U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 26, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number
Pallet Management Systems, Inc.
-------------------------------
(Name of Small Business issuer in its charter)
Florida 59-2197020
------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
One South Ocean Boulevard, Suite 305
Boca Raton, Florida 33432
------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (561) 338-7763
---------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $38,744.129.
The aggregate market value of the issuer's Common Stock, $.01 par value, held by
non-affiliates on August 31, 1999 was approximately $12,985,460.
As of August 24, 1999, there were 4,062,612 shares of the issuer's Common Stock,
$.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
<TABLE>
<CAPTION>
THRIFT MANAGEMENT, INC.
FORM 10-KSB
FOR THE YEAR ENDED JUNE 26, 1999
TABLE OF CONTENTS
-----------------
Page No.
--------
<S> <C>
PART I..........................................................................................................2
Item 1. Description of Business................................................................................2
Item 2. Description of Property...............................................................................12
Item 3. Legal Proceedings.....................................................................................14
Item 6. Management's Discussion and Analysis or Plan of Operations............................................16
Item 7. Financial Statements..................................................................................27
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure..................27
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.....................................................................28
Item 10. Executive Compensation................................................................................30
Item 11. Security Ownership of Certain Beneficial Owners and Management........................................34
</TABLE>
i
<PAGE>
FORWARD-LOOKING STATEMENTS
Pallet Management Systems, Inc. ("Pallet Management") cautions readers
that certain important factors may affect Pallet Management's actual results and
could cause such results to differ materially from any forward-looking
statements which may be deemed to have been made in this Report or which are
otherwise made by or on behalf of Pallet Management. For this purpose, any
statements contained in this Report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may," "expect," "believe," "anticipate,"
"intend," "could," "estimate," or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors which may affect Pallet Management's results include, but
are not limited to, dependence on sources of inventories, dependence on the
resale market for unsold goods, dependence on charitable donations and a limited
number of charities, reliance on management, changes in trends in buyer
preferences, competition with other retail sources, general economic conditions
and seasonality of the population in Pallet Management's market areas. Pallet
Management is also subject to other risks detailed herein or detailed from time
to time in Pallet Management's filings with the Securities and Exchange
Commission.
PART I
Item 1. Description of Business
-----------------------
Introduction
Pallet Management is an industry leader in reducing product
distribution costs for major manufacturers and distributors by providing
value-added transport packaging products and logistical services. As one of the
largest pallet manufacturing companies in the United States, Pallet Management
has continued to expand its line of business to include related transport
packaging logistical and repair services. With two related lines of business,
manufacturing and services, the primary products manufactured by Pallet
Management are wood pallets, which are the base of all transport packaging used
to move and warehouse manufactured goods. Services related to transport
packaging, which are focused at reducing customer distribution costs, include
transport packaging retrieval, repair, recycling, sorting, storage, reverse
distribution, tracking, and other value added information services.
A significant portion of Pallet Management's current business is the
sale of pallets and services to CHEP Americas, which is part of the worldwide
CHEP organization that manages the largest pallet rental pool worldwide, with
more than 110 million pallets and containers in over 30 countries. CHEP services
the retail, grocery and automotive industries with high quality pallets and
containers.
Pallet Management's strategy is to manufacture and service pallets or
containers for niche markets. Manufacturing operations complement expansion of
our related pallet and other transport packaging services that will increase
gross margins. All of Pallet Management's products and services are designed to
assist our customers in reducing the cost per trip of shipments of goods.
In order to fulfill the increasing demand for transport management
services, Pallet Management expects to expand our service offerings and its
network of facilities by opening company-owned facilities as well as entering
2
<PAGE>
into affiliations with other pallet and logistical companies in strategic
locations. These additional locations will provide local retrieval, repair,
sortation, storage and recycling services for Pallet Management's national
customers. Pallet Management also expects to be able to accelerate our internal
growth by marketing expanded value-added information services to new and
existing customers.
Pallet Management is also seeking acquisitions as part of our growth
strategy. Acquisitions will enable it to capitalize on the significant trends
currently affecting product manufacturing and distribution practices throughout
the U.S. These trends include the increasing reliance by shippers and logistics
agents on outsourcing to smaller, better-capitalized companies which specialize
in specific segments of the distribution chain.
Industry Overview
Pallet Industry
A pallet is a platform, usually made of wood and assembled with metal
nails that is used for storing and shipping goods. Pallets allow goods to be
transported or warehoused economically by providing a foundation for forklifts
and vertical storage. Pallets are used in virtually all U.S. industries where
products are physically distributed, including the automotive, chemical,
consumer products, grocery, produce and food production, paper and forest
products, retail, and steel and metals industries. Without pallets, shipping by
air, land and sea would be severely hampered. Pallets come in a wide range of
shapes and sizes. Although pallets are primarily made of wood, they may also be
made from steel, plastic, cardboard, molded wood fiber and other materials to
satisfy smaller niche markets. Pallet Management believes that there are over
1,000 different sizes and specifications of pallets used in North America. The
grocery industry, however, which accounts for approximately one-third of the all
new pallets produced in the United States, uses a standard size 48 x 40 inch
pallet referred to as a GMA pallet. Other industries utilize unique
specifications that are appropriate for their particular needs. According to a
survey conducted by the National Wooden Pallet and Container Association
("NWPCA"), 97% of pallet users reported using wood pallets with just 3% or less
using plastic, a combination of wood and plastic, or other material. The wooden
pallet has traditionally been the basis for the design of storage racks,
warehouse storage areas, forklifts, docks and containers used in shipping goods.
Many pallets are not durable enough for multiple trips. The
manufacturing capacity for the standard GMA pallet is in excess of demand and
unless one is manufacturing a top quality durable pallet for a customer who
wants to use their pallets for multiple trips, the margins are very slim.
Standard GMA pallets weigh approximately 45 lbs. and are designed to hold 1,500
pounds of goods. Since CHEP has a pool of pallets that are continually reused,
it demands a higher quality, better-engineered pallet, which is more durable. A
CHEP pallet weighs approximately 60 lbs., and is engineered to hold 2,800 pounds
of goods.
Based on information supplied by industry sources, Pallet Management
estimates that the U.S. pallet industry generated revenues of approximately $6
billion in 1998, and it is served by approximately 3,600 companies, most of
which are small, privately-held entities. These companies are generally
operating in only one location and serving customers within a limited geographic
radius. The industry is generally composed of companies that manufacture new
3
<PAGE>
pallets and companies that repair and recycle pallets. According to the NWPCA,
there are approximately 500 million new wood pallets produced annually in the
United States with hundreds of millions sold on a used or recycled basis. New
pallet sales in the United States alone are in excess of $4 billion per year.
Pallet Management estimates there are more than two billion pallets in
circulation in the U.S.
today.
The pallet industry has experienced significant changes and growth
during the past several years. These changes are due, among other factors, to
the focus by Fortune 1000 businesses on improving the logistical efficiency of
their manufacturing and distribution systems. This focus has caused many of
these businesses to attempt to reduce significantly the number of vendors
serving them in order to simplify their procurement and product distribution
processes. It has also prompted large manufacturers and distributors to
outsource key elements of those processes that are not within their core
competencies and to develop just-in-time procurement, manufacturing, and
distribution systems. With the adoption of these systems, expedited product
movement has become increasingly important and the demand for a high quality
source of pallets has increased. Palletized freight facilitates movement through
the supply chain by reducing costly loading and unloading delays at distribution
centers and warehouse facilities. However, the use of low-quality or improperly
sized pallets may increase product damage during shipping or storage. As a
result, there has been an increased demand for high-quality pallets in an
attempt to decrease the cost per trip by reducing product damage during shipping
and storage, and increasing the number of trips for which pallet can be used.
The broad changes affecting U.S. industry have created significant
demand for higher quality pallets distributed through an efficient, more
sophisticated system. Environmental and cost concerns have also accelerated the
trend toward increased reuse or "recycling" of pallets and certain other
transport packing materials, further increasing the importance of the quality of
newly manufactured pallets. In recognition of these trends, CHEP has established
an international system that provides high-quality pallets to customers
worldwide. CHEP is a partnership created by Brambles Industries Limited, an
Australian publicly-held corporation, and GKN, Ltd., a publicly held U.K.
corporation. CHEP outsources it's pallet manufacturing and some of it's repair
operations. During the fiscal year ending June 26, 1999, approximately 75% of
Pallet Management's revenues and a significant percentage of Pallet Management's
growth were attributable to CHEP. Pallet Management expects to continue to build
its relationship with CHEP both geographically and by providing additional
services.
CHEP's pallet leasing system represents a significant change in the
U.S. grocery pallet market. CHEP leases high quality, standardized and easily
identifiable (all CHEP pallets are painted blue) 48" by 40" pallets, primarily
for use by grocery and consumer product manufacturers. CHEP pallets are
manufactured to strict specifications by vendors, including Pallet Management,
that have been selected based on their ability to provide large volumes of high
quality pallets manufactured to CHEP specifications in a timely manner.
Due to the high cost of plastics and other materials, wood is the
preferred "more environmentally conscious" material (a renewable resource) for
pallets. Wood pallets are also generally stronger, repairable, and less
expensive than comparable plastic pallets. Plastic pallets currently have a
limited market where "closed loop" systems can be individually monitored and
retrieved for reuse.
4
<PAGE>
Third Party Logistics Industry
As manufacturers and retailers continue to drive down the costs of
distribution, they will continue to look to third party logistics companies. It
is estimated that only approximately 7%, or approximately $40 billion, of
relevant logistics costs are currently managed by third party logistics
companies. Within the next 3 to 5 years, this sector could capture 10% to 15% of
the available market. Third party logistics companies include outsourcing
companies that manage portions of a company's supply chain. Outsourcing supply
chain management gives companies a competitive edge and drives profitability.
The third party logistics industry is expected to experience an annual growth
rate of about 20%, driven primarily by the continued outsourcing of specific
supply chain logistic functions. Management believes that this industry will
eventually be ready for consolidation, as customers will want third-party
logistic companies to increase their scope of service offerings on a global
level.
Reverse Distribution, a sub-industry of the logistics industry, is estimated to
grow from $4.6 billion in 1997 to over $7.7 billion by the year 2000 in the
United States. It is rapidly growing and becoming more diverse and complex as
its importance to the supply chain becomes more evident. Reverse Distribution is
defined as the opposite of direct distribution. It is moving products back up
the supply chain to the original manufacturer, and reverse logistics is the
process by which this occurs. The increasing importance of reverse distribution
in the market place is a key factor in the dramatic changes taking place in the
pallet industry.
Until recently, pallet manufactures were focused on producing the cheapest
pallet for their customers, who considered their packaging material an expense.
Manufacturers and distributors are now discovering that the lowest cost per trip
for their packaging material is realized when high quality packaging is utilized
and subsequently returned for re-use in a reverse distribution system. They are
viewing packaging material now as an asset instead of an expense and require a
reverse distribution system to return their packaging assets. Pallet Management
is aggressively pursuing this market as a sub-specialist in reverse distribution
for packaging materials.
Growth Strategy
Pallet Management's goal is to become the leading national provider of
pallets and related transport packaging services by continuing to expand its
existing operations and seeking strategic acquisitions. Pallet Management
believes that a significant market opportunity exists for a company that can
consistently offer high-quality pallets and related value-added services to
large pallet users in the U.S. Pallet Management believes that it's management's
experience, industry reputation, and existing customer base will provide the
company with a significant competitive advantage as it pursues its growth
strategy. Elements of its strategy include:
o CHEP
o Specifically Engineered Niche Market Manufacturing
o Reverse Distribution Services
o Acquisitions
5
<PAGE>
CHEP
Pallet Management has entered into a series of multi-year manufacturing
agreements with CHEP to produce specially engineered grocery pallets in
strategic locations. CHEP is the world's largest pallet pooling company with a
pallet pool worth over $2 billion consisting of over 110 million pallets in more
than 30 countries worldwide. CHEP markets to the grocery, retail, and automotive
industries, where large volumes of standard size pallets can be contained in a
closed loop-system. Based on published information, CHEP has a market share of
88% of all leased pallets worldwide and dominates 90% of the markets in which
they operate. CHEP is by far the largest participant in the U.S. pallet industry
and does not have a significant pallet-pooling competitor. During each of the
years 1999 and 2000, Chep is projected to invest several hundred million dollars
to purchase 16 million new pallets as their growth continues to accelerate in
the United States.
In September 1998, Pallet Management opened a new manufacturing
facility in Rogersville, Alabama, in April 1999 opened another facility in
Bolingbrook, Illinois, just outside Chicago and in August 1999, Pallet
Management opened an additional manufacturing facility in Plainfield, Indiana,
just outside Indianapolis. Pallet Management is using these new facilities along
with its other existing facilities to supply CHEP pallets. Pallet Management has
invested over $3.5 million in "state-of the art" pallet manufacturing equipment
for these facilities.
In addition to pallet manufacturing, Pallet Management also offers to
CHEP Reverse Distribution Services. Pallet Management has two facilities, which
sort, repair, warehouse and return pallets to their pallet pool.
Pallet Management has had a business relationship with CHEP for over
ten years and CHEP is expected to be Pallet Management's largest customer for
the next several years during which Pallet Management will support CHEP's
projected growth. While Pallet Management is continuously developing its CHEP
relationship, it continues to aggressively pursue the other areas of growth,
which are expected to generate higher margins.
