association
(NWPCA), in calendar year 1997, there were approximately 2 billion pallets in
circulation in the United States including 400 million new wood pallets
manufactured and sold. There were hundreds of millions of wood pallets sold on a
used or recycled basis. Sales of recycled pallets and pallet leasing 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 or pallets made of other materials where
closed loop supply systems can control pallet accountability and requirements
such as sanitation and/or durability is critical. According to analysts, plastic
pallets currently have about 3% of the US pallet market.
3
<PAGE>
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 pallet industry is highly fragmented with over 3,500 pallet
companies scattered across the United States. It is estimated that a quarter of
these companies have fewer than five employees and sales under $2 million. Most
of these companies attempt to specialize in only one segment of the industry:
new pallet manufacturing, recycled pallet repair and 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 increase. Customers have 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 in high volume markets
such as the grocery industry, which is estimated to generate $1.5 billion in
annual pallet sales. However, management believes that this response will only
solve a small piece of the overall supply chain packaging dilemma which plague
other lower volume pallet users.
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 facility, with a daily capacity of over 10,000 units. Due to rising
costs and increased competition, the Company's gross profit per pallet on high
volume pallet manufacturing has decreased over time. In response, the Company
focuses its marketing efforts for new pallet manufacturing to niche areas where
lower volume, specially engineered pallets command higher profit margins.
Other Transport Packaging
The Company functions as a wholesale distributor of various returnable
transport packaging. Profits on these items vary and include plastic and metal
pallets; collapsible plastic bulk boxes; wood, plastic, and metal slave pallets;
wooden boxes and crates; and various other products. Due to lack of demand,
sales of pallets made from materials other than wood are minimal.
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 sells as recycled pallets, disassembles for
repair components, or mulches.
Services
Third Party Management
The Company offers pallet and packaging component sorting and repair
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 packaging resources.
Retrieval Systems
Provides customers with a system for lowering cost-per-trip packaging
by creating a closed-loop return system
4
<PAGE>
between the manufacturer, their customers, and their vendors. The Company
currently manages several retrieval programs on a regional basis. Packaging
retrieval is the primary focus of the Company's expansion program.
Warehousing
At select locations, the Company sorts and stores pallets as well as
other packaging components for customers indoors to provide higher quality
recycled reusable packaging components. Margins are low; however, this service
adds value and provides a competitive advantage. Management anticipates that
packaging component warehousing will be in higher demand in the future as
reusable packaging will increase demand for moisture controlled environments.
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 20% of its lumber from
Clary Lumber Co., Inc., ("Clary") at or below market price. Clary is owned by
John C. Lucy, Jr., a significant shareholder and director of the Company.
End users are the principal suppliers of used pallets. Depending on the
season and other circumstances, used pallet supplies vary in cycles from region
to region.
Operations
Operations are grouped into Pallet Manufacturing, Sorting and Repair
Services, Recycling and Retrieval Systems, and Logistical Services. These groups
manage local operations as accounting and administrative functions are
centralized in Lawrenceville, VA.
The Company services customers through affiliated companies as well as
company owned facilities which are classified as: Repair Depots and
Manufacturing Plants.
Repair Depots.
The Company has regional Repair Depots in Virginia and Florida. These
facilities have 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, pallet storage and pallet
recycling.
Manufacturing Plants
The Company manufactures high quality specialty wood and wood combination
pallets for niche markets. A large manufacturing plant is located in Virginia
with another recently opened plant in Alabama. These facilities are capital
intensive with "state of the art" automation for new pallet production.
Marketing and Distribution.
The Company has a customer base of over 200 customers, many of which
are Fortune 500 companies, including AlliedSignal, Bethlehem Steel, Cannon, Chep
America, Dupont, IAMS, Metal Container, Mitsubishi, Scotts Company, Walt Disney
World, WestVaco and various governmental agencies.
The marketing plan of the Company focuses on service, and the related
cost savings for our customers. Service, no longer means just delivering pallets
on time, it also means helping customers manage their packaging requirements and
providing overall solutions to generate cost savings.
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 companies which are trying to consolidate the pallet
industry by acquiring pallet companies nationwide. Many of the competitors are
larger and have greater resources than the Company.
5
<PAGE>
Employees
The Company has approximately 335 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
Citra, Fl, Repair Depot/Plant: 18801 U.S. Highway 301 North. Pallet recycling
and manufacturing are performed at this location which contains a 5,000 sq. ft.
building on five acres leased for five years ending July, 2000. This facility
employs approximately 20 people.
Lakeland, FL, Repair Depot: 2420 New Tampa Hwy. This facility, opened in April
1996, is comprised of a 63,000-sq. ft. building on five acres with a five-year
lease terminating in March 2001. It employs eight-five people and can process
all types of pallets on a high-speed automated line.
