As filed with the Securities and Exchange Commission on March 9, 1998
Registration No. 333-46245
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 To
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
PALLET MANAGEMENT SYSTEMS, INC.
(Name of small business issuer in charter)
Florida 2448 59-2197020
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State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classification I.D. Number)
incorporation Code Number)
or organization)
(Address and telephone number, of registrant's
principal executive offices)
One South Ocean Boulevard, Suite 305
Boca Raton, FL 33432
(561) 338-7763
(Address of principal place of business or
intended principal place of business)
(Name, address and telephone number, of agent for service)
Mr. Zachary Richardson
c/o Pallet Management Systems, Inc.
One South Ocean Boulevard, Suite 305
Boca Raton, FL 33432
(561) 338-7763
Please send a copy of all communications to:
DAVID W. SASS, ESQ.
McLaughlin & Stern, LLP
260 Madison Avenue
New York, NY 10016
(212) 448-1100
Fax(212) 448-0066
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. []_____
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. []---
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 of the Securities
Act of 1933, check the following box [x]
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. []
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CALCULATION OF REGISTRATION FEE
Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Security Being Offering Price Aggregate Offering Registration
Being Registered Registered Per Share (1) Price Fee
- --------------------------------------------------------------------------------------------------
Shares of Common Stock 1,100,000 (1) $ 1.50 (5) $1,650,000 $486.75
$.001 par value
Shares of Common Stock 1,100,000 (2) $ 1.75 (5) $1,925,000 $567.88
$.001 par value
Shares of Common Stock 151,685 (3) $20.00 (5) $3,033,700 $894.94
$.001 par value
Shares of Common Stock 50,000 (4) $10.72 (6) $ 536,000 $158.12
$.001 par value
TOTAL $2,107.69
Paid on Account $2,047.56
Balance Due $ 60.13
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(1) Includes 1,100,000 shares of Common Stock underlying outstanding Class
A Warrants, 100,000 shares of which underlie 100,000 Class A Warrants
included in an outstanding Placement Agent Warrant ("Placement Agent
Warrant")issued in connection with the Company's November 1997 private
placement.
(2) Includes 1,100,000 shares of Common Stock underlying outstanding Class
B Warrants, 100,000 shares of which underlie 100,000 Class B Warrants
included in the Placement Agent Warrant.
(3) Includes 151,685 shares of Common Stock underlying outstanding warrants
forming a part of "A Units" issued in connection with the conversion of
certain outstanding debt of the Company.
(4) Includes 50,000 shares of Common Stock included in the Placement Agent
Warrant.
(5) Calculated, pursuant to Rule 457 (g), as the exercise price of each
particular class of warrant.
(6) Calculated, pursuant to Rule 457(c), as the average of the bid and
asked prices as of the close of trading on February 12, 1998, (as
adjusted for the 1 for 4 reverse split approved January 29, 1998 and
effective February 16, 1998.)
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The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
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PALLET MANAGEMENT SYSTEMS, INC.
Cross Reference Sheet
Item Caption Location
1. Forepart of Registration Statement Outside Front Cover
Page and Outside Front
Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Inside Front and Back
Outside Pages of Prospectus Cover Pages
3. Summary Information and Risk Factors Prospectus Summary;
Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Risk Factors; Business
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Description of
Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Risk Factors
Indemnification for Securities Act
15. Organization Within Last Five Years Not Applicable
16. Description of Business Business; Risk
Factors; Financial
Statements; Selected
4 Financial Data;
Prospectus Summary
<PAGE>
17. Management's Discussion and Analysis Management's
or Plan of Operation Discussion and
Analysis of Financial
Condition and Results
of Operation
18. Description of Property Business-Properties
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Market for Common
Stockholder Matters Equity and Related
Stockholder Matters
21. Executive Compensation Management-Executive
Compensation
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Management's
Accountants on Accounting and Discussion and
Financial Disclosure Analysis of Financial
Condition and Results
Of Operation
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SUBJECT TO COMPLETION DATED MARCH 9, 1998
PROSPECTUS
2,401,685 Shares of Common Stock PALLET
MANAGEMENT SYSTEMS, INC.
This Prospectus relates to the offering of 2,401,685 shares of common
stock, par value $.001 per share ("Common Stock"), of Pallet Management Systems,
Inc., a Florida corporation ("Company"). 1,000,000 of such shares underlie
outstanding Class A Warrants ("Class A Warrants"); 1,000,000 of such shares
underlie outstanding Class B Warrants ("Class B Warrants"), 151,685 of such
shares underlie outstanding warrants forming a party of "A Units" issued in
connection with the conversion of certain outstanding debt of the Company ("A
Unit Warrants") and an aggregate of 250,000 of such shares underlie a warrant
issued to the Placement Agent ("Placement Agent Warrant") in the Company's
November 1997 private placement ("Private Placement") to purchase units
consisting of 50,000 shares of Common Stock, 100,000 Class A Warrants and
100,000 Class B Warrants. The Class A Warrants, the Class B Warrants and the
Placement Agent Warrant were issued by the Company in a Private Placement in
November, 1997. See "Description of Securities."
401,685 shares of Common Stock offered by this Prospectus may be sold
from time to time by the Selling Stockholders or by their transferees
and the balance of 2,000,000 shares may be sold from time to time by certain
holders of Class A and Class B Warrants ("Warrant Holders"). No
underwriting arrangements have been entered into by the Selling Stockholders
or the Warrant Holders. The distribution of shares of Common Stock by the
Selling Stockholders or the Warrant Holders may be effected
in one or more transactions that may take place on the over-the-counter market
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more dealers for resale of such shares as principals at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Stockholders and/or the Warrant Holders in connection with sales of the
Common Stock. Transfers of the Common Stock may also be made pursuant to
applicable exemptions under the Securities Act of 1933, as amended
("Securities Act") including, but not limited to, sales under Rule 144 under
the Securities Act.
The Selling Stockholders, the Warrant Holders and intermediaries through whom
such shares Common Stock may be sold may be deemed "underwriters" within the
meaning of the Securities Act with respect to the Common Stock offered, and any
profits realized or commissions received may be deemed underwriting
compensation. All costs incurred in the registration of the securities of the
Selling Stockholders and the Warrant Holders are being borne by the Company. See
"Selling Stockholders."
The Company voluntarily furnishes its security holders with annual
reports containing audited financial statements and the audit report of the
independent certified public accountants and such interim reports as it deems
appropriate or as may be required by law. The Company's fiscal year ends June
30.
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF
THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS", WHICH BEGINS ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS, ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is __________________ , 1998
1
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AVAILABLE INFORMATION
The Company voluntarily complies with the informational requirements of
the Securities Exchange Act of 1934, as amended ("Exchange Act") and in
accordance therewith presently files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected at the Commission's public reference room located
in Room 1024 at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661 and at 7 World Trade Center, 13th
Floor, New York, NY 10048. Copies of such materials may also be obtained at
prescribed rates from the Public Reference Section of the Commission located in
Room 1024 at 450 Fifth Street, N.W., Washington, D.C. 20549. Such reports may
also be obtained by visiting the Commission's Internet home page at WWW.Sec.gov.
The Company has filed a Registration Statement relating to the
securities offered hereby with the Commission pursuant to the provisions of the
Securities Act of 1933, as amended ("Securities Act"). Although this Prospectus
forms a part of the Registration Statement, it does not contain all of the
information set forth in the Registration Statement, the exhibits or the
schedules thereto. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement, the
exhibits and the schedules thereto. All material elements of documents
referenced in the Registration Statement are set forth in the prospectus
disclosure herein. Reference is also made to the copy of such document which has
been filed as an exhibit to the Registration Statement.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to and
should be read in conjunction with the more detailed information and financial
data (including any financial statements and the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share and per
share amounts set forth hereinafter have been adjusted to reflect the reverse
stock split on a one-for-four basis effective as of the close of business
February 16, 1998. Each prospective investor is urged to read this Prospectus
in its entirety.
The Company
Pallet Management Systems, Inc., a Florida corporation ("Company") is
engaged in the manufacture, sale, repair and retrieval of wooden, plastic and
metal pallets as well as other product packaging required for the shipment of
goods. The Company was formed by the combination of several companies and has
operations in Florida and Virginia.
A pallet is a portable platform for the storing or moving of cargo or
freight. Most commonly made of wood, its standard size is approximately a four
feet square and is designed to be transported by a forklift. The Company focuses
on total solutions for its customers' pallet requirements through comprehensive
products and services including manufacturing and distributing new and recycled
pallets and pallet remediation. (Pallet remediation is the systematic
collection, repair, return and reuse of pallets and other types of packaging.)
Due to rising costs and increasing competition, the industry's gross profit for
new pallets has decreased over the years. Consequently, the Company is shifting
its focus to remediation services.
The Offering
Securities Offered 2,401,685 shares of Common
Stock, par value $.001 per share
("Common Stock").
Securities Outstanding Prior to the
Offering
Common Stock 1,712,489 Shares
Class A Warrants 1,000,000 Warrants
Class B Warrants 1,000,000 Warrants
A Unit Warrants 151,685 Warrants
3
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Securities Outstanding After the
Offering:
Common Stock 4,114,174 Shares (1)
Class A Warrants -0- (2)
Class B Warrants -0- (2)
- ------------
(1) Assumes the exercise in full of (i) the Class A and Class B Warrants; (ii)
the Placement Agent Warrant (and the underlying Class A and Class B Warrants)
and (iii) the warrants forming a part of the A Units issued in connection with
the conversion of certain outstanding debt of the Company ("A Unit Warrants").
(2) Assumes the exercise of all outstanding Class A Warrants and Class B
Warrants.
Nasdaq OTC Bulletin Board Symbol
Common Stock PALT
Risk Factors
An investment in any of the securities being offered hereby is highly
speculative and involves substantial risks including a qualified independent
auditors report, financial losses and competition.
See "Risk Factors."
Use of Proceeds
Assuming the exercise of all of the outstanding Class A Warrants and
Class B Warrants, the exercise in full of the Placement Agent Warrant (including
the exercise in full of the underlying Class A Warrants and Class B Warrants)
and the outstanding A Unit Warrants, the Company will receive proceeds of
$3,998,370, all of which will be used for general working capital purposes. See
"Use of Proceeds."
4
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Summary Consolidated Financial Information
The following summary of selected consolidated financial information
concerning the Company have been derived from the financial statements
(including the related notes thereto) of the Company included elsewhere in this
Prospectus ("Financial Statements").
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
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Year Ended Year Ended Twenty-Six Weeks Twenty-Six Weeks
June 30, 1997 June 30, 1996 Ended Ended
December 27, 1997 December 28, 1996
(Unaudited) (Unaudited)
Revenues 21,051,818 16,847,597 9,744,636 9,019,756
Cost of Revenues 19,553,853 15,980,771 8,909,313 8,263,432
Operating Expenses 1,938,548 2,816,045 902,741 864,977
Other Income
(expense) (539,478) (318,035) (208,675) (169,689)
Income Tax Benefit 97,084 489,049 - -
Net (Loss) (882,977) (1,778,205) (276,093) (278,342)
Net (Loss) per share (.77) (1.69) (.20) (.26)
Weighted average
number of Common Shares (1) 1,149,287 1,050,189 1,370,822 1,060,804
CONSOLIDATED BALANCE SHEET DATA:
June 30, 1997 December 27, 1997
Working Capital (Deficit) (1,343,811) ( 913,266)
Total Assets 5,783,427 6,139,298
Long-term Debt 1,137,976 1,213,364
Total Liabilities 5,515,554 5,365,628
Accumulated Deficit 2,558,345 2,834,439
Stockholders' Equity 267,873 773,670
5
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RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE AND INVOLVE A
HIGH DEGREE OF RISK. SUCH SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN
AFFORD TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH PROSPECTIVE INVESTOR
SHOULD, PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE FOLLOWING RISK FACTORS,
AS WELL AS ALL OF THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS
AND THE INFORMATION CONTAINED IN THE FINANCIAL STATEMENTS, THE NOTES THERETO AND
THE DOCUMENTS REFERENCED HEREIN.
When used in this Prospectus, the words "may," "will," "expect",
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends that may affect the Company's future plans of operations, business
strategy, operating results and financial position. Prospective investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors. Such factors are described under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "The Company," "Business" and in the risk factors set forth below.
1. Continuing Operating Losses; Accumulated Deficit
The Company had net losses of ($882,977), ($1,778,205) and ($276,093) for the
fiscal years ended June 30, 1997 and 1996 and the twenty-six weeks ended
December 27, 1997, respectively and at December 27, 1997 had an accumulated
deficit of ($2,834,439). The Company's prospects must therefore be considered in
light of the risks, expenses and difficulties frequently encountered in
operating a business in a highly competitive industry. There can be no assurance
that the Company will experience profitability in the future.
2. Capital Requirement; Working Capital Deficit; Limited Sources of Liquidity;
Need for Additional Capital; Default on Long Term Debt
The Company requires substantial capital to pursue its expansion strategy
involving the creation of new and comprehensive remediation products and
services. To date, the Company has relied primarily upon net cash provided by
financing activities to fund its capital requirements. Net cash provided by
(used in) financing activities was $626,000, $1,488,000 and ($397,381) for the
fiscal years ended June 30, 1997 and 1996 and the twenty-six weeks ended
December 27, 1997, respectively. In November 1997, the Company completed a
private placement ("Private Placement") of 1,000,000 Units, each Unit consisting
of 2 (pre reverse split) shares of Common Stock, one Class A Warrant and one
Class B Warrant. The Private Placement generated gross proceeds of $1,000,000
<PAGE>
and specifically provided that the Class A and Class B Warrants (including those
issuable upon exercise of the Placement agent Warrant) would be exempt from the
1 for 4 reverse split. Net cash provided (used in) by operating activities was
$122,000, $1,118,000 and $204,551 for the fiscal years ended June 30, 1997 and
1996 and the twenty-six weeks ended December 27, 1997, respectively. The Company
expects that operations before working capital charges will not generate
significant cash flow until the Company has net income. These results will
continue to impact the Company's capital position and cause continued reliance
upon external sources of liquidity for at least the near future. There can be no
assurance that the Company will generate sufficient cash in future periods to
satisfy the Company's capital requirements.
At December 27, 1997, the Company had a working capital deficit of ($913,266).
The Company maintains a $2,500,000 line of credit ("Line of Credit") with
Nations Bank, secured by substantially all of the assets of the Company and
guaranteed by one (1) major stockholder. Advances on the Line of Credit are
based on 80% of eligible accounts receivable and 50% of eligible inventories. At
December 27, 1997, the Company had no borrowing availability against its Line of
Credit, short-term indebtedness of approximately $2,100,000 in the form of trade
payables and accrued liabilities, $1,400,000 borrowed under the Line of Credit,
and $1,300,000 of long-term liabilities.
In connection with its Line of Credit, the Company was current on its monetary
obligations, but is in default in maintaining compliance with certain debt
covenants. Nonetheless, the Company has entered into a new line of credit for
approximately $3,750,000 in the aggregate with a national financial institution.
The new line of credit is secured by the receivables, inventory and other assets
of the Company and completely replaces the NationsBank financing.
3. Economic Conditions
The Company's business may be adversely affected by periods of economic slowdown
or recession or a decline in the manufacturing and retail sectors. The Company's
business may also be adversely affected by an increase in lumber prices.
Historically, lumber prices have been volatile.
4. Long-Term Debt Covenant Non-Compliance; Going Concern Uncertainty
The Company currently is out of compliance with certain covenants of its
long-term debt agreements. As of December 27, 1997 approximately $1,800,000 of
the outstanding long-term debt (including the $1,400,000 borrowed under the Line
of Credit) is callable and has therefore been classified as current.
The report of the independent auditors on the Company's Financial
Statements contains an explanatory paragraph concerning the Company's ability to
continue as a going concern. In short, the independent auditors explain that the
Company is in default of certain debt covenants which could result in the lender
demanding payment under the Company's long-term debt agreements, thereby raising
substantial doubt about its ability to continue as a going concern. The Company
believes that, upon the successful completion of this Offering, it will have the
cash resources to meet its current obligations.
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5. Supply and Demand for Lumber
Pallet prices are closely related to the changing costs and availability
of lumber, the principal raw material used in the manufacture and repair of
wooden pallets. Typically, lumber prices fall in oversupplied lumber markets,
enabling small pallet manufacturers with limited capital resources to procure
lumber and initiate production of low-cost pallets, depressing pallet prices
overall and adversely affecting the Company's revenues and operating margins.
The majority of the lumber used in the pallet industry is hardwood, which is
only grown in certain regions of the country and which is difficult to harvest
in adverse weather, making its pricing volatile. The Company purchases
approximately 25% of its lumber requirements from an affiliated company. There
can be no assurance that the Company will be able to secure adequate lumber
supplies in the future. Lumber supplies and costs are affected by many factors
outside the Company's control, including weather, governmental regulation of
logging on public lands, lumber agreements between Canada and the U.S. and
competition from other industries that use similar grades and types of lumber.
For example, in October through December of 1996, the Company experienced higher
lumber costs resulting from the impact of wet weather on the harvesting of
hardwood timber in the southeast. To the extent the Company encounters adverse
lumber prices or is unable to procure adequate supplies of lumber, its financial
condition and results of operations could be materially adversely affected.
6. Reliance on Acquisitions
One of the Company's growth strategies is to increase its revenues and the
markets it serves through the acquisition of additional pallet manufacturing and
recycling companies. There can be no assurance that the Company will be able to
identify or acquire additional businesses or to integrate and manage such
additional businesses successfully. Acquisitions may involve a number of risks,
including: adverse short-term effects on the Company's reported operating
results; diversion of management's attention; dependence on retention, hiring
and training of key personnel; risks associated with unanticipated problems or
legal liabilities; and amortization of acquired intangible assets. Some or all
of these risks could have a material adverse effect on the Company's financial
condition or results of operations. In addition, to the extent that
consolidation becomes more prevalent in the industry, the prices for attractive
acquisition candidates may increase and the number of attractive acquisition
candidates may decrease and, in any event, there can be no assurance that
businesses acquired in the future will achieve sales and profitability that
justify the investment therein.
7. Acquisition Financing
The Company intends to use its Common Stock for a portion of the
consideration for future acquisitions. If the Common Stock does not maintain a
sufficient valuation or potential acquisition candidates are unwilling to accept
Common Stock as part of the consideration for the sale of their businesses, the
Company may be required to utilize more of its cash resources, if available, in
order to pursue its acquisition program. If the Company does not have sufficient
cash resources, its growth
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could be limited unless it is able to obtain additional capital through future
debt or equity financings. Using cash to complete acquisitions and finance
internal growth could substantially limit the Company's financial flexibility,
using debt could result in financial covenants that limit the Company's
operations and financial flexibility, and using equity may result in significant
dilution of the ownership interests of the then existing stockholders of the
Company. There can be no assurance that the Company will be able to obtain
financing if and when it is needed or that, if available, it will be available
on terms the Company deems acceptable. As a result, the Company may be unable to
pursue its acquisition strategy successfully. See "Management's Discussion and
Analysis of Financial Resources -- Combined" and "Business -- Strategy."
8. Competition
The markets for pallet manufacturing and recycling services are highly
fragmented and competitive. Competition on pricing is often intense and the
Company may face increasing competition from pallet leasing or other pallet
systems providers, which are marketed as less expensive alternatives to new
pallet purchasers. CHEP's pallet leasing system competes with new pallet sales
to the grocery and wholesale distribution industries, and may expand into other
industries in the future. In addition, pallet manufacturing and recycling
operations are not highly capital intensive, and the barriers to entry in such
businesses are minimal. Certain other smaller competitors may have lower
overhead costs and consequently, may be able to manufacture or recycle pallets
at lower costs than the Company. Other companies with significantly greater
capital and other resources than the Company (including CHEP) may enter or
expand their operations in the pallet manufacturing and recycling businesses in
the future, changing the competitive dynamics of the industry. The Company has
in the past and will continue to compete with lumber mills in the sale of new
pallets. The lumber mills typically view pallet manufacturing as an opportunity
to use the lower grade lumber that would otherwise represent waste that must be
disposed by the mill. While the Company estimates, based on industry sources,
that non-wooden pallets currently account for less than 10% of the pallet
market, there can be no assurance that the Company will not face increasing
competition from pallets fabricated from non-wooden components in the future.