Specifically Engineered Niche Market Manufacturing
Many manufacturers require specially engineered pallets to transport
their goods. Pallet Management targets these markets due to the limited number
of pallet manufacturers that can produce specialized pallets, the established
reputation of Pallet Management in the industry for being a high quality pallet
manufacturer, and the higher profit margins realized in the production of these
pallets.
Niche market pallets are uniquely engineered to transport a specific
product and are not universally used like the standard GMA or CHEP pallet.
Examples of niche pallets Pallet Management builds include those for the metals
and for the fibers industries. These types of pallets are specially engineered
by Pallet Management by using PDS (Pallet Design System), a system developed by
Virginia Tech University's Pallet Laboratory in conjunction with the National
Wooden Pallet and Container Association.
6
<PAGE>
Most niche market pallets cost more than high volume grocery pallets
and yield high margins because due to their uniqueness and strict
specifications, which are required for automated warehousing operations. Pallet
Management is aggressively marketing its experience and expertise in this area,
as it believes that large manufacturing companies will always have a demand for
specially engineered pallets to transport certain kinds of goods.
Reverse Distribution Services
As large manufacturers are focusing more of their attention on reducing
distribution costs, Pallet Management has expanded the marketing of its Reverse
Distribution Services. Reverse Distribution is the systematic retrieval,
sortation, repair, warehouse and return of pallets and other packaging material
that creates closed-loop return systems between the manufacturer, their
customers, and their vendors. Pallet Management's customer owns the pallets or
containers, which are shipped out to their customers, loaded with products.
Large manufacturing companies often make sizable investments in specially
engineered and heavy-duty pallets. Pallet Management can recover, sort, repair,
warehouse and return a niche pallet to a customer for significantly less than
the cost of a new pallet, thereby eliminating or reducing some of its customers'
distribution expenses. At the same time, Pallet Management generates greater
margins than when a new pallet is built. The key to successfully implementing a
large-scale reverse distribution program is to have an integrated retrieval
network. Pallet Management is actively seeking strategic relationships to more
fully develop a nationwide reverse distribution network.
Pallet Management is forming the majority of its reverse distribution
network through the utilization of the over 3,600 existing pallet manufacturers
and recyclers across the United States, as well as creating it's own facilities.
Many of the smaller pallet companies are looking for an affiliation with a
national company as they lack the ability to market their company beyond a small
radius, coupled with their customers now demanding more diverse geographical
services, and the impact CHEP has made on the grocery pallet market. Pallet
Management believes that many of these companies have excess capacity and are
willing to affiliate with Pallet Management on a fee-for-service basis.
Pallet Management is currently implementing and refining a Reverse
Distribution Information System to track flows of pallets. This system can track
flows of packaging throughout a supply chain.
7
<PAGE>
Acquisitions
Pallet Management intends to actively pursue acquisitions within its
existing markets and new markets to increase its market penetration, as well as
to provide a broader range of services to existing customers in those markets.
These acquisitions will primarily involve transport services businesses and
smaller pallet companies whose operations can be incorporated into Pallet
Management's existing operations without a significant increase in
infrastructure as well as those that will provide Pallet Management with the
ability to service new customers or existing customers in new locations. Pallet
Management does not currently plan to acquire any significant additional
manufacturing capacity. Except for the recently completed acquisition of The
Nelson Company described elsewhere, Pallet Management does not have any current
agreements or understandings for any acquisitions and has put all such
activities on hold until current operations are stabilized. The consideration
for such acquisitions, if consummated, could consist of cash, debt, equity or
any combination thereof.
Current Operations
Manufacturing
o High volume, high quality CHEP grocery pallet manufacturing
o Low volume specifically engineered niche pallet manufacturing
Services
o Retrieval, sort, repair, warehouse and return services
o Reverse Distribution Services
o Other Products
Manufacturing. New pallet manufacturing represents approximately 77% of
Pallet Management's revenues. The manufacturing process for new pallets at each
of Pallet Management's facilities is generally the most capital intensive part
of the business, with the majority of assembly and construction being automated.
New pallets are manufactured from an assortment of wood products, varying in
type and quality, with construction specifications being determined by the
pallet's end user. Pallet Management believes that approximately 70% of the wood
used in new pallets manufactured in North America consists of hardwood
(including, oak, poplar, alder and gum) with the balance consisting of pine or
other softwoods.
Pallet Management utilizes sawing equipment, which cuts large wood
sections to specification. The cut wood is then transported to assembly points
where employees load the side boards ("stringers") or blocks and deck boards
into nailing machines which nail the pallets together. A typical nailing machine
can produce an average of 2,000 pallets per 8-hour shift with five to ten
employees. After construction is completed, pallets are transported to a stacker
for shipment or storage.
8
<PAGE>
All the high volume CHEP pallets and most of the lower volume
specifically engineered niche pallets are manufactured on automated nailing
machines. More customized or smaller niche pallet orders may be manufactured by
hand on assembly tables utilizing two laborers with pneumatic nailers. Pallet
Management typically manufactures pallets upon receipt of customer orders and
does not generally maintain significant finished goods inventory.
Services. Cost reduction of product distribution is the focus of Pallet
Management's value-added services. Retrieval, sortation, repair, warehouse and
return services enable the customer to better utilize their packaging assets.
Besides being environmentally friendly, a properly repaired used pallet will
provide the customer significant savings over having to buy a new pallet. Pallet
Management initiates the retrieval or purchase of used pallets from a variety of
sources. The condition and size of these pallets vary greatly. Once obtained,
the pallets are sorted by size, condition and potential customer. Pallets that
can be repaired have their damaged boards replaced with salvaged boards or
boards from new stock inventory at the facility. Pallets that cannot be repaired
are dismantled and the salvageable boards are recovered for use in repairing and
building other pallets. Pallet Management sells the remaining damaged boards to
be ground into wood fiber, which is used as landscaping mulch, fuel, animal
bedding, gardening material and other goods. Despite recent increases in levels
of automation, pallet return operations remain a labor-intensive process.
Other Products and Services. Pallet Management functions as a wholesale
distributor of other various returnable transport packaging such as plastic and
metal pallets; collapsible plastic bulk boxes; wood, plastic, and metal slave
pallets; wooden boxes and crates; and various other products. Due to lack of
demand, sales of pallets made from materials other than wood are minimal.
Pallet Management also supplies exporters, importers and manufacturers
with a full range of specialized shipping services encompassing export
packaging, crating, transportation coordination, warehousing and storage, and
on-site packaging.
The Nelson Company Acquisition
Effective June 27, 1999, the first day of fiscal year 2000, Pallet
Management acquired The Nelson Company a Baltimore, Maryland based pallet
company in a stock purchase agreement whereby The Nelson Company became a wholly
owned subsidiary of Pallet Management. The Nelson Company is a $12.6 million
niche pallet manufacturing and reverse distribution company. Because The Nelson
Company was a customer of Pallet Management, $3.1 million of their sales were
discounted as intra-company sales. This acquisition added $3,813,000 in total
assets, $1,571,000 in net assets, and $730,997 in debt. The Nelson Company added
9
<PAGE>
100 employees, and 4 facilities in 4 states. The purchase price was $1,000,000
in cash, a $1,000,000 note due December 1999 and 145,000 shares of Pallet
Management common stock. The seller was also issued a note in the amount of
$375,000, which was equal to the estimated profits for the period from January
1, 1999 to the effective date. Arthur P. Caltrider, the owner and president of
The Nelson Company joined Pallet Management as a vice president and director.
Due to the inability to timely complete bank financing, as of October
1, 1999, the $1,000,000 cash purchase price has not yet been paid. The parties
are working on a restructuring of the purchase price and bank financing that
will involve the payment of approximately $1.4 million of cash and the issuance
of a new second note due in January 2000. If the restructuring is not completed
by October 17, 1999, the acquisition may be unwound.
Since there is minimal duplication between the companies, cost savings
was not a major factor in this transaction. The real value of this transaction
is the growth synergies created through a unified and enlarged sales force and
operating network of the two companies.
Pallet Management and The Nelson Company had entered into many
co-venture business relationships over the past 20 years. The Nelson Company
brings a seasoned sales force that is strong in the analysis and sales of
reverse distribution networks and compliments Pallet Management's sales force in
its drive for new business.
The Nelson Company was founded in 1921 by John M. Nelson, Jr. as the
company received its first wood packaging contract from Bethlehem Steel. During
World War II, with the advent of the forklift and other material handling
equipment, The Nelson Company began manufacturing pallets. In the late 1950's it
established one of the first pallet brokerage operations in the industry and
later acquired Associated Box, which was founded in 1890. In the early 1990s,
The Nelson Company saw a changing market place as companies began to focus more
on pallet related services. With this shift, The Nelson Company positioned
itself to be a leader in pallet related services.
Marketing and Distribution
Pallet Management uses its internal sales force in marketing its
products and services. With services being the primary focus of all marketing
efforts, Pallet Management seeks to efficiently serve large numbers of customers
across diverse markets and industries to provide a stable and diversified base
for ongoing sales of products and services.
Pallet Management has over 200 customers, many of which are Fortune
1000 companies, including AlliedSignal, Bethlehem Steel, CHEP Americas, DuPont,
IAMS, Mitsubishi, Monsanto, Scotts Company, and various governmental agencies.
During fiscal year ended June 26, 1999, CHEP accounted for
approximately 75% of Pallet Management's revenues. No other single customer
accounted for 10% or more of Pallet Management's revenues. Pallet Management
10
<PAGE>
enters into contracts with CHEP on a facility by facility basis and the terms of
such contracts vary in accordance with the service to be provided. Depot
agreements may be terminated with or without cause, while repair and
depot/repair agreements may only be terminated by CHEP for cause and have both
indefinite and fixed terms of between one and three years. Manufacturing
contracts are on a multi-year basis and have varying minimum pallet purchase
requirements for each facility. All of the CHEP contracts prohibit Pallet
Management's contracting facilities from competing with CHEP during the term of
the agreement and for up to three years thereafter in the pallet leasing
business and from repairing pallets for other pallet leasing companies.
Suppliers
Pallet Management believes that there is an adequate supply of raw
material components for pallet production. The primary raw materials are
hardwood, softwood, used lumber, used pallets and nails. Pallet Management has
several principal suppliers, which are rotated depending on availability. During
the fiscal year ended June 26, 1999, Pallet Management purchased lumber and
plywood from over 50 vendors. The three largest suppliers accounted for
approximately 35%, 9% and 3 % of the lumber purchases. During the fiscal year
ended June 26, 1999, Pallet Management purchased approximately 8% of its lumber
from Clary Lumber Co., Inc., at or below market price. Clary is owned by John C.
Lucy, Jr., a significant shareholder and director of Pallet Management and his
son, John Lucy III who is Pallet Management's Chairman and CEO. Pallet
Management expects its percentage of purchases from Clary to decrease in the
future as Pallet Management's lumber demands increase in geographic areas
outside where Clary has the ability to supply any additional lumber to Pallet
Management. See "Certain Transactions." Pallet Management does not believe that
the loss of any vendor would materially adversely affect its financial condition
or results of operations. Pallet Management intends to continue to pursue a
strategy of purchasing from alternative sources of lumber.
Pallet Management sales prices are closely related to the changing
costs and availability of lumber. While Pallet Management believes that it will
benefit from strong relationships with multiple lumber suppliers, there can be
no assurance that Pallet Management will be able to secure adequate lumber
supplies in the future. Lumber supplies and costs are affected by many factors
outside Pallet Management's control, including 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.
In addition, adverse weather conditions may affect Pallet Management's ability
to obtain adequate supplies of lumber at a reasonable cost. Pallet Management
also is able to buy low quality lumber and upgrade such lumber at its own
plants. Though Pallet Management has studied the broad use of alternative
materials for the manufacture of pallets, such as plastic, it believes that
there is not currently an available alternative raw material that possesses the
tensile strength, recyclability and low cost of wood. Pallet Management
continues to evaluate alternatives to wood and is receptive to their future use
in pallet production.
Competition
Pallet Management believes that the principal competitive factors in
the pallet industry are price, quality of services and reliability. With over
11
<PAGE>
3,600 industry participants, the pallet manufacturing industry has been and is
expected to remain extremely fragmented and highly competitive. While there are
several companies which have attempted to establish national pallet operations,
most of Pallet Management's competitors are small, privately held companies that
operate in only one location and serve customers within a limited geographic
radius. Pallet Management does not directly compete against many of these
companies to a large extent due to its concentration on CHEP and specialty
pallets, which are not made by most of these companies, although they may at any
time attempt to compete directly with Pallet Management. New pallet
manufacturers can typically service up to a 300-mile radius, although recyclers
rarely market beyond a 100-mile radius. Pallet Management believes that it will
have a competitive advantage as it expands its national network of facilities,
thus benefiting from economies of scale while interfacing with customers'
nationwide distribution systems.
Competition is often intense and Pallet Management faces most of its
competition from other manufacturers. Pallet rental systems competes with new
pallet sales to the grocery and wholesales distribution industries, and may
expand into other industries in the future. Pallet Management does not compete
to any significant extent with pallet rental systems in the grocery industry and
intends to focus on industries and products in which pallet rental systems do
not compete.
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
Pallet Management. Other companies with significantly greater capital and other
resources than Pallet Management (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. While Pallet Management
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 Pallet
Management will not face increasing competition from pallets fabricated from
non-wooden components in the future. Pallet Management does not believe that
non-wooden pallets will be widely used until it is demonstrated that they
replicate the strength of wood pallets and that their cost decreases from their
current levels, which are well above the cost of similar wood pallets.
