U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT ISSUED UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Thirteen- week period ended
Commission file September 26,
1998 Number 2-99212-A
PALLET MANAGEMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2197020
(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)
One E. Ocean Boulevard, Suite 305, Boca Raton, Florida 33432
(Address of principal executive offices)
Registrant's telephone number, including area code:
(561) 338-7763
-------------------------------------------
(Former name or address if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or such shorter
period that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No _______
---------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes _______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
On September 26, 1998, the Registrant had outstanding 3,917,478 shares
of common stock, $.001 par value.
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PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
Year Ended
Sept. 26, June 30,
ASSETS 1998 1998
---- ----
(Audited)
CURRENT ASSETS
Cash $1,882,247 $401,166
Accounts Receivable - trade, net of allowance
for doubtful accounts 2,113,849 1,691,827
Inventories 1,808,320 1,175,346
Other Current Assets 353,346 155,731
------- -------
Total current assets 6,157,762 3,424,070
Property and equipment - net of accumulated
depreciation 3,437,049 2,966,946
Other assets 40,712 41,572
------ ------ ------
$9,635,523 $6,432,588
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $1,821,225 $2,127,888
Accounts payable - trade 596,609 593,521
Accrued liabilities 677,735 406,761
------- ----- -------
Total current liabilities 3,095,569 3,128,170
--------- ---------
LONG TERM DEBT
Deferred income tax 31,381 31,381
Long-term debt 1,477,498 1,097,595
--------- ---------
1,508,879 1,128,976
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, authorized 10,000,000 shares at $.001 par value; issued and
outstanding 3,917,612 shares at September 26, 1998 and 2,342,034
at June 27, 1998 3,918 2,342
Additional paid in capital 6,828,704 4,526,340
Unrealized gain on securities available for sale 9,484 13,477
Retained (deficit) earnings (1,811,031) (2,366,718)
----------- -----------
5,031,075 2,175,441
--------- ---------
$9,635,523 $6,432,587
========== ==========
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PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
13 Weeks Ended
Sept. 26, 1998 Sept. 27, 1997
Net sales $7,919,647 $4,564,132
Cost of goods sold 6,712,534 4,210,993
--------- ---------
Gross profit 1,207,113 353,139
Selling, general and administrative expense 478,624 444,494
------- -------
Operating profit 728,489 (91,355)
Other income (expense)
Other income (expense) (89,093) 12,266
Interest expense (83,709) (96,755)
-------- --------
Earnings before income taxes 555,687 (175,844)
Income tax expense (benefit) 0 0
-------------- - -------------- -
Net earnings (loss) $555,687 ($175,844)
======== ==========
Net earnings (loss) per common share .22 (.04)
=== =====
Diluted earnings (loss) per common share .15 *
=== = =
* exercise of warrants and options would be anti-dilutive
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PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
13 Weeks Ended
Sept. 26, 1998 Sept. 27, 1997
Cash flows from operating activities:
Net (loss) earnings $555,687 ($175,844)
Adjustments to reconcile net (loss) earnings to net
cash provided by (used in) operating activities:
Depreciation 108,770 99,084
(Incr.) Decr. in operating assets:
Accounts receivable (422,023) 544,578
Inventories (632,974) (236,548)
Prepaid expenses (197,615) 60,067
Income tax refund receivable 0 0
Other assets (3,131) (14,565)
Incr. (Decr.) in operating assets:
Accounts payable 3,087 309,852
Accrued liabilities and taxes 270,975 3,204
Deferred credits 0 0
- ------------- -
Net cash provided by (used in)
operating activities (317,224) 469,694
--------- -------
Cash flows from investing activities:
Purchase of fixed assets (578,873) (88,704)
--------- --------
Net cash (used in) investing activities (578,873) (88,704)
--------- --------
Cash flows from financing activities:
Net Borrowings (Repayments) to lenders 73,238 (454,785)
Capital contributed from exercise of 2,303,940 0
--------- -------------- -
warrants and options
Net cash (used in) provided by
Financing activities 2,377,178 (454,785)
--------- ---------
Increase (Decrease) in Cash 1,481,081 (73,795)
Cash at beginning of period 401,166 237,447
------- -------
Cash at end of period 1,882,247 $163,652
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Pallet Management Systems, Inc.