9. Control by Management
As of the date hereof, the directors and executive officers of the Company
beneficially owned approximately 39.39% of the Company's outstanding Common
Stock with John Lucy, Jr., director, beneficially owning 25.25% of the Company's
outstanding Common Stock and John Lucy III, the Company's chairman, beneficially
owning 5.27% of the Company's Common Stock. Accordingly, these shareholders may
be able to substantially influence the outcome of shareholder votes as to
matters on which they may be in agreement. If the performance options are earned
then such persons would own approximately 30.33 % of the outstanding shares of
the Company's Common Stock, assuming the exercise of all outstanding options and
warrants.
10. Dependence on Key Customers
The Company is dependent on certain customers for a material portion of
its business. The loss
9
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of any of these customers, or the reduction of their business, could have a
material adverse effect on the Company. The Company had sales to one (1)
significant customer which represented approximately 44% and 27% of net sales
for the years ended June 30, 1997 and June 30, 1996, respectively.
11. OTC Electronic Bulletin Board and Public Market
The Common Stock is currently listed for quotation on the OTC Electronic
Bulletin Board. The trading market for the Common Stock is sporadic, limited and
highly volatile. The Company has agreed, to the extent that it qualifies, to use
its best efforts to list its shares of Common Stock on the Nasdaq SmallCap
Market, the American Stock Exchange or any other United States recognized
exchange as soon as possible after the initial closing date of the Private
Placement. In order for the Common Stock to become eligible for listing on the
Nasdaq SmallCap Market, the Company must, among other things have (i) net
tangible assets of at least $4,000,000, (ii) a market value of the public float
of at least $5,000,000, (iii) a minimum bid price of $4.00, (iv) at least 300
stockholders, and (v) at least 1,000,000 publicly held shares. There can be no
assurance that the Company will be able to meet the current or any future
listing requirements for the Nasdaq Small Cap Market, or if such requirements
are met, that they can be maintained. There can also be no assurance that any
trading market will continue to exist for the Common Stock.
12. Regulatory Compliance
As of the date hereof, the Company is current with its voluntary
regulatory filings with under the Securities Exchange Act of 1934, as amended
("'34 Act"). The Company, however, has had a history of not filing some of those
documents, such as its Forms 10-QSB and 10-KSB, on a timely basis. The Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30 1996, which was
required to be filed on September 30, 1996, was not filed until February 27,
1997, while the Company's Form 10-QSB for the twenty-six (26) week period ending
December 30, 1996, which was required to be filed by February 13, 1997, was
filed with the SEC on April 2, 1997. The Company timely filed Form 10-QSB for
the thirty-nine (39) week period ending March 29, 1997. Going forward, the
Company intends to file timely all such documents, although no assurance can be
given that it will be able to do so. In the event that the Company is unable to
do so, an Investor may not have access to the Company's most recent financial
information and, in the event that the Common Stock is Market Listed, the
Company's Common Stock may be delisted from such exchange. Further, if the
Company does not timely file its documents, Investors will not be able to sell
their shares of Common Stock either under the Registration Statement or pursuant
to Rule 144 under the Securities Act of 1933 ("Act") (which requires that there
be "current information" available on the Company.)
13. Transactions With Affiliates; Default on Obligations
For fiscal year 1997, the Company's wholly-owned subsidiary, Abell Lumber
Corporation ("Abell"), purchased approximately 25% of its lumber supply from
Clary Lumber Corp. ("Clary") which is owned by the family of John C. Lucy, Jr.,
a director and principal shareholder of the Company. The Company is party to a
Consulting, Non-competition and Confidentiality Agreement
10
<PAGE>
with John C. Lucy, Jr. under which the Company has agreed to pay Mr. Lucy a
consultant fee of $2,000 per week. By mutual agreement, however, the Company has
no obligation to Mr. Lucy through June 30, 1997. The Board of Directors of the
Company and Mr. Lucy are currently considering alternatives to this agreement by
which the Company may, in lieu of cash, satisfy its remaining obligation to Mr.
Lucy by issuing equity in the Company or by issuing options to acquire equity in
the Company.
14. Possible Volatility of Stock Price
The market price of common stock has been and may continue to be volatile.
During an average week, not more than approximately 100,000 shares of Common
Stock trade and the market price of the Common Stock could therefore be affected
substantially by any significant buy or sell order.
15. Probable Need for Additional Financing
The Company may require additional financing in the near future. No
assurances can be given that such financing will be available to the Company on
acceptable terms, if at all.
16. Dependence Upon Key Personnel
The Company's success depends, in part, upon a number of key managerial
personnel and employees, including John C. Lucy, III, and Zachary Richardson,
the loss of either of whom could adversely affect the Company. The Company
believes that its future success depends in part on its ability to continue to
attract and retain highly skilled employees. The Company has entered into
employment agreements with Mr. Lucy and Mr. Richardson, expiring June 30, 2000.
The Company maintains $1,000,000 life insurance policies on the lives of each of
Mr. Lucy and Mr. Richardson. There can be no assurance that the Company will be
able to attract and retain the personnel necessary for the development of its
business.
17. Penny Stock Regulation
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by certain penny stock rules adopted by the SEC. Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ System). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information regarding penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson must disclose this fact and the broker-dealer's presumed control
over the market, and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, broker-dealers who sell
such securities to persons other than established customers and accredited
investors, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the
11
<PAGE>
transaction. Consequently, these requirements may have the effect of reducing
the level of trading activity, if any, in the secondary market for the Common
Stock underlying the Warrants and Offerees in this Private Placement may find it
more difficult to sell their shares.
18. Dividends on Common Stock Not Likely
No dividends have been declared or paid by the Company on its Common Stock
since the inception of the Company, and the Company does not presently intend to
declare or pay cash dividends on its Common Stock in the foreseeable future. Any
earnings that may be generated, of which no assurance can be given, are intended
to be used in the foreseeable future to finance the growth of the Company.
19. Possible Anti-Takeover Effect of Significant Number of Authorized but
Unissued Preferred Stock.
The Company is authorized to issue 7.5 million shares of its preferred
stock, none of which are currently issued and outstanding. The Board of
Directors has total discretion in the issuance and the determination of the
rights and privileges of any shares of preferred stock which may be issued in
the future, which rights and privileges may be detrimental to the holders of the
Common Stock and Warrants of the Company. The Board of Directors could issue
shares of preferred stock with such rights and preferences that could discourage
attempts by others to obtain control of the Company through merger, tender
offer, proxy contest or otherwise by making such attempts more difficult to
achieve or more costly.
20. Broad Indemnification by the Company of Officers and Directors.
The Company's Amended and Restated By Laws provide that the Company shall
have the power to and shall indemnify any person who was or is a party to any
proceeding from any liability or expenses incurred by reason of the fact that
such person is or was an employee or agent of the Corporation, to the full
extent allowed under the laws of the State of Florida.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended ("Act") may be sought by directors, officers and
controlling persons of the Company pursuant to such indemnity (or otherwise),
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any such action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the Common Stock
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
12
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds upon the sale of any of the 401,685
shares of Common Stock offered by the Selling Stockholders but may receive
proceeds of up to $3,998,370, assuming the exercise in full of the outstanding
Class A Warrants and Class B Warrants, the Placement Agent Warrant (including
the Class A and Class B Warrants underlying the Placement Agent Warrant) and the
A Unit Warrants. All of such proceeds, if actually received by the Company, will
be utilized for working capital purposes.
13
<PAGE>
CAPITALIZATION
The following table sets forth as of December 27, 1997 the Company's
capitalization on a historical basis and as adjusted to give effect to this
Offering and its net proceeds. The information below should be read in
conjunction with the Financial Statements contained in this Prospectus, which
should be read in their entirety.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Actual As Adjusted (1)
Long Term Debt $1,284,252 $1,284,252
Short Term Debt 2,187,680 2,187,680
Stockholders' Equity
Preferred Stock, 7,500,000 shares
authorized, none outstanding
Common Stock, $.001 par value,
100,000,000 shares authorized, 1,712,489
shares issued and outstanding (actual); 1,712 4,114
4,114,174 shares issued and outstanding
(as adjusted.)
Additional Paid in Capital 3,606,397 (7,602,365)
Accumulated Deficit
Total Stockholders' Equity (2,834,439) (2,834,439)
773,670 4,772,040
Total Capitalization:
Debt and Stockholders Equity $ 4,245,602 $ 8,243,972
=========== ============
</TABLE>
(1) Adjusted to reflect the exercise in full of (i) 1,000,000
outstanding Class A Warrants, (ii) 1,000,000 outstanding Class
B Warrants, (iii) the Placement Agent Warrant (including the
underlying Class A and Class B Warrants) and (iv) the A Unit
Warrants.
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<PAGE>
DIVIDEND POLICY
The Company has never paid and does not anticipate paying any dividends
on its Common Stock in the foreseeable future. The Company currently intends to
retain all working capital and earnings, if any, for use in the Company's
business operations and in the expansion of its business.
See "Description of Securities-Common Stock."
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements appearing elsewhere in this Report.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30,
1996:
For the year ended June 30, 1997 net sales increased 25% to $21,052,000
from $16,848,000 for the prior year. This increase was due to an increase in new
pallet sales, which accounted for 68% of net revenues, as opposed to 59% of net
revenues the previous year. The increase in new pallet sales resulted from a
significant increase from one major customer, which accounted for approximately
44% of 1997 net sales.
Cost of sales for 1997 was $19,554,000 (93% of net sales) as compared
to $15,981,000 (95% of net sales) for 1996. This percentage decrease is
attributable to efficiencies gained in new pallet production, a result of larger
"production runs" and cost containment. During 1997, the Company experienced
rising cost of lumber which resulted in increased product cost that could not be
entirely passed onto the customer.
Selling, general and administrative expenses were $1,939,000 (9% of net
sales) in 1997 as compared to $2,816,000 (17% of net sales) in 1996. This
decrease is due to cost savings realized through consolidation of both
operational and administrative functions.
Interest expense decreased to $365,000 in 1997 from $401,000 in 1996.
This decrease is due to improved cash flow from new pallet operations,
remediation in Florida, the conversion of $607,000 of debt to equity and a tax
refund of $518,000.
The net loss for 1997 was $883,000 compared to $1,778,000 for 1996.
This reduction in loss was due to increased sales volume, improved operational
efficiencies and cost containment strategies implemented by management.
In 1997, the Company wrote-off $100,000 of costs associated with an
attempted debt restructuring and private placement; debt conversion expense was
recorded in the amount of $72,000 and $102,000 gain on the sale of real estate
to a related party was treated as additional paid in capital. Hence, the
Company's net loss exclusive of these items was $609,000.
15
<PAGE>
Liquidity and Capital Resources:
The Company's financing needs depend primarily upon sales volume and
controllable variable expenses. During 1997, the Company financed its working
capital needs through new borrowings.
The Company had cash on hand of $237,000 at the end of 1997, versus
$17,000 at the beginning of the fiscal year. This cash increase is attributable
to the receipt of an income tax refund of $518,000, decreases in inventory by
$118,000, prepaid expenses by $46,000, other assets by $10,000, an increase in
accounts payable by $191,000, proceeds from sale of property, plant and
equipment of $206,000 and $524,000 net proceeds from lenders. These cash
increases were offset by an increase in accounts receivable by $573,000 and
decreases in accrued liabilities by $31,000, deferred taxes by $97,000 and
purchase of property, plant and equipment by $387,000.
The Company completed a new financing agreement with NationsBank on
September 30, 1995 which increased the line of credit available to the Company
to $2.5 million, from the former $1.2 million line, at an interest rate of prime
plus 2% and is secured by priority lien upon substantially all the assets of
Abell and is guaranteed by the majority stockholder. Advances are based on 80%
of eligible accounts receivable and 50% of inventory. The line of credit has a
three-year term with provisions for annual renewals thereafter. In addition, the
Company obtained a $500,000 ten year term loan from NationsBank for the
Petersburg, Virginia facility at prime plus 2%. The proceeds of this loan were
used to repay short-term indebtedness. The Company is current with this loan as
the loan is to be repaid in equal monthly installments of principal plus
interest. At June 30, 1997, the Company is in violation of certain debt
covenants on the line of credit and term loan. Consequently, NationsBank debt is
classified as current debt on the Company's financial statements. The Company is
in the process of seeking a replacement lending institution.
The Company believes that it will have sufficient capital and borrowing
power to sustain operations as it seeks new financing due to significant cost
cutting measures and increased sales volumes through June 30, 1998.
During 1997, unprofitable operations were closed in Douglas, Georgia
and Hartford, Connecticut. Operations in Baltimore, Maryland have been turned
over to an affiliated company. As a result of these actions, the Company
eliminated a layer of management infrastructure and changed focus to operational
efficiency measures. In addition, the Company's Chairman and CEO and its'
President have each reduced their salaries to $52,000 annually and assumed the
operational responsibilities of the COO who resigned at the beginning of 1997 to
pursue other non-pallet interests.
Automation has been installed at the Lakeland, Florida facility, which
has resulted in reduced labor costs and increased sales capacity. The Orlando,
Florida facility increased sales capacity by building a 15,000 sq. ft. repair
and storage building for a major customer while attempting to develop the used
pallet market.
16
<PAGE>
On June 12, 1997, the Company notified Grant Thornton LLP, that it was
changing auditors. The change in auditors was approved by the Company's Board of
Directors. The reason for the change of auditors at this time is that the
Company desired to reduce its auditing costs in order to conserve cash. The
change is part of a general cost reduction program begun by the Company. There
were no disagreements on any manner of accounting principles or practices of
financial statement disclosure or audit scope or procedure. None of the events
listed in paragraphs (A) through (D) of Item 304 (a) (1) (v) have occurred. The
new auditors engaged by the Company are Kaufman, Rossin & Co. There were no
disagreements on any manner of accounting principles or practices of financial
statement disclosure during the most recent financial statements included
herein.
Thirteen Weeks Ended December 27, 1997 compared to Thirteen Weeks Ended
December 28, 1996
For the thirteen week period ended December 27, 1997 net sales decreased to
$5,168,237 from $5,289,065 for the comparable 1996 period. This decrease was
due to the loss of several unprofitable or marginal customer accounts for which
the Company out-sourced manufacturing.
During the thirteen week period ended December 27, 1997 new pallet sales
decreased 15% to $3,111,000 from $3,684,000 and pallet recycling (pallet
remediation, depot and repair services and sales of used pallets) increased by
15% to $1,844,000 from the $1,605,000 recorded for the same thirteen week period
ended December 28, 1996. The gross margin for the thirteen week period was 9% as
compared to 10.1% achieved for the same thirteen week period a year prior. This
decrease in gross margin was due to an increase in lumber prices not immediately
passed on to customers. The Company experienced a $16,000 (4%) increase in
Selling, General and Administrative Expenses for the thirteen week period ended
December 27, 1997 when compared to the comparable period ended December 28,
1996. This increase is a result of additional management hired to handle
expanding pallet recyling operations. Other income decreased to $0 from $6,000
as a result of the sale of rental real estate. This sale was shown as additional
paid-in capital for fiscal year 1997. The Company experienced a $34,000 (43%)
increase in interest expense for the thirteen week period ended December 27,
<PAGE>
1997. This increase is a result of additional borrowing and interest points
amounting to $25,000 paid to NationsBank for default of certain debt covenants.
A net loss of $100,000 or ($.07) per share was realized during the thirteen week
period ended December 27, 1997 compared to a gain of $22,000 or $.02 per share
recorded for the same period last year. The Company did not record any tax
effect on the loss.
During this thirteen week period, the Company completed a $1,000,000 private
placement from which the proceeds will be used to purchase equipment designed to
improve manufacturing and recycling efficiency and expand the remediation
program with an improved computer systems, and working capital. The Company also
received a Commitment Letter from a major financial institution to replace the
Company's financing debt with NationsBank. It is anticipated that this will
close before the end of February.
The Company's board of directors approved a one for four reverse stock split
which was ratified by the shareholders on January 29, 1998. The split is
expected to take effect February 16, 1998.
Twenty-six Weeks Ended December 27, 1997 compared to Twenty-six Weeks Ended
December 28, 1996
For the twenty-six week period ended December 27, 1997 net sales
increased 8% to $9,745,000 from $9,020,000 for the comparable 1996 period.
During the twenty-six week period ended December 27, 1997 new pallet sales
increased 2% to $6,083,000 from $5,971,000, pallet recycling (pallet
remediation, depot and repair services and sales of used pallets) increased by
13% to $3,436,000 from the $3,048,000 recorded for the same twenty-six week
period ended December 28, 1996. The gross margin for the twenty-six week period
was 8.6% as compared to 8.4% achieved for the same twenty-six week period a year
prior. This increase in gross margin was due to an increase in manufacturing
efficiencies and termination of unprofitable customers. The Company experienced
a $38,000 (4%) increase in Selling, General and Administrative expenses for the
twenty-six week period ended December 27, 1997 when compared to December 28,
1996. This increase is a result of additional management hired to handle
expanding pallet recycling operations. Other income decreased to $0 from $10,000
as a result of the sale of rental real estate. This sale was shown as additional
paid in capital for fiscal year 1997. The Company experienced a $29,000 (16%)
increase in interest expense for the twenty six week period ended December 27,
1997. This increase is a result of additional borrowing and interest points
amounting to $25,000 paid to NationsBank for default of certain debt covenants.
A net loss of $276,000 or ($.20) per share was realized during the twenty-six
week period ended December 27, 1997 compared to a loss of $278,000 or ($.26) per
share recorded for the same period last year. The Company did not record any tax
effect on the loss.
Liquidity and Capital Resources
The Company had $529,000 in cash on hand at the end of the twenty-six week
period ending December 27, 1997 versus $237,000 at the beginning of fiscal year
1997. This increase in cash is attributable to increases in accounts payable and
accrued expenses by $235,000, decreases in accounts recievable by $443,000 and
prepaid expenses by $3,000 and capital contributed by $782,000. These cash
increases were offset by cash decreases due to increases in inventories by
$359,000 and other assets by $39,000 and net repayments to lenders of $385,000.
The Company completed a $1,000,000 private placement during this period.
The Company is in default of certain debt covenants as a result of which
certain long-term debt has been reclassified as current. The Company's financial
statements for the years ended June 30, 1997 and June 30, 1996 have been
prepared assuming that the Company will continue as a going concern. The Company
is taking various steps to remedy such situation including a cost reduction
program and entering into new financing arrangements whereby the foregoing debt
will be repaid in full.
18
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq OTC 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
twenty six weeks ended December 31, 1997 and the two fiscal years ended June 30,
1997 and 1996:
Bid Prices
Period High Low
Fiscal Year 1998
First Qtr. (9/97) 1 3/16 1/4
Second Qtr. (12/97) 2 9/16
Fiscal Year 1997
First Qtr. (9/96) 3 1/2
Second Qtr. (12/96) 1 1/16 1/4
Third Qtr. (3/97) 3/4 1/2
Fourth Qtr. (6/97) 13/16 7/16
Fiscal Year 1996
First Qtr. (9/95) 10 3/4 10 1/2
Second Qtr. (12/95) 10 1/2 8
Third Qtr. (3/96) 8 7
Fourth Qtr. (6/96) 7 1/4 5/8
The quotations in the foregoing table represent prices between dealers
and do not include retail markup, markdown, or commissions paid and may not
represent actual transactions. Such quotations are not necessarily
representative of actual transactions or of the value of the Company's
securities.
As of January 9, 1998, there were approximately 102 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.
19
<PAGE>
BUSINESS
Introduction
Pallet Management Systems, Inc. ("Company") is engaged in the
manufacture, sale, repair and retrieval of wooden, plastic and metal pallets as
well as other product packaging required for the shipment of goods. The Company
was formed by the combination of several companies and has operations in Florida
and Virginia.
A pallet is a portable platform for the storing or moving of cargo or
freight. Most commonly made of wood, its standard size is approximately a four
feet square and is designed to be transported by a forklift. The pallet, a
little known entity to the consumer, is a key factor to retail and industrial
distribution. Without pallets, shipping by air, land and sea would be severely
hampered. The pallet industry in the United States has grown to more than a $6
billion ($6,000,000,000) industry and plays a vital roll in transportation
today. Many small, localized and/or specialized companies that usually have an
operational radius of less than 100 miles, none of which individually has any
appreciable market impact, characterize the industry.