On a national level, at least two other pallet companies PalletPallet,
Inc., a Canadian corporation which recently moved its headquarters to Dallas,
Texas and PalEx, which recently announced a merger with IFCO, a returnable
plastic container company, have announced plans for national expansion.
Employees
Pallet Management currently has over 450 employees. These include
production workers who work on new and recycled pallets, clerical personnel,
logistical and computer personnel, facility management personnel, regional
management personnel, sales force, customer service personnel, administrative
personnel, and executive personnel.
Item 2. Description of Property
-----------------------
Pallet Management currently has 10 facilities in 9 states.
12
<PAGE>
Baltimore, Maryland - Manufacturing Plant/Repair Depot (The Nelson
Company): Located at 2116 Sparrows Point Road, Baltimore, Maryland, with a year
to year lease, which has been in continuous use since 1921, this facility
employs 70 people. This facility is on approximately 12 acres with 140,000
square feet of manufacturing space and manufactures specialty wood packaging. In
addition, a substantial operation exists for the repair and recycling of
specialty pallets and packaging.
Bolingbrook, Illinois - Manufacturing Plant: This facility opened in
April 1999 at 335 Crossroads Suite B, Bolingbrook, Illinois in a 110,000-sq. ft.
facility with a 5-year lease ending February 2004. It will employ up to 65
people once fully operational and will manufacture pallets on high-speed,
automated manufacturing lines.
Conyers, Georgia - Repair Depot (The Nelson Company): Located at 2475
Covington Highway, Conyers, Georgia, with a lease that expires June 30, 2002.
This facility employs 8 people on approximately 1.2 acres with 9,000 square feet
of manufacturing space.
Jackson, Michigan - Repair Depot (The Nelson Company): Located at 3143
W. Michigan Avenue, Jackson, Michigan, with a lease that expires March 1, 2001.
This facility employs 14 people and is part of a larger complex with 23,000
square feet of manufacturing space.
Lakeland, Florida - Repair Depot: Located at 2420 New Tampa Hwy,
Lakeland, Florida, this facility can process all types of pallets on a
high-speed automated pallet sortation and repair line. CHEP has recently opened
a pallet processing facility in the Lakeland area, which could greatly reduce
the revenues at this facility. This facility opened in April 1996 and is
comprised of a 63,000-sq. ft. building on five acres with a five-year lease
terminating in March 2001 and employs 100 people.
Lawrenceville, Virginia - Manufacturing Plant: Located at 10324 Liberty
Road, Lawrenceville, Virginia, new pallet manufacturing is performed at this
Company-owned facility using automated equipment. This facility's primary
production is specifically engineered niche pallets and cutting lumber to size
for pallet production at this facility and shipment to other company facilities.
In addition, pallet recycling and repair services are performed 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 145 people.
Plainfield Indiana - Manufacturing Plant: This facility opened at 6030
Gateway Dr., Plainfield, Indiana, in August 1999 in a 130,000-sq. ft. facility
with a 5-year lease ending September 2004. It will employ up to 65 people once
fully operational and will manufacture pallets on high-speed automated
manufacturing lines.
Petersburg, Virginia - Repair Depot: Located at 1925 Puddledock Road,
Petersburg, Virginia, this facility processes, repairs, and stores all types of
pallets. It contains a 40,000-sq. ft. warehouse on eight acres of Company-owned,
mortgage-free property. There are approximately 50 people employed at this
facility, which contains "state of the art" automated sorting and repair
equipment.
13
<PAGE>
New Castle, Pennsylvania - Repair Depot (The Nelson Company): Located
at 1 Rockwell Place, New Castle, Pennsylvania with a month to month lease and
employs 9 people. This facility is part of a larger complex with 30,000 square
feet of manufacturing space.
Rogersville, Alabama - Manufacturing Plant: Located at 120 Industrial
Park Road, Rogersville, Alabama, this facility opened in September 1998 in a
25,500-sq. ft. facility on seven acres with a three-year lease terminating
September 2001. It employs over 45 people manufacturing pallets on a high-speed
automated manufacturing line.
Corporate Offices: Corporate offices are located at the following
addresses.
2116 Sparrows Point Road, Baltimore, Maryland - Finance and Sales - One
year renewable lease expiring June 2000
2900 Highwoods Boulevard Suite 200, Raleigh, North Carolina - Finance,
Information Technologies, Human Resources - Three year lease expiring September
2002.
2001 Weston Parkway, Cary, North Carolina - Executive Offices and Sales
- - Two year lease expiring October 2000.
1 South Ocean Boulevard, Boca Raton, Florida - Corporate Headquarters -
Three year lease expiring May 2000. This office is expected to be closed and
moved to Raleigh in fiscal 2000.
Item 3. Legal Proceedings
-----------------
In June 1999, Pallet Management was named as a co-defendant in a
lawsuit whereby the plaintiff is alleging damages of up to $300,000 related to
lost income from a facility formerly leased to it in Jessup, Maryland.
Management believes the claim is without merit and intends to vigorously contest
the claim. The outcome of the action as well as the extent of the company's
liability, if any, can not be determined at this time.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On January 7, 1999, the Company held its annual meeting of
shareholders. At the meeting (i) all five director nominees were elected, (ii)
the Company's 1998 Omnibus Stock Option Plan was approved and ratified, and (ii)
the appointment of Kaufman, Rossin & Co. as the independent auditors was
ratified.
(i) The following directors were elected for a one-year term by the votes
indicated:
<TABLE>
<CAPTION>
- ------------------------------------------- ------------------- ------------------------ ------------------------
Name Votes For Votes Against Abstain
- ------------------------------------------- ------------------- ------------------------ ------------------------
<S> <C> <C> <C>
John C. Lucy, III 3,154,420 1,100 16,685
- ------------------------------------------- ------------------- ------------------------ ------------------------
Zachary M. Richardson 3,154,420 1,100 16,685
- ------------------------------------------- ------------------- ------------------------ ------------------------
John C. Lucy, Jr. 3,154,420 1,100 16,685
- ------------------------------------------- ------------------- ------------------------ ------------------------
Donald Radcliffe 3,154,420 1,100 16,685
- ------------------------------------------- ------------------- ------------------------ ------------------------
David W. Sass 3,154,420 1,100 16,685
- ------------------------------------------- ------------------- ------------------------ ------------------------
</TABLE>
14
<PAGE>
(ii) Pallet Management's Omnibus Stock Option Plan was approved and ratified by
a vote of 1,242,785 for, 89,765 against and 16,135 abstaining.
(iii) The appointment of Kaufman, Rossin & Co. was ratified by a vote of
3,136,395 for, 27,000 against and 8,810 abstaining.
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
Pallet Management's Common Stock is quoted on the OTC Bulletin Board
under the symbol PALT. The following table sets forth the average of the high
and low bid prices of the Pallet Management's Common Stock as reported on the
OTC Bulletin Board for each quarter from July 1, 1997 through June 26, 1999. The
quotations are over-the-market quotations and, accordingly, reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
High Bid Low Bid
---------------------- ---------------------
<S> <C> <C>
FISCAL 1998
- -----------
July 1, 1997 through September 26, 1997 5 1/2 1
September 27, 1997 through December 27, 1997 9 2 1/4
December 28, 1997 through March 28, 1998 12 1/2 8
March 29, 1998, 1998 through June 26, 1998 12 7/8 10 1/2
FISCAL 1999
- -----------
June 28, 1998 through September 26, 1998 14 1/8 3 1/2
September 27, 1998 through December 26, 1998 10 1/8 5
December 27, 1998 through March 27 , 1999 11 1/4 6 5/8
March 28, 1999 through June 26, 1999 10 15/16 5 1/4
</TABLE>
On August 8, 1999, the closing bid price for the Common Stock as
reported on the OTC Bulletin Board was $5 1/8. As of August 30, 1999, there were
924 holders of record of the Pallet Management's Common Stock. Pallet Management
has not declared or paid any dividends on its Common Stock in the last two
fiscal years. All stock data and per share amounts have been restated to give
effect to the one-for-four reverse stock split in February 1998.
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.
Dividend Policy
Pallet Management has not paid any cash dividends on its Common Stock
since its inception. Pallet Management presently intends to retain future
earnings, if any, to finance the expansion of its business and does not
anticipate that any cash dividends will be paid in the foreseeable future.
Future dividend policy will depend on Pallet Management's earnings, capital
requirements, expansion plans, financial condition and other relevant factors.
15
<PAGE>
Sales of Unregistered Securities
None
Item 6. Management's Discussion and Analysis or Plan of Operations
----------------------------------------------------------
The following discussion and analysis should be read in conjunction
with Pallet Management's Consolidated Financial Statements and the Notes thereto
included in Part II, Item 7 of this Report.
The following discussion regarding Pallet Management and its business
and operations contains "forward-looking statements" within the meaning of
Private Securities Litigation Reform Act 1995. These statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The reader is cautioned that all forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward looking statements, including the limited
history of profitable operations, dependence on CHEP, competition, risks related
to acquisitions, difficulties in managing growth, dependence on key personnel
and other factors discussed under "Factors That May Affect Future Results" in
this report. Pallet Management does not have a policy of updating or revising
forward-looking statements and thus it should not be assumed that silence by
management of the Pallet Management over time means that actual events are
bearing out as estimated in such forward looking statements.
Results of Operations
General
Our company has grown to be one of the largest pallet companies in the
more than $6 billion pallet industry, by providing value-added products and
services to our customers. Our customer base has grown to over 200 Fortune 1000
companies, some of which we have been servicing since 1921. Our consolidated pro
forma sales for fiscal year 1999, which include The Nelson Company, were nearly
$50 million with ten facilities in nine states and one more to open in the first
half of fiscal year 2000.
The majority of our company's revenues have traditionally been
generated from providing high quality, specially engineered pallets to
manufacturers, wholesalers and distributors. As supply chain logistics has
become more and more complex, our existing customers as well as prospective
customers are seeking new ways to streamline distribution and reduce costs,
which is opening a huge service orientated market for our company.
With this shift in focus toward services and cost efficiency, our
company is providing "state of the art" logistical services known as Reverse
Distribution. Reverse Distribution is simply defined as maximizing the use of
transport packaging, the base of which is the pallet, by reusing assets to
reduce the overall cost per trip.
This shift in focus toward supply chain cost efficiency by our customer
base is by far the most dramatic shift in focus and provides the most
opportunity for our company. Driven mainly by economics, reusable packaging in a
Reverse Distribution system also has environmental marketing benefits.
16
<PAGE>
As this market of Reverse Distribution is just starting to be created,
the economic advantages to companies that are implementing it are huge; thus the
demand is overwhelming. We are working diligently as an industry leader in this
area, as the growth potential continues to unfold.
Reverse logistics, a sub-industry of the logistics industry, is growing
rapidly and is estimated to be $7.7 billion by the year 2000. We are positioning
Pallet Management to become a third party sub-specialist in reverse logistics of
pallets and other packaging material. The third party logistics industry is
estimated to be in excess of $35 billion and growing rapidly as companies are
discovering the benefits of out-sourcing their logistical demands.
Our company has two lines of revenue, manufacturing and services;
Manufacturing: We have two primary categories of manufacturing: CHEP
grocery pallets and specifically engineered niche market pallets. We have
multi-year contracts to manufacture of high quality grocery pallets for CHEP,
the world's largest pallet rental pool. We have three manufacturing facilities,
which currently exclusively produce CHEP pallets.
Pallets that are uniquely engineered to transport a specific product
are classified as niche market pallets. Besides CHEP, our company's customer
base is primarily composed of customers who require niche pallets. These types
of pallets are lower volume and higher margin than CHEP pallets.
Services: We have three categories of services; retrieval, sortation,
repair, warehousing and return, reverse distribution, and other products.
Retrieval, sortation, repair, warehouse and return services enable our
customers to better utilize their packaging assets. Besides being
environmentally friendly, a properly repaired used pallet will provide the
customer significant savings over having to buy a new pallet. A large portion of
new pallets is currently discarded by pallet users after one use. Pallet
Management initiates the retrieval or purchase of used pallets from a variety of
sources. The condition and size of these pallets vary greatly. Once obtained,
the pallets are sorted by size, condition and potential customer. The pallets
are sorted and repaired as needed, or placed in storage and made available for
return to service ("depot services"). Pallets that can be repaired have their
damaged boards replaced with salvaged boards or boards from new stock
inventoried at the facility. Pallets that cannot be repaired are dismantled and
the salvageable boards are recovered for use in repairing and building other
pallets. Pallet Management sells the remaining damaged boards to be ground into
wood fiber, which is used as landscaping mulch, fuel, animal bedding, gardening
material and other items. Despite recent increases in levels of automation,
pallet return operations remains a labor-intensive process.
17
<PAGE>
Reverse Distribution Services can carry the retrieval, sort, repair,
warehouse and return services one step further by contracting with a customer to
track either their pallet flow or individual pallets themselves.
Pallet Management functions as a wholesale distributor of other various
returnable transport packaging such as plastic and metal pallets; collapsible
plastic bulk boxes; wood, plastic, and metal slave pallets; wooden boxes and
crates; and various other products. Due to lack of demand, sales of pallets made
from materials other than wood are minimal.
Without the pallet, the supply chain would be severely hampered, though it is
also the weak link in the supply chain. If a manufacturer or wholesaler can
manage their pallet assets, distribution logistics become dramatically
simplified and more cost effective. Unlike most companies that are entering the
logistical distribution arena through the transportation industry, we are
responding to customer demands for Reverse Distribution Logistics through the
pallet industry. This approach will provide us a more cost-effective "seamless
system" which provides increased benefits to the customer base and will give
Pallet Management Systems an advantage over competition from current logistic
companies.