Lawrenceville, VA, Manufacturing Plant: 10324 Liberty Road. New pallet
manufacturing is performed at this Company-owned mortgage-free facility using
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.
Orlando, FL, Depot: 9639 Sidney Hayes Road. Pallet sorting is performed in a
15,000-sq. ft. building on three acres of leased property which expires August
2004. This facility employees approximately 6 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, mortgage free
property. There are approximately 50 people employed at this facility which
contains "state of the art" automated equipment.
Rogersville, AL, Manufacturing Plant: 120 Industrial Park Road. This facility
opened September 1998 in a 25,500 sq. ft. facility on seven acres with a three
year lease terminating September 2001. It will employ up to 45 people and
manufactures pallets on a high-speed automated manufacturing line.
Corporate Offices are located at One South Ocean Boulevard, Suite 305, and Boca
Raton. The Company leases 1,009-sq. ft. of office space which expires in May
2000.
Item 3. Legal Proceedings.
There are no material 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
None
6
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the NASDAQ 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 1998 and 1997: <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C>
Bid Prices
Period High Low
Fiscal Year 1998
First Qtr. (9/97) 5 1/2 1
Second Qtr. (12/97) 9 2 1/4
Third Qtr. (3/98) 12 1/2 8
Fourth Qtr. (6/98) 12 7/8 10 1/2
Fiscal Year 1997
First Qtr. (9/96) 12 2
Second Qtr. (12/96) 4 1/4 1
Third Qtr. (3/97) 3 2
Fourth Qtr. (6/97) 3 1/4 1 3/4
</TABLE>
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 August 25, 1998, there were 890 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. All stock data and per share amounts
have been restated to give effect to the two-for-one stock split in October 1996
and the one-for-four reverse stock split in February 1998.
Item 6. 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 27, 1998 Compared to Fiscal Year Ended June 30, 1997:
For the year ended June 27, 1998 net sales increased 10% to $23,214,000
from $21,052,000 for the prior year. This increase was due mainly to an increase
in new pallet sales, which accounted for 71% of net revenues, as opposed to 68%
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 56% and 44% of 1998 and 1997 net sales respectively.
Cost of sales for 1998 was $20,818,000 (90% of net sales) as compared
to $19,554,000 (93 % of net sales) for 1997. This percentage decrease is
attributable to efficiencies gained in new pallet production, new "state of the
art" manufacturing equipment, and a result of larger production runs and cost
containment. During fiscal year 1997, the Company also experienced rising cost
of lumber which resulted in increased product cost that could not be entirely
passed onto the customer. Lumber prices stabilized in 1998 and customer
contracts were adjusted.
Selling, general and administrative expenses were $1,830,000 (8% of net
sales) in 1998 as compared to $1,939,000 (9% of net sales) in 1997. This
decrease is due to cost savings realized through consolidation of both
operational and administrative functions.
Interest expense increased to $385,000 in 1998 from $365,000 in 1997.
This increase is due to increased borrowing in the first half of 1998 and
default penalties paid to the previous lender.
7
<PAGE>
Net income for 1998 was $192,000 compared to a net loss of $883,000 for
1997. This turnaround to profitability was due to increased volume at several
locations, a continued focus on cost control, and the addition of higher margin
products throughout the year.
The Company credits its turnaround to the continued focus on higher
margin products and its perseverance to stick with the Company's long-term
marketing plan of niche markets in the face of severe competition. In addition,
the stabilized cost of raw materials in the hardwood markets allowed more
effective purchasing controls. The Company continues to focus on cost control in
normal pallet manufacturing while investing in the service and system side of
the business to insure long term viability. Future profitability will be
directly related to the Company's ability to sell higher than average quality
pallets (including plastic) and link this together with management and operation
of remediation systems.
Liquidity and Capital Resources:
The Company's financing needs depend primarily upon sales volume and
controllable variable expenses. During 1998, the Company financed its working
capital needs through profits, new borrowings and equity offerings..
The Company had cash on hand of $401,000 at the end of 1998, versus
$237,000 at the beginning of the fiscal year. This cash increase is attributable
to $1,702,000 provided through equity offerings. The cash increase was offset by
cash used in operating activities of $519,000, purchase of property, plant and
equipment of $506,000, and net repayment of debt of $513,000.
The Company completed a new financing agreement with American
Commercial Financial Corporation which increased the line of credit available to
the Company to $3.9 million, from the former $2.5 million line from NationsBank,
at an interest rate of prime plus 2.25% and is secured by priority lien upon
substantially all the assets of the Company, except for real estate. Advances
are based on 80% of eligible accounts receivable and 50% of inventory. The line
of credit has a two-year term. 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.
Management does not anticipate any problem with year 2000
compatibility. During the past 24 months the Company has been upgrading its
computer hardware and software systems.