The Company focuses on total solutions for its customers' pallet
requirements through comprehensive products and services including manufacturing
and distributing new and recycled pallets and pallet remediation. (Pallet
remediation is the systematic collection, repair, return and reuse of pallets
and other types of packaging.) Due to rising costs and increasing competition,
the Industry's gross profit for new pallets has decreased over the years.
Consequently, the Company is shifting its focus to remediation services.
History of the Company
The Company was incorporated in the State of Florida on June 10, 1982,
under the name Air Bags, Inc. From inception through October 7, 1994, when the
Company merged with Pallet Recycling Technologies, Inc. (PRTI), the Company was
in a development stage, expending funds investigating business opportunities.
The Company changed its name to Pallet Management Systems, Inc. in November
1994.
On June 29, 1995, pursuant to a Merger Agreement and Plan of
Reorganization among Abell Lumber Corporation, a Virginia corporation (Abell)
and the Company, (i) the shareholders of Abell acquired 67.33% of the
outstanding shares of the Company's Common Stock and (ii) Abell became a wholly
owned subsidiary of the Company.
The Pallet Industry
The pallet industry is considered part of the overall transportation
packaging industry and is critical to global commerce. This industry is
extremely fragmented, substantially free from government regulation and has no
market dominator. Considered a "staple" industry, pallets are an integral part
of retail and industrial distribution. Nearly every item manufactured or
processed is
20
<PAGE>
shipped and/or stored on pallets.
According to the National Wooden Pallet and Container Association
(NWPCA), in 1995, there were approximately 411 million new wood pallets produced
in the United States with hundreds of millions sold on a used or recycled basis.
New pallet sales are in excess of $4 billion annually. Sales of recycled pallets
have increased substantially over the past few years as this segment of the
pallet industry continues to develop.
Due to the high cost of plastics and other materials, wood is the
preferred and more environmentally conscious material for pallets. However, some
customers require plastic pallets for closed loop supply systems where pallet
sanitation is critical and accountability can be controlled. According to a
NWPCA survey, 99% of all pallet users reported using wood pallets. Of the 99%
respondents, only 2.5% of those surveyed reported using a material other than
wood.
PRIMARY INDUSTRY USERS OF PALLETS:
1) food and beverage 3) steel and metal 5) chemical and fluid
2) paper and fiber 4) automotive 6) printing
The industry is highly fragmented with over 3,000 pallet companies
scattered across the United States. Most of these companies attempt to
specialize in only one segment of the industry: new pallet production, recycled
pallet sales or pallet rental. Pallet companies, except for those involved in
pallet rental, are generally small independent businesses that operate within a
limited radius from their facilities. The fragmentation of the industry has
become frustrating to pallet users. As their demand for service increases, they
become burdened by attempting to integrate independent companies to service
their logistical needs.
Customers are quickly recognizing the significant benefits of
returnable packaging and are searching for an integrated system that can
effectively manage and service these needs. One response to this demand for
service has been the development of pallet rental pools. However, this response
will only solve a small piece of the packaging industry dilemma.
Products and Services
The Company fulfills customer demands through a variety of products and
services.
Products
New Wood Pallets
The Company manufactures, sells, and distributes new pallets in large
quantities. New wood pallets are manufactured at the Company's Lawrenceville,
Virginia plant, with a capacity of 10,000 units per day. Due to rising costs and
increased competition, the Company's gross profit per pallet has decreased over
time.
21
<PAGE>
Other Transport Packaging
The Company functions as a wholesale distributor of various returnable
transport packaging. These items include plastic and metal pallets; plastic,
collapsible bulk boxes; wood, plastic, and metal slave pallets; wooden boxes and
crates. Profits vary by item as these products are purchased in the market. Due
to lack of demand, sales of pallets made from materials other than wood are
minimal.
Recycled Wood Pallets
Recycled pallets generally come from companies that are "end users".
These end users accumulate thousands of unwanted pallets, which the Company
retrieves, sorts, processes and are sold as recycled pallets, disassembled for
repair components or mulched.
Services
Third Party Pallet Management
The Company offers on-site pallet repair and sorting systems that
provide professional management and significant savings to large volume
customers. These operations can produce substantial savings for customers by
reducing their costs through better utilization of their pallet resources.
Pallet Retrieval
Provides customers with a system for lowering pallet cost-per-trip by
creating a closed-loop return system between the manufacturer, their customers,
and their vendors. The Company currently manages several retrieval programs on a
regional basis. Pallet retrieval is the primary focus of the Company's expansion
program.
Pallet Warehousing
At select locations, the Company sorts and stores pallets for customers
indoors to provide higher quality recycled pallets. Margins are low; however,
this service adds value and provides a competitive advantage. Management
anticipates that pallet warehousing will be in higher demand in the future as
pallet users increase demand for moisture controlled pallets.
Suppliers
There is adequate supply of the Company's raw material components. The
primary raw materials are hardwood, softwood, used lumber, used pallets and
nails. The Company has several principal suppliers, which are rotated depending
on availability. The Company currently buys approximately 25% of its lumber from
Clary Lumber Co., Inc.,("Clary") at or below market price. Clary is owned by
John C. Lucy, Jr., a majority shareholder and director of the Company.
22
<PAGE>
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 the Mid Atlantic and South Eastern regions,
which consist of geographical areas encompassing several states. These regions
manage local operations and include manufacturing, inventory, transportation,
manpower, customer pallet usage, handling systems, program costs, pricing
structure and payroll. Accounting functions are centralized in Lawrenceville,
VA. All functions are reviewed and monitored at the corporate office in Boca
Raton, Florida.
The Company services customers with two different types of operational
facilities: Repair Depots and Manufacturing Plant.
Repair Depots
The Company has regional Repair Depots in Virginia and Florida. These
facilities are a minimum of 40,000 sq. ft. of covered work space with indoor
storage and up to 8 acres of outside storage. The Repair Depot is designed to
sort, repair and store pallets. It is automated, employs approximately 75 people
and is located in markets where existing customers have major distribution
centers and pallet retrieval systems. The Repair Depot in Florida has several
satellite operations that provide pallet repair and pallet storage.
Manufacturing Plant
The Company currently has one manufacturing plant located in Virginia.
This facility is capital intensive with "state of the art" automation for new
pallet construction. The plant has approximately 125 employees and maintains a
transportation fleet for product delivery and repair service.
Marketing and Distribution
The Company has a customer base of over 350 customers, many of which
are Fortune 500 companies, including Allied Signal, Chep USA, Coca-Cola, DuPont,
Food Lion, Metal Container, , Walt Disney World, Winn-Dixie 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 needs. One
value-added aspect of this service is the Company's ability to process rental,
non-rental and odd sized pallets. Normally a pallet inventory of varying sizes
is a logistical problem for the customer.
23
<PAGE>
Seasonality
Sales remain relatively constant with minor fluctuations around major
holidays and during the summer months.
Competition
Competition consists mainly of small, single-location pallet companies
with limited resources; however, there are several large pallet
manufacturing/distribution plants. During 1997, two larger manufacturing
companies and a recycling company merged to form a public company.
Employees
The Company has approximately 240 employees including: production
workers, drivers, facility management, sales, customer service, administrative
support and executive personnel.
Government Regulations
There are no government regulations applicable to the manufacture and
recycling of wooden pallets.
Properties
Lakeland, FL, Repair Depot: 2420 New Tampa Hwy. This facility was opened in
April 1996 at a 63,000 sq. ft. facility on five acres with a five-year lease
terminating in March 2001. It employs seventy-five people and can process all
types of pallets on the automated line. This facility supports two satellite
operations located in Citra and Orlando, Florida. These satellite operations
contain a 5,000 sq. ft. building on five acres leased for five years and a
15,000 sq. ft. building on three acres leased for eight years. These leases
expire July, 2000, and August, 2004, respectively.
Lawrenceville, VA, Manufacturing Plant: 10324 Liberty Road. Substantially all
new pallet manufacturing is performed at this company owned facility on
automated equipment. In addition, pallet recycling and repair services occur at
this location which has 60,000 sq. ft. of manufacturing buildings located on 70
acres, a 3,000 sq. ft. office building and employs over 125 people.
Petersburg, VA, Repair Depot: 1925 Puddledock Road. This facility has the
capacity to process, repair, and store all types of pallets. It contains a
40,000 sq. ft. warehouse on eight acres of Company-owned property. At June 30,
1997, this property is subject to a $417,000, 2% above prime mortgage that
matures in October 2005. There are approximately forty people employed at this
facility which contains "state of the art" automated equipment.
Corporate Offices are located at One South Ocean Boulevard, Suite 305,
Boca Raton, Florida.
24
<PAGE>
The Company leases 1,009 sq. ft. of office space which expires in May 2000.
Legal Proceedings.
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
25
<PAGE>
MANAGEMENT
Directors and Officers
The following table sets forth certain information with respect to each of
the Company's directors and executive officers.
NAME AGE POSITION
John C. Lucy, III 39 Chairman of the Board
Of Directors and CEO
Zachary M. Richardson 43 President, Secretary,
Treasurer and Director
John C. Lucy, Jr. 63 Director
Donald Radcliffe 52 Director
Each director will serve until the next annual meeting of shareholders
and until his or her successor is duly elected and qualifies. Each officer will
serve until the first meeting of the Board of Directors following the next
annual meeting of the shareholders and until his or her successor is duly
elected and qualifies.
John C. Lucy, III joined Abell on a full-time basis in 1980 after
graduating from Virginia Tech with a B.S. in business. Since June 29, 1995, Mr.
Lucy has served as Chairman and CEO of the Company. Five years prior, Mr. Lucy
was the president of Abell Industries. He has extensive experience in pallet and
lumber manufacturing and has spent many years with Abell focusing on sales and
marketing to large, national customers. In addition to being President of Abell,
an officer and director of the Company, he is President of Clary, a hardwood
lumber sawmill located in Gaston, North Carolina, and is Vice-President of
Blacksburg Enterprises, Inc., which operates Baskin-Robbins and Sub-Station II
franchises in Blacksburg, Virginia. Mr. Lucy has completed a two year term as
Chair of the National Wooden Pallet and Container Association (NWPCA) Military
Packing Task Force and three years as Chair of its Research Steering Committee.
Zachary M. Richardson during the past ten years has been president of the
Company or one of its predecessor companies. He founded Skeezix Communications,
Inc., a professional consulting firm, in 1988 and PMSI of America, a pallet
company, in January 1992. Mr. Richardson became President and a Director of the
Company on October 7, 1994 when the Company merged with PRTI. Mr. Richardson has
been involved with management and sales for over 20 years. After graduating from
Franklin and Marshall College in 1977, he was commissioned in the United States
Navy and designated a Naval Aviator. He maintained his reserve status in the
Navy and retired from the reserves in 1997. Mr. Richardson is an active member
of the NWPCA and serves on the Recyclers Council Executive Committee.
John C. Lucy, Jr. founded Abell in 1966 after having worked in a family lumber
and pallet manufacturing business for approximately ten years. In 1969, he
acquired Clary to supply lumber to
26
<PAGE>
Abell, and remains the chairman of Clary. In 1976, he acquired Shelbyville
Enterprises that operated a motel/restaurant in Shelbyville, Tennessee (sold in
1996). In 1980 he formed Blacksburg Enterprises to operate food service
operations in Blacksburg, Virginia. He attended Richmond Polytechnic Institute
for two years prior to serving two years in the military.
Donald Radcliffe has been a director of the Company since April 25, 1985.
Since June 1984, Mr. Radcliffe has served as the Chief Operating Officer,
Executive Vice President and Director of World Wide Business Centers, a company
which provides businesses with office space and facilities. From June 1970
through June 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.
Executive Compensation.
The following table sets forth the cash and cash equivalents paid
during the fiscal years ended June 30, 1995, 1996 and 1997 to all individuals
serving as the Company's executive officers during the last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Name and Year sition Annual Compensation long-term
Principal Position Compensation
Awards Payouts
sition
Salary Bonus Other Restricted Options/
($) (3) ($) ($) Stock SALTIP All
Awards OTHER
------------------ ---------------
John C. Lucy, III, 1997 56,883
1996
1995 86,800 64,000
Chairman (1) (4) 114,758
Zachary M. 1997 57,480
Richardson, 1996 100,117
President, Director (2) (4) 1995 81,453
</TABLE>
(1) Mr. Lucy's compensation was paid to him by Abell, which became a
subsidiary of the Company on June 29, 1995. He was elected Chairman and
CEO of the Company on June 29, 1995.
(2) The compensation paid to Mr. Richardson was paid by PRTI and its
predecessors prior to the Company's merger with PRTI on October 7,
1994.
(3) Includes medical insurance reimbursements.
(4) Messrs. Lucy and Richardson reduced their annualized salaries from $95,000
to $52,000 in June 1996.
27
<PAGE>
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 have elected to temporarily reduce their salary to
an annualized $52,000 for the unforeseeable future.
The Company has key man life insurance on John C. Lucy, III, and
Zachary M. Richardson. The Company has no key man insurance on the life of any
other officer or director.
The Company has entered into a consulting agreement with John C. Lucy,
Jr. to provide consulting services to the Company. This agreement provides for a
consultant fee of $104,000 per year, an automobile allowance and reimbursement
of reasonable out-of-pocket expenses incurred in connection with any activities
under this agreement. In February 1996, the agreement and services were
temporarily suspended through June 30, 1997 by mutual consent; accordingly, no
payments were made during that time. Management is currently reviewing this
agreement.
No compensation is paid to any director for his or her services.
However, the Company may authorize travel expenses for attendance at each
meeting of the Board. Under the Company's Articles of Incorporation and By-Laws,
the Directors may set their own compensation for service as officers.
The Company has adopted a combined stock option and appreciation rights
plan to attract and to induce officers, directors and key employees of the
Company to remain with the Company. The plan will provide for options which will
qualify as incentive stock options under Section 422(a) of the Internal Revenue
Code of 1986, as amended, as well as for options which do not so qualify. No
more than fifteen percent (15%) of the Common Stock outstanding will be reserved
for issuance upon exercise of options to be granted from time-to-time. On July
1, 1997, the Company granted 235,513 ten year stock options with an exercise
price of $2.00 per share. These options vest over a four-year period and expire
in ten years or thirteen weeks after separation of service, whichever occurs
earlier. 549,400 of the options granted were granted to Mr. Lucy, III and Mr.
Richardson. Of such options, 187,094 are non-qualified stock options granted to
key executives and the remaining 48,419 options were granted to other key
personnel.
28
<PAGE>
CERTAIN TRANSACTIONS
Clary, which is owned by the family of John C. Lucy, Jr., a Director
and principal shareholder of the Company, sold lumber to Abell in the amounts of
$2,895,000 and $2,178,000 which is 25% and 32% of Abell's lumber purchases for
the years ended June 30, 1997 and 1996 respectively. Abell sold approximately
$10,000 and $159,000 of lumber to Clary in the years ended June 30, 1997 and
1996 respectively. The Company believes that these transactions were made at or
below market prices in the ordinary course of business. Clary has loaned the
Company money to acquire property and provide additional working capital during
1997. As of June 30, 1997, Clary converted $437,000 of trade debt into a 2 year
12% note. The Company has paid $57,000 in salary reimbursement to Clary for
compensation to John C. Lucy III who performs services for both Clary and the
Company. In August 1996, Abell sold to Clary real estate at the market price of
$200,000 to increase working capital of the Company. Book value of the real
estate was approximately $98,000 net of depreciation at the date of the sale.
The $102,000 gain was recorded as additional paid-in capital.
The majority shareholder has personally guaranteed to NationsBank
both the $2.5M Line of Credit and the $500,000 mortgage note on the Petersburg,
VA building.
On September 27, 1996 the Board of Directors approved a 2 for 1 stock
split to shareholders of record dated October 3, 1996, payable as of November
15, 1996. Prior to the declaration of the split, certain inside shareholders who
held in excess of 65% of the outstanding shares waived their rights to receive
additional shares from this stock split.
The Company's Board of Directors approved on December 3, 1996, a
dollar for dollar exchange of outstanding notes into newly formed "A Units".
Each A Unit consists of one share of the Company's common stock, and one
two-year warrant (subsequently extended by the Board of Directors until 2001) to
purchase one (pre-reverse split) share of the Company's common stock at an
exercise price of $1.25 ("A Unit Warrants"). At the time of the offer, the
Company had notes valued at $682,000 and a commitment from the majority
shareholder to invest an additional $300,000 into the Company prior to the end
of the calendar year. From the $982,000 eligible for this exchange offer,
$607,000 was converted into 607,000 A Units. $577,000 of the debt converted was
held by Company board members.
29
<PAGE>
PRINCIPAL STOCKHOLDERS
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.The Company had 1,712,489 shares of Common Stock issued and outstanding
as of December 31, 1997. <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C>
Amount and (Before (After
Name and Address Nature of Beneficial Offering) Offering) Percent
Of Beneficial Owner (1) Ownership Percent of Class (2)
Of Class
John C. Lucy, III (3 & 5) 129,565 7.49% 3.15%
Zachary Richardson(3 & 6) 132,827 7.66% 3.23%
John C. Lucy, Jr. (4 &7) 620,797 32.80% 15.09%
Donald Radcliffe (4 & 8) 14,900 * *
----------------------- ------------------- ----------
All officers and Directors as a group (1-8) 898,089 46.39% 21.83%
</TABLE>
* Less than 1%
(1) The address of all beneficial owners in this table is Suite
305, One South Ocean Boulevard, Boca Raton, Florida 33432.
(2) Assumes the exercise in full of (i) the Class A and Class B
Warrants; (ii) the Placement Agent Warrant and all of the
Class A and Class B Warrants included therein; and (iii) the A
Unit Warrants.
(3) An officer and director.
(4) Director only.
(5) Includes 90,097 shares owned directly ; 23,000 shares held in
custody for children; 2,718 five year warrants with $2.00
exercise price, expiring in December 2001 and 13,750 ten year
stock options granted on July, 1, 1997 with $2.00 exercise
price expiring July 2007.
(6) Includes 28,749 shares owned directly; 79,078 shares owned by
Sequoia Capital Inc. and 2,500 shares owned by Skeezix, Inc.,
companies beneficially owned by Mr. Richardson. Also includes
8,750 five year warrants with $2.00 exercise price, expiring
in December 2001 and 13,750 ten year stock options granted on
July, 1, 1997 with $2.00 exercise price expiring July 2007.
(7) Includes 390,690 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, expiring in
December 2001 and 55,106 ten year stock options granted on
July, 1, 1997 with $2.00 exercise price expiring July 2007.
(8) Includes 10,400 shares owned; 3,750 five year warrants with
$2.00 exercise price, expiring in December 2001 and 750 ten
year stock options granted on July, 1, 1997 with $2.00
exercise price expiring July 2007.
30
<PAGE>
SELLING STOCKHOLDERS
The Registration Statement of which this Prospectus forms a part covers
the registration of an aggregate of 2,401,685 shares of Common Stock. 1,000,000
of such shares underlie outstanding Class A Warrants; 1,000,000 of such shares
underlie outstanding Class B Warrants, 151,685 of such shares underlie
outstanding A Unit Warrants and an aggregate of 250,000 of such shares underlie
an outstanding Placement Agent Warrant to purchase units consisting of 50,000
shares of Common Stock, 100,000 Class A Warrants and 100,000 Class B Warrants.
The Class A Warrants, the Class B Warrants and the Placement Agent Warrant were
issued by the Company in a Private Placement in November, 1997. The costs of
qualifying such shares of Common Stock under federal and state securities laws,
together with legal and accounting fees, printing and other costs in connection
with this offering, will be paid by the Company.
The resale of the Common Stock offered hereby is subject to
prospectus delivery and other requirements of the Securities Act. Sales of these
securities, or even the potential for such sales at any time, would likely have
an adverse effect on the market prices of the Common Stock.
The Company will not receive any proceeds from the sale of such
securities by the Selling Stockholders. Assuming the exercise in full of (i) the
Class A and Class B Warrants, (ii) the Placement Agent Warrant (including the
underlying Class A Warrants and Class B Warrants) and (iii) the A Unit Warrants,
of which there can be no assurance, the Company will receive proceeds
aggregating $3,998,370.