Fiscal Year Ended June 26, 1999 Compared to Fiscal Year Ended June 27, 1998
For the year ended June 26, 1999 net sales increased 66.9% to
$38,744,129 from $23,214,020 for the prior year. This increase was due mainly to
an increase in new pallet sales, which accounted for 77% of net revenues, as
opposed to 71% 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 75% and 56% of 1999 and 1998 net sales respectively.
Cost of sales for 1999 was $35,012,585 or 90.3% of net sales as
compared to $20,818,052 or 89.7% of net sales for 1998. This increase reflects
the higher expenses associated with the opening of a new facility in Illinois in
the fourth quarter of 1999, which did not recognize significant sales until the
end of the quarter and the loss of sales at the Lawrenceville facility as CHEP
sales were shifted to other facilities and the Company was unable to reduce
costs commensurate with the decrease in sales. Other costs remained consistent
as lumber prices remained stable. The Company hopes to recognize efficiencies in
fiscal 2000 with larger production runs. For the fourth quarter of fiscal 1999,
cost of sales were equal to 99% of revenues as the Company's Lawrenceville
facility incurred substantial costs with decreased volume and the new Illinois
facility was in its start-up phase and incurred substantial up front costs.
18
<PAGE>
Selling, general and administrative expenses were $2,944,355 (7.6% of
net sales) in 1999, as compared to $1,869,470 or 8.1% of net sales in 1998. This
dollar increase reflected the decision to strengthen its middle and upper
management in anticipation of future growth. Operations, finance and human
resources all increased staffing during the year at the senior level.
Additionally, information systems received substantial support during the year
with the acquisition of equipment and the recruitment of new staff. This was
done both to support current needs, and to prepare for the introduction of new
products in logistics. The Company also incurred an increase in professional
fees related to CHEP contracts, facility leases and increased accounting needs.
Net interest expense decreased to $299,019 in 1999 from $385,782 in
1998, although the Company reported a loss of $1,016,740 for the last quarter of
1999. This decrease resulted from an increase in capital brought about by the
exercise of warrants in early fiscal 1999 and the lower interest rate on the new
borrowing facility entered into in the fourth quarter.
Net income for 1999 was $537,529 compared to $191,627 in 1998. The
Company credits its continuing turnaround to its ongoing focus on higher sales
volume and its adherence to a long-term marketing plan of niche markets in the
face of severe competition. In addition, the stabilized cost of raw materials in
the hardwood markets allowed more effective purchasing controls. The Company
continues to focus on cost control in normal pallet manufacturing while
investing in the service and system side of the business to ensure long term
viability. Future profitability will be directly related to the Company's
ability to sell higher than average quality pallets and link this with reverse
distribution.
Liquidity and Capital Resources
The Company had $262,117 of cash on hand at June 26, 1999, compared to
$401,166 at the beginning of fiscal year 1999. Net cash used in operating
activities was $854,788 for the year, primarily for opening new facilities,
installing manufacturing and computer equipment and funding accounts receivable
and inventory increases. During fiscal year 1999, the Company purchased
approximately $1,852,000 of fixed assets including $191,000 pursuant to capital
lease obligations, had a net increases in borrowing of $198,000 and received
$2,304,000 from the exercise of warrants. The new equipment primarily related to
opening new facilities in Alabama and Illinois. In the fourth quarter of fiscal
1999, the company secured a new $10,000,000 line of credit in a financing
agreement with The National Bank of Canada. This new funding replaced the
previous $3,900,000 from American Commercial Finance Corporation. The new credit
facility has more favorable terms than the one with American Commercial Finance
Corporation with additional availability for accounts receivable, inventory and
machinery and equipment. The new facility bears interest at a rate of prime for
the revolver and prime plus one quarter for the term loans. At August 31, 1999,
the Company had approximately $100,000 of availability under the line of credit.
The Company is in the process of amending the facility to include The Nelson
Company, which should give additional borrowing availability. This amount may
not be sufficient to meet the Company's needs over the next few months as the
Company expects to have a substantial increase in revenues until the end of
calendar 1999. The Company's real estate is unencumbered, which may give it the
ability to borrow against it.
Pallet Management intends to pursue expansion and acquisition plans,
which may include the opening of additional facilities as well as the
acquisition of additional facilities or companies. The success and timing of any
such plans and required capital expenditures cannot be reasonably estimated at
this time and the Company has no current arrangements with respect to any such
19
<PAGE>
acquisition or expansion. Funding for these plans and for ongoing operations
could be a combination of issuance of additional equity, working capital,
additional borrowings, and profits from operations. Pallet Management can not
make any assurances that such funding would become available for such plans.
Pallet Management is in the process of achieving ISO 9002 registration.
Once completed, this program will streamline and enhance internal operations to
better meet customer needs. Many large corporations are now requiring their
vendors to be ISO certified. Pallet Management views this program as a vehicle
to strengthen its ongoing quality program.
Year 2000
- ---------
Pallet Management uses software and related technologies throughout its
businesses that may 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.
Assessment. Pallet Management has undertaken various initiatives
intended to ensure that its computer equipment and software will function
properly with respect to dates in the Year 2000 and thereafter. For this
purpose, the term "computer equipment and software" includes systems that are
commonly thought of as IT (Information Technologies) systems, including
accounting, data processing, telephone/PBX systems and other miscellaneous
systems, as well as systems that are not commonly thought of as IT systems, such
as alarm systems, fax machines, or other miscellaneous systems. Both IT and
non-IT systems may contain embedded technology and complicate the Company's Year
2000 identification, assessment, recycling, and testing efforts.
Internal Systems. Based upon its identification and assessment efforts
to date, the Company believes that substantially all of its computer equipment
and software are Year 2000 compliant. Pallet Management has recently upgraded
its computer systems and believes that it has minimized the detrimental effects
of any Year 2000 problem. Utilizing both internal and external resources to
identify and assess needed Year 2000 remediation, the Company anticipates that
its Year 2000 identification, assessment, remediation and testing efforts, which
began in the fourth quarter 1998, are expected to be completed by second quarter
fiscal year 2000, and that these efforts will be completed prior to any
currently anticipated impact on its computer equipment and software.
Pallet Management believes that substantially all of its manufacturing
equipment is not affected by Year 2000 issues.
Suppliers. Pallet Management has mailed letters to its significant
vendors and service providers to determine the extent to which interfaces with
such entities are vulnerable to Year 2000 issues and whether the products and
services purchased from or by such entities is Year 2000 compliant. As of August
1999 the Company had received responses from approximately 25% of these third
parties, and all of them that have responded have provided written assurance
that they expect to address all their significant Year 2000 issues on a timely
basis. A follow-up mailing to significant vendors and service providers that did
not initially respond, or whose responses were deemed unsatisfactory by the
Company, will be conducted in September 1999.
20
<PAGE>
Costs. Pallet Management believes that the cost of its Year 2000
identification, assessment, remediation and testing efforts, as well as
currently anticipated costs to be incurred by the Company with respect to Year
2000 issues of third parties, will not exceed $100,000 and will be funded from
current existing financial resources. As of August 31, 1999, the Company had
incurred costs of approximately $35,000 related to its Year 2000 identification,
assessment, remediation and testing efforts. These costs were for planning,
analysis, repair or replacement of existing software, upgrades of existing
software, or evaluation of information received from significant vendors,
service providers, or customers.
If all Year 2000 issues are not properly identified, or assessment,
remediation and testing of those Year 2000 problems that are identified is not
effected in a timely manner, there can be no assurance that the Year 2000 issue
will not materially adversely impact the Company's results of operations or
adversely affect the Company's relationships with customers, vendors, or others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations.
Contingency Plan. Pallet Management has not yet completed a
comprehensive analysis of the operational problems and costs (including loss of
revenues) that would be reasonably likely to result from the failure by the
Company and certain third parties to complete efforts necessary to achieve Year
2000 compliance on a timely basis. Pallet Management has no contingency plan for
dealing with the most reasonably likely worst case scenario, and such scenario
has not yet been clearly identified. Pallet Management currently plans to
complete such analysis and contingency planning by September 30, 1999. Virginia
Power, which supplies two of the Company's facilities, has told the Company that
they cannot assure compliance and that potential power disruptions are possible.
Pallet Management believes that there is no viable alternative for the expected
temporary power disruption. Pallet Management has also switched nail suppliers
to those that are Year 2000 compliant to minimize the disruption of supplies.
The costs of the Company's Year 2000 identification, assessment,
remediation and testing efforts and the dates on which the Company believes it
will complete such efforts are based upon management's best estimates, which
were derived using numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans, and
other factors. Pallet Management cannot assure that these estimates will prove
to be accurate and actual results could differ materially from those currently
anticipated. Specific factors that could cause material differences include, but
are not limited to, the availability and cost of personnel trained in Year 2000
issues, the ability to identify, assess, remediate and test all relevant
computer codes and embedded technology and other similar uncertainties. In
addition, variability of definitions of "compliance with Year 2000" and the
variety of different products and services and combinations thereof sold by the
Company may lead to claims relating to Year 2000 compliance whose impact on the
Company is not currently estimable.
Factors That May Affect Future Results
--------------------------------------
You should carefully consider the following risks in evaluating Pallet
Management. The risks described below are not the only ones that we face.
Additional risks that we do not yet know of or that we currently think are
immaterial may also impair our business operations. Our business, operating
21
<PAGE>
results or financial condition could be materially adversely affected by any of
the following risks. The trading price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment. You should
also refer to the other information set forth in this Report, including our
financial statements and the related notes.
Pallet Management cautions readers that certain important factors may affect
Pallet Management's actual results and could cause those results to differ
significantly from any forward-looking statements made in this report or
otherwise made by or on behalf of Pallet Management. For this purpose, any
statements contained in this report that are not statements of historical fact
should be considered to be forward-looking statements. Words such as "may,"
"expect," "believe," "anticipate," "intend," "could," "estimate," or "continue"
or the negatives of those words, or other comparable terminology, are intended
to identify forward-looking statements. These statements appear in a number of
places in this report and include statements as to the intent, belief or
expectations of Pallet Management and its management.
Limited History of Profitable Operations
We reported net income of $537,529 for the fiscal year ended June 26,
1999, $191,627 for the fiscal year ended June 27, 1998 and a net loss of
$882,977 for the fiscal year ended June 30, 1997. We reported a net loss of
approximately $995,000 for the last quarter of fiscal 1999 and expect to report
a loss for the first quarter of fiscal 2000 due to operational problems at two
facilities and theft at one of these facilities. We cannot be certain that we
can sustain growth, that we will again become profitable or that we will
maintain sufficient revenues for profitability. We cannot be certain that we can
sustain or increase profitability on a quarterly or annual basis in the future.
Dependence on Key Customer
We are currently dependent on CHEP for a material portion of our
business. During the fiscal year ended June 26, 1999, approximately 75% of our
revenues and a significant percentage of our growth was attributable to CHEP. We
expect that the revenues from CHEP may account for up to 80% of our revenues for
the next year until we grow our reverse distribution business. In addition, CHEP
is the predominant customer of certain of our facilities. If CHEP were to
materially decrease its purchase of pallets and services from us for any reason,
our financial condition and results of operations will be materially adversely
affected. We have entered into a separate agreement with CHEP for each facility
that performs CHEP repair or depot services. These agreements do not contain
fixed volume requirements and have various terms of up to three years. We cannot
assure you that CHEP will not terminate or fail to renew such agreements in the
future.
Supply and Demand for Lumber
Pallet prices are closely related to the market price of lumber, the
principal raw material used in the manufacture and repair of wooden pallets. If
lumber prices increase sharply, we may not be able to pass this increase on to
our customers. We have attempted to index the sale prices of our pallets based
on our lumber costs, although we have not always been able to do so.
22
<PAGE>
The price of lumber has been volatile in recent years due to factors
beyond our control, including
o weather,
o governmental regulation of logging on public lands,
o lumber agreements between Canada and the U.S.,
o competition from other industries that use similar grades and types of
lumber and
o other natural events.
We typically buy our lumber in the open market, although in fiscal 1999
approximately 47% was purchased from three suppliers. We purchased approximately
8% of our lumber from a related company, which we believe lessens our supply
risk. However, we may be unable to purchase adequate lumber supplies to meet our
needs. To the extent we encounter adverse lumber prices or are unable to procure
adequate supplies of lumber, our financial condition and results of operations
could be materially adversely affected.
Competition from Other Companies
There are over 3,600 companies that manufacture pallets or provide
pallet recycling services. Many of these are small companies that concentrate on
the grocery and retail businesses in which we do not generally compete, although
they may at any time attempt to compete directly with us. We generally
concentrate in specialty markets and other services in which there are not as
many competitors. CHEP's pallet rental system competes with new pallet sales to
the grocery and wholesale distribution industries, and may expand into other
industries in the future.
Pallet manufacturing and recycling operations are not highly capital
intensive, and the barriers to entry in these businesses are minimal. Smaller
competitors may have lower overhead costs and consequently, may be able to
manufacture or recycle pallets at lower costs than us. Other companies with
significantly greater capital and other resources than us (including CHEP) may
enter or expand their operations in the pallet manufacturing and recycling
businesses in the future, which could change the competitive dynamics of the
industry. We have in the past and will continue to compete with lumber mills for
sales of new pallets. While industry sources estimate that non-wooden pallets
currently account for less than 10% of the pallet market, we may face increasing
competition from pallets fabricated from non-wooden components in the future.