The Company is in the process of achieving ISO 9000 registration. Total
anticipated time to complete the project is twelve months. Profile Consulting
Group, Ltd. of Troy, MI has been engaged to assist in this endeavor. Once
completed, this process will streamline and enhance internal operations to
better meet customer needs. Many large corporations are now requiring their
vendors to be ISO certified. The Company views this program as a vehicle to
strengthen its ongoing quality program.
In November 1997 the Company completed a private placement offering in
which it sold 1,000,000 units for $1.00 each. The units consisted of two shares
of stock and two warrants, A and B. A Warrants have an exercise price of $1.50
and B Warrants have an exercise price of $1.75. As of September 15, 1998,
235,000 A Warrants and 612,300 B Warrants remain outstanding as well as
underwriter warrants for 100,000 units which expire September 2002. On August
31, 1998, notice was given to all A and B Warrant holders that on October 1,
1998, the Company would redeem all outstanding A & B Warrants as of September
30, 1998 for $.01. In February 1998 the company had a one-for-four reverse stock
split which did not effect the exercise price of the warrants.
8
<PAGE>
The Company believes that it will have sufficient capital and borrowing
power to sustain operations and proceed with plans for expansion. In fiscal 1999
the Company has plans to open at least one new specialty pallet manufacturing
facility as well as expand its pallet services and logistical operations.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Item 7. Financial Statements
(i) Report of Independent Certified Public
Accountants June 27, 1998....................................................................F-1
(ii) Consolidated Balance Sheet as of June 27, 1998................................................F-2
(iii) Consolidated Statements of Operations
for the years ended June 1998 and 1997........................................................F-3
(iv) Consolidated Statement of Stockholders'
Equity for the years ended June 1998 and 1997.................................................F-4
(v) Consolidated Statements of Cash Flows for
the years ended June 1998 and 1997............................................................F-5
(vi) Notes to Consolidated Financial Statements....................................................F-6
</TABLE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no disagreements on any manner of accounting principles or
practices of financial statement disclosure during the most recent financial
statements included herein.
9
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
As of August 30, 1998, the executive officers and directors of the
Company were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Names and Addresses Age Position
John C. Lucy, III 39 Chairman of the Board of
Directors and CEO
M. Richardson 43 President, Secretary,
Treasurer and Director
John C. Lucy, Jr. 64 Director
Donald Radcliffe 53 Director
David W. Sass 62 Director
</TABLE>
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 BS in business. For the past two years, 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,
and 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.
He was elected Chairman and CEO of the Company on June 29, 1995.
Zachary M. 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 21 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 WorldWide Business Centers, a company
which provides businesses with office space and facilities. From June 1970
through June 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.
10
<PAGE>
David W. Sass was appointed a director in July 1998. Mr. Sass has, for
the past 38 years, been a practicing attorney in New York City and is currently
a senior partner in the law firm of McLaughlin & Stern, LLP and is legal counsel
to the Company. Mr. Sass is a director of The Harmat Organization, Inc., a real
estate development company; a director of Genisys Reservation Systems, Inc., a
company engaged in the development of a computerized limousine reservation
system; an officer of Westbury Metals Group, Inc., a company engaged in the
refining of precious metals; an officer of Pioneer Commercial Funding Corp., a
company engaged as a mortgage warehouse lender providing short term financing to
mortgage bankers and a member and Vice Chairman of the Board of Trustees of
Ithaca College.
Item 10. Executive Compensation.
The following table sets forth the cash and cash equivalents paid
during the fiscal years ended June 1996, 1997 and 1998 to all individuals
serving as the Company's executive officers during the last fiscal year.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLES
Name and Principal Year Annual Long-Term
Position Compensation Compensation
Awards Payouts
------------ --------- ------------------ ------------- --------- ---------
Salary Bonus ($) Other Restricted Options/ LTIP All
($) (2) ($) Stock Awards SARs(4) Other
------------ --------------- --------- ------------------ ------------- --------- ---------
John C. Lucy, III, 1998 58,546 69,000
Chairman (1), (3) 1997 56,883
1996 86,800
--------- ------------------ ------------- --------- ---------
Zachary M. 1998 58,104 69,000
Richardson, 1997 57,480
President, Director 1996 100,117
(3)
========================== ======== ============ =============== ========= ================== ============= ========= =========
</TABLE>
(1) Mr. Lucy was elected Chairman of the Company on June 29, 1995.
(2) Includes medical insurance reimbursements.
(3) Messrs. Lucy and Richardson reduced their annualized salaries from
$95,000 to $52,000 in June 1996. In July 1998 Messrs. Lucy and
Richardson restored their salaries to their $95,000 contracted amount.
This was not made retroactive. (4) Includes for each 9,000 Incentive
Stock Options and 60,000 non-qualified options with a $2 exercise price
with a four-year vesting period. Does not include 345,535 performance
options with exercise prices from $1.50 to $2.25.