Set forth below is a list of the Selling Stockholders and the number of
shares of Common Stock which are being registered pursuant to the Registration
Statement, of which this Prospectus forms a part:
<TABLE> <CAPTION> <S> <C> <C>
<C> <C> <C> <C>
NAME NO. OF SHARES OWNED NO. OF SHARES NO. OF SHARES
BEFORE OFFERING BEING OFFERED OWNED AFTER
------------------------ ------------- OFFERING
----------
Fierce & Co. 250,000 200,000 50,000
D.L. Cromwell
Investments, Inc. (1) 250,000 250,000 -0-
John Lucy III (2) 129,565 2,717 126,848
Donald Radcliffe (2) 14,900 3,750 11,150
Skeezix, Inc. (2) 5,000 2,500 2,500
Sequoia Capital, Inc. (2) 81,578 2,500 79,078
M. Bruce Adelberg 15,000 6,250 8,750
Jack Simon IRA 7,936 2,718 5,218
Barry McEwen 3,375 1,250 2,125
Donald Levine Trust 5,141 1,250 3,891
Clary Lumber (2) 100,000 50,000 50,000
John Lucy, Jr. (2) 620,797 75,000 545,797
Zachary M. Richardson (1) 132,827 3,750 129,077
</TABLE>
-----------------------
(1) This Selling Stockholder ("Placement Agent") is the holder
of the Placement Agent Warrant.
(2) These Selling Stockholders are affiliates of the Company. See
"Principal Stockholders." In addition, the shares of Common Stock
beneficially owned by such affiliates are subject to a lock-up
agreement such that such shares cannot be sold until May 16, 1999
without the Placement Agent consent.
<PAGE>
PLAN OF DISTRIBUTION
The 401,685 shares of Common Stock offered hereby may be sold from time to time
directly by the Selling Stockholders and the balance of 2,000,000 shares may be
sold from time to time by certain holders of Class A and Class B Warrants
("Warrant Holders"). Alternatively, the Selling Stockholders and/or the Warrant
Holders may, from time to time, offer such securities through underwriters,
dealers and/or agents. The distribution of securities by the Selling
Stockholders or the Warrant Holders may be effected in one or more transactions,
privately-negotiated transactions or through sales to one or more broker-dealers
for resale of such securities as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Stockholders or the Warrant Holders in
connection with such sales. The Selling Stockholders, the Warrant Holders and
intermediaries through whom such securities are sold, may be deemed
"underwriters" within the meaning of the Securities Act with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of the
Selling Stockholders or the Warrant Holders to the extent required, a prospectus
will be distributed which will set forth the number of securities being offered
and the terms of the offering, including the name or names of any underwriter,
dealer or agent, the purchase price paid by the underwriter for securities
purchased from the Selling Stockholders or Warrant Holders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers and the
proposed selling price to the public.
Under the Exchange Act and Regulation M promulgated thereunder, any
person engaged in the distribution of the securities of the Company offered by
this Prospectus may not simultaneously engage in market-making activities with
respect to such securities of the Company during the applicable "cooling off"
period, which begins five (5) days prior to the commencement of such
distribution and ends upon its completion. In addition, and without limiting the
foregoing, the Selling Stockholders will be subject to applicable provisions of
the Exchange Act, and the rules and regulations promulgated thereunder,
including without limitation, Rule 102 of Regulation M, in connection with
transactions in such securities, which may limit the timing of purchases and
sales of such securities by the Selling Stockholders or the Warrant Holders.
DESCRIPTION OF SECURITIES
Common Stock
The Company is currently authorized to issue 100,000,000 shares of Common
Stock, having a par value of $.001 per share of which 1,712,489 are outstanding
as of the date of this Prospectus. Each share of Common Stock entitles the
holder thereof to one vote on each matter submitted to the stockholders of the
Company for a vote thereon. The holders of Common Stock: (i) have equal ratable
rights to dividends from funds legally available therefor when, as and if
declared by the Board of Directors; (ii) are entitled to share ratably in all of
the assets of the Company available for distribution to holders of Common Stock
upon liquidation, dissolution or winding up of the affairs of the Company; (iii)
do not have preemptive, subscription or conversion rights, or redemption or
sinking fund provisions applicable thereto; and (iv) as noted above, are
entitled to one non-cumulative vote per share on all matters submitted to
stockholders for a vote at any meeting of stockholders. The Company has not paid
any dividends on its Common Stock to date. The Company anticipates that, for the
foreseeable future, it will retain earnings, if any, to finance the continuing
operations of its business. The payment of dividends will depend upon, among
other things, capital requirements and operating and financial conditions of the
Company.
33
<PAGE>
Common Stock Purchase Warrants
The Company has outstanding 1,000,000 Class A Warrants and 1,000,000
Class B Warrants which formed a part of Units issued in the Company's November
1997 private placement. Each Warrant is exercisable for a period of 24 months
commencing on the date of this Prospectus.
Class A Warrants
Each Class A Warrant shall entitle the holder to acquire one share of
Common Stock at a price equal to $1.50 per share. The Company will have the
right at any time to redeem all, but not less than all, of the Class A Warrants
at a price equal to one cent ($.01) per Class A Warrant, provided that the
closing bid price of the Common Stock equals or exceeds $6.00 per share for any
twenty (20) trading days within a period of thirty (30) consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption.
Class B Warrants
Each Class B Warrant shall entitle the holder to acquire one share of
the Common Stock at a price equal to $1.75 per share. The Company will have the
right at any time to redeem all, but not less than all, of the Class B
Redeemable Warrants at a price equal to one cent ($.01) per Class B Warrant,
provided that the closing bid price of the Common Stock equals or exceeds $8.00
per share for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption.
A Unit Warrants
Each A Unit Warrant shall entitle the holder to acquire one share of
Common Stock at a price equal to $20.00 per share until December 3, 1998.
Placement Agent Warrant
The Placement Agent Warrant entitles the holder to purchase 100,000
Units, each Unit consisting of 2 (pre-reverse split) shares of Common Stock, 1
Class A Warrant and 1 Class B Warrant at an exercise price of $1.20 per Unit.
The Placement Agent Warrant expires in November 2002.
Preferred Stock
The Certificate of Incorporation of the Company authorizes the issuance
of up to 7,500,000 shares of Preferred Stock, $0.001 par value per share. None
of such Preferred Stock has been designated or issued. The Board of Directors is
authorized to issue shares of Preferred Stock from time to time in one or more
Class and, subject to the limitations contained in the Certificate of
Incorporation and any limitations prescribed by law, to establish and designate
any such Class and to fix the number of shares and the relative conversion
rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences. If shares of Preferred Stock with
voting rights are issued, such issuance could affect the voting rights of the
holders of the Common Stock by increasing the number of outstanding shares
having voting rights, and by the creation of class or series voting rights. If
the Board of Directors authorizes the issuance of shares of Preferred Stock with
conversion rights, the number of shares of Common Stock outstanding could
potentially be increased by up to the authorized amount. Issuance of shares of
Preferred Stock could, under certain circumstances, have the effect of delaying
or preventing a change in control of the Company
34
<PAGE>
and may adversely affect the rights of holders of Common Stock. Also, the
Preferred Stock could have preferences over the Common Stock (and other series
of preferred stock) with respect to dividends and liquidation rights.
Transfer and Warrant Agent
Jersey Transfer and Trust Co., Verona, NJ is the Registrar and Transfer
Agent for the Common Stock and the Registrar and Warrant Agent for the Class A
and Class B Warrants.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the securities
being offered by the Company will be passed upon for the Company by McLaughlin &
Stern, LLP, New York, NY. A partner of such firm owns an option to purchase 300
shares of Common Stock at $2.00 per share
EXPERTS
The Consolidated Financial Statements of the Company included in this
Prospectus to the extent and for the year ended June 30, 1997 have been audited
by Kaufman, Rossin & Co., independent certified public accountants, as stated in
their report appearing herein in reliance upon such report given on the
authority of that firm as experts in accounting and auditing. Their report
contains an explanatory paragraph regarding an uncertainty as to the Company's
ability to continue as a going concern.
The Consolidated Financial Statements of the Company included in this
Prospectus to the extent and for the year ended June 30, 1996 have been audited
on by Grant Thornton LLP, independent certified public accountants, as stated in
their report appearing herein in reliance upon such report given on the
authority of that firm as experts in accounting and auditing. Their report
contains an explanatory paragraph regarding an uncertainty as to the Company's
ability to continue as a going concern.
<PAGE>
PALLET MANAGEMENT SYSTEMS, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
JUNE 30, 1997
<PAGE>
Kaufman Rossin & Co.
Certified Public Accountants
2699 South Bayshore Drive
Miami, Florida 33133-5486
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Pallet Management Systems, Inc.
We have audited the accompanying consolidated balance sheet of Pallet Management
Systems, Inc. and Subsidiaries as of June 30, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Pallet Management Systems,
Inc. and Subsidiaries as of June 30, 1997, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B, the Company is
in default of certain debt covenants which could result in the lender demanding
payment under the Company's long-term debt agreements, raising substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note B. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KAUFMAN ROSSIN & CO.
Miami, Florida
August 29, 1997
F -1
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 237,447
Accounts receivable, net of allowance for doubtful accounts of $37,123 1,724,957
Inventories 902,396
Prepaid expenses 98,079
----------
Total current assets 2,962,879
Property, plant and equipment - net 2,780,882
Other assets 39,666
$ 5,783,427
---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,507,648
Accounts payable 1,215,076
Accrued liabilities 583,966
---------------
Total current liabilities 4,306,690
---------------
LONG-TERM LIABILITIES
Deferred income taxes 70,888
Long-term debt 1,137,976
---------------
1,208,864
---------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 7,500,000 shares at $.001 par
value; no shares issued and outstanding -
Common stock, authorized 10,000,000 shares at $.001 par
value; issued and outstanding 4,849,956 shares 4,850
Additional paid-in capital 2,821,368
Accumulated deficit (2,558,345)
-------------
267,873
---------------
$ 5,783,427
-----------------
The accompanying notes are an integral part of these statements.
</TABLE>
F-2
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
Net sales $21,051,818 $ 16,847,597
Cost of goods sold 19,553,853 15,980,771
------------- ------------
Gross profit 1,497,965 866,826
Selling, general and
administrative expenses 1,938,548 2,816,045
Operating loss (440,583) (1,949,219)
------------ -----------
Other income (expense)
Other income 23,878 82,738
Other expense (563,356) (400,773)
------------ -----------
Other income (expense) (539,478) (318,035)
------------ ------------
Loss before income taxes (980,061) ( 2,267,254)
Income tax benefit 97,084 489,049
------------ ------------
Net loss ($882,977) ($1,778,205)
============ ===========
Net loss per common share ($.19) ($.42)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F - 3
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Retained
Additional Earnings
Common Stock Paid-In (Accumulated
Shares Amount Capital Deficit) Total
Balance at July 1, 1995 4,099,216 $ 4,099 $ 1,611,499 $ 102,837 $ 1,718,435
Issuance of common stock 144,000 144 429,888 - 430,032
Net loss - - - (1,778,205) (1,778,205)
---------- ----------- ---------- ----------- -----------
Balance at June 30, 1996 4,243,216 4,243 2,041,387 (1,675,368) 370,262
Contributed capital on sale of
building to related party - - 102,326 - 102,326
Conversion of debt to
common stock 606,740 607 677,655 - 678,262
Net loss - - - (882,977) (882,977)
---------- ------------ ------------- ------------- ----------
Balance at June 30, 1997 4,849,956 $4,850 $ 2,821,368 ($2,558,345) $267,873
=========== ============= ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F - 4
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
Cash flows from operating activities:
Net loss ($ 882,977) ($ 1,778,205)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 417,331 384,077
Loss on sale and abandonment of property, plant and equipment 61,283 -
Bad debt expense 28,736 51,542
Debt conversion expense 71,522 -
(Increase) decrease in operating assets:
Accounts receivable (572,625) 336,052
Inventories 117,847 554,630
Prepaid expenses 46,118 (119,271)
Income tax receivable 517,771 (517,771)
Other assets 9,673 36,276
Increase (decrease) in operating liabilities:
Accounts payable 191,485 (416,125)
Accrued liabilities (30,880) 334,094
Income taxes - (2,346)
Deferred income taxes (97,084) 19,171
Net cash used in operating activities (121,800) (1,117,876)
Cash flows from investing activities:
Purchase of fixed assets (386,967) (801,500)
Proceeds from sale of property, plant and equipment 103,318 -
Net cash used in investing activities (283,649) (801,500)
Cash flows from financing activities:
Proceeds under line of credit, net 420,172 258,691
Proceeds from lenders 836,555 1,919,019
Repayments to lenders (733,048) (1,120,147)
Issuance of stock - 430,032
Contributed capital 102,326 -
Net cash provided by financing activities 626,005 1,487,595
Increase (decrease) in cash 220,556 (431,781)
Cash at beginning of period 16,891 448,672
Cash at end of period $ 237,447 $ 16,891
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 353,008 $ 404,054
Income taxes $ - $ -
</TABLE>
Schedule of non-cash investing and financing activities:
In December 1996, the Company converted $606,740 of long-term debt to common
stock. Debt conversion expense of $71,522 was recognized as a result of this
transaction.
The accompanying notes are an integral part of these statements.
F - 5
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows:
1. Nature of Operations
Pallet Management Systems, Inc. and Subsidiaries (the "Company"/"Pallet") is
principally engaged in the manufacture and repair of wooden pallets in Florida
and Virginia. The Company's revenues are derived primarily from the sale of new
and used pallets. The Company allows its customers uncollateralized credit for
various periods of time.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries Pallet Recycling Technology,
Inc. ("PRTI") and Abell Lumber, Inc. ("Abell"). Intercompany balances and
transactions are eliminated in consolidation.
3. Accounts Receivable
Trade receivable accounts are primarily located on the Eastern coast of the
United States and are principally comprised of large distributors,
national retail chains and major manufacturers. The Company evaluates each
account receivable balance to establish an estimate for uncollectible accounts.
4. Inventories
Inventories, consisting of raw materials, work in process, and finished
goods, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
5. Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Major renewals and improvements are capitalized. Repairs and
maintenance are expensed as incurred. Depreciation is computed by using the
straight-line method over the expected useful lives of the related assets which
are as follows:
Years
Machinery and equipment 5 - 15
Vehicles 5 - 10
Buildings and improvements 3 - 40
Furniture and equipment 3 - 10
F - 6
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Estimates
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts and disclosures of assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company has recorded a deferred tax asset of approximately $1,082,000 at
June 30, 1997 which is offset by a valuation allowance of approximately
$960,000. Realization of the deferred tax asset is dependent on generating
sufficient taxable income in the future. The amount of the deferred tax asset
considered realizable could change in the near term if estimates of future
taxable income are increased.
7. Income Taxes
The Company accounts for income taxes under the liability method.
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
8. Earnings Per Share
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding. The total number of such
weighted average shares outstanding was 4,597,148 and 4,200,754 for the years
ended June 30, 1997 and 1996, respectively.
For the years ended June 30, 1997 and 1996 outstanding stock options were
not considered in the calculation of weighted average number of shares
outstanding as their effect would have been antidilutive.
9. Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure of
the estimated fair value of financial instruments. The carrying values of cash,
accounts receivable and accounts payable approximate fair value due to the
short-term maturities of these instruments. The carrying value of debt
approximates fair value due to the length of the maturities, the interest rates
being tied to market indices and/or due to the interest rates not being
significantly different from the current market rates available or offered to
the Company.
10. Stock Options (SFAS 123)
Options granted under the Company's Stock Option Plan are accounted for
under APB Opinion 25, Accounting for Stock Issued to Employees and related
interpretations. In October 1995, the Financial Accounting Standards Board
issued Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123),
which defines a fair value based method of accounting for employee stock
options. The new accounting standards prescribed by SFAS 123 are optional and
companies may continue to account for employee stock options under the intrinsic
value method specified in APB 25. Currently, the Company does not expect to
adopt the new standards, consequently, SFAS 123 will not have a material impact
on the Company's results of operations or financial position. However, pro forma
disclosures of net earnings and earnings per share must be made as if the SFAS
123 accounting standards had been adopted.
F - 7
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. Reclassification
Certain prior year amounts within the accompanying financial statements
have been reclassified to conform to the current year presentation.
12. Concentration of Credit
The Company, from time to time, maintains deposits at financial
institutions in excess of federally insured limits.
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. Currently, the Company is not in compliance with
certain financial covenants under the bank loan agreements ("Debt").
Accordingly, the debt is classified as current in the accompanying consolidated
balance sheet. The debt is secured by substantially all of the assets of the
Company.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain present financing, and
to succeed in its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
Management has taken steps to reduce its operating expenses and streamline
its operations. In addition, a shareholder loaned $500,000 to the Company for
working capital. This and other loans were converted to common stock in December
1996. The Company continues to seek alternative sources of financing and
capital. Management believes the aforementioned steps are sufficient to provide
the company with sufficient cash flow to meet its operating needs.
NOTE C - INVENTORIES
Inventories consist of the following at June 30, 1997:
Raw materials $ 362,173
Work in process 280,030
Finished goods 260,193
$ 902,396
F - 8
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30, 1997:
Machinery and equipment $ 2,900,503
Building and improvements 1,512,145
Vehicles 882,429
Furniture and equipment 191,855
Land 136,044
5,622,976
Less: Accumulated depreciation
and amortization 2,842,094
$ 2,780,882
Depreciation and amortization expense was $417,331 and $384,077 in 1997
and 1996, respectively, and is included in "cost of goods sold" and
"selling, general and administrative" expenses in the accompanying
consolidated financial statements.
NOTE E - INCOME TAXES
The income tax benefit consists of the following:
Years Ended June 30
1997 1996
Current:
Federal $ - ($ 425,109)
State - ( 83,111)
- (508,220)
Deferred:
Federal ( 87,719) 16,369
State ( 9,365) 2,802
( 97,084) 19,171
($ 97,084) ($ 489,049 )
F - 9
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE E - INCOME TAXES - Continued
Deferred income taxes were recognized in the consolidated balance sheet at
June 30, 1997 due to the tax effect of temporary differences and loss
carryforwards as follows:
Deferred tax assets:
Net operating loss carryforwards $ 1,046,359
Other 36,095
-------------------
1,082,454
Valuation Allowance ( 959,951)
-------------------
122,503
Deferred tax liabilities:
Depreciation 193,391
Net deferred tax liability $ 70,888
===================
The major elements contributing to the difference between the income tax
provision and the amount computed by applying the federal statutory tax rate of
34% to loss before income taxes are as follows:
Years Ended June 30
-------------------------------
1997 1996
Statutory rate ( $ 333,220) ( $ 770,866)
State or local income taxes ( 28,018) ( 80,309)
Increase in valuation allowance 184,812 357,461
Permanent differences and other 79,342 4,665
( $ 97,084) ( $ 489,049)
=================== ===================
As of June 30, 1997, the Company had net operating loss carryforwards of
approximately $2,781,000 which expire in various years through June 30, 2012.
Approximately $1,109,000 of these net operating losses are subject to
substantial restrictions imposed under the change in ownership and separate
return limitation year rules.
F - 10
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NOTE F - DEBT
$2,500,000 revolving credit agreement with a bank. The agreement expires
on September 30, 1998 and includes interest at the bank's prime rate plus 2.0%
(10.5% at June 30, 1997). The line is collateralized by substantially all the
assets of the Company. The loan is guaranteed by a majority stockholder.
Advances are based on 80% of eligible accounts receivable and 50% of eligible
inventories. The revolving credit agreement contains certain restrictive
covenants as defined. The Company had zero borrowing availability as of June 30,
1997. The Company was in violation of certain restrictive covenants,
accordingly, the loan is subject to demand by the bank and has been classified
as current at June 30, 1997. $ 1,746,841
Related party note payable, interest payable monthly at 12%; subordinated
to all non-trade debt and uncollateralized. Principal due July 1999. 437,424
Bank note payable in monthly installments of $4,166, plus interest at prime
plus 2% (10.5% at June 30, 1997). Final payment due October 2005, collateralized
by substantially all the assets of the Company and subjected to the same
restrictive covenants as the related revolving credit agreement. Accordingly,
the loan has been classified as current at June 30, 1997 and is
subject to demand by the bank. The loan is guaranteed by a majority stockholder. 416,667
Note payable in monthly installments of $5,327, plus interest at 10.25%.