Other Debt May Increase in the Future
We currently have a $10 million borrowing facility with the National
Bank of Canada, of which approximately $5 million is outstanding. We use the
facility to finance receivables and inventory as well as for various other
corporate purposes, including acquisitions and the purchase of new equipment.
Thus, our debt and interest expense may be substantially higher in the future,
which could limit our flexibility . In addition, this bank has a lien on
substantially all of our assets other than real estate.
23
<PAGE>
Potential Risks Related to Acquisitions
One of our growth strategies is to acquire additional pallet
manufacturing and recycling companies to increase our revenues and markets. In
the first quarter of fiscal 2000, we completed the acquisition of The Nelson
Company. Acquisitions may involve a number of risks, including
o adverse short-term effects on our operating results;
o difficulties in successfully integrating and managing additional
businesses;
o diversion of management's attention;
o dependence on retention, hiring and training of key personnel;
o loss of existing or anticipated customers of the acquired companies;
o unanticipated problems or legal liabilities; and
o amortization of acquired intangible assets.
Some or all of these risks could have a material adverse effect on our
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. We cannot assure you that we will be able to acquire
additional businesses or to successfully integrate and manage such additional
businesses.
Potential Problems in Financing Acquisitions
We intend to use Common Stock for a portion of the consideration for
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, we may be required to use
more cash or bank financing, if available, in order to complete acquisitions. If
we do not have sufficient cash resources or borrowing availability, our growth
could be limited unless we are able to obtain additional capital through future
debt or equity financing. We do not currently have sufficient availability under
our current facility to finance any additional acquisitions. Using cash to
complete acquisitions and finance internal growth could substantially limit our
financial flexibility. Using debt could result in financial covenants that limit
our operations and financial flexibility. We may be unable to obtain financing
if and when we need it on acceptable terms. As a result, we may be unable to
pursue our acquisition strategy successfully.
Transactions With Affiliates
For fiscal 1999, we purchased approximately $2,895,000 or 9% of our
lumber supply from Clary Lumber Corp. which is owned by the family of John C.
Lucy, Jr., a director and principal shareholder of Pallet Management. We expect
to purchase less than 10% of our lumber from Clary for the foreseeable future.
John C. Lucy, III, Mr. Lucy's son, is our Chairman of the Board and Chief
Executive Officer and a minority shareholder of Clary.
Volatility of Stock Price
The trading price of our Common Stock has been, and in the future is
expected to be, volatile and we expect to experience further market fluctuations
as a result of a number of factors, including:
24
<PAGE>
o current and anticipated results of operations;
o changes in our business, operations or financial results;
o general market and economic conditions;
o competition;
o the number of shares outstanding;
o the number of market makers in our stock;
o lumber prices; and
o other factors.
We Have Applied to List Our Common Stock on the Nasdaq Stock Market
We have applied to list our Common Stock on the Nasdaq Market. Our
application was initially denied and we are involved in the appeal process. We
cannot assure you that our application will be approved. In the mean time, our
Common Stock will continue to trade on the OTC Bulletin Board. Securities traded
on the OTC Bulletin Board generally have less liquidity than those traded on the
American Stock Exchange or the Nasdaq Stock Market. Even if our Common Stock
trades on the Nasdaq Stock Market or the American Stock Exchange, we cannot
assure you that there will be an active market in our Common Stock.
Difficulties in Managing Rapid Growth
In the last year we have experienced rapid growth which has placed a
significant strain on our personnel, our financial importing system and other
resources. We may be unable to
o successfully implement our business strategy;
o generate sufficient cash flow from operations;
o manage our costs,
o obtain adequate financing on acceptable terms to fund continuing
growth; or
o successfully manage continued growth.
The failure to manage growth effectively may have a material adverse effect on
our business, financial condition and results of operations.
We Need to Attract and Retain Key Personnel
We are materially dependent upon:
o John C. Lucy, III, Chairman and Chief Executive Officer,
o Zachary M. Richardson, President and Chief Operating Officer
o Arthur P. Caltrider, Senior Vice President; and
o David Shumate, Executive Vice President.
We have five-year employment agreements with Messrs. Lucy and Richardson that
expire in 2003 and with Mr. Caltrider that expires in 2003. Mr. Shumate's
agreement is not for a fixed term. We would be adversely affected by the loss of
the services of any of these officers.
25
<PAGE>
We Do Not Anticipate Paying Dividends
We have never paid any cash dividends on our Common Stock and we do not
anticipate paying cash dividends on our Common Stock in the foreseeable future.
The future payment of dividends is directly dependent upon our future earnings,
capital requirements, financial requirements and other factors to be determined
by our Board of Directors. For the foreseeable future, it is anticipated that
earnings, if any, which may be generated from our operations will be used to
finance our growth. See "Dividend Policy."
Sales by Existing Stockholders Could Depress the Market Price of Our Common
Stock
If our stockholders sell substantial amounts of our Common Stock
(including shares issued upon the exercise of outstanding options), the market
price of our Common Stock could fall. We have outstanding 4,062,612 shares of
Common Stock, of which 3,246,365 shares are freely tradable in the public
market, and of which 816,247 shares are "restricted securities" under the Rule
144. Most of these restricted shares are owned by our offices and directors may
be sold in limited amounts under Rule 144. Our officers, directors and employees
own options to purchase up to 1,694,392 additional shares of Common Stock. The
exercise prices for some of these options are substantially below the current
market price.
Restricted securities may only be sold pursuant to an effective
registration statement under the Securities Act or in compliance with Rule 144
under the Securities Act or other exemption from registration. Rule 144 provides
that a person holding restricted securities for a period of one year may sell
such securities during any three-month period, subject to certain exceptions, in
limited amounts. Rule 144 also permits, under certain circumstances, the sale of
shares without any quantity limitations by a person who is not our affiliate and
who has held the shares for a two year holding period. No predictions can be
made as to the effect, if any, that market sales of such shares or the
availability of such shares for future sale will have on the market price of the
Common Stock prevailing from time to time.
We May Issue Preferred Stock to Resist Takeovers
Our Articles of Incorporation authorizes 7,500,000 shares of preferred
stock, none of which are issued and outstanding. As provided in our Articles of
Incorporation, preferred stock may be issued by resolutions of our Board of
Directors from time to time without any action of the stockholders. These
resolutions may authorize issuance of the preferred stock and set dividend and
liquidation preferences, voting rights, conversion privileges, redemption terms
and other privileges and rights. Accordingly, our Board of Directors may,
without stockholder approval, issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or the rights of the holders of our Common Stock. The preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of Pallet Management.
Antitakeover Effects in Our Charter Documents and Under Florida Law
Certain provisions of our Articles and Bylaws may be deemed to have antitakeover
effects and may delay, defer or prevent a hostile takeover, including
prohibition of shareholder action by written consent and advance notice
requirements for shareholder proposals and director nominations In addition,
Florida has enacted legislation that may deter or hinder takeovers of Florida
corporations. The Florida Control Share Act generally provides that shares
26
<PAGE>
acquired in excess of certain specified thresholds will not have any voting
rights unless such voting rights are approved by a majority of the corporation's
disinterested shareholders. The Florida Affiliated Transactions Act generally
requires supermajority approval by disinterested shareholders of certain
specified transactions between a public corporation and holders of more than 10%
of the outstanding voting shares of the corporation (or their affiliates).
Item 7. Financial Statements
--------------------
The financial statements are attached at the end of this document following the
signature page.
Item 8. Changes In and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
- --------------------
On August 16, 1999, Pallet Management replaced Kaufman, Rossin & Co. as its
principal independent auditor to be effective once the fiscal year 1999 audit
included in this report was completed. During the period Kaufman, Rossin & Co.
was engaged as the Registrant's principal accountant there were no disagreements
with Kaufman, Rossin & Co. on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. No accountant's
report on the financial statements of the Registrant issued by Kaufman, Rossin &
Co. contained an adverse opinion or a disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope or accounting principles. Kaufman,
Rossin & Co. furnish Pallet Management with a letter addressed to the Securities
and Exchange Commission stating that Kaufman, Rossin & Co. agreed with the
statements made by the Company in the Form 8-K
Effective August 16, 1999, PricewaterhouseCoopers LLP was engaged by
the Registrant to serve as the independent auditor of the Registrant's financial
statements for fiscal 2000. PricewaterhouseCoopers LLP was also retained to
audit The Nelson Company, which the Company recently acquired.
27
<PAGE>
Item 9. Directors, Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The following table sets forth the names, ages and positions held with
respect to each Director and Executive Officer of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------------------ -------- -------------------------------------------------
<S> <C> <C>
John C. Lucy, III 40 Chairman of the Board and Chief Executive
Officer
Zachary M. Richardson 44 President and Director
David Shumate 52 Executive Vice President and Secretary
Arthur P. Caltrider 64 Senior Vice President
Bruce Antenberg 60 Director
John C. Lucy, Jr. 64 Director
Donald Radcliffe 54 Director
David Sass 63 Director
</TABLE>
John C. Lucy, III joined Abell on a full-time basis in 1980 after
graduating from Virginia Tech with BS in business. Mr. Lucy has served as
Chairman and CEO of the Pallet Management since 1995. In addition to being
Chairman and CEO, he is President of Clary, a hardwood lumber sawmill located in
Gaston, North Carolina, and is Vice-President of Blacksburg Enterprises, Inc.,
which operates Baskin-Robbins and Sub-Station II franchises in Blacksburg,
Virginia. Mr. Lucy has completed a two year term as Chair of the National Wooden
Pallet and Container Association ("NWPCA") Military Packing Task Force and three
years as Chair of its Research Steering Committee. He was elected Chairman and
CEO of the Company on June 30, 1995. See "Certain Transactions."
Zachary M. Richardson has been President of the Company since 1994,
when Pallet Recycling Technologies, Inc. (PRTI) acquired the company in a
reverse acquisition. Mr. Richardson was president and founder of PRTI and has
been involved in the pallet industry since 1991 with over 23 years of management
and sales experience. After graduating from Franklin and Marshall College in
1977, he was commissioned in the United States Navy and designated a Naval
Aviator. On active duty for eight years he maintained his reserve status in the
Navy until his retirement from the reserves in 1997. Mr. Richardson is an active
member of the NWPCA and serves on the association's Recyclers Council Executive
Committee, which deals with national issues, related to pallet recycling.
David Shumate has been Executive Vice President for operations, sales
and marketing, customer service and information technology since February 1999.
Prior to joining Pallet Management Systems Inc. Mr. Shumate was Senior Vice
President for Distributor Sales and Customer Service at CHEP. Mr. Shumate has
had extensive experience in general management with such companies as Chemlawn,
the national lawn care service company where he was General Manager for North
28
<PAGE>
America; Group Vice President and General Manager for Purolator Courier and as
President and COO for Chemserve Environmental Company. Mr. Shumate has also
served on active duty for 10 years with the US Army and 17 years in the
reserves. He retired in 1995 after 27 years of service as a Lieutenant Colonel.
Mr. Shumate is a graduate of the University of Vermont.
Arthur P. Caltrider joined the Company in June 1999 when The Nelson
Company was acquired. He resigned as director on October 1, 1999 and will rejoin
the board upon the completion of the Nelson acquisition. He joined The Nelson
Company in 1958 and has his BS in Business from Johns Hopkins University. He
became president of the Nelson Company in 1969 and led a management buy-out from
Allegheny International in 1980. In 1997 he became sole owner. He has been a
leader in the pallet industry as President of the National Wooden Box
Association (1976 - 1978) and as Senior Vice President and on the Board of
Directors of the National Wooden Pallet and Container Association (1985 - 1987).
Bruce Antenberg was appointed to the board in June 1999. From 1986 to
1997 he was senior vice president finance & treasurer of Great Western Financial
Corporation, a $45 Billion national Savings & Loan. He managed a 40 plus person
department with the following major responsibilities: asset liability
management, cash management, treasury accounting, wire transfer department, $ 2
billion investment portfolio, raised all the capital & and debt for Great
Western ($45+ billion in assets) and Aristar ($2 billion in assets), insurance
risk management, management of a $220 billion pension plan through J.P. Morgan,
and managed all the investment banking relationships and bank relationships.
Prior to this position, he was senior vice president finance & treasurer of
Aristar, Inc., a $1 billion corporation. His prior work history also includes
Tax Manager for Kentucky Fried Chicken, Tax Manager for Marriott Corp., and
Internal Revenue Agent for the Internal Revenue Service. He graduated from Ohio
University in 1960 with a B.S. in Commerce.
John C. Lucy, Jr. founded Abell in 1966 after having worked in a family
lumber and pallet manufacturing business for approximately ten years. In 1969,
he acquired Clary to supply lumber to Abell, and remains its chairman. In 1976,
he acquired Shelbyville Enterprises, which operated a motel/restaurant in
Shelbyville, Tennessee and was sold in 1996. In 1980 he formed Blacksburg
Enterprises to operate food service operations in Blacksburg, Virginia.
Donald Radcliffe has been a director of the Company since 1985. Since
1984, Mr. Radcliffe has served as the Chief Operating Officer, Executive Vice
President and Director of WorldWide Business Centers, a company, which provides
businesses with office space and facilities. From 1970 through 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 1982. He is also a director of SVI Systems,
Inc., an American Stock Exchange Company, and Complete Wellness Centers, Inc., a
Nasdaq company. Mr. Radcliffe is a certified public accountant in the State of
New York.