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.
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 elected to temporarily reduce their salary to an
annualized $52,000 for the fiscal years 1997 and 1998. On July 1998, their
salary was restored to the contracted amount.
11
<PAGE>
The Company currently 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 28, 1998 by mutual consent; accordingly, no
payments were made during that time. Management is currently reviewing this
agreement.
No compensation has been paid to any director for his or her services
during fiscal year 1998 or years prior. In July 1998 the board of directors
authorized compensation of $1,000 per Director for each board meeting and $500
for special conference telephone meetings. The Company also authorizes 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.
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. As of
June 27th, 1998, 217,000 had been granted with an exercise price of $2.00. These
options will be fully vested July 1, 2001 and expire June 30th, 2007.
In conjunction with the November private placement, 1,000,000 options
were granted to Messrs. Lucy and Richardson. These options have an exercise
restriction based on income performance before taxes, depreciation and
amortization. Messrs. Lucy and Richardson allocated approximately one-third of
these options to company management. The Company achieved the first threshold
thus releasing 325,000 options (145,000 with exercise price of $1.50, 90,000
with exercise price of $1.75, and 160,000 with exercise price of $2.25). The
next threshold is corporate income of $400,000 for the first half of fiscal year
1999. (360,000 options - 110,000 with exercise price of $1.50, 90,000 with
exercise price of $1.75, and 90,000 with exercise price of $2.25). The last
threshold is corporate income of $1,000,000 for fiscal year 1999. (315,000
options - 145,000 with exercise price of $1.50, 120,000 with exercise price of
$1.75, and 50,000 with exercise price of $2.25).
Item 11. 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 2,342,034 shares of
Common Stock and as of June 30, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Name and Address Amount and Nature of Percent
Of Beneficial Owner (1) Beneficial Ownership Of Class
(9)
John C. Lucy, III (2,4 & 9) 184,818 7.7%
Pallet Management Systems, Inc.
One S. Ocean Boulevard #305
Boca Raton, Florida 33432
12
<PAGE>
Zachary Richardson (2,5 & 9) 188,077 7.8%
Pallet Management Systems, Inc.
One S. Ocean Boulevard #305
Boca Raton, Florida 33432
John C. Lucy, Jr. (3,6 & 9) 670,052 26.6%
Pallet Management Systems, Inc.
One S. Ocean Boulevard #305
Boca Raton, Florida 33432
Donald Radcliffe (3,7 & 9) 12,750 (10)
Pallet Management Systems, Inc.
One S. Ocean Boulevard #305
Boca Raton, Florida 33432
David W. Sass (3,8 & 9) 1,500 (10)
McLaughlin & Stern, LLP
260 Madison Avenue, 18th Floor
New York, New York 10016
All officers and Directors as a group (5persons) (1-9) 1,057,197 40.6%
</TABLE>
(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 90,100 shares owned; 23,000 shares held in custody for
children; 2,718 five year warrants with $2.00 exercise price, expire in
December 2001 and 69,000 ten year stock options granted on July, 1,
1997 with $2.00 exercise price and expire July 2007. (5) Includes
110,327 shares owned; 8,750 five year warrants with $2.00 exercise
price, expire in December 2001 and 69,000 ten year stock options
granted on July, 1, 1997 with $2.00 exercise price and expire July
2007. (6) Includes 440,696 shares owned; 50,000 shares owned by Clary;
75,000 and 50,000 five year warrants with $2.00 exercise price, owned
by Mr. Lucy and Clary respectively, expire in December 2001 and 54,356
ten year stock options granted on July, 1, 1997 with $2.00 exercise
price and expire July 2007. (7) Includes 5,250shares owned; 3,750 five
year warrants with $2.00 exercise price, expire in December 2001 and
3,750 ten year stock options granted on July, 1, 1997 with $2.00
exercise price and expire July 2007. (8) Includes 1,500 ten-year stock
options granted on July 1, 1997 having a $2.00 per share exercise price
and expire July 2007. (9) Does not include performance options. (10)
Less than 1%
Item 12. 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
$2,721,000 and $2,895,000 which is 22% and 25% of Abell's lumber purchases for
the fiscal years 1998 and 1997 respectively. Abell sold approximately $10,000 of
lumber to Clary in fiscal year ended 1997. 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 1998 of which all has been repaid. The Company
has paid Clary $63,000 in salary and related taxes reimbursement for
compensation to John C. Lucy III who performs services for both Clary and the
Company.