Final payment due October 2001, collateralized by various machinery and
equipment. 219,067
Notes payable to investors; interest payable quarterly at 9%; each $25,000
principal amount is convertible into 1% of PRTI's common stock, as defined;
subordinated to all non-trade debt and uncollateralized. Principal due
November 1998. 200,000
F - 11
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE F - DEBT - Continued
Notes payable to investors; interest payable quarterly at 10%; convertible to
21,875 shares of the Company's common stock; subordinated to all non-trade
debt and uncollateralized. Principal due April 1998. 175,000
Industrialized development notes payable; quarterly installments of $3,381
beginning December 1997; interest at 5.25%, maturing October 2017. 167,000
Bank notes payable in monthly installments ranging from $219 to $3,498;
including interest ranging from 8% to 14%; collateralized by equipment and
vehicles; maturing at various dates through January 2000. 115,161
Capital lease obligations payable in monthly installments of $267 to $2,634,
including interest ranging from 10% to 19%, collateralized by equipment and
vehicles; maturing at various dates through May 2001. 168,464
----------
Total debt 3,645,624
Less: Current portion 2,507,648
-----------
$ 1,137,976
=============
Interest expense for the years ended June 30, 1997 and 1996 amounted to $364,938
and $400,773, respectively and is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Scheduled maturities of long-term debt are as follows:
Year Ended June 30,
1998 $ 2,507,648
1999 349,363
2000 536,317
2001 85,219
2002 27,141
Thereafter 139,936
-----------------
$ 3,645,624
=================
F - 12
</TABLE>
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE G - ACCRUED LIABILITIES
Accrued liabilities consist of the following at June 30, 1997:
Accrued compensation $ 168,046
Other accrued liabilities 415,920
-----------------
$ 583,966
==================
NOTE H - COMMITMENTS
The Company leases office space, equipment and vehicles under
non-cancelable operating leases. The following is a schedule, by years, of
the minimum rental commitments remaining on leased property and equipment:
Year Ended June 30,
1998 $ 300,323
1999 292,019
2000 289,019
2001 258,598
2002 60,000
Thereafter 130,000
------------------
Total $ 1,329,959
=================
Total rent expense was $594,322 and $583,783 for the years ended June 30,
1997 and 1996, respectively.
NOTE I - RELATED PARTY TRANSACTIONS
Clary Lumber, currently owned by an officer and directors of the Company,
loaned the Company money to facilitate the acquisition of property and to
supplement cash flow. The outstanding balance of the note at June 30, 1997, was
$437,424. The Company paid approximately $57,000 during the year ended June 30,
1997 to Clary Lumber for compensation of certain employees who perform services
for both Clary Lumber and the Company.
The Company purchased approximately $2,895,000 and $2,178,000 of lumber
from Clary Lumber in 1997 and 1996, respectively. This amounted to 25% and 32%
of the Company's lumber purchases for the years ended June 30, 1997 and 1996,
respectively.
The Company sold approximately $10,000 and $159,000 of lumber to Clary
Lumber for the years ended June 30, 1997 and 1996, respectively.
During August 1996, the Company sold a real estate investment to Clary
Lumber for $200,000 to increase its working capital. The net book value was
approximately $98,000 at the time of sale. The gain of $102,000 was recorded as
additional paid-in capital.
F - 13
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE J - EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment agreements with two senior executives that
provide for minimum annual compensation totaling $190,000 and additional
compensation as defined in the agreement.The contracts expire in June 30, 2000.
Payments under these agreements for the years ended June 30, 1997 and 1996
totaled $114,363 and $201,758, respectively. The Company's remaining commitments
at June 30, 1997 under such contracts is $570,000.
The Company entered into a Consulting, Non-competition and Confidentiality
Agreement (the Agreement) with a majority shareholder and director. The
Agreement provides for, among other things, payment of a consulting fee of
$2,000 per week. In February 1996, the Agreement and services were temporarily
suspended through June 30, 1997 by mutual consent of the parties.
NOTE K - STOCKHOLDERS' EQUITY
Common Stock Offering
In September 1995, the Company completed a private placement offering for
144,000 shares of its common stock. The stock was sold to unrelated investors at
an offering price of $3.50 per share. The net proceeds of this transaction
increased the Company's equity by $430,032.
Stock Split
The Company's Common Stock was split two-for-one on October 3, 1996.
Certain shareholders, consisting primarily of officers and directors, waived
their right to this split resulting in an increase of 814,286 shares. All stock
data and per share amounts in the consolidated financial statements have been
restated to give effect to the stock split.
Debt Conversion
In December 1996, a majority shareholder and director loaned $500,000 to
the Company for working capital. This and other loans of $106,740 were
converted into newly formed "A Units" at a rate of $1 of note value for each
unit. A unit consists of one share of common stock and a five year warrant to
purchase one share of common stock at $1.25.
Stock Option Plan
In July 1995, the Company established a Stock Option Plan which authorizes
the Company to issue options to employees, directors and outside consultants of
the Company. The issuance and form of the options shall be at the discretion of
the Company's board of directors, except that the exercise price may not be less
than 85% of the fair market value at the time of grant.
No options had been granted as of June 30, 1997.
F - 14
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE L - SIGNIFICANT CUSTOMERS
The Company had sales to one significant customer which represented
approximately 44% and 27% of net sales for the years ended June 30, 1997 and
1996, respectively.
At June 30, 1997 two customers accounted for approximately 51% of trade
accounts receivable.
NOTE N - SUBSEQUENT EVENT
In July 1997, the Company granted to various employees, directors and
outside consultants, options to purchase 783,825 shares of common stock at an
exercise price of $.50 per share. The options vest over a four year period and
expire in ten years or three months after separation of service, whichever
occurs earlier.
F - 15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Pallet Management Systems, Inc.
We have audited the accompanying consolidated balance sheet of Pallet Management
Systems, Inc. and Subsidiaries (a Florida corporation) as of June 30, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pallet Management
Systems, Inc. and Subsidiaries as of June 30, 1996, and the consolidated results
of their operations and their consolidated cash flows for each of the two years
in the period ended June 30, 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B, the Company is
in default of certain debt covenants which could result in the lender demanding
payment under the Company's long-term debt agreements, raising substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note B. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
GRANT THORNTON LLP
Miami, Florida
September 4, 1996 (except for Notes B and N, as to which the date is January 28,
1997 and October 3, 1996, respectively)
F-16
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ 16,891
Accounts receivable, net of allowance
for doubtful accounts of $ 62,000 1,181,068
Inventories 1,020,243
Prepaid expenses 144,197
Income tax refunds receivable 517,771
Total current assets 2,880,170
Property, plant and equipment - net 2,877,809
Other assets 147,377
$ 5,905,356
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,150,634
Accounts payable 1,023,591
Accrued liabilities 614,846
Total current liabilities 3,789,071
LONG-TERM LIABILITIES
Deferred income taxes 167,972
Long-term debt 1,578,051
1,746,023
STOCKHOLDERS' EQUITY
Common stock, authorized 10,000,000 shares at $.001 par
value; issued and outstanding 4,243,216 shares 4,243
Additional paid-in capital 2,041,387
Accumulated deficit (1,675,368)
370,262
$ 5,905,356
The accompanying notes are an integral part of this statement.
</TABLE>
F-17
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996 1995
Net sales $ 16,847,597 $ 29,444,264
Cost of goods sold 15,980,771 25,494,151
Gross profit 866,826 3,950,113
Selling, general and administrative expense 2,816,045 3,344,338
Operating (loss) profit (1,949,219) 605,775
Other income (expense)
Other income 82,738 106,051
Interest expense (400,773) (305,393)
Other income (expense) (318,035) (199,342)
Income (loss) before income taxes (2,267,254) 406,433
Income taxes expense (benefit) (489,049) 457,690
Net loss $ (1,778,205) $ (51,257)
Net loss per common share $ (.42) $ (.01)
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Retained
Additional Earnings
Common Stock Paid-In (Accumulated
Shares Amount Capital Deficit) Total
Balance at July 1, 1994 3,441,196 $ 3,441 $ 744,573 $ 154,094 $ 902,108
Subordinated debt
conversion to stock 307,620 308 448,926 - 449,234
Issuance of common
stock 350,400 350 418,000 - 418,350
Net loss - - - (51,257) (51,257)
Balance at June 30,
1995 4,099,216 4,099 1,611,499 102,837 1,718,435
Issuance of common
stock 144,000 144 429,888 - 430,032
Net loss - - - (1,778,205) (1,778,205)
Balance at June 30,
1996 4,243,216 $ 4,243 $ 2,041,387 $ (1,675,368) $ 370,262
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996 1995
Cash flows from operating activities:
Net loss $(1,778,205) $(51,257)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 384,077 358,101
Bad debt expense 51,542 20,379
(Increase) decrease in operating assets:
Accounts receivable 336,052 (50,160)
Inventories 554,630 131,350
Prepaid expenses (119,271) 36,041
Income tax receivable (517,771) -
Other assets 36,276 3,978
Increase (decrease) in operating liabilities:
Accounts payable (416,125) 201,311
Accrued liabilities 334,094 65,020
Income taxes (2,346) (11,895)
Deferred income taxes 19,171 (14,931)
Net cash (used in) provided by operating activities (1,117,876) 687,937
Cash flows from investing activities:
Purchase of fixed assets (801,500) (1,036,951)
Net cash used in investing activities (801,500) (1,036,951)
Cash flows from financing activities:
Proceeds from lenders 5,901,901 642,530
Repayments to lenders (4,844,338) (909,172)
Issuance of stock 430,032 867,584
Net cash provided by financing activities 1,487,595 600,942
(Decrease) increase in cash (431,781) 251,928
Cash at beginning of period 448,672 196,744
Cash at end of period $ 16,891 $ 448,672
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 404,054 $ 316,592
Income taxes $ - $ 155,626
Noncash investing and financing activity:
Net assets of businesses acquired in 1995
Book value of assets acquired $ - $ 6,382,597
Less: Cash acquired - 352,790
- 6,029,807
Liabilities assumed - 4,794,210
$ - $ 1,235,597
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
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. The Company
operates in Connecticut, Florida, Georgia, Maryland and Virginia. The Company's
revenues are derived primarily from the sale of new and used pallets. The
Company allows its customers uncollateralized credit for various periods of
time.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries Pallet Recycling Technology, Inc.
("PRTI") and Abell Lumber, Inc. ("Abell"). Intercompany balances and
transactions are eliminated in consolidation.
3. Accounts Receivable
Trade receivable accounts are primarily located on the Eastern coast of
the United States and are comprised of large distributors, national retail
chains, major manufacturers and the U.S. Government. 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-21
<PAGE>
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.
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
Earnings (loss) per share is computed by dividing net earnings by the
weighted average number of shares of common stock and common stock
equivalents (common stock options outstanding during the year unless such
inclusion is anti-dilutive). The weighted average number of shares are
based upon the weighted average number of common stock shares and common
equivalent shares outstanding during each year. The total number of such
weighted average shares was 4,200,754 and 3,620,147 at June 30, 1996 and
1995, respectively.
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 (FAS 123)
Options granted under the Company's Stock Option Plan are accounted
for under APB Opinion 25, Accounting for Stock Issued to Employees and
related interpretations. In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123), which will require additional proforma disclosures
for companies that will continue to account for employee stock options
under the intrinsic value method specified in APB25. The Company plans to
continue to apply APB 25 and the only effect of adopting SFAS 123 in 1997
will be the new disclosure requirement.
(continued)
F-22
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. Reclassifications
Certain prior year amounts within the accompanying financial
statements have been reclassified to conform to the current year
presentation.
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. Currently, the Company is
not in compliance with certain financial covenants under the bank loan
agreements ("Debt"). Accordingly, the debt is classified as current in the
accompanying consolidated balance sheet. The note is secured by
substantially all of the assets of the Company.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to meet
its financing requirements on a continuing basis, to maintain present
financing, and to succeed in its future operations. The financial
statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts and classification
of liabilities that might be necessary should the Company be unable to
continue in existence.
Management has taken steps to reduce its operating expenses and
streamline its operations. In addition, a shareholder and an affiliated
Company (Note I) have contributed $500,000 of cash for operating purposes.
The Company continues to seek alternative sources of financing and capital.
Management believes the aforementioned steps are sufficient to provide the
company with sufficient cash flow to meet its operating needs.
NOTE C - INVENTORIES
Inventories consist of the following at June 30, 1996:
Raw materials $ 455,031
Work in process 279,988
Finished goods 285,224
$ 1,020,243
F-23
<PAGE>
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at June 30,
1996:
Machinery and equipment $ 2,936,694
Building and improvements 1,518,852
Vehicles 938,634
Furniture and equipment 277,849
Land 136,044
5,808,073
Less: Accumulated depreciation 2,930,264
$ 2,877,809
Depreciation expense was $360,600 and $358,101 in 1996 and 1995,
respectively, and is included in "cost of goods sold" and "selling, general
and administrative" expenses in the accompanying consolidated financial
statements.
NOTE E - INCOME TAXES
The provision for (benefit from) income taxes consists of the
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
following:
Years Ended June 30,
1996 1995
Current
Federal $(425,109) $ 354,580
State (83,111) 71,705
(508,220) 426,285
Deferred
Federal 16,369 28,375
State 2,802 3,030
19,171 31,405
$(489,049) $ 457,690
Deferred tax assets are comprised of the following at:
June 30,
1996 1995
Deferred tax assets
Net operating loss
carryforward $701,000 $ 391,821
Other 74,000 25,718
775,000 417,539
Valuation allowance (775,000) (417,539)
Total $ - $ -
</TABLE>
F-24
<PAGE>
NOTE E - INCOME TAXES - Continued
Deferred tax liabilities are comprised of the following at:
June 30,
1996 1995
Depreciation $167,972 $ 148,801
The major elements contributing to the difference between the federal
statutory tax and the effective tax rates are as follows:
Years Ended June 30,
1996 1995
Statutory rate $ (770,866) $ 138,187
State or local income taxes (80,309) 33,327
Increase in valuation allowance 357,461 229,397
Permanent differences and other 4,665 56,779
$ (489,049) $ 457,690
The fiscal 1995 tax provision is in excess of the statutory rate as a
result of permanent differences, state taxes, an increase in the valuation
allowance and restrictions placed on the use of the net operating losses of
PRTI due to the change in ownership and separate return year limitation
rules. The fiscal 1996 tax benefit is less than the statutory rate
primarily as a result of limitations placed on the amount of the net
operating loss that could be carried back and an increase in the valuation
allowance related to the additional net operating loss carryforwards.
As of June 30, 1996, the Company has a net operating loss carryforward
of approximately $1,864,000 which expires in the fiscal year ending June
30, 2011. 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-25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NOTE F - DEBT
$2,500,000 revolving credit agreement with a bank. The agreement
expires on September 30, 1998, includes interest at the bank's prime rate
plus 2.0% (10.25% at June 30, 1996). The line is collateralized by
substantially all the assets of the Company. The loan is guaranteed by a
majority stockholder. Advances are based on 80% of eligible accounts
receivable and 50% of eligible inventories. The revolving credit agreement
contains certain restrictive covenants as defined. The Company had zero
borrowing availability as of June 30, 1996. At June 30, 1996, Abell was in
violation of various restrictive covenants and the Bank waived each
violation as of June 30, 1996; however, subsequent to year end, Abell is
again in violation of these covenants. Accordingly, the loan has been
classified as current at June 30, 1996 and is subject to demand by the
bank. $1,326,669
Bank Term Loans:
The following bank term loans are collateralized by substantially all the
assets of the Company and are subjected to the same restrictive covenants
as the related revolving credit agreement. Accordingly, these loans have
been classified as current at June 30, 1996 and are subject to demand by
the bank. The loans are guaranteed by a majority stockholder.
Bank note payable in monthly installments of $8,580, plus
interest at prime plus 2.0% (10.25% at June 30, 1996). Final
payment due December 1997. 154,434
Bank note payable in monthly installments of $ 4,166, plus
interest at prime plus 2.0% (10.25% at June 30, 1996). Final
payment due October 2005. 466,667
Bank note payable in monthly installments of $4,000, plus interest at
9.0%. Final payment due January 1997.
28,000
Related party note payable, interest payable monthly at 12%; subordinated
to all non-trade debt and uncollateralized. Principal due July 1998.
742,282
F-26
<PAGE>
NOTE F - DEBT - Continued
Bank Term Loans: - Continued
Notes payable to investors; interest payable quarterly at 9%; each $25,000
principal amount is convertible into 1% of the Company's common stock, as
defined; subordinated to all non-trade debt and uncollateralized.
Principal due November 1998.
$225,000
Notes payable to investors; interest payable quarterly at 10%; convertible to
32,093 shares of the Company's common stock; subordinated to all non-trade
debt and uncollateralized. Principal due
April 1998. $256,410
Banknotes payable in monthly installments ranging from $219 to $3,498;
including interest ranging from 8% to 14%; collateralized by equipment and
vehicles; maturing at various dates through January
2000. $141,592
Industrialized development notes payable; quarterly installments of $3,381
beginning December 1997; interest at 5.25%; maturing
October 2017. 167,000
Capital Lease Obligations
Obligation to credit corporation under capital leases payable in monthly
installments of $267 to $2,634, including interest ranging from 10% to 19%,
collateralized by equipment and vehicles; maturing
at various dates through May 2001. 220,631
Total debt 3,728,685
Less: Current portion 2,150,634
$ 1,578,051
Scheduled maturities of long-term debt are as follows:
Year Ended June 30,
1997 $ 2,150,634
1998 1,083,055
1999 283,338
2000 42,946
2001 23,002
145,710
$ 3,728,685
</TABLE>
F-27
<PAGE>
NOTE G - ACCRUED LIABILITIES
Accrued expenses consist of the following at June
30, 1996:
Accrued compensation $ 126,078
Other accrued expenses 488,768
$ 614,846
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment and vehicles under
non-cancelable operating leases. The following is a schedule by years of
the minimum rental commitments remaining on leased property and equipment:
Year Ended June 30,
1997 $ 380,216
1998 335,766
1999 285,689
2000 277,934
2001 450,198
Total $ 1,729,803
Total rent expense was $583,783 and $374,505 for the years ended June 30, 1996
and 1995, respectively.
NOTE I - RELATED PARTY TRANSACTIONS
ClaryLumber, currently owned by an officer and directors of the Company, has
loaned the Company money to facilitate the acquisition of property. The
outstanding balance of the note at June 30, 1996, was $742,282. The Company
has paid approximately $55,000 to Clary Lumber for compensation of certain
employees who perform services for both Clary Lumber and the Company.
The Company purchased approximately $2,178,000 and $1,980,000 of lumber from
Clary Lumber in 1996 and 1995, respectively. This amounted to 32.0% and
7.5% of the Company's inventory purchases for the years ended June 30, 1996
and 1995, respectively.
The Company sold approximately $159,000 and $70,000 of lumber to Clary Lumber
for the year ended June 30, 1996 and 1995, 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 $93,000 at the time of sale.
F-28
<PAGE>
NOTE I - RELATED PARTY TRANSACTIONS - Continued
During 1992, an officer of the Company provided a loan to the Company. During
the year ended June 30, 1995, these funds were converted under the terms of
the subordinated debt agreements into the Company's common stock.
NOTE J - EMPLOYMENT AGREEMENT
The Company has employment agreements with two senior executives that provide
for minimum annual compensation totalling $190,000 and additional
compensation as defined in the agreement. The contracts expire in June 30,
2000. Payments under these agreements for the year ended June 30, 1996 and
1995 totaled $201,758 and $212,905, respectively. The Company's remaining
commitments at June 30, 1996 under such contracts is $760,000.
NOTE K - STOCKHOLDERS' EQUITY
Common Stock Offering
In September 1995 and January 1995, the Company completed private placement
offerings for 144,000 and 350,400 shares of its common stock, respectively.
The stock was sold to unrelated investors at offering prices of $3.50 and
$1.46, per share, respectively. The net proceeds of these transactions
increased the Company's equity by $430,032 and $418,350, respectively.
Stock Option Plan
In July 1995, the Company established a Stock Option Plan which authorizes the
Company to issue options to employees, directors and outside consultants of
the Company. The issuance and form of the options shall be at the
discretion of the Company's board of directors, except that the exercise
price may not be less than 85% of the fair market value at the time of
grant. No options as of June 30,1996 have been granted.
NOTE L - SIGNIFICANT CUSTOMERS
The Company has sales to one significant customer which represents
approximately 27% of net sales for the year ended June 30, 1996. In fiscal
1995, the Company had sales to two significant customers which represent
approximately 46% and 11% of net sales, respectively.