David W. Sass was appointed a director in July 1998. Mr. Sass has, for
the past 38 years, been a practicing attorney in New York City and is currently
a senior partner in the law firm of McLaughlin & Stern, LLP. Mr. Sass is a
director of BarPoint.com, Inc., a company that will operate a patent pending
search engine and software technology that allows consumers to use the standard
UPC barcode to search for products specific information on the internet; a
director of Genisys Reservation Systems, Inc., a company engaged in the internet
business travel; an officer of Westbury Metals Group, Inc., a company engaged in
29
<PAGE>
the refining of precious metals; an officer of Pioneer Commercial Funding Corp.,
a company engaged as a mortgage warehouse lender providing short term financing
to mortgage bankers and a member and Vice Chairman of the Board of Trustees of
Ithaca College.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and on representations that no other
reports were required, there were no reports required under Section 16(a)
("Section 16(a)") of the Securities Exchange Act of 1934, which were not timely
filed during fiscal 1999.
Item 10. Executive Compensation
----------------------
The following table summarizes all compensation accrued by the Company
in each of the last three fiscal years for the Company's executive officers
serving as such whose annual compensation exceeded $100,000.
<TABLE>
<CAPTION>
Long Term
Name and Annual Compensation Compensation
Principal Position Year Salary($)(1)(2) Bonus Other(3) Options
-------------------------- ---- ------------------- ------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Zachary M. Richardson, 1999 119.000 0 13,200 79,890
President, and Director 1998 58,104 0 0 69,000
1997 57,480 0 0
John C. Lucy, III 1999 119,000 0 25,200 79,890
Chairman of the Board and 1998 58,546 0 0 69,000
Chief Executive Officer 1997 56,883 0 0
</TABLE>
- --------------
(1) Includes medical insurance reimbursements.
(2) Messrs. Lucy and Richardson annual salaries were reduced from
$95,000 to $52,000 in June 1996. In July 1998, their salaries were
restored to their $95,000 contracted amount. This was not made
retroactive. In November, they entered into new employment agreement
with a base salary of $156,000.
(3) Includes car allowances and other miscellaneous benefits.
The following table sets forth information concerning individual grants
of stock options made during the fiscal year ended December 31, 1995 to each of
the Named Executive Officers:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
Number of Shares % of Total Options Exercise or
Underlying Options Granted to Employees Base Price Expiration
Name Granted(#)(1) in Fiscal Year ($/Share) Date
- ---- ------------- -------------------- --------- ----------
<S> <C> <C> <C> <C>
John C. Lucy, III 79,890 26% 5.00 8/26/08
Zachary M. Richardson 79,890 26% 5.00 8/26/08
</TABLE>
30
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number Of Value Of
Securities Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options Options
On Value At FY-End (#) At FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
---- --- --- ------------- -------------
<S> <C> <C> <C> <C>
John C. Lucy, III - - 421,790/91,400 $1,441,275/$52,350
Zachary M. Richardson - - 421,790/91,400 $1,441,275/$52,350
</TABLE>
Employment Agreements
Effective November 1, 1998 the Company entered into new identical
employment agreements with John C. Lucy, III and Zachary M. Richardson. Pursuant
to the terms of these five-year agreements, each executive is entitled to
receive (i) annual base compensation of $156,000, which increases in future
years by the percentage increase of the Consumer Price Index and (ii) a bonus up
to 100% of base salary based on the increase in pretax earnings per share over
the prior year. The agreement also provides for annual grants of stock options
commencing in fiscal 2000 equal to 1% of the then outstanding number of shares
at the then fair market value and the granting of 150,000 stock appreciation
rights that vest only upon a "Change of Control" as defined in the Agreements.
During the term of the Agreements should there be a Change of Control
of the Company, as that term is defined in the Agreements, the Company at its
sole option may terminate the Agreements upon 30 days prior written notice and
thereafter will be obligated to pay the executive the balance of the
compensation payable under the Agreement had it not been terminated prior to its
expiration, together with an additional sum equal to 299% of Executive's annual
base compensation. The Agreement also contains noncompetition and
confidentiality provisions.
In January 1999, the Company entered into an Understanding of
Compensation with David Shumate. Pursuant to this arrangement, Mr. Shumate is
paid at a weekly rate of $3,000 and is entitled to a bonus based on the
Company's pretax earnings. Mr. Shumate was also granted options to purchase
20,000 shares of Common Stock and 25,000 stock appreciation rights that vest
only upon a "Change of Control." Mr. Shumate's employment may be terminated by
the Company at any time with or without cause without any payment by the
Company.
No compensation was paid to any director for his services during fiscal
1998 or prior years. In July 1998 the board of directors authorized compensation
of $1,000 per Director for each board meeting and $500 for special conference
telephone meetings. Pallet Management also reimburses directors for travel
expenses for attendance at each meeting of the Board. Starting in fiscal year
2000, directors are paid a monthly retainer of $500, a payment of $1,000 per
board meeting and $500 per teleconference meeting. All directors are granted
5,000 three-year options on the first day of each fiscal year at 10% above the
then market value. These options vest in one year.
31
<PAGE>
Stock Option Plans
Pallet Management has adopted two combined stock option and
appreciation rights plans 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 nonstatutory
options. 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. The 1997 Omnibus Stock Option Plan (the "1997 Plan") was approved
in August, 1997. Pallet Management's 1998 Omnibus Stock Option Plan (the "1998
Plan") became effective on September 1, 1998. An aggregate of 250,000 shares is
reserved for issuance under the 1997 Plan and 1,000,000 shares are reserved for
issuance under the 1998 Plan, subject to approval by the shareholders of an
increase from 500,000 to 1,000,000 shares.
As of August 25, 1999, an aggregate of 224,406 options were outstanding
under the 1997 Plan with exercise prices of $2.00 and $2.50 and an aggregate of
322,780 options were outstanding under the 1998 Plan with exercise prices of
$5.00 to $8.00. These options vest immediately to over a five-year period and
expire from two years to ten years.
297,780 of the options granted were granted to Mr. Lucy, III and Mr. Richardson.
The Plans provide for a combined stock option and appreciation rights
plan. The Plans provides for options which will qualify as incentive stock
options under Section 422(a) of the Internal Revenue Code of 1986, as amended,
as well as for options which do not so qualify.
Incentive Awards may be granted under the Plans in the form of Options,
Stock Appreciation Rights, Restricted Stock, and Performance Awards.
The Board may terminate the Plan or may amend the Plan in such
respects, as it shall deem advisable. The Board may unilaterally amend the Plan
and Incentive Awards as it deems appropriate o ensure compliance with Rule 16b-3
and to cause Incentive Awards to meet the requirements of the Code, including
Code section 422, and regulations thereunder.
No more than 50,000 shares may be allocated to Incentive Awards and no
more than 300,000 shares may be allocated to Non-Incentive Awards granted to any
one Employee during a single calendar year.
All present and future employees of the Company or of any parent or
subsidiary of the Company ("Employee") and any person retained to provide
services to the Company (other than as an Employee, a member of the Board of
Directors or a member of the board of directors of any subsidiary or parent of
the Company), and who is selected by the committee to be eligible to receive
Incentive Awards under the Plan ("Selected Advisors").
All present and future Non-Employee Directors are eligible to receive
Non-Statutory Options") under the Plan. Non-Employee Directors shall not be
entitled to receive any other form of Incentive Award under the Plan.
32
<PAGE>
The exercise price of shares of Company Stock covered by an Incentive
Stock Option cannot be less than 100% of the fair market value of such shares on
the date of grant; provided that if an Incentive Stock Option is granted to an
Employee who, at the time of the grant, is a 10% Shareholder, then the exercise
price of the shares covered by the Incentive Stock Option will not less than
110% of the fair market value of such shares on the date of grant. The exercise
price of Nonstatutory Stock Options will not less than 85 % of fair market value
of such shares on the date of grant.
Whenever the Committee deems it appropriate, Stock Appreciation Rights
may be granted in connection with all or any part of an Option, either
concurrently with the grant of the Option or, if the Option is a Nonstatutory
Stock Option, by an amendment to the Option at any time thereafter during the
term of the Option. Stock Appreciation Rights may be exercised in whole or in
part at such times and under such conditions as may be specified by the
Committee in the participant's stock option agreement.
Accelerated Options
In August 1997, 1,000,000 options were granted to Messrs. Lucy and
Richardson that vested over four years commencing in August 1999. Messrs. Lucy
and Richardson immediately allocated approximately one-third of these options to
other members of the Company's management. The options provided that vesting
would accelerate if the Company achieved specified income before taxes,
depreciation, amortization and certain other charges ("Adjusted Income") at
different measurement dates. The milestones were determined based on
management's internal projections through fiscal 1999. All three milestones were
met and the options vested according to the accelerated schedule.
The following table summarizes the terms of these options.
Name Exercise Price Vested
---- -------------- ------
John C. Lucy, III $1.50 136,400
$1.75 108,400
$2.25 119,500
Zachary M. Richardson $1.50 136,400
$1.75 108,400
$2.25 119,500
Other Employees $1.50 127,200
$1.75 83,200
$2.25 61,000
----------
1,000,000
==========
33
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth, as of the close of business on
September 15, 1999 (a) the name, address and number of shares of each person
known by the Company to be the beneficial owner of more than 5% of the Company's
Common Stock and (b) the number of shares of Common Stock owned by each director
and all officers and directors as a group, together with their respective
percentage holdings of such shares:
<TABLE>
<CAPTION>
Amount of
Name and Beneficial
Address of Ownership of
Beneficial Owner(1) Stock %
------------------------------------------------ ------------------------- -------
<S> <C> <C>
John C. Lucy, III 669,631(2) 14.5
Zachary M. Richardson 670,769(3) 14.5
John C. Lucy, Jr. 783,802(4) 18.0
Arthur P. Caltrider 145,000(5) 3.6
Donald Radcliffe 25,250(6) *
David Sass 5,250(7) *
Bruce Antenberg 34,000(9) *
All Officers and Directors 2,237,450 40.6
as a Group (six persons)
</TABLE>
* Less than 1%
(1) The address of all persons listed above is Suite 305, One Ocean
Boulevard, Boca Raton, Florida 33432.
(2) Includes 113,097 shares owned by Mr. Lucy and his children and options to
acquire 556,534 shares.
(3) Includes 108,204 shares and options to acquire 562,566 shares.
(4) Includes 450,696 shares owned by Mr. Lucy, 50,000 shares owned by Clary and
options to acquire 283,106 shares.
(5) Includes 135,000 shares of stock and 10,000 options to purchase stock.
(6) Includes 5,250 shares and options to acquire 20,000 shares.
(7) Includes options to acquire 5,250 shares.
(8) Includes 4,000 shares and options to purchase 30,000 shares
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
Clary, which is owned by the family of John C. Lucy, Jr., a Director and
principal shareholder of the Company, sold $2,359,000 of pallets and lumber and
$2,895,000 of lumber to the Company during the fiscal years 1999 and 1998,
respectively. Lumber purchases from Clary amounted to 8% and 22% of the
Company's lumber purchases for fiscal years 1999 and 1998, respectively. Pallet
Management believes that these transactions were made at or below market prices
in the ordinary course of business. Clary had loaned the Company money for
working capital during fiscal 1998, all of which has been repaid. Pallet
Management paid Clary approximately $76,000 in salary and related tax
reimbursement for compensation to John C. Lucy III, who performs services for
both Clary and the Company.
34
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Stock Purchase Agreement among Pallet Management,
The Nelson Company and Arthur P. Caltrider (1)
3.1 Articles of Incorporation (2)
3.2 Amendment to Articles of Incorporation filed June 7, 1985. 21)
3.3 Amendment to Articles of Incorporation filed July 10,1985. (2)
3.4 Amendment to Articles of Incorporation filed October 12, 1994. (2)
3.5 Amendment to Articles of Incorporation filed November 21, 1994. (2)
3.6 Amendment to Articles of Incorporation filed February 3, 1998. (3)
3.7 Amended and Restated By-Laws. (2)
4.1 Specimen Certificate of Common Stock. (2)
10.1 1997 Omnibus Stock Plan (4)*
10.2 Employment Agreement between the Company and John C. Lucy, III (6)*
10.3 Employment Agreement between the Company and Zachary M. Richardson (6)*
10.4 Understanding of Compensation with David Shumate (6)*
10.5 1998 Omnibus Stock Plan (5)*
10.6 Employment Agreement between the Company and Arthur P. Caltrider (1)*
10.7 Loan Agreement among National Bank of Canada, the Company and its subsidiaries
21.1 Subsidiaries (2)
27.1 Financial Data Schedule
</TABLE>
35
<PAGE>
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated August 18,1999.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996
(3) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (file number 46245)
(4) Incorporated by referenced to the Annual Report on Form 10-K for the fiscal
year ended June 30, 1998
(5) Incorporated by reference to the Registrant's Proxy Statement filed
November 30, 1998
(6) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the period ended December 26, 1998
*Management compensation plan or arrangement
(b) Pallet Management did not file any Reports on Form 8-K during the fourth
quarter of the year ended June 26, 1999.
36
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has caused its Annual Report on Form 10-KSB to be signed
on its behalf by the undersigned, thereunto duly authorized.
PALLET MANAGEMENT SYSTEMS, INC.