In conjunction with the November private placement, 1,000,000 options
were granted to Messrs. Lucy and Richardson. These options have an exercise
restriction based on income performance before taxes, depreciation and
amortization. Messrs. Lucy and Richardson allocated approximately one-third of
these options to company management. The Company achieved the first threshold
thus releasing 325,000 options (145,000 with exercise price of $1.50, 90,000
with exercise price of $1.75, and 90,000 with exercise price of $2.25). The next
threshold is corporate income of
13
<PAGE>
$400,000 for the first half of fiscal year 1999. (360,000 options - 110,000 with
exercise price of $1.50, 160,000 with exercise price of $1.75, and 90,000 with
exercise price of $2.25). The last threshold is corporate income of $1,000,000
for fiscal year 1999. (315,000 options - 145,000 with exercise price of $1.50,
120,000 with exercise price of $1.75, and 50,000 with exercise price of $2.25).
Item 13. Exhibits and Reports on Form 8-K
Schedules and Reports on Form 8-K
Page
A. (1) Financial Statements
(i) Report of Independent Certified Public
Accountants June 27, 1998...............................F-1
(ii) Consolidated Balance Sheet as of June 27, 1998...........F-2
(iii) Consolidated Statements of Operations
for the years ended June 1998 and 1997...................F-3
(iv) Consolidated Statement of Stockholders'
Equity for the years ended June 1998 and 1997............F-4
(v) Consolidated Statements of Cash Flows for
the years ended June 1998 and 1997.......................F-5
(vi) Notes to Consolidated Financial Statements.............. F-6
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits
3.1 Articles of Incorporation Incorporated by reference to the
filing of such Exhibit with Registrants Annual Report on Form
10-K for the fiscal year ended June 30, 1996.
3.2 By-Laws Incorporated by reference to the filing of such
Exhibit with Registrants Annual Report on Form 10-K for the
fiscal year ended June 30, 1996.
4.1 Specimen Certificate of Common Stock Incorporated by reference
to the filing of such Exhibit with Registrants Annual Report
on Form 10-K for the fiscal year ended June 30, 1996.
99 Omnibus Stock Plan Incorporated by reference to the filing of
such Exhibit with Registrants Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.
99 1997 Omnibus Stock Plan (filed herewith)
27 Financial Data Schedule
B. Reports on Form 8-K - None
14
<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 27, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended June 27, 1998 (52 weeks) and June 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pallet Management
Systems, Inc. and Subsidiaries as of June 27, 1998, and the results of their
operations and their cash flows for the years ended June 27, 1998 (52 weeks) and
June 30, 1997, in conformity with generally accepted accounting principles.
KAUFMAN, ROSSIN & CO.
Miami, Florida
August 14, 1998 (Except for notes J and N, as to which the date is September 18,
1998)
The accompanying notes are an integral part of these statements.
F-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 27, 1998
ASSETS
CURRENT ASSETS
Cash $ 401,166
Accounts receivable, net of allowance for doubtful accounts of $15,000 1,691,827
Inventories 1,175,346
Prepaid expenses 155,731
Total current assets 3,424,070
Property, plant and equipment - net 2,966,947
Other assets 41,572
$ 6,432,589
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,127,889
Accounts payable 593,522
Accrued liabilities 406,760
Total current liabilities 3,128,171
LONG-TERM LIABILITIES
Deferred income taxes 31,381
Long-term debt 1,097,596
1,128,977
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 2,342,034 shares 2,342
Additional paid-in capital 4,526,340
Accumulated deficit ( 2,366,718)
Unrealized gain on available-for-sale investments 13,477
2,175,441
$ 6,432,589
The accompanying notes are an integral part of these
statements.
F - 2
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 27, 1998 (52 weeks) and June 30, 1997
1998 1997
----------------- -----------------
Net sales $ 23,214,020 $ 21,051,818
Cost of goods sold 20,818,052 19,553,853
Gross profit 2,395,968 1,497,965
Selling, general and administrative expenses 1,869,470 1,938,548
Operating income (loss) 526,498 ( 440,583)
Other income (expense)
Other income 11,404 23,878
Other expense ( 385,782) ( 563,356)
Other income (expense) ( 374,378) ( 539,478)
Income (loss) before income taxes 152,120 ( 980,061)
Income tax benefit 39,507 97,084
Net income (loss) $ 191,627 ($ 882,977)
Earnings (loss) per common and common equivalent share:
Primary $ .12 ($ .77)
Fully diluted $ .05 ($ .77)
Shares used in computing earnings (loss) per common and common equivalent share:
Primary 1,646,791 1,149,287
Fully diluted 4,070,901 1,149,287
F-3
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY Years Ended June 27, 1998 (52 weeks) and
June 30, 1997
Retained Unrealized
gain on
available-for-sale
investments
Additional Earnings
Common Stock Paid-In (Accumulated
----------------------------------
Shares Amount Capital Deficit) Total
---------------- ----------------- ---------------- ----------------- ---------------- ------
Balance at June 30, 1996 1,060,849 $ 1,061 $ 2,044,569 ($ 1,675,368) $ - $370,262
Contributed capital on sale of
building to related party - - 102,326 - - 102,326
Conversion of debt to
common stock 151,685 152 678,110 - - 678,262
Net loss - - - ( 882,977) - (882,977)
---------------- ----------------- ---------------- ----------------- ---------------- -----
Balance at June 30, 1997 1,212,534 1,213 2,825,005 ( 2,558,345) - 267,873
Issuance of common stock and 500,000 500 832,500 - - 833,000
warrants
Common stock and warrants issue - - ( 96,694) - - ( 96,694)
costs
Exercise of options and warrants 629,500 629 965,529 - - 966,158
Unrealized gain on - - - - 13,477 13,477
available-for-sale investments
Net income - - - 191,627 - 191,627
---------------- ----------------- ---------------- ----------------- ---------------- ------
Balance at June 27, 1998 2,342,034 $ 2,342 $ 4,526,340 ($ 2,366,718) $13,477 $2,175,441
---------------- ----------------- ---------------- ----------------- ---------------- -----
The accompanying notes are an integral part of these statements.