Notes to Financial Statements
September 26, 1998
Note 1. Consolidated Financial Statements:
The consolidated balance sheet as of September 26, 1998, the
consolidated statement of operations and cash flows for the thirteen-week period
ended of September 26, 1998 and September 27, 1997 has been prepared by the
Company without audit. In the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations and cash flows
for the periods reported have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. It
is suggested that these consolidated financial statements be read in conjunction
with the financial statements and the notes thereto as of June 27, 1998.
Certain prior year amounts within the accompanying financial statements
have been reclassified to conform to the current year presentation.
Note 2. Net Gain (Loss) per Share of Common Stock:
Net gain (loss) per share was computed using the weighted average
number of shares outstanding based on the consolidated results of the Company
for the period presented.
Note 3. Stockholders' Equity:
During the thirteen weeks ended September 26, 1998 stockholders' equity
changed for the following items:
Common stock sold $ 1,576
Additional paid-in capital 2,302,364
Decrease in unrealized gain on available for sale securities (3,993)
Current net income 555,687
-------
$ 2,855,634
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Pallet Management Systems, Inc.
Management's Discussion and Analysis or Plan of Operation
September 26, 1998
PART I
ITEM 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction
with the financial statements appearing as Item 1 to this Report. These
financial statements reflect the consolidated operations of Pallet Management
Systems, Inc. (the Company) for the thirteen-week periods ended September 26,
1998 and September 27, 1997.
Results of Operations
General
The Company provides the transport packaging industry with pallet supplies,
pallet retrieval, pallet repair, other packaging components and packaging
logistics management. The Company was formed by the combination of several
companies and has operations in Alabama, Florida and Virginia.
The pallet is the base component for the transportation and warehousing
of most packaging which allows goods to be transported or warehoused
economically by providing a foundation which enables the use of forklifts and
vertical storage. Most commonly associated with a four-foot square wood
platform, pallets are also engineered from various materials in varying
dimensions. The pallet, a little known entity to the consumer, is a key factor
to worldwide retail and industrial distribution. Without pallets, shipping by
air, land and sea would be severely hampered. The pallet industry in the United
States has grown to approximately $6 billion ($6,000,000,000) and plays a vital
roll in transportation and distribution today. The industry is characterized by
many small, localized, and/or specialized companies that usually have an
operational radius of less than 100 miles, none of which individually has any
appreciable market impact. There is no industry dominator and it is free from
government regulation.
The Company focuses on total solutions for its customers' pallet and
packaging requirements through comprehensive products and services, including
manufacturing and distributing new and recycled pallets as well as logistical
and remediation services. (Remediation being the systematic collection, repair,
return and reuse of pallets and other types of packaging.) Due to rising costs
and increasing competition, the industry's gross profit for typical four-foot
square wooden pallets has decreased over the years. Consequently, the Company is
focused on manufacturing specially engineered pallets for niche markets and
transport packaging logistical services.
The Company has a customer base of over 200, many of which are Fortune
500 companies, including AlliedSignal, Bethlehem Steel, Canon, Chep America,
Dupont, IAMS, Metal Container, Mitsubishi, Scotts Company, Siemens , Disney,
Westvaco and various governmental agencies.
Thirteen Weeks Ended September 26, 1998 compared to Thirteen Weeks Ended
September 27, 1997
For the thirteen week period ended September 26, 1996 net sales
increased to $7,920,000 from $4,564,000 for the comparable 1997 period.
During the thirteen-week period ended September 26, 1998 new pallet
sales increased 91.4% to $5,678,000 from $2,972,000, and pallet recycling and
logistical services increased by 40.7% to $2,241,000 from the $1,592,000
recorded for the same thirteen-week period ended September 27, 1997. The gross
margin for this thirteen-week period was 15.2% as compared to 7.7% achieved for
the same thirteen-week period a year prior. This increase in gross margin was
due to better utilization of raw material resources through advanced automation,
improved product mix, increased remediation and logistical sales which have
higher margins than manufacturing, and customer price increases in niche
markets. The Company experienced a $34,000 (7.6%) increase in Selling, General
and Administrative expenses for the thirteen week period ended September 26,
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1998 when compared to September 27, 1997. This modest increase was a result of
additional variable costs related to the sales volume increase. The Company
experienced a $13,046 (13.4%) decrease in interest expense for the thirteen week
period ended September 26, 1998 because of better cash flow resulting from
improved profits and from additional stock issues. A net profit of$555,687 or
$0.22 per share was realized during the thirteen week period ended September 26,
1998 compared to a loss of ($175,844) or ($0.04) per share recorded for the same
period last year. The Company did not record any tax effect on the income due to
net operating losses previously established.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $1,882,247 cash on hand at the end of the thirteen-week
period ending September 26, 1998, versus $401,166 at the beginning of the fiscal
year. This increase in cash is attributable to 1,382,100 warrants exercised
which generated $2,303,940 in cash and net borrowings increasing cash an
additional $73,000. These increases were offset by $313,000 of cash used in
operating activities and $579,000 used in purchases of fixed assets.