Date: October 6, 1999 By: /s/ Zachary M. Richardson
-------------------------
Zachary M Richardson, President
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John C. Lucy, III Chairman of the Board October 6, 1999
----------------------- and Chief Executive Officer
John C. Lucy, III
/s/ Zachary M.Richardson President and Director October 6, 1999
----------------------- (Principal Financial
Zachary M. Richardson and Accounting Officer)
/s Bruce Antenberg Director October 6, 1999
-----------------------
Bruce Antenberg
/s/ Donald Radcliffe Director October 6, 1999
-----------------------
Donald Radcliffe
/s/ David W. Sass Director October 6,, 1999
------------------
David W. Sass
</TABLE>
37
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Pallet Management Systems, Inc.
We have audited the accompanying consolidated balance sheet of Pallet Management
Systems, Inc. and Subsidiaries as of June 26, 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for the years (52
weeks) ended June 26, 1999 and June 27, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pallet Management
Systems, Inc. and Subsidiaries as of June 26, 1999, and the results of their
operations and their cash flows for the years (52 weeks) ended June 26, 1999 and
June 27, 1998, in conformity with generally accepted accounting principles.
KAUFMAN, ROSSIN & CO.
Miami, Florida
August 6, 1999 (Except for note Q, as to which date is October 1, 1999)
F - 1
<PAGE>
<TABLE>
<CAPTION>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 26, 1999
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 262,117
Accounts receivable, net of allowance for doubtful accounts of $5,000 2,652,599
Inventories 1,866,495
Prepaid expenses 156,421
---------------
Total current assets 4,937,632
Property, plant and equipment - net 4,259,038
Other assets 1,008,336
---------------
Total assets $ 10,205,006
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 252,295
Current portion of capital lease obligations 52,046
Accounts payable 1,123,515
Accrued liabilities 513,655
---------------
Total current liabilities 1,941,511
---------------
LONG-TERM LIABILITIES
Long-term debt 2,931,665
Capital lease obligations 187,913
---------------
Total long-term liabilities 3,119,578
---------------
Total liabilities 5,061,089
---------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 7,500,000 shares at $.001 par
value; no shares issued and outstanding -
Common stock, authorized 100,000,000 shares at $.001 par
value; issued and outstanding 3,917,612 shares 3,918
Additional paid-in capital 6,958,704
Accumulated deficit (1,829,189)
Accumulated other comprehensive income 10,484
---------------
Total stockholders' equity 5,143,917
---------------
Total liabilities and stockholders' equity $ 10,205,006
===============
</TABLE>
The accompanying notes are an integral part of these statements.
F - 2
<PAGE>
<TABLE>
<CAPTION>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years (52 weeks) Ended June 26, 1999 and June 27, 1998
1999 1998
----------------- ---------------
<S> <C> <C>
Net sales $ 38,744,129 $ 23,214,020
Cost of goods sold 35,012,585 20,818,052
-------------- -------------
Gross profit 3,731,544 2,395,968
Selling, general and administrative expenses 2,944,355 1,869,470
-------------- -------------
Operating income 787,189 526,498
-------------- -------------
Other income (expense)
Other income 64,521 11,404
Other expense (335,562) (385,782)
--------------- --------------
Other income (expense) (271,041) (374,378)
--------------- --------------
Income before income taxes 516,148 152,120
Income tax benefit 21,381 39,507
-------------- -------------
Net income $ 537,529 $ 191,627
============== =============
Earnings per common and common equivalent share:
Basic $ .15 $ .12
============== =============
Diluted $ .11 $ .05
============== =============
Shares used in computing earnings per common and common equivalent share:
Basic 3,582,195 1,646,791
============== =============
Diluted 4,788,764 4,070,901
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years (52 weeks) Ended June 26, 1999 and June 27, 1998
Retained Accumulated
Common Stock Additional Earnings Other
------------------------------- Paid-In (Accumulated Comprehensive
Shares Amount Capital Deficit) Income (1) Total
------------- ----------------- ---------------- ----------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 1,212,534 $ 1,213 $ 2,825,005 ($2,558,345) $ - $ 267,873
Issuance of common stock and 500,000 500 832,500 - - 833,000
warrants
Common stock and warrants issue - - (96,694) - - (96,694)
costs
Exercise of options and warrants 629,500 629 965,529 - - 966,158
Unrealized gain on - - - - 13,477 13,477
available-for-sale investments
Net income - - - 191,627 - 191,627
------------------------------------------------------------------------------------------------
Balance at June 27, 1998 2,342,034 2,342 4,526,340 (2,366,718) 13,477 2,175,441
Exercise of options and warrants 1,575,578 1,576 2,302,364 - - 2,303,940
Options issued for services - - 130,000 - - 130,000
Unrealized loss on - - - - (2,993) (2,993)
available-for-sale investments
Net income - - - 537,529 - 537,529
------------------------------------------------------------------------------------------------
Balance at June 26, 1999 3,917,612 $ 3,918 $ 6,958,704 ($1,829,189) $ 10,484 $ 5,143,917
------------------------------------------------------------------------------------------------
</TABLE>
(1) Consisting of unrealized gains on available-for-sale securities.
The accompanying notes are an integral part of these statements.
F - 4
<PAGE>
<TABLE>
<CAPTION>
Pallet Management Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years (52 weeks) Ended June 26, 1999 and June 27, 1998
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 537,529 $ 191,627
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 524,371 413,287
Issuance of stock options for services 130,000 -
Gain on sale of property, plant and equipment (29,826) -
Bad debt expense 6,857 9,565
(Increase) decrease in operating assets:
Accounts receivable (967,629) 23,765
Inventories (691,149) (272,950)
Prepaid expenses (690) (57,652)
Income tax receivable - -
Other assets (969,757) 11,371
Increase (decrease) in operating liabilities:
Accounts payable 529,991 (621,554)
Accrued liabilities 106,896 (177,206)
Deferred income taxes (31,381) (39,507)
-------------- -------------
Net cash used in operating activities (854,788) (519,254)
-------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (1,661,323) (506,357)
Proceeds from sale of property, plant and equipment 65,712 -
------------- ------------
Net cash used in investing activities (1,595,611) (506,357)
-------------- -------------
Cash flows from financing activities:
Repayments under line of credit, net (171,998) (165,480)
Proceeds from lenders 1,433,193 900,000
Repayments to lenders (1,253,785) (1,247,654)
Issuance of stock and warrants - 736,306
Exercise of options and warrants 2,303,940 966,158
------------- ------------
Net cash provided by financing activities 2,311,350 1,189,330
------------- ------------
Increase (decrease) in cash (139,049) 163,719
Cash at beginning of period 401,166 237,447
------------- ------------
Cash at end of period $ 262,117 $ 401,166
============= ============
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 315,803 $ 393,604
============= ============
Income taxes $ - $ -
============= ============
</TABLE>
Schedule of non-cash investing and financing activities:
Capital lease obligations of $191,024 and $92,995 were incurred during the
years ended June 26, 1999 and June 27, 1998, respectively.
The accompanying notes are an integral part of these statements.
F - 5
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows:
1. Nature of Operations
Pallet Management Systems, Inc. and Subsidiaries (the "Company"/"Pallet") is
principally engaged in the manufacture and repair of wooden pallets in
Florida, Virginia, Alabama, Illinois and Indiana. The Company's revenues are
derived primarily from the sale of new and used pallets.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries Pallet Recycling Technology,
Inc. ("PRTI"), Abell Lumber, Inc. ("Abell"), Pallet Systems-Lakeland, FL,
Inc., Pallet Management Systems of Alabama, Inc., Pallet Management Systems
of Illinois, Inc. and Pallet Management Systems of Indiana, Inc.
Intercompany balances and transactions are eliminated in consolidation.
3. Accounts Receivable
Trade receivable accounts are principally comprised of amounts due from
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 7 - 40
Furniture and equipment 5 - 10
F - 6
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
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 $592,000 at
June 26, 1999, which is completely offset by a valuation allowance.
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 modified.
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
Basic earnings per common and common equivalent share is computed using the
weighted average number of shares outstanding during the period. Diluted
earnings per common and common equivalent share is computed using the
weighted average number of shares outstanding during the period adjusted for
incremental shares attributed to outstanding options and warrants to
purchase common stock of 1,206,569 and 2,424,110 for the years ended June
26, 1999 and June 27, 1998, respectively. In addition to the options
discussed in Note M, the Company had approximately 143,000 warrants
outstanding to purchase common stock at $2.00 per share. The warrants expire
December 31, 2001.
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.
F - 7
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. Stock Options (SFAS 123)
Options granted to employees under the Company's Stock Option Plan are
accounted for by using the intrinsic method under APB Opinion 25, Accounting
for Stock Issued to Employees (APB 25). In October 1995, the Financial
Accounting Standards Board issued Statement No. 123, Accounting for
Stock-Based Compensation (SFAS 123), which defines a fair value based method
of accounting for stock options. The new accounting standards prescribed by
SFAS 123 are optional and companies may continue to account for stock
options under the intrinsic value method specified in APB 25. The Company
intends to continue with its current method of accounting under APB 25 for
employees, however, pro forma disclosures of net earnings and earnings per
share have been made in accordance with SFAS 123.
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.
13. Impact of the "Year 2000" Computer Issue
Because computers frequently use only two digits to recognize years, on
January 1, 2000, many computer systems, as well as equipment that uses
embedded computer chips, may be unable to distinguish between the years 1900
and 2000. If not remediated, this problem could create system errors and
failures resulting in the disruption of normal business operations. In the
event the Company fails to identify or correct a material Year 2000 problem,
there could be disruptions in normal business operations, which could have a
material adverse effect on the Company's results of operations, liquidity or
financial condition. Further, there may be some third parties, such as
governmental agencies, utilities, telecommunication companies, vendors,
suppliers and customers who may not be able to continue business with the
Company due to their own Year 2000 problems. Also, risks associated with
some foreign third parties may be greater since there is general concern
that some entities operating outside the United States are not addressing
Year 2000 issues on a timely basis. There can be no assurance that any
efforts made will fully mitigate the effect of Year 2000 issues.
14. Comprehensive Income
Comprehensive income is not reported in the accompanying consolidated
financial statements as it is not materially different from net income.
F - 8
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
NOTE B - INVENTORIES
Inventories consisted of the following at June 26, 1999:
Raw materials $ 999,993
Work in process 640,274
Finished goods 226,228
---------------
$ 1,866,495
===============
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at June 26, 1999:
Machinery and equipment $ 4,795,347
Building and improvements 1,663,435
Vehicles 688,794
Furniture and equipment 313,387
Land 136,044
---------------
7,597,007
Less: accumulated depreciation
and amortization 3,337,969
---------------
$ 4,259,038
===============
Depreciation and amortization expense was $524,371 and $413,287 in 1999 and
1998, respectively, and is included in "cost of goods sold" and "selling,
general and administrative" expenses in the accompanying consolidated
financial statements. Property, plant and equipment at June 26, 1999
included assets recorded under capital leases and related accumulated
amortization of approximately $284,000 and $26,000, respectively.
Amortization expense related to assets under capital leases was
approximately $23,000 and $3,000 in 1999 and 1998, respectively.
NOTE D - OTHER ASSETS
Other assets consisted of the following at June 26, 1999:
Deposits on machinery $ 428,362
Software costs - in process 149,803
Security deposits 140,720
Notes receivable 84,025
Other 205,426
---------------
$ 1,008,336
===============
F - 9
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
NOTE E - INCOME TAXES
The income tax benefit consisted of the following:
<TABLE>
<CAPTION>
Years Ended
----------------------------------
June 26, 1999 June 27, 1998
--------------- -------------
<S> <C> <C>
Current:
Federal $ - $ -
State 10,000 -
------------- -------------
10,000 -
------------- -------------
Deferred:
Federal (29,812) (35,696)
State (1,569) (3,811)
------------- -------------
(31,381) (39,507)
------------- -------------
($21,381) ($39,507)
============= =============
</TABLE>
Deferred income taxes were recognized in the consolidated balance sheet at
June 26, 1999 due to the tax effect of temporary differences and loss
carryforwards as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 812,151
Other 21,300
---------------
833,451
Deferred tax liabilities:
Depreciation 241,109
---------------
Net deferred tax asset 592,342
Less valuation allowance 592,342
---------------
$ -
===============
</TABLE>
The major elements contributing to the difference between the income tax
benefit and the amount computed by applying the federal statutory tax rate
of 34% to income before income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
June 26, 1999 June 27, 1998
---------------- ----------------
<S> <C> <C>
Statutory rate $ 175,490 $ 51,721
State income taxes 30,205 6,514
Decrease in valuation allowance ( 245,279) ( 122,329)
Permanent differences and other 18,203 24,587
---------------- ---------------
( $ 21,381) ( $ 39,507)
================ ===============
</TABLE>
As of June 26, 1999, the Company had net operating loss carryforwards of
approximately $2,158,000 which expire in various years through June 2012.
Approximately $976,000 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 26, 1999 and June 27, 1998
<TABLE>
<CAPTION>
NOTE F - LONG-TERM DEBT
<S> <C>
$5,000,000 revolving credit agreement with a bank. Interest is paid monthly at the bank's
prime rate (7.75% at June 26, 1999). Principal is due on demand. The line is
collateralized by substantially all the assets of the Company, excluding real estate, and
expires in April 2002. Advances are based on 85% of eligible accounts receivable and 55%
of eligible inventories, as defined. $ 1,409,364
Bank note payable in monthly installments of $11,905 plus interest at the bank's prime rate
plus .25% (8.00% at June 26, 1999) through April 2006. The note is collateralized by
substantially all the assets of the Company, excluding real estate. 988,095
Bank note payable with interest only payable monthly at the bank's prime rate plus .25%
(8.00% at June 26, 1999) through April 2000 and monthly installments of $5,794 plus
interest at the bank's prime rate plus .25% thereafter, through April 2006. The note is
collateralized by substantially all the assets of the Company, excluding real estate.