F - 4
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 27, 1998 (52 weeks) and June 30, 1997
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 191,627 ($ 882,977)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 413,287 417,331
Loss on sale and abandonment of property, plant and - 61,283
equipment
Bad debt expense 9,565 28,736
Debt conversion expense - 71,522
(Increase) decrease in operating assets:
Accounts receivable 23,765 ( 572,625)
Inventories ( 272,950) 117,847
Prepaid expenses ( 57,652) 46,118
Income tax receivable - 517,771
Other assets 11,371 9,673
Increase (decrease) in operating liabilities:
Accounts payable ( 621,554) 191,485
Accrued liabilities ( 177,206) ( 30,880)
Deferred income taxes ( 39,507) ( 97,084)
Net cash used in operating activities ( 519,254) ( 121,800)
Cash flows from investing activities:
Purchase of fixed assets ( 506,357) ( 386,967)
Proceeds from sale of property, plant and equipment - 103,318
Net cash used in investing activities ( 506,357) ( 283,649)
Cash flows from financing activities:
Proceeds (repayments) under line of credit, net ( 165,480) 420,172
Proceeds from lenders 900,000 836,555
Repayments to lenders ( 1,247,654) ( 733,048)
Issuance of stock and warrants 1,702,464 -
Contributed capital - 102,326
Net cash provided by financing activities 1,189,330 626,005
Increase in cash 163,719 220,556
Cash at beginning of period 237,447 16,891
Cash at end of period $ 401,166 $ 237,447
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 393,604 $ 353,008
Income taxes $ - $ -
Schedule of non-cash investing and financing activities:
Capital lease obligations of $92,995 were incurred during the year ended
June 27, 1998.
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.
F-5
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 27, 1998 and June 30, 1997
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,
Virginia and Alabama. The Company's revenues are derived primarily from the sale
of new and used pallets.
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"), Abell Lumber, Inc. ("Abell"), Pallet Systems-Lakeland, FL, Inc. and
Pallet Management Systems of Alabama, Inc. 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-6
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED June 27, 1998 and June
30, 1997
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 $1,005,000 at
June 27, 1998 which is offset by a valuation allowance of approximately
$838,000. 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
Primary earnings (loss) per common and common equivalent share and fully
diluted earnings per common and common equivalent share are computed using
the weighted average number of shares outstanding adjusted for the
incremental shares attributed to outstanding options and warrants to
purchase common stock. For the year ended June 30, 1997 outstanding stock
options were not considered in the calculation of weighted average number of
shares outstanding as their effect would have been antidilutive.
All stock data and per share amounts have been restated to give effect to
the two-for-one stock split in October 1996 and one-for-four reverse stock
split in February 1998.
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 to employees under the Company's Stock Option Plan are
accounted for by using the intrinsic method under APB Opinion 25, Accounting
for Stock Issued to Employees (APB 25). 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 stock options. The new accounting standards prescribed by
SFAS 123 are optional and companies may continue to account for stock
options under the intrinsic value method specified in APB 25. The Company
intends to continue with its current method of accounting under APB 25 for
employees, however, pro forma disclosures of net earnings and earnings per
share have been made in accordance with SFAS 123.
F-7
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED June 27, 1998 and June
30, 1997
NOTEA - 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 - INVENTORIES
Inventories consisted of the following at June 27, 1998:
Raw materials $ 505,101
Work in process 366,757
Finished goods 303,488
$ 1,175,346
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at June 27, 1998:
Machinery and equipment $ 3,154,739
Building and improvements 1,594,593
Vehicles 885,275
Furniture and equipment 212,924
Land 136,044
5,983,575
Less: accumulated depreciation
and amortization 3,016,628
$ 2,966,947
Depreciation and amortization expense was $413,287 and $417,331 in 1998 and
1997, respectively, and is included in "cost of goods sold" and "selling,
general and administrative" expenses in the accompanying consolidated
financial statements.