During this period the Company notified holders of outstanding "A" and
"B" warrants that all outstanding "A" and "B" warrants would be redeemed by the
Company on October 1, 1998. Prior to the redemption period, all warrants were
exercised, including the underwriter warrants, which generated $$2,298,612 in
cash during the period. On September 8, 1998, the Company opened a new pallet
manufacturing facility in Rogersville, Alabama. This facility has "state of the
art" pallet manufacturing equipment, which will be utilized to fulfill a new
multi-year contract with Chep America.
Results of this new operation will not be realized until the next quarter.
On February 19, 1998 the Company completed a two year financing agreement with
American Commercial Financial Corporation, which provided a $3.7 million line of
credit to the Company and was amended on March 20th 1998 to $3.9 million, at an
interest rate of prime plus 2.25%. This line is secured by priority lien upon
substantially all the assets of the Company, except for real estate. Included in
the line is a $3,000,000 revolving loan. This revolving loan can advance 80% of
eligible accounts receivable and 50% of inventory up to a maximum of $800,000 on
inventory. In addition, the line has a term loan of $900,000 for equipment. As
of September 26, 1998, the Company had an outstanding balance of $2,519,675.
The Company intends to pursue expansion and acquisition plans. The success and
timing of any such plans and required capital expenditures are unpredictable.
Funding for such plans could be a combination of issuance of additional equity,
working capital, additional borrowings, and profits from operations. The Company
can not make any assurances that such funding would become available for such
plans.
The Company is in the process of achieving ISO 9000 registration.
Profile Consulting Group, Ltd. of Troy, MI has been engaged to assist in this
endeavor. Once completed, this process will streamline and enhance internal
operations to better meet customer needs. Many large corporations are now
requiring their vendors to be ISO certified. The Company views this program as a
vehicle to strengthen its ongoing quality program.
Year 2000 Issues
The Company uses software and related technologies throughout is businesses that
will be affected by the "Year 2000 Problem", which is common to most businesses
and relates to the inability of information systems and computer software
programs to properly recognize and process date-sensitive information as the
year 2000 approaches. The Company has recently up-graded its computer systems
and believes that it has minimized the detrimental effects of any Year 2000
Problem. The Company is also working with its customers and vendors to resolve
Year 2000 Problems, which could interrupt the normal course of business.
Although it is not possible to estimate the actual cost to resolve Year 2000
Problems, the Company doe not anticipate it to have any significant impact on
the Company's financial position.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulations S-B.
None.
(b) None.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on behalf by the
undersigned thereunto duly authorized.
PALLET MANAGEMENT SYSTEMS, INC.
Dated: November 10, 1998 By: Zachary M. Richardson, President
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<LEGEND>
This schedule contains summary financialinfomration extracted from the
financial statements contained in the Company's Form 10-QSB and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,143,849
<ALLOWANCES> 30,000
<INVENTORY> 1,808,320
<CURRENT-ASSETS> 6,157,762
<PP&E> 3,545,819
<DEPRECIATION> 108,770
<TOTAL-ASSETS> 9,635,523
<CURRENT-LIABILITIES> 3,095,569
<BONDS> 0
0
0
<COMMON> 3,918
<OTHER-SE> 5,027,157
<TOTAL-LIABILITY-AND-EQUITY> 9,635,523
<SALES> 7,919,647
<TOTAL-REVENUES> 7,919,647
<CGS> 6,712,534
<TOTAL-COSTS> 6,712,534
<OTHER-EXPENSES> 567,717
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,709
<INCOME-PRETAX> 555,687
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555,687
<EPS-PRIMARY> .22
<EPS-DILUTED> .15
</TABLE>