NOTE M - ACQUISITION OF ABELL LUMBER CORPORATION
On June 29, 1995, the Company acquired all the common stock of Abell in
exchange for 2,260,143 shares of the Company's common stock. Abell is a
manufacturer of pallets in Virginia. The merger qualifies as a tax-free
reorganization and was accounted for as a pooling of interest and ,
accordingly, the consolidated financial statements for all periods
presented, have been restated to include the results of Abell. Abell's
fiscal year has been changed from November 30 to June 30 to conform to the
Company's new fiscal year-end.
F-29
<PAGE>
NOTE N - SUBSEQUENT EVENT
The Company's Common Stock was split two-for-one on October 3, 1996.
Certain shareholders, consisting primarily of officers and directors, waived
their right to this dividend resulting in an increase of 814,286 shares. All
stock data and per share amounts in the consolidated financial statements have
been restated to give effect to the stock split.
F-30
<PAGE>
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Dec. 27, Jun. 30,
ASSETS 1997 1997
(Audited)
CURRENT ASSETS
Cash $529,474 $237,447
Accounts Receivable - trade, net of allowance
for doubtful accounts 1,282,116 1,724,957
Inventories 1,261,512 902,396
Prepaid expenses 95,008 98,079
Total current assets 3,168,110 2,962,879
Property and equipment - net of accumulated
depreciation 2,892,743 2,780,882
Other assets 78,445 39,666
---------- ------------
$6,139,298 $5,783,427
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $2,047,750 $2,507,648
Accounts payable - trade 1,618,288 1,215,076
Accrued liabilities 415,338 583,966
------------ -----------
Total current liabilities 4,081,376 4,306,690
LONG TERM DEBT
Deferred income tax 70,888 70,888
Long-Term debt 1,213,364 1,137,976
--------- ---------
1,284,252 1,208,864
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, authorized 100,000,000 shares at $.001 par value; issued and
outstanding 1,712,489 shares at December 27, 1997 and 1,212,489
at June 30, 1997 1,712 1,212
Additional paid in capital 3,606,397 2,825,006
Retained (deficit) earnings (2,834,439) (2,558,345)
----------- ------------
773,670 267,873
------- ----------
$6,139,298 $5,783,427
========== ==========
</TABLE>
F-31
<PAGE>
PALLET MANAGEMENT SYSTEMS
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
13 Weeks Ended 26 Weeks Ended
Dec. 27, 1997 Dec. 28, 1996 Dec. 27, 1997 Dec. 28, 1996
Net sales $5,168,237 $5,289,065 $9,744,636 $9,019,756
Cost of goods sold 4,698,320 4,752,318 8,909,313 8,263,432
Gross profit 469,917 536,747 835,323 756,324
Selling, general and
administrative expense 458,247 442,557 902,741 $864,977
Operating profit 11,670 94,190 (67,418) (108,653)
Other income (expense)
Other income 0 5,971 0 9,940
Interest expense (111,920) (78,371) (208,675) (179,629)
Earnings before income taxes (100,250) 21,790 (276,093) (278,342)
Income tax expense (benefit) 0 0 0 0
Net earnings (loss) (100,250) 21,790 ($276,093) ($278,342)
Net (loss) earnings per
common share $(0.07) $0.02 $(0.20) $(0.26)
(reflects 1 for 4 reverse split)
</TABLE>
F-32
<PAGE>
PALLET MANAGEMENT SYSTEMS
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
13 Weeks Ended 26 Weeks Ended
Dec. 27, 1997 Dec. 28, 1996 Dec. 27, 1997 Dec. 28, 1996
Cash flows from operating activities:
Net (loss) earnings ($100,250) $21,791 ($276,094) ($176,015)
Adjustments to reconcile net (loss) earnings to net cash provided by (used in)
operating activities:
Depreciation 98,961 95,520 198,045 184,857
(Incr.) Decr. in operating assets:
Accounts receivable (101,737) (100,852) 442,841 (413,378)
Inventories (122,570) (84,309) (359,118) (109,439)
Prepaid expenses 63,139 (67,113) 3,072 (28,457)
Income tax refund receivable 0 0 0 517,771
Other assets (24,214) 84,696 (38,779) 98,204
Incr. (Decr.) in operating assets:
Accounts payable 93,360 (97,526) 403,212 168,824
Accrued liabilities and taxes (171,832) (67,601) (168,628) (6,329)
Deferred credits 0 0 0 0
Net cash provided by (used in)
operating activities (265,143) (215,394) 204,551 236,038
Cash flows from investing activities:
Purchase of fixed assets (221,201) (204,776) (309,905) (224,336)
Net cash (used in) investing activities (221,201) (204,776) (309,905) (224,336)
Cash flows from financing activities:
Borrowing from (Payments to) lenders 70,275 173,472 (384,510) (275,291)
Capital contributed 781,891 606,740 781,891 606,740
Net cash (used in) provided by
Financing activities 852,166 780,212 397,381 331,449
INCREASE (DECREASE) IN CASH 365,822 360,042 292,027 343,151
Cash at beginning of period 163,652 0 273,447 16,891
Cash at end of period 529,474 $360,042 529,474 $360,042
</TABLE>
F-33
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied on as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the securities offered
by this Prospectus, or an offer or solicitation of an offer to buy any
securities by any person in any jurisdiction in which such offer or solicitation
is not authorized or is unlawful. The delivery of this Prospectus shall not,
under any circumstances, create any implication that the information herein is
correct as of any time subsequent to the date of this Prospectus.
Until _______________, 1998 (25 days after the date of this
Prospectus), all dealers effecting transactions in the Securities offered
hereby, whether or not participating in the distribution, may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with regard to their unsold
allotments or subscriptions.
TABLE OF CONTENTS
Available Information ..................................2
Prospectus Summary......................................3
Risk Factors............................................6
Use of Proceeds.........................................13
Capitalization..........................................14
Dividend Policy.........................................15
Management's Discussion and Analysis of Financial Condition
and Results of Operation............................. 15
Market for Common Equity and Related Stockholder Matters.19
Business................................................ 20
Management...............................................26
Certain Transactions.....................................29
Principal Stockholders...................................30
Selling Stockholders.....................................31
Plan of Distribution.....................................33
Description of Securities................................33
Legal Matters ...........................................35
Experts..................................................35
Financial Statements.....................................F-1
PALLET MANAGEMENT SYSTEMS, INC.
2,401,685 Shares of Common Stock
-----------
PROSPECTUS
-----------
_______________, 1998
<PAGE>
PART II
Information Not Required in Prospectus
ITEM 24. Indemnification of Officers and Directors
Article 8 of the Company's Amended and Restated By Laws
provides that "The Corporation shall have the power to and shall indemnify any
person who was or is a party to any proceeding from any liability or expenses
incurred by reason of the fact that such person is or was an employee or agent
of the Corporation, to the full extent allowed under the laws of the State of
Florida."
ITEM 25. Other Expenses of Issuance and Distribution
Securities and Exchange Commission Fees......................$ 1,997.96
Accounting fees and expenses.................................$ 10,000.00
Blue Sky fees and expenses...................................$ 15,000.00
Printing Expenses ...........................................$ 10,000.00
Legal fees...................................................$ 30,000.00
Miscellaneous................................................$ 3,002.04
Total.....................................................$70,000.00
ITEM 26. Recent Sales of Unregistered Securities
In November 1997, the Company completed a private placement ("Private
Placement") of one million ($1,000,000) dollars of Units (as defined below) at
$1.00 per Unit. Each unit ("Unit") consists of (a) two (2) shares of common
stock of the Company, $.001 par value per share ("Common Stock") and (b) one (1)
Class A warrant exercisable to purchase one (1) share of Common Stock at a price
of $1.50 per share and one (1) Class B Warrant exercisable to purchase one share
of Common Stock at a price of $1.75 per share for a period of two (2) years
commencing from the date that this Registration Statement is declared effective.
The Company's Board of Directors approved on December 3, 1996, a dollar
for dollar exchange of outstanding notes into newly formed "A Units." Each A
Unit consists of one share of the Company's common stock, and one two-year
warrant (subsequently extended by the Board of Directors until 2001) to purchase
one (pre-reverse split) share of the Company's common stock at an exercise price
of $1.25 ("A Unit Warrants.") At the time of the offer, the Company had notes
valued at $682,000 and a commitment from the majority shareholder to invest an
additional $300,000 into the Company prior to the end of the calendar year. From
the $982,000 eligible for this exchange offer, $607,000 was converted into
607,000 A Units. $577,000 of the debt converted was held by Company board
members.
Neither the Company nor any person acting on its behalf offered or sold
the securities described above by means of any form of general solicitation or
general advertising. Each purchaser represented in writing that he acquired the
securities for his own account. A legend was placed on
II-1
<PAGE>
the certificate stating that the restrictions on their transferability and sale.
Each purchaser signed a written agreement that the securities will not be sold
without registration under the Act or exemption therefrom. The Registrant
believes such private placement was an exempt transactions not involving a
public offering under Sections 3(b) of the Securities Act of 1933, as amended
and Rule 504 of Regulation D promulgated thereunder.
ITEM 27. Exhibits and Financial Statement Schedules
(a) Exhibits
3.1 Registrant's Articles of Incorporation
3.2 Amendment to Articles of Incorporation filed June 7, 1985.
3.3 Amendment to Articles of Incorporation filed July 10,1985.
3.4 Amendment to Articles of Incorporation filed October 12, 1994.
3.5 Amendment to Articles of Incorporation filed November 21, 1994
3.6 Amendment to Articles of Incorporation filed February 3, 1998.
3.7 Registrant's Amended and Restated By-Laws.
4.1 Form of Common Stock Certificate.
4.2 Form of Class A Warrant.
4.3 Form of Class B Warrant.
5 Opinion of McLaughlin & Stern, LLP
21 List of Subsidiaries
23.1 Consent of McLaughlin & Stern, LLP (included in Exhibit 5)
23.2 Consent of Kaufman, Rossin & Co.
23.3 Consent of Grant Thornton LLP
Exhibits 3.1; 3.2; 3.3; 3.4; 3.5; 3.7 and 4.1 are incorporated
by reference to the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1996, Commission File No.2-99212-A.
Schedules other than those listed above have been omitted
since they are either not required, are not applicable or the required
information is shown in the financial statements or related notes.
II-2
<PAGE>
ITEM 28. Undertakings
The undersigned Registrant hereby undertakes to:
(a) (1) File, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a) (3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of a prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement.
(iii) Include any additional or changed material information
on the plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement for the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering;
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering; and
(b) Provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suite or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
II-3
<PAGE>
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated September 4, 1996 accompanying the
Consolidated Statements of Operations, Stockholders' Equity and Cash flows for
the year ended June 30, 1996 of Pallet Management Systems, Inc. and
Subsidiaries, contained in the Form SB-2 Registration Statement and Prospectus.
We consent to the use of the aforementioned report in the Form SB-2 Registration
Statement and Prospectus and to the use of our name as it appears under the
caption "Experts."
GRANT THORNTON LLP
Fort Lauderdale, FL
March 6, 1998
<PAGE>
Kaufman Rossin & Co.
Certified Public Accountants
2699 South Bayshore Drive
Miami, Florida 33133-5486
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 on Form SB-2 to the
Registration Statement on Form SB-2 of our report dated August 29, 1997 relating
to our audit of the consolidated financial statements of Pallet Management
Systems, Inc. and Subsidiaries for the year ended June 30, 1997.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
KAUFMAN, ROSSIN & CO.
Miami, Florida
March 6, 1998
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Boca Raton, State of Florida, on March 9, 1998.
PALLET MANAGEMENT SYSTEMS, INC.
By:/s/ Zachary Richardson, President
In accordance with the requirements of the Securities Act of
1933, this registration statement was signed by the following persons in the
capacities and on the dates stated.
______________________________ Chairman and CEO ___________________
John C. Lucy, III
___________________________ President, Secretary _______________
Zachary M. Richardson CFO and Director
_____________________________ Director ______________________
John C. Lucy, Jr.
____________________________ Director ______________________
Donald Radcliffe
ARTICLES OF AMENDMENT
OF
PALLET MANAGEMENT SYSTEMS, INC.
Pursuant to Section 607.1006 Florida Statutes, the Articles of
Incorporation of Pallet Management Systems, Inc. shall be amended as follows:
ONE: The following Article of the Articles of Incorporation shall be
deleted in its entirety and the following shall be added in its place:
ARTICLE IV - Capital Stock.
The total number of shares of all classes of stock which the corporation shall
have authority to issue is one hundred seven million five hundred thousand
(107,500,000), which are divided into one hundred million (100,000,000) shares
of Company's common stock of a par value of one mil ($.001) per share ("Common
Stock") and seven million five hundred thousand (7,500,000) shares of Preferred
Stock of a par value of one mil ($.001) per share.
The shares of Preferred Stock may be issued from time to time in one or more
series, in any manner permitted by law, as determined from time to time by the
Board of Directors, and stated in the resolution or resolutions providing for
the issuance of such shares adopted by the Board of Directors pursuant to
authority hereby vested in it. Without limiting the generality of the foregoing,
shares in such series shall have such voting powers, full or limited, or no
voting powers, and shall have such designations, preferences, and relative,
participating, optional, or other special rights, and qualifications,
limitations, or restrictions thereof, permitted by law, as shall be stated in
the resolution or resolutions providing for the issuance of such shares adopted
by the Board of Directors pursuant to authority hereby vested in it. The number
of shares of any such series so set forth in such resolution or resolutions may
be increased (but not above the total number of authorized shares of Preferred
Stock) or decreased (but not below the number of shares thereof then
outstanding) by further resolution or resolutions adopted by the Board of
Directors pursuant to authority hereby vested in it.
The total number of issued shares of Common Stock (but not the outstanding Class
A Warrants and Class B Warrants, with respect to either exercise price or the
number of shares issuable upon the exercise of such warrants) will be
reclassified, wherein every four (4) shares of the Common Stock outstanding as
of the end of business on the Record Date will be replaced by one (1) share of
Common Stock ("Reverse Stock Split"). The Reverse Stock Split will reduce the
number of outstanding shares of Common Stock as of the record date from
6,849,956 to 1,712,489. All reclassified shares resulting in fractional
denominations will be rounded up.
TWO: The foregoing amendment shall be implemented in a manner to determined
by the corporation's Board of Directors.
THREE: The foregoing amendment shall be deemed adopted as of the date hereof.
<PAGE>
The foregoing amendment was approved and adopted on January 29, 1998 by
the holders of in excess of fifty-one percent (51%) of the Common Stock (the
sole outstanding class of securities) of the Corporation at a meeting duly
called and held on that date. The number of votes cast for the amendment was
sufficient for approval.
PALLET MANAGEMENT SYSTEMS, INC.
Dated: January 29, 1998 By: Zachary M. Richardson, President
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (" 1933 ACT") OR ANY STATE SECURITIES LAWS AND HAVE BEEN
ACQUIRED PURSUANT TO AN INVESTMENT REPRESENTATION ON THE PART OF THE PURCHASER
HEREOF AND SHALL NOT BE SOLD, PLEDGED, TRANSFERRED, HYPOTHECATED, DONATED, OR
OTHERWISE DISPOSED OF OR ENCUMBERED, WHETHER OR NOT FOR CONSIDERATION, BY THE
PURCHASER EXCEPT UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF ITS
COUNSEL OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE
SATISFACTORY TO COUNSEL FOR THE COMPANY, IN EITHER CASE, TO THE EFFECT THAT ANY
SUCH TRANSACTION SHALL NOT BE IN VIOLATION OF THE 1933 ACT OR APPLICABLE STATE
SECURITIES LAWS.
PALLET MANAGEMENT SYSTEMS, INC.
Class A
Common Stock Purchase Warrant No.
to Purchase Shares of Common Stock
This Class A Common Stock Purchase Warrant is issued to:
by PALLET MANAGEMENT SYSTEMS, INC., a Florida corporation (hereinafter called
the "Company", which term shall include its successors and assigns).
FOR VALUE RECEIVED and subject to the terms and conditions hereinafter set out,
the registered holder (the "Registered Holder") of this redeemable common stock
purchase warrant (the "Warrant") is entitled upon surrender of this Warrant to
purchase from the Company fully paid and nonassessable shares of Common Stock,
$.001 par value per share (the "Common Stock"), at the price of $1.50 per share,
subject to adjustment as provided herein.
This Warrant shall expire at the close of business on [two years from the
effective date of the Registation Statement].
1. (a) The right to purchase shares of Common Stock represented by this Warrant
may be exercised by the Registered Holder, in whole or in part, by the surrender
of this Warrant (properly endorsed, if required) at the principal office of the
Company at One South Ocean Boulevard, Suite 305, Boca Raton, Florida 33432 (or
such other office or agency of the Company as it may designate by notice in
writing to the Registered Holder at the address of the Registered Holder
appearing on the books of the Company), and upon payment to the Company, by cash
or by certified check or bank draft, of the Warrant Exercise Price (as
hereinafter defined) for such shares of Common Stock, the Company shall cause
its transfer agent to issue a certificate representing the shares of Common
Stock so purchased (or if the Company does not have a transfer agent, the
Company shall issue a certificate
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<PAGE>
representing the shares of Common Stock so purchased). The Company agrees that
the shares of Common Stock so purchased shall be deemed to be issued to the
Registered Holder as the record owner of such shares of Common Stock as of the
close of business on the date on which this Warrant shall have been surrendered
and payment made for such shares of Common Stock as aforesaid. Certificates for
the shares of Common Stock so purchased shall be delivered to the Registered
Holder within a reasonable time, not exceeding ten (10) business days, after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the number of shares of
Common Stock, if any, with respect to which this Warrant shall not then have
been exercised, in all other respects identical with this Warrant, shall also be
issued and delivered to the Registered Holder within such time, or, at the
request of the Registered Holder, appropriate notation may be made on the
Registered Holder's Warrant and the same returned to the Registered Holder.
(b) This Warrant may be exercised to acquire, from and after the date hereof,
from time to time up to the number of shares of Common Stock set forth on the
first page hereof, subject to adjustment as provided herein; provided, however,
the night hereunder to purchase such shares of Common Stock shall expire at the
close of business on [two years from the effective date of the Registation
Statement].
(c) This Warrant has been issued pursuant to the Unit Purchase Agreement (as
defined below) and the Company's Confidential Private Placement Memorandum dated
September 15, 1997, as same shall be amended ("Memorandum"). Pursuant to the
Memorandum, the Company offered $1,000,000 of units ("Units") at a price of
$1.00 per Unit. Each Unit consisted of, among other things, two Warrants. As set
forth in the Unit Purchase Agreement, the Company is required to file a
registration statement ("Registration Statement") with the United States
Securities and Exchange Commission ("SEC") under the 1933 Act registering the
shares of Common Stock issuable upon the exercise of this Warrant.
2. If this Warrant or any shares of Common Stock issuable hereunder require
declaration, qualifications or registration with or approval of any governmental
official or authority (other than registration under the 1933 Act, but including
declaration, qualification or registration under any blue sky law that the
holder hereof may request) before this Warrant or shares of Common Stock issued
pursuant hereto may be issued, the Company shall at its sole cost and expense
take all requisite action in connection with such declaration, qualification,
registration or approval and shall use its best efforts to cause such shares of
Common Stock or this Warrant or both, to be duly declared, qualified, registered
or approved as may be required.
3. The Company covenants and agrees that all shares of Common Stock, upon
issuance and payment pursuant to this Warrant, will be validly issued, fully
paid and nonassessable and free and clear from all taxes, liens and charges with
respect to the issue thereof and free and clear of any and all preemptive rights
of any holders of the Company's securities; and, without limiting the generality
of the foregoing, the Company covenants and agrees that it will take from time
to time all such action as may be required to assure that the par value per
share of the Common Stock is at all times equal
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<PAGE>
to or less than the then effective Warrant Exercise Price. The Company covenants
and agrees that during the period within which the rights represented by this
Warrant may be exercised, the Company will have at all times authorized and
reserved for the purpose of issue or transfer upon exercise of the rights
evidenced by this Warrant is a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant, and will
procure at its sole cost and expense upon each such reservation of shares of
Common Stock the listing thereof (subject to issuance or notice of issuance) on
all stock exchanges on which the shares of Common Stock of the Company are then
listed or inter-dealer trading systems on which the shares of Common Stock of
the Company are then traded. The Company will take all such action as may be
necessary to assure that such shares of Common Stock may be so issued without
violation of any applicable law or regulation, or of any requirements of any
securities exchange or inter-dealer trading systems upon which the Common Stock
of the Company may be listed. The Company will not take any action which would
result in any adjustment in the number of shares of Common Stock purchasable
hereunder if the total number of shares of Common Stock issuable pursuant to the
terms of this Warrant after such action upon full exercise of this Warrant and,
together with all shares of Common Stock then outstanding and all shares of
Common Stock then issuable upon exercise of all outstanding options, warrants
and other rights to purchase shares of Common Stock then outstanding, would
exceed the total number of shares of Common Stock then authorized by the
Company's certificate of incorporation, as then amended.