F-8
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED June 27, 1998 and June 30,
1997
NOTE D - INCOME TAXES
The income tax benefit consisted of the following:
Years Ended
June 27, 1998 June 30, 1997
Current:
Federal $ - $ -
State - -
- -
Deferred:
Federal ( 35,696) ( 87,719)
State ( 3,811) ( 9,365)
( 39,507) ( 97,084)
($ 39,507) ($ 97,084)
Deferred income taxes were recognized in the consolidated balance sheet at
June 27, 1998 due to the tax effect of temporary differences and loss
carryforwards as follows:
Deferred tax assets:
Net operating $ 980,417
loss carryforwards
Other 24,259
1,004,676
Valuation Allowance 837,621
167,055
Deferred tax
liabilities:
Depreciation 198,436
Net deferred tax $ 31,381
liability
The major elements contributing to the difference between the income tax
benefit and the amount computed by applying the federal statutory tax rate
of 34% to income (loss) before income taxes are as follows:
Years Ended
-----------------------------------------
June 27, 1998 June 30, 1997
-------------------- --------------------
Statutory rate $ 51,721 ($ 333,220)
State or local income taxes 6,514 ( 28,018)
Increase (decrease) in valuation allowance ( 122,329) 184,812
Permanent differences and other 24,587 79,342
($ 39,507) ($ 97,084)
As of June 27, 1998, the Company had net operating loss carryforwards of
approximately $2,600,000 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-9
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED June 27, 1998 and June 30,
1997
NOTE E - DEBT
$3,000,000 revolving credit agreement with a bank. Interest is paid monthly at the $ 1,581,361
bank's prime rate plus 2.25% (10.75% at June 27, 1998). Principal is due on demand. The
line is collateralized by substantially all the assets of the Company, excluding real
estate and expires February 29, 2000. Advances are based on 80% of eligible accounts
receivable and 50% of eligible inventories, as defined.
Bank note payable in monthly installments of $15,000 plus interest at the bank's prime 855,000
rate plus 2.25% (10.75% at June 27, 1998) through March 2002. The note is collateralized
by substantially all the assets of the Company.
Notes payable to investor; interest payable quarterly at 9%; each $25,000 principal 200,000
amount is convertible into 1% of PRTI's common stock, as defined; subordinated to all
non-trade debt and uncollateralized. Principal due November 1998.
Note payable in monthly installments of $5,327, plus interest at 10.25%.
Final payment 177,938 due November 2001, collateralized by various
machinery and equipment.
Industrialized development notes payable; quarterly installments of $3,381, including 161,283
interest at 5.25%, maturing October 2017 and uncollateralized.
Bank notes payable in monthly installments ranging from $219 to $3,498, including 51,398
interest ranging from 8% to 19%; collateralized by equipment and vehicles; maturing at
various dates through January 2000.
Notes payable in monthly installments of $267 to $2,634, including interest ranging from 198,505
7% to 17%, collateralized by equipment and vehicles; maturing at various dates through
March 2003.
Total debt 3,225,485
Less: current portion 2,127,889
$ 1,097,596
Interest expense for the years ended June 27, 1998 and June 30, 1997
amounted to $385,782 and $364,938, respectively, and is included in other
expense in the accompanying consolidated statements of operations.
Scheduled maturities of long-term debt for years subsequent to June 27,
1998 are as follows:
1999 $ 2,127,889
2000 296,467
2001 283,327
2002 227,210
2003 156,745
Thereafter 133,847
$ 3,225,485
F - 10
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED June 27, 1998 and June 30,
1997
NOTE F - ACCRUED LIABILITIES
Accrued liabilities consisted of the following at June 27, 1998:
Accrued compensation $ 113,768
Other accrued liabilities 292,992
$ 406,760
NOTE G - 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:
1999 $ 317,714
2000 322,482
2001 298,437
2002 266,706
2003 60,000
Thereafter 70,000
Total $ 1,335,339
Total rent expense was approximately $471,000 and $594,000 for the years ended June 27, 1998 and June 30,
1997, respectively.
NOTE H - 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. All advances were repaid during the year ended June
27, 1998. The Company paid approximately $63,000, and $57,000 during the
years ended June 27, 1998 and June 30, 1997, respectively, to Clary Lumber
for compensation of certain employees who perform services for both Clary
Lumber and the Company.
The Company purchased approximately $2,771,000 and $2,895,000 of lumber
from Clary Lumber during the years ended June 27, 1998 and June 30, 1997,
respectively. This amounted to 22% and 25% of the Company's lumber
purchases for the years ended June 27, 1998 and June 30, 1997,
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 - 11
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED June 27, 1998 and June 30,
1997
NOTE I - EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment agreements with two senior executives that
provide for minimum annual compensation totaling $190,000 as well as
additional compensation as defined in the agreement. The contracts expire
on June 30, 2000. The executives elected to reduce their salaries through
June 27, 1998. Payments under these agreements for the years ended June
27, 1998 and June 30, 1997 totaled $116,650 and $114,363, respectively.