4. The provisions of this Warrant are subject to the following terms and
conditions:
(a) The Initial Warrant Exercise Price shall be $1.50 per share of Common Stock.
Such purchase price shall be subject to an adjustment from time to time as
hereinafter provided (such price or price as last adjusted, as the case may be,
being herein called the "Warrant Exercise Price"). Upon each adjustment of the
Warrant Exercise Price, the registered holder of this Warrant shall thereafter
be entitled to purchase, at the Warrant Exercise Price resulting from such
adjustment, the number of shares of Common Stock obtained by (i) multiplying the
Warrant Exercise Price in effect immediately prior to such adjustment by the
number of shares of Common Stock purchasable hereunder immediately prior to such
adjustment and (ii) dividing the product thereof by the Warrant Exercise Price
resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares of Common Stock, or declare a
dividend or make any other distribution upon the Common Stock of the Company
payable in shares of Common Stock, the Warrant Exercise Price in effect
immediately prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock of the Company shall
be combined into a smaller number of shares of Common Stock, the Warrant
Exercise Price in effect immediately prior to such combination shall be
proportionately increased. There shall be no adjustment in the Warrant Exercise
Price in the event that the Company pays a cash dividend- provided, however,
that the Company shall give written notice to the registered holders of the
Warrants at least thirty (30) days prior to the record date for the cash
dividend that the Corporation intends to declare a cash dividend. Further, there
shall be no adjustment for the Company's
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<PAGE>
contemplated one for four reverse split expected to be effectuated in connection
with the Private Placement, of which this Warrant is a part.
(c) In case the Company shall issue or otherwise sell or distribute shares of
Common Stock (collectively, "Subsequent Transactions") for a consideration per
share in cash or property less than $1.50 per share (such lower price per share
being hereinafter referred to as the "Lower Price"), the Warrant Exercise Price
then in effect shall be reduced to 125% of the Lower Price. If the consideration
in a Subsequent Transaction is other than cash, the price per share of such
consideration shall be as determined by the Board of Directors, including a
majority of the Directors who are not officers or employees of the Company or
any of its subsidiaries, whose determination shall be conclusive and described
in a resolution of the Board of Directors. The provisions of this Section 4(c)
shall not apply to the issuance by the Company of Common Stock upon the exercise
or conversion of outstanding options, warrants and other convertible securities
which existed on the date that this Warrant was created.
(d) If any capital reorganization or reclassification of the capital stock of
the Company, or any consolidation or merger of the Company with another
corporation or other entity, or the sale of all or substantially all of the
Company's assets to another corporation or other entity shall be effected in
such a way that holders of shares of Common Stock shall be entitled to receive
stock, securities, other evidence of equity ownership or assets with respect to
or in exchange for shares of Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale (except as
otherwise provided below in this Paragraph 4(d)), lawful and adequate provisions
shall be made whereby the Registered Holder of this Warrant shall thereafter
have the right to purchase and receive upon the basis and upon the terms and
conditions specified in this Warrant is for such shares of stock, securities,
other evidence of equity ownership or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of Common Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented by this
Warrant had such reorganization, reclassification, consolidation, merger or sale
not taken place, and in any such case appropriate provision shall be made with
respect to the rights and interests of the Registered Holder of this Warrant to
the end that the provisions hereof (including, without limitation, provisions
for adjustments of the Warrant Exercise Price and of the number of shares of
Common Stock purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities, other evidence of equity ownership or assets thereafter
deliverable upon the exercise hereof (including an immediate adjustment, by
reason of such consolidation or merger, of the Warrant Exercise Price to the
value for the Common Stock reflected by the terms of such consolidation or
merger if the value so reflected is less than the Warrant Exercise Price in
effect immediately prior to such consolidation or merger), In the event of a
merger or consolidation of the Company with or into another corporation or other
entity as a result of which the number of shares of common stock of the
surviving corporation or other entity is issuable to holders of Common Stock of
the Company, greater or lesser than the number of shares of Common Stock of the
Company outstanding immediately prior to such merger or consolidation, then the
Warrant Exercise Price in effect immediately prior to such merger or
consolidation shall be adjusted in the same manner as
4
<PAGE>
though there were a subdivision or combination of the outstanding shares of
Common Stock of the Company. The Company will not effect any such consolidation,
merger or sale, unless prior to the consummation thereof the successor
corporation (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing such assets shall assume by written
instrument executed and mailed or delivered to the Registered Holder hereof at
the last address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities, other
evidence of equity ownership or assets as, in accordance with the foregoing
provisions, such Registered Holder may be entitled to purchase or otherwise
acquire. If a Person (as defined below) makes a purchase, tender or exchange
offer to and such is accepted by the holders of more than fifty (50%) percent of
the outstanding shares of Common Stock of the Company, the Company shall not
subsequently effect any consolidation, merger or sale with the Person or with
any Affiliate (as defined below) of such Person, unless prior to the
consummation of such consolidation, merger or sale the Registered Holder of this
Warrant shall have been given a reasonable opportunity to then elect to receive
upon the exercise of this Warrant either the amount of stock, securities, other
evidence of equity ownership or assets then issuable with respect to the number
of shares of Common Stock of the Company in accordance with such offer. The term
"Person" as used in this Paragraph 4(d) shall mean and include an individual, a
partnership, a corporation, a trust, a joint venture, an unincorporated
organization and a government or any department or agency thereof For the
purposes of this Paragraph 4(d), an "Affiliate" of any Person shall mean any
Person directly or indirectly controlling, controlled by or under direct or
indirect preferred control with, such other Person. A Person shall be deemed to
control a corporation if such Person possesses, directly or indirectly, the
power to direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities, by contract or
otherwise.
(e) In the event that the Registration Statement is not declared effective
within ten (10) months after the Final Closing Date (as defined in the Unit
Purchase Agreement), the Warrant Exercise Price shall be reduced (and the number
of shares of Common Stock issuable upon exercise of the Warrant will be
concomitantly increased by five (5%) percent per month, or part thereof, up to
twenty-five (25%) percent in the aggregate.
(f) Whenever the Warrant Exercise Price and the number of shares of Common Stock
shall be adjusted as herein provided, the Company shall compute the adjusted
Warrant Exercise Price and the adjusted number of shares of Common Stock in
accordance with such provisions and shall prepare a certificate signed by its
President, any Vice President, Treasurer or Secretary setting forth the adjusted
Warrant Exercise Price and the adjusted number of shares of Common Stock which
may be acquired and showing in reasonable detail the facts upon which such
adjustments are based and accompanied by a report of the Company's independent
certified public accountants upon their examination of such adjustments, and the
Company shall cause to be mailed to the Registered Holder of this Warrant a
notice stating that the Warrant Exercise Price and the number of shares of
Common Stock have been adjusted and setting forth the adjusted Warrant Exercise
Price and the adjusted number of shares of Common Stock.
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<PAGE>
(g) In case at any time;
(i) the Company shall declare any cash dividend upon its Common
Stock;
(ii) the Company shall declare any dividend upon its Common Stock payable in
stock or make any special dividend or other distribution to the holders of its
Common Stock;
(iii) the Company shall offer for subscription pro rata to the holders of its
Common Stock any additional shares of stock of any class or other rights;
(iv) there shall be any capital reorganization, or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with, or
sale of all or substantially all of its assets to, another corporation; or
(v) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more of said cases, the Company shall give by first class
mail, postage prepaid, addressed to the Registered Holder of this Warrant at the
address of such holder as shown on the books of the Company (A) at least thirty
(30) days prior written notice of the date on which the books of the Company
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, and (B) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, at least thirty (30) days prior written notice of the date when the
same shall take place. Any notice required by clause (A) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto and any notice
required by clause (B) shall also specify the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be.
(h) If any event occurs as to which in the reasonable and good faith opinion of
the Board of Directors of the Company the other provisions of this Paragraph 4
are not strictly applicable or if strict application would not fairly protect
the purchase rights of this Warrant in accordance with the essential intent and
principles of such provisions, then the Board of Directors of the Company shall
make an adjustment 'in the application of such provisions, 'in accordance with
such essential intent and principles, so as to protect such purchase rights as
aforesaid, but in no event shall have such adjustment have the effect of
increasing the Warrant Exercise Price as otherwise determined pursuant to this
Paragraph 4 except in the event of a combination of shares of the type
contemplated in Paragraph 4(b) and then 'in no event to an amount larger than
the Warrant Exercise Price as adjusted pursuant to Paragraph 4(b).
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<PAGE>
(i) There shall be no adjustment of this Warrant in the event of the exercise of
(i) up to 1,000,000 shares of Common Stock subject to the Company's Stock Option
Plan; (ii) up to 1,000,000 shares of Common Stock subject to performance options
granted to certain principals of the Company; and (iii) all placement agent
warrants.
5. In the event the Company grants rights to all of the holders of its
securities to purchase Common Stock, the Registered Holder of this Warrant shall
have the same rights as if this Warrant had been exercised immediately prior to
such grant.
6. The Registered Holder shall have the registration rights and continuing
"piggyback" registration rights set forth in the Unit Purchase Agreement ("Unit
Purchase Agreement") by and among the Company, the Placement Agent, either on
Its own behalf or on behalf of other investors, and the persons and entities
listed on Exhibit A to the Unit Purchase Agreement, including the Registered
Holder thereof Such registration rights and "piggy back" registration rights are
incorporated herein by this reference as if such provisions had been set forth
herein in full.
7. This Warrant need not be changed because of any change in the Warrant
Exercise Price or in the number of shares of Common Stock purchased hereunder.
8. The terms defined in this paragraph, whenever used in this Warrant shall,
unless the context otherwise requires, have the respective meanings hereinafter
specified. The term "Common Stock" shall mean and include the Company's Common
Stock, $.001 par value, authorized on the date of the original issue of this
Warrant and shall also include in case of any reorganization, reclassification,
consolidation, merger or sale of assets of the character referred to in
Paragraph 4 hereof, the stock, securities, other evidence of equity ownership or
assets provided for in such Paragraph. The term "Company" shall also include any
successor corporation to Pallet Management Systems, Inc. by merger,
consolidation or otherwise. The term "outstanding" when used with reference to
Common Stock shall mean at any date as of which the number of shares of Common
Stock thereof is to be determined, all issued shares of Common Stock, except
shares of Common Stock then owned or held by or for the account of the Company.
The term "1933 Act" shall mean the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the SEC, or any other
Federal agency then administering such Securities Act, thereunder, all as the
same shall be in effect at the time.
9. This Warrant is exchangeable, upon the surrender hereby by the Registered
Holder hereof at the office or agency of the Company, for new Warrants of like
tenor representing in the aggregate the right to subscribe for and purchase the
number of shares of Common Stock which may be subscribed for and purchased
hereunder, each of such new Warrants to represent the right to subscribe for and
purchase such number of shares of Common Stock as shall be designated by such
Registered Holder hereof at the time of such surrender. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant or any such new Warrants, the Company will issue to
the Registered Holder hereof a new Warrant of like tenor, in lieu of this
Warrant or such new Warrants, representing the right to subscribe for and
purchase the
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number of shares of Common Stock which may be subscribed for and purchased
hereunder.
10. The Company agrees to use its best efforts to file timely all reports
required to be filed by it pursuant to Section 13 or 15 of the Securities
Exchange Act of 1934, as amended and to provide such information as will permit
the Registered Holder to sell any shares of Common Stock acquired upon exercise
of this Warrant in accordance with Rule 144 under the 1933 Act.
11. The Company will at no time close its transfer books against the transfer of
any shares of Common Stock issued or issuable upon the exercise of this Warrant
in any manner which interferes with the timely exercise of this Warrant. This
Warrant shall not entitle the re ' registered holder hereof to any voting rights
or any rights as a stockholder of the Company. The rights and obligations of the
Company, of the registered holder of this Warrant, and of any holder of shares
of Common Stock issuable hereunder, shall survive the exercise of this Warrant.
12. If the average closing bid price for the Common Stock is at or above $4.00
per share for twenty (20) consecutive trading days and the Company then has an
effective Registration Statement under the 1933 Act with respect to all shares
of Common Stock underlying the Warrants and the Company's Common Stock is Market
Listed (as defined below), the Company has the night (but not the obligation),
upon not less than thirty (30) days nor more than forty-five (45) days' prior
written notice (the "Warrant Redemption Notice") to all holders of record of the
Warrants, to redeem all, but not less than all, of the outstanding Warrants at
$.01 per Warrant. Notwithstanding anything to the contrary, the Warrant
Redemption Notice can only be given if the Registration Statement is effective
at the time the Warrant Redemption Notice is given and the Warrant Redemption
Notice shall remain effective only if the Registration Statement remains
effective continually throughout the notice period. Registered Holders shall
have the right to exercise all or any portion of their Warrants up to and
including one (1) business day prior to the date set for redemption. The Company
has agreed to use its best efforts to list its shares of Common Stock on the
NASDAQ Stock Market, or the American Stock Exchange, or any other United States
based recognized exchange (wherever the shares of Common Stock are listed being
hereinafter referred to as the "Market") as soon as possible after the Initial
Closing Date (as defined in the Memorandum). In the event that the Company does
not qualify or is otherwise not able to list its shares of Common Stock on a
Market, the Company shall promptly make application to list its shares of Common
Stock on such other exchange as the Company shall qualify for listing and the
Company shall use its best efforts to cause its shares of Common Stock to be so
listed as soon as possible. The term "Market Listed" shall mean the date that
the Company's Common Stock commenced trading on the Market.
13. The Registered Holder of this Warrant shall have the right to sell,
transfer, assign or otherwise dispose of all or any part of this Warrant
(collectively, "Transfer") provided, however, that the Registered Holder
provides to the Company, the following: (i) an opinion of counsel reasonably
satisfactory to the Company that the proposed Transfer will not violate the 1933
Act or applicable state securities laws; or (ii) such other written evidence as
shall be reasonably satisfactory to the Company that the proposed Transfer will
not violate the 1933 Act or applicable state securities laws.
8
<PAGE>
14. This Warrant sets forth the entire agreement of the Company and the
Registered Holder of this Warrant and the Common Stock with respect to the
rights of the Registered Holder of this Warrant and the Common Stock,
notwithstanding the knowledge of such Registered Holder of any other agreement
or the provisions of any agreement whether or not known to such Registered
Holder and the Company represents that there are no agreements inconsistent with
the terms hereof or which purport in have any way to bind the Registered Holder
of this Warrant or the Common Stock.
15. The validity, interpretation and performance of this Warrant and each of its
terms and provisions shall be governed by the laws of the State of Florida.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly
authorized officer under its corporate seal and to be dated October 14, 1997
PALLET MANAGEMENT SYSTEMS, INC.
By:___________________________
Name: Zachary M. Richardson
Title: President
9
<PAGE>
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase shares of Common Stock of PALLET
MANAGEMENT SYSTEMS, INC. and herewith tenders in payment for such securities a
certified or official bank check payable to the order of PALLET MANAGEMENT
SYSTEMS, INC. in the amount of $ all in accordance with the terms hereof. The
undersigned requests that each of the certificates evidencing such securities be
registered in the name of whose address is and that such certificates be
delivered to whose address is .
Dated: Signature:_____
(Signature must conform in all respects to the name of the Holder as
specified in the face of the Warrant Certificate.)
ID # of the Holder:
10
<PAGE>
ASSIGNMENT OF WARRANTS
(To be exercised by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED hereby sells, assigns and transfers unto (Please print name
and address of transferee) this Warrant Certificate, together with all rights,
title and interest therein, and does hereby irrevocably constitute and appoint
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, and full power of substitution.
Dated: Signature:
(Signature must conform in all respects to name
of Holder as specified on the face of the
Warrant Certificate.)
(Insert Identifying Number of Holder
11
<PAGE>
FORM OF CLASS B WARRANT
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (" 1933 ACT") OR ANY STATE SECURITIES LAWS AND HAVE BEEN
ACQUIRED PURSUANT TO AN INVESTMENT REPRESENTATION ON THE PART OF THE PURCHASER
HEREOF AND SHALL NOT BE SOLD, PLEDGED, TRANSFERRED, HYPOTHECATED, DONATED, OR
OTHERWISE DISPOSED OF OR ENCUMBERED, WHETHER OR NOT FOR CONSIDERATION, BY THE
PURCHASER EXCEPT UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF ITS
COUNSEL OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE
SATISFACTORY TO COUNSEL FOR THE COMPANY, IN EITHER CASE, TO THE EFFECT THAT ANY
SUCH TRANSACTION SHALL NOT BE IN VIOLATION OF THE 1933 ACT OR APPLICABLE STATE
SECURITIES LAWS.
PALLET MANAGEMENT SYSTEMS, INC.
Class B
Common Stock Purchase Warrant No.
to Purchase Shares of Common Stock
This Class B Common Stock Purchase Warrant is issued to:
by PALLET MANAGEMENT SYSTEMS, INC., a Florida corporation (hereinafter called
the "Company", which term shall include its successors and assigns).
FOR VALUE RECEIVED and subject to the terms and conditions hereinafter set out,
the registered holder (the "Registered Holder") of this redeemable common stock
purchase warrant (the "Warrant") is entitled upon surrender of this Warrant to
purchase from the Company fully paid and nonassessable shares of Common Stock,
$.001 par value per share (the "Common Stock"), at the price of $1.75 per share,
subject to adjustment as provided herein.
This Warrant shall expire at the close of business on [two years from the
effective date of the Registation Statement].
1. (a) The right to purchase shares of Common Stock represented by this Warrant
may be exercised by the Registered Holder, in whole or in part, by the surrender
of this Warrant (properly endorsed, if required) at the principal office of the
Company at One South Ocean Boulevard, Suite 305, Boca Raton, Florida 33432 (or
such other office or agency of the Company as it may designate by notice in
writing to the Registered Holder at the address of the Registered Holder
appearing on the books of the Company), and upon payment to the Company, by cash
or by certified check or bank draft, of the Warrant Exercise Price (as
hereinafter defined) for such shares of Common Stock, the Company shall cause
its transfer agent to issue a certificate representing the shares of Common
Stock so purchased (or if the Company does not have a transfer agent, the
Company shall issue a certificate
<PAGE>
representing the shares of Common Stock so purchased). The Company agrees that
the shares of Common Stock so purchased shall be deemed to be issued to the
Registered Holder as the record owner of such shares of Common Stock as of the
close of business on the date on which this Warrant shall have been surrendered
and payment made for such shares of Common Stock as aforesaid. Certificates for
the shares of Common Stock so purchased shall be delivered to the Registered
Holder within a reasonable time, not exceeding ten (10) business days, after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the number of shares of
Common Stock, if any, with respect to which this Warrant shall not then have
been exercised, in all other respects identical with this Warrant, shall also be
issued and delivered to the Registered Holder within such time, or, at the
request of the Registered Holder, appropriate notation may be made on the
Registered Holder's Warrant and the same returned to the Registered Holder.
(b) This Warrant may be exercised to acquire, from and after the date hereof,
from time to time up to the number of shares of Common Stock set forth on the
first page hereof, subject to adjustment as provided herein; provided, however,
the night hereunder to purchase such shares of Common Stock shall expire at the
close of business on [two years from the effective date of the Registation
Statement].
(c) This Warrant has been issued pursuant to the Unit Purchase Agreement (as
defined below) and the Company's Confidential Private Placement Memorandum dated
September 15, 1997, as same shall be amended ("Memorandum"). Pursuant to the
Memorandum, the Company offered $1,000,000 of units ("Units") at a price of
$1.00 per Unit. Each Unit consisted of, among other things, two Warrants. As set
forth in the Unit Purchase Agreement, the Company is required to file a
registration statement ("Registration Statement") with the United States
Securities and Exchange Commission ("SEC") under the 1933 Act registering the
shares of Common Stock issuable upon the exercise of this Warrant.