The Company's remaining commitment at June 27, 1998 under such contracts
is $380,000.
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 27, 1998 by mutual consent of the
parties.
NOTE J - STOCKHOLDERS' EQUITY
1. Stock Splits
The Company's common stock was split two-for-one on October 3, 1996
resulting in an increase of 814,286 shares. Certain shareholders,
consisting primarily of officers and directors, waived their right to this
split. In February 1998, the Company effected a one-for-four reverse stock
split. All stock data and per share amounts in the consolidated financial
statements have been restated to give effect to the stock splits.
2. Private Placement Offering
In November 1997, the Company completed a Private Placement Offering (the
Offering) for 1,000,000 units for $1 per unit. Each unit consisted of one
half of a share of common stock and warrants, exercisable for two years,
to purchase two shares of common stock for $1.50 and $1.75, respectively.
After expenses of the Offering, including commissions and professional
fees, proceeds to the Company were $736,306. In August 1998 the Company
notified all warrant holders that the Company would redeem all outstanding
warrants on October 1, 1998.
3. 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.
NOTE K - STOCK BASED COMPENSATION
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. The options vest over a four year period and expire in ten
years or three months after separation of service, whichever occurs
earlier.
F-12
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED June 27, 1998 and June 30,
1997
NOTE K - STOCK BASED COMPENSATION (Continued)
In September 1997, in connection with the Offering, the Company granted
options to purchase 1,000,000 shares of common stock to the principal
officers of the Company. The officers allocated approximately one-third of
these options to Company management. The options, which expire in five
years, will only be exercisable as performance goals are achieved. The
goals are based on income amounts, as defined, through June 30, 1999.
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" (APB 25") in accounting for
its employees stock options. Under APB 25, because the exercise price of
the Company's employee stock options issued was greater than the market
price of the underlying stock on the date of grant, no compensation
expense was recognized.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-based Compensation," ("SFAS No. 123") requires the Company to
provide proforma information regarding net income (loss) and income (loss)
per common share as if compensation cost for the Company's Stock Option
plan had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimated the fair value of each
stock option on the date of grant by using the Black-Sholes pricing model.
Under the accounting provisions of SFAS No. 123, the Company's net income
and primary and fully diluted earnings per common and common equivalent
share for the year ended June 27, 1998 would have been $161,489, $.10 and
$.04, respectively. A summary of the Company's stock option activity, and
related information for the year ended June 27, 1998, is as follows:
# of Weighted Average
Options Exercise Price
-------------------------- --------------------------
Outstanding July 1, 1997 - $ -
Granted 1,233,957 1.84
Exercised 2,850 2.00
Forfeited - -
Outstanding June 27, 1998 1,231,107 $ 1.84
Exercisable at June 27, 1998 414,782 $ 1.83
The weighted-average fair value of options granted was $.06 for the year
ended June 27, 1998.
Exercise prices for options outstanding and exercisable as of June 27,
1998 ranged from $1.50 to $2.25. The weighted average remaining
contractual life of these options is approximately 5 years.
F-13
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED June 27, 1998 and June 30,
1997
NOTE L - SIGNIFICANT CUSTOMERS
The Company had sales to one significant customer which represented approximately 56% and 44% of net sales
for the years ended June 27, 1998 and June 30, 1997, respectively.
At June 27, 1998 two customers accounted for approximately 60% of trade
accounts receivable.
NOTE M - PENSION AND PROFIT SHARING PLAN
The Company has a salary reduction/profit-sharing plan under the
provisions of Section 401(k) of the Internal Revenue Code. The Plan covers
all full-time employees who have completed one year of service with the
Company. The Company's contributions to the plan are made at the
discretion of the Board of Directors and amounted to approximately $14,000
for the year ended June 27, 1998.
NOTE N - SUBSEQUENT EVENT
In September 1998, the Company entered into a multi-year Pallet
Manufacturing Agreement with a major customer. In connection therewith,
the Company purchased approximately $500,000 of manufacturing equipment
and entered into a non-cancelable operating lease for a facility in
Rogersville, Alabama. The lease provides for monthly rental payments of
$3,500 and expires in September 2001.
F-14
</TABLE>
<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:
Zachary M. Richardson, President
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
John C. Lucy, III Chairman, September 23, 1998
CEO and Director
Zachary M. Richardson President, September 23, 1998
Secretary, Treasurer and Director
John C. Lucy, Jr. Director September 23, 1998
Donald Radcliffe Director September 23, 1998
David W. Sass Director September 23, 1998