2. If this Warrant or any shares of Common Stock issuable hereunder require
declaration, qualifications or registration with or approval of any governmental
official or authority (other than registration under the 1933 Act, but including
declaration, qualification or registration under any blue sky law that the
holder hereof may request) before this Warrant or shares of Common Stock issued
pursuant hereto may be issued, the Company shall at its sole cost and expense
take all requisite action in connection with such declaration, qualification,
registration or approval and shall use its best efforts to cause such shares of
Common Stock or this Warrant or both, to be duly declared, qualified, registered
or approved as may be required.
3. The Company covenants and agrees that all shares of Common Stock, upon
issuance and payment pursuant to this Warrant, will be validly issued, fully
paid and nonassessable and free and clear from all taxes, liens and charges with
respect to the issue thereof and free and clear of any and all preemptive rights
of any holders of the Company's securities; and, without limiting the generality
of the foregoing, the Company covenants and agrees that it will take from time
to time all such action as may be required to assure that the par value per
share of the Common Stock is at all times equal
2
<PAGE>
to or less than the then effective Warrant Exercise Price. The Company covenants
and agrees that during the period within which the rights represented by this
Warrant may be exercised, the Company will have at all times authorized and
reserved for the purpose of issue or transfer upon exercise of the rights
evidenced by this Warrant is a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant, and will
procure at its sole cost and expense upon each such reservation of shares of
Common Stock the listing thereof (subject to issuance or notice of issuance) on
all stock exchanges on which the shares of Common Stock of the Company are then
listed or inter-dealer trading systems on which the shares of Common Stock of
the Company are then traded. The Company will take all such action as may be
necessary to assure that such shares of Common Stock may be so issued without
violation of any applicable law or regulation, or of any requirements of any
securities exchange or inter-dealer trading systems upon which the Common Stock
of the Company may be listed. The Company will not take any action which would
result in any adjustment in the number of shares of Common Stock purchasable
hereunder if the total number of shares of Common Stock issuable pursuant to the
terms of this Warrant after such action upon full exercise of this Warrant and,
together with all shares of Common Stock then outstanding and all shares of
Common Stock then issuable upon exercise of all outstanding options, warrants
and other rights to purchase shares of Common Stock then outstanding, would
exceed the total number of shares of Common Stock then authorized by the
Company's certificate of incorporation, as then amended.
4. The provisions of this Warrant are subject to the following terms and
conditions:
(a) The Initial Warrant Exercise Price shall be $1.75 per share of Common Stock.
Such purchase price shall be subject to an adjustment from time to time as
hereinafter provided (such price or price as last adjusted, as the case may be,
being herein called the "Warrant Exercise Price"). Upon each adjustment of the
Warrant Exercise Price, the registered holder of this Warrant shall thereafter
be entitled to purchase, at the Warrant Exercise Price resulting from such
adjustment, the number of shares of Common Stock obtained by (i) multiplying the
Warrant Exercise Price in effect immediately prior to such adjustment by the
number of shares of Common Stock purchasable hereunder immediately prior to such
adjustment and (ii) dividing the product thereof by the Warrant Exercise Price
resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares of Common Stock, or declare a
dividend or make any other distribution upon the Common Stock of the Company
payable in shares of Common Stock, the Warrant Exercise Price in effect
immediately prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock of the Company shall
be combined into a smaller number of shares of Common Stock, the Warrant
Exercise Price in effect immediately prior to such combination shall be
proportionately increased. There shall be no adjustment in the Warrant Exercise
Price in the event that the Company pays a cash dividend- provided, however,
that the Company shall give written notice to the registered holders of the
Warrants at least thirty (30) days prior to the record date for the cash
dividend that the Corporation intends to declare a cash dividend. Further, there
shall be no adjustment for the Company's
3
<PAGE>
contemplated one for four reverse split expected to be effectuated in connection
with the Private Placement, of which this Warrant is a part.
(c) In case the Company shall issue or otherwise sell or distribute shares of
Common Stock (collectively, "Subsequent Transactions") for a consideration per
share in cash or property less than $1.50 per share (such lower price per share
being hereinafter referred to as the "Lower Price"), the Warrant Exercise Price
then in effect shall be reduced to 125% of the Lower Price. If the consideration
in a Subsequent Transaction is other than cash, the price per share of such
consideration shall be as determined by the Board of Directors, including a
majority of the Directors who are not officers or employees of the Company or
any of its subsidiaries, whose determination shall be conclusive and described
in a resolution of the Board of Directors. The provisions of this Section 4(c)
shall not apply to the issuance by the Company of Common Stock upon the exercise
or conversion of outstanding options, warrants and other convertible securities
which existed on the date that this Warrant was created.
(d) If any capital reorganization or reclassification of the capital stock of
the Company, or any consolidation or merger of the Company with another
corporation or other entity, or the sale of all or substantially all of the
Company's assets to another corporation or other entity shall be effected in
such a way that holders of shares of Common Stock shall be entitled to receive
stock, securities, other evidence of equity ownership or assets with respect to
or in exchange for shares of Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale (except as
otherwise provided below in this Paragraph 4(d)), lawful and adequate provisions
shall be made whereby the Registered Holder of this Warrant shall thereafter
have the right to purchase and receive upon the basis and upon the terms and
conditions specified in this Warrant is for such shares of stock, securities,
other evidence of equity ownership or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of Common Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented by this
Warrant had such reorganization, reclassification, consolidation, merger or sale
not taken place, and in any such case appropriate provision shall be made with
respect to the rights and interests of the Registered Holder of this Warrant to
the end that the provisions hereof (including, without limitation, provisions
for adjustments of the Warrant Exercise Price and of the number of shares of
Common Stock purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities, other evidence of equity ownership or assets thereafter
deliverable upon the exercise hereof (including an immediate adjustment, by
reason of such consolidation or merger, of the Warrant Exercise Price to the
value for the Common Stock reflected by the terms of such consolidation or
merger if the value so reflected is less than the Warrant Exercise Price in
effect immediately prior to such consolidation or merger), In the event of a
merger or consolidation of the Company with or into another corporation or other
entity as a result of which the number of shares of common stock of the
surviving corporation or other entity is issuable to holders of Common Stock of
the Company, greater or lesser than the number of shares of Common Stock of the
Company outstanding immediately prior to such merger or consolidation, then the
Warrant Exercise Price in effect immediately prior to such merger or
consolidation shall be adjusted in the same manner as
4
<PAGE>
though there were a subdivision or combination of the outstanding shares of
Common Stock of the Company. The Company will not effect any such consolidation,
merger or sale, unless prior to the consummation thereof the successor
corporation (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing such assets shall assume by written
instrument executed and mailed or delivered to the Registered Holder hereof at
the last address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities, other
evidence of equity ownership or assets as, in accordance with the foregoing
provisions, such Registered Holder may be entitled to purchase or otherwise
acquire. If a Person (as defined below) makes a purchase, tender or exchange
offer to and such is accepted by the holders of more than fifty (50%) percent of
the outstanding shares of Common Stock of the Company, the Company shall not
subsequently effect any consolidation, merger or sale with the Person or with
any Affiliate (as defined below) of such Person, unless prior to the
consummation of such consolidation, merger or sale the Registered Holder of this
Warrant shall have been given a reasonable opportunity to then elect to receive
upon the exercise of this Warrant either the amount of stock, securities, other
evidence of equity ownership or assets then issuable with respect to the number
of shares of Common Stock of the Company in accordance with such offer. The term
"Person" as used in this Paragraph 4(d) shall mean and include an individual, a
partnership, a corporation, a trust, a joint venture, an unincorporated
organization and a government or any department or agency thereof For the
purposes of this Paragraph 4(d), an "Affiliate" of any Person shall mean any
Person directly or indirectly controlling, controlled by or under direct or
indirect preferred control with, such other Person. A Person shall be deemed to
control a corporation if such Person possesses, directly or indirectly, the
power to direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities, by contract or
otherwise.
(e) In the event that the Registration Statement is not declared effective
within ten (10) months after the Final Closing Date (as defined in the Unit
Purchase Agreement), the Warrant Exercise Price shall be reduced (and the number
of shares of Common Stock issuable upon exercise of the Warrant will be
concomitantly increased by five (5%) percent per month, or part thereof, up to
twenty-five (25%) percent in the aggregate.
(f) Whenever the Warrant Exercise Price and the number of shares of Common Stock
shall be adjusted as herein provided, the Company shall compute the adjusted
Warrant Exercise Price and the adjusted number of shares of Common Stock in
accordance with such provisions and shall prepare a certificate signed by its
President, any Vice President, Treasurer or Secretary setting forth the adjusted
Warrant Exercise Price and the adjusted number of shares of Common Stock which
may be acquired and showing in reasonable detail the facts upon which such
adjustments are based and accompanied by a report of the Company's independent
certified public accountants upon their examination of such adjustments, and the
Company shall cause to be mailed to the Registered Holder of this Warrant a
notice stating that the Warrant Exercise Price and the number of shares of
Common Stock have been adjusted and setting forth the adjusted Warrant Exercise
Price and the adjusted number of shares of Common Stock.
5
<PAGE>
(g) In case at any time;
(i) the Company shall declare any cash dividend upon its Common Stock;
(ii) the Company shall declare any dividend upon its Common Stock payable in
stock or make any special dividend or other distribution to the holders of its
Common Stock;
(iii) the Company shall offer for subscription pro rata to the holders of its
Common Stock any additional shares of stock of any class or other rights;
(iv) there shall be any capital reorganization, or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with, or
sale of all or substantially all of its assets to, another corporation; or
(v) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more of said cases, the Company shall give by first class
mail, postage prepaid, addressed to the Registered Holder of this Warrant at the
address of such holder as shown on the books of the Company (A) at least thirty
(30) days prior written notice of the date on which the books of the Company
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, and (B) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, at least thirty (30) days prior written notice of the date when the
same shall take place. Any notice required by clause (A) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto and any notice
required by clause (B) shall also specify the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be.
(h) If any event occurs as to which in the reasonable and good faith opinion of
the Board of Directors of the Company the other provisions of this Paragraph 4
are not strictly applicable or if strict application would not fairly protect
the purchase rights of this Warrant in accordance with the essential intent and
principles of such provisions, then the Board of Directors of the Company shall
make an adjustment 'in the application of such provisions, 'in accordance with
such essential intent and principles, so as to protect such purchase rights as
aforesaid, but in no event shall have such adjustment have the effect of
increasing the Warrant Exercise Price as otherwise determined pursuant to this
Paragraph 4 except in the event of a combination of shares of the type
contemplated in Paragraph 4(b) and then 'in no event to an amount larger than
the Warrant Exercise Price as adjusted pursuant to Paragraph 4(b).
6
<PAGE>
(i) There shall be no adjustment of this Warrant in the event of the exercise of
(i) up to 1,000,000 shares of Common Stock subject to the Company's Stock Option
Plan; (ii) up to 1,000,000 shares of Common Stock subject to performance options
granted to certain principals of the Company; and (iii) all placement agent
warrants.
5. In the event the Company grants rights to all of the holders of its
securities to purchase Common Stock, the Registered Holder of this Warrant shall
have the same rights as if this Warrant had been exercised immediately prior to
such grant.
6. The Registered Holder shall have the registration rights and continuing
"piggyback" registration rights set forth in the Unit Purchase Agreement ("Unit
Purchase Agreement") by and among the Company, the Placement Agent, either on
Its own behalf or on behalf of other investors, and the persons and entities
listed on Exhibit A to the Unit Purchase Agreement, including the Registered
Holder thereof Such registration rights and "piggy back" registration rights are
incorporated herein by this reference as if such provisions had been set forth
herein in full.
7. This Warrant need not be changed because of any change in the Warrant
Exercise Price or in the number of shares of Common Stock purchased hereunder.
8. The terms defined in this paragraph, whenever used in this Warrant shall,
unless the context otherwise requires, have the respective meanings hereinafter
specified. The term "Common Stock" shall mean and include the Company's Common
Stock, $.001 par value, authorized on the date of the original issue of this
Warrant and shall also include in case of any reorganization, reclassification,
consolidation, merger or sale of assets of the character referred to in
Paragraph 4 hereof, the stock, securities, other evidence of equity ownership or
assets provided for in such Paragraph. The term "Company" shall also include any
successor corporation to Pallet Management Systems, Inc. by merger,
consolidation or otherwise. The term "outstanding" when used with reference to
Common Stock shall mean at any date as of which the number of shares of Common
Stock thereof is to be determined, all issued shares of Common Stock, except
shares of Common Stock then owned or held by or for the account of the Company.
The term "1933 Act" shall mean the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the SEC, or any other
Federal agency then administering such Securities Act, thereunder, all as the
same shall be in effect at the time.
9. This Warrant is exchangeable, upon the surrender hereby by the Registered
Holder hereof at the office or agency of the Company, for new Warrants of like
tenor representing in the aggregate the right to subscribe for and purchase the
number of shares of Common Stock which may be subscribed for and purchased
hereunder, each of such new Warrants to represent the right to subscribe for and
purchase such number of shares of Common Stock as shall be designated by such
Registered Holder hereof at the time of such surrender. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant or any such new Warrants, the Company will issue to
the Registered Holder hereof a new Warrant of like tenor, in lieu of this
Warrant or such new Warrants, representing the right to subscribe for and
purchase the
7
<PAGE>
number of shares of Common Stock which may be subscribed for and purchased
hereunder.
10. The Company agrees to use its best efforts to file timely all reports
required to be filed by it pursuant to Section 13 or 15 of the Securities
Exchange Act of 1934, as amended and to provide such information as will permit
the Registered Holder to sell any shares of Common Stock acquired upon exercise
of this Warrant 'in accordance with Rule 144 under the 1933 Act.
11. The Company will at no time close its transfer books against the transfer of
any shares of Common Stock issued or issuable upon the exercise of this Warrant
in any manner which interferes with the timely exercise of this Warrant. This
Warrant shall not entitle the re ' registered holder hereof to any voting rights
or any rights as a stockholder of the Company. The rights and obligations of the
Company, of the registered holder of this Warrant, and of any holder of shares
of Common Stock issuable hereunder, shall survive the exercise of this Warrant.
12. If the average closing bid price for the Common Stock is at or above $4.00
per share for twenty (20) consecutive trading days and the Company then has an
effective Registration Statement under the 1933 Act with respect to all shares
of Common Stock underlying the Warrants and the Company's Common Stock is Market
Listed (as defined below), the Company has the night (but not the obligation),
upon not less than thirty (30) days nor more than forty-five (45) days' prior
written notice (the "Warrant Redemption Notice") to all holders of record of the
Warrants, to redeem all, but not less than all, of the outstanding Warrants at
$.01 per Warrant. Notwithstanding anything to the contrary, the Warrant
Redemption Notice can only be given if the Registration Statement is effective
at the time the Warrant Redemption Notice is given and the Warrant Redemption
Notice shall remain effective only if the Registration Statement remains
effective continually throughout the notice period. Registered Holders shall
have the right to exercise all or any portion of their Warrants up to and
including one (1) business day prior to the date set for redemption. The Company
has agreed to use its best efforts to list its shares of Common Stock on the
NASDAQ Stock Market, or the American Stock Exchange, or any other United States
based recognized exchange (wherever the shares of Common Stock are listed being
hereinafter referred to as the "Market") as soon as possible after the Initial
Closing Date (as defined in the Memorandum). In the event that the Company does
not qualify or is otherwise not able to list its shares of Common Stock on a
Market, the Company shall promptly make application to list its shares of Common
Stock on such other exchange as the Company shall qualify for listing and the
Company shall use its best efforts to cause its shares of Common Stock to be so
listed as soon as possible. The term "Market Listed" shall mean the date that
the Company's Common Stock commenced trading on the Market.
13. The Registered Holder of this Warrant shall have the right to sell,
transfer, assign or otherwise dispose of all or any part of this Warrant
(collectively, "Transfer") provided, however, that the Registered Holder
provides to the Company, the following: (i) an opinion of counsel reasonably
satisfactory to the Company that the proposed Transfer will not violate the 1933
Act or applicable state securities laws; or (ii) such other written evidence as
shall be reasonably satisfactory to the Company that the proposed Transfer will
not violate the 1933 Act or applicable state securities laws.
8
<PAGE>
14. This Warrant sets forth the entire agreement of the Company and the
Registered Holder of this Warrant and the Common Stock with respect to the
rights of the Registered Holder of this Warrant and the Common Stock,
notwithstanding the knowledge of such Registered Holder of any other agreement
or the provisions of any agreement whether or not known to such Registered
Holder and the Company represents that there are no agreements inconsistent with
the terms hereof or which purport in have any way to bind the Registered Holder
of this Warrant or the Common Stock.
15. The validity, interpretation and performance of this Warrant and each of its
terms and provisions shall be governed by the laws of the State of Florida.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly
authorized officer under its corporate seal and to be dated October 14, 1997.
PALLET MANAGEMENT SYSTEMS, INC.
By:_____________________________
Name: Zachary M. Richardson
Title: President
9
<PAGE>
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase shares of Common Stock of PALLET
MANAGEMENT SYSTEMS, INC. and herewith tenders in payment for such securities a
certified or official bank check payable to the order of PALLET MANAGEMENT
SYSTEMS, INC. in the amount of $ all in accordance with the terms hereof. The
undersigned requests that each of the certificates evidencing such securities be
registered in the name of whose address is and that such certificates be
delivered to whose address is .
Dated: Signature:_________________________
(Signature must conform in all respects to the name of the Holder as
specified in the face of the Warrant Certificate.)
ID # of the Holder:
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<PAGE>
ASSIGNMENT OF WARRANTS
(To be exercised by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED hereby sells,
assigns and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all rights, title and interest therein,
and does hereby
irrevocably constitute and appoint Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, and full
power of substitution.
Dated: Signature:
(Signature must conform in all respects to name
of Holder as specified on the face of the
Warrant Certificate.)
(Insert Identifying Number of Holder
11
<PAGE>
McLaughlin & Stern, LLP
260 Madison Avenue
18th Floor
New York, New York 10016
212-448-1100
February 13, 1998
Unites States Securities
and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Pallet Management Systems, Inc. ("Company")
Gentlemen:
Reference is made to the registration statement ("Registration Statement") on
Form SB-2, filed the date hereof with the Securities and Exchange Commission by
the Company.
We hereby advise you that we have examined originals or copies certified to our
satisfaction of the Certificate of Incorporation and amendments thereto and the
By-Laws and amendments thereto of the Company, minutes of the meetings of the
Board of Directors and Shareholders and such other documents and instruments,
and we have made such examination of law as we have deemed appropriate as the
basis for the opinions hereinafter expressed.
Based on the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing and in good
standing under the laws of the State of Florida.
2. The 1,000,000 shares of Common Stock issuable upon the exercise of 1,000,000
outstanding Class A Warrants; the 1,000,000 shares of Common Stock issuable upon
the exercise of 1,000,000 outstanding Class B Warrants; the 151,685 shares of
Common Stock issuable upon the exercise of 151,685 outstanding A Unit Warrants,
the 50,000 shares of Common Stock issuable upon the exercise of the Placement
Agent Warrant and the aggregate of 200,000 shares of Common Stock issuable upon
the exercise of the 100,000 Class A and 100,000 Class B Warrants underlying the
Placement Agent Warrant have each been duly and validly authorized and when paid
for will be fully paid and non-assessable.
<PAGE>
We hereby consent to the reference to our firm under the caption "Legal Matters"
in the prospectus forming a part of such Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
McLAUGHLIN & STERN, LLP
SUBSIDIARIES OF THE REGISTRANT
- Abell Lumber Corp.
- Pallet Recycling Technologies, Inc.
- Pallet Systems - Lakeland, FL, Inc.
March 6, 1998
Unites States Securities
and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Pallet Management Systems, Inc. ("Company") File No. 333-46245
Gentlemen:
Reference is made to Amendment No.1 to the registration statement
("Registration Statement") on Form SB-2, filed the date hereof with the
Securities and Exchange Commission by the Company.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the prospectus forming a part of such Registration Statement and to
the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
McLAUGHLIN & STERN, LLP