Maximum borrowings under this agreement are $4,000,000. 417,176
Note payable in monthly installments of $5,327, plus interest at 10.25%. Final payment due
November 2001, collateralized by various machinery and equipment. 135,548
Industrialized development notes payable in quarterly installments of $3,381, including
interest at 5.25%, maturing October 2017 and uncollateralized. 156,368
Bank notes payable in monthly installments ranging from $371 to $594, including interest
ranging from 10% to 16%, collateralized by equipment and vehicles, maturing at various
dates through May 2001. 31,607
Notes payable in monthly installments of $440 to $3,343, including interest ranging from 8%
to 16%, collateralized by equipment and vehicles, maturing at various dates through August
2001. 45,802
-------------
Total debt 3,183,960
Less: current maturities of long-term debt 252,295
-------------
Long-term debt $ 2,931,665
=============
</TABLE>
Interest expense for the years ended June 26, 1999 and June 27, 1998
amounted to $332,818 and $385,782, respectively, and is included in other
expense in the accompanying consolidated statements of income.
Scheduled maturities of long-term debt for years subsequent to June 26, 1999
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $ 252,295
2001 298,943
2002 1,655,143
2003 218,478
2004 218,813
Thereafter 540,288
-------------
$ 3,183,960
=============
</TABLE>
F - 11
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
NOTE G - CAPITAL LEASE OBLIGATIONS
Minimum future annual lease payments under capital leases as of June 26,
1999, in the aggregate, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $ 68,370
2001 68,370
2002 68,370
2003 61,629
2004 13,111
-------------
Total minimum future lease payments 279,850
Less: imputed interest 39,891
-------------
Present value of future minimum lease payments 239,959
Less: current portion of capital lease obligations 52,046
-------------
Long-term portion of capital lease obligations $ 187,913
=============
</TABLE>
<TABLE>
<CAPTION>
NOTE H - ACCRUED LIABILITIES
Accrued liabilities consisted of the following at June 26, 1999:
<S> <C>
Accrued compensation $ 185,157
Other accrued liabilities 328,498
-------------
$ 513,655
=============
</TABLE>
<TABLE>
<CAPTION>
NOTE I - COMMITMENTS
1. Operating Leases
The Company leases manufacturing facilities, 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:
<S> <C> <C>
2000 $ 1,095,004
2001 1,117,863
2002 939,860
2003 897,086
2004 634,643
Thereafter 40,000
-------------
Total $ 4,724,456
=============
</TABLE>
Total rent expense was approximately $530,000 and $471,000 for the years
ended June 26, 1999 and June 27, 1998, respectively.
F - 12
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
NOTE I - COMMITMENTS (Continued)
2. Purchase of Machinery
During the year ended June 26, 1999, the Company entered into various
agreements for the purchase of machinery in the aggregate of approximately
$2,300,000. Deposits paid on the machinery amounted to approximately
$428,000 during the year. This amount is included in other assets on the
accompanying consolidated balance sheet. The Company is committed under
these agreements to pay approximately $1,872,000 during the next fiscal
year.
NOTE J - RELATED PARTY TRANSACTIONS
The Company paid approximately $76,000 and $63,000, during the years ended
June 26, 1999 and June 27, 1998, respectively, to Clary Lumber Co. (Clary),
an entity owned by an officer and directors of the Company, for compensation
of certain employees who perform services for both Clary and the Company.
The Company purchased approximately $2,358,938 of lumber and pallets and
$2,771,000 of lumber from Clary during the years ended June 26, 1999 and
June 27, 1998, respectively. Lumber purchases from Clary amounted to
approximately 8% and 22% of the Company's lumber purchases for the years
ended June 26, 1999 and June 27, 1998, respectively.
NOTE K - EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment agreements with two senior executives that
provide for, among other things, annual compensation totaling $312,000, a
bonus based on diluted earnings per share, stock appreciation rights to vest
upon a change of control, as defined, and stock options to be granted
annually. The agreements are cancellable by the Company upon 30 days written
notice to the executives and payment of requisite compensation and expire on
October 31, 2003.
NOTE L - STOCKHOLDERS' EQUITY
1. Stock Split
In February 1998, the Company effected a one-for-four reverse stock split.
All stock data and per share amounts in the consolidated financial
statements have been restated to give effect to the stock splits.
2. Private Placement Offering
In November 1997, the Company completed a Private Placement Offering (the
Offering) for 1,000,000 units for $1 per unit. Each unit consisted of one
half of a share of common stock and warrants, exercisable for two years, to
purchase two shares of common stock for $1.50 and $1.75, respectively. After
expenses of the Offering, including commissions and professional fees,
proceeds to the Company were $736,306. On October 1, 1998, the Company
redeemed all outstanding warrants.
F - 13
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
NOTE M - STOCK BASED COMPENSATION
In April 1997 and September 1998, the Company established Stock Option Plans
which authorize the Company to issue options to employees, directors and
outside consultants of the Company. The issuance and form of the options
shall be at the discretion of the Company's board of directors, except that
the exercise price may not be less than 85% of the fair market value at the
time of grant. The options vest over a four year period and expire in ten
years or three months after separation of service, whichever occurs earlier.
In August 1997, the Company granted options to purchase 1,000,000 shares of
common stock to the principal officers of the Company. The officers
allocated approximately one-third of these options to Company management.
The options, which expire in June 2004, became exercisable as of June 26,
1999 as certain performance goals were achieved which accelerated vesting.
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25") in accounting for its
employees stock options. Under APB 25, because the exercise price of the
Company's employee stock options issued was greater than the market price of
the underlying stock on the date of grant, no compensation expense was
recognized.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-based Compensation," ("SFAS No. 123") requires the Company to provide
proforma information regarding net income (loss) and earnings (loss) per
common share as if compensation cost for the Company's Stock Option plan had
been determined in accordance with the fair value based method prescribed in
SFAS No. 123. The Company estimated the fair value of each stock option on
the date of grant by using the Black-Scholes pricing model with the
following assumptions: discount on underlying stock of 50%; expected
volatility of 90%; expected life of the option of 75% of the stated life for
10 year options and the stated life for all others; no dividends; and a risk
free interest rate of 5.5%.
Under the accounting provisions of SFAS No. 123, the Company's net income
and basic and diluted earnings per common and common equivalent share for
the years ended June 26, 1999 and June 27, 1998 would have been $663,274,
$.19 and $.14 and $161,489, $.10 and $.04, respectively.
A summary of the Company's stock option activity, and related information
for the years ended June 26, 1999 and June 27, 1998, is as follows: # of
Weighted Average Options Exercise Price
<TABLE>
<CAPTION>
<S> <C> <C>
Outstanding July 1, 1997 - $ -
Granted 1,233,957 1.84
Exercised 2,850 2.00
Forfeited - -
--------------- ---------------
Outstanding June 27, 1998 1,231,107 $ 1.84
Granted 322,780 5.20
Exercised - -
Forfeited 6,701 2.00
--------------- ---------------
Outstanding June 26, 1999 1,547,186 $ 2.56
=============== ===============
Exercisable at June 26, 1999 1,199,167 $ 2.05
=============== ===============
</TABLE>
F - 14
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
NOTE M - STOCK BASED COMPENSATION (Continued)
The weighted-average fair value of options granted during the years ended
June 26, 1999 and June 27, 1998 was $1.87 and $.06, respectively.
Exercise prices for options outstanding as of June 26, 1999 ranged from
$1.50 to $8.00. The weighted average remaining contractual life of these
options is as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise # of Weighted Average Remaining
Price Options Exercise Price Contractual Life
- --------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
$1.50 - $2.50 1,224,406 $1.86 4.73
$5.00 - $8.00 322,780 $5.20 8.93
</TABLE>
NOTE N - SIGNIFICANT CUSTOMERS
The Company had sales to one significant customer, which represented
approximately 75% and 56% of net sales for the years ended June 26, 1999 and
June 27, 1998, respectively.
At June 26, 1999 three customers accounted for approximately 80% of trade
accounts receivable, with one customer accounting for approximately 45%.
NOTE O - PENSION AND PROFIT SHARING PLAN
The Company has a salary reduction/profit-sharing plan under the provisions
of Section 401(k) of the Internal Revenue Code. The Plan covers all
full-time employees who have completed one year of service with the Company.
The Company's contributions to the plan are made at the discretion of the
Board of Directors and amounted to approximately $23,000 and $14,000 for the
years ended June 26, 1999 and June 27, 1998, respectively.
NOTE P - CONTINGENCY
In June 1999, the Company was named as a co-defendant in a lawsuit whereby
the plaintiff is alleging damages of up to $300,000 related to lost income
from a facility formerly leased to the Company in Jessup, Maryland.
Management believes the claim is without merit and intends to vigorously
contest the claim. The outcome of the action as well as the extent of the
Company's liability, if any, can not be determined at this time.
F - 15
<PAGE>
Pallet Management Systems, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 26, 1999 and June 27, 1998
NOTE Q - SUBSEQUENT EVENTS
1. Pallet Manufacturing Agreement
Effective September 1999, the Company entered into a multi-year pallet
manufacturing agreement with a major customer. In connection therewith, the
Company entered into a non-cancelable operating lease for a facility in
Plainfield, Indiana. The lease provides for monthly rental payments of
$24,204 through December 31, 1999 and $32,070 thereafter until it expires in
September 2004.
2. Acquisition of The Nelson Company
Effective June 27, 1999, the Company acquired all of the outstanding stock
of The Nelson Company (Nelson) for $1,000,000 in cash, $1,000,000 in
promissory notes and 145,000 shares of common stock of the Company. The
promissory notes bear interest at 10% per annum and are due on December 17,
1999. In addition to the purchase price, the Company is required to pay to
the shareholder of Nelson his pro rata share of Nelson's net income for
1999, which is approximately $400,000.
As of October 1, 1999, the $1,000,000 cash portion of the purchase price had
not been paid. The parties are working on a restructuring of the purchase
price and bank financing that will involve the payment of approximately
$1,400,000 of cash and issuance of a $1,000,000 promissory note due in
January 2000. If the restructuring is not completed by October 17, 1999, the
acquisition will be unwound.
3. Stock Options
On June 27, 1999, the Company granted options to employees and directors to
purchase approximately 247,000 shares of common stock.
4. Long-Term Debt Covenants
The revolving credit agreement and bank notes which aggregate $2,814,635 at
June 26, 1999 are subject to certain restrictive covenants. Although the
Company is not in violation of these covenants at June 26, 1999, it is
probable that the Company will fail to meet certain of these covenants at
the September 25, 1999 compliance date. Failure to satisfy future covenants
or obtain a waiver from the lender could result in the loans being demanded
by the lender, which could have a material adverse effect on the Company's
financial position if the Company could not obtain an alternative financing
arrangement with similar terms.
F - 16
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT is made and entered into as of the 22nd day of
April, 1999, by and between PALLET MANAGEMENT SYSTEMS, INC., a Florida
corporation, PALLET RECYCLING TECHNOLOGIES, INC., a Delaware corporation, ABELL
LUMBER CORPORATION, a Virginia corporation d/b/a PALLET MANAGEMENT SYSTEMS,
PALLET MANAGEMENT SYSTEMS OF ALABAMA, INC., an Alabama corporation, and PALLET
MANAGEMENT SYSTEMS OF ILLINOIS, INC., an Illinois corporation (all of the above
set forth entities hereinafter individually and collectively referred to as
"Borrower" or "Borrowers"), and NATIONAL BANK OF CANADA, a Canadian Chartered
Bank (hereinafter referred to as "Lender").
W I T N E S S E T H:
WHEREAS, Borrowers desire to obtain extensions of credit of up to Ten
Million and 00/100 Dollars ($10,000,000.00) from the Lender, consisting of a
revolving line of credit in the principal amount of Five Million and 00/100
Dollars ($5,000,000.00) (the "Loan"), the proceeds of which shall be used to
refinance existing indebtedness and to provide working capital for the support
of accounts receivables and inventory of Borrowers; a term loan in the principal
amount of One Million and 00/100 Dollars ($1,000,000.00) (the "Term Loan"), the
proceeds of which shall be used to finance existing machinery and equipment of
Borrowers; and, a CAPEX line/term loan in the maximum principal amount of Four
Million and 00/100 Dollars ($4,000,000.00) (the "CAPEX Line/Term Loan"), the
proceeds of which shall be used to partially finance future machinery and
equipment expenditures of Borrowers, and Lender is agreeable to effectuating the
Loans (as defined herein) up to such amounts, subject to the terms and
provisions set forth herein.
NOW, THEREFORE, for and in consideration of the sum of Ten and 00/100
($10.00) Dollars and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the loans
or extensions of credit heretofore, now or hereafter made or to be made to or
for the benefit of the Borrower by the Lender, the parties do hereby agree as
follows:
Article 1
RECITALS AND DEFINITIONS
1.1 Recitals. The foregoing recitals are acknowledged by the parties to
be true and correct, and are incorporated herein by reference.
1.2 Definitions. As used in this Agreement, the terms listed below
shall have the following meanings:
(a) "Advance": A disbursement by the Lender of a portion of the Loan
proceeds to refinance existing indebtedness and to provide working capital for
the support of accounts receivables and inventory of the Borrower.
(b) "Agreement" or "Loan Agreement": This Loan Agreement.
-1-
<PAGE>
(c) "Borrowers": PALLET MANAGEMENT SYSTEMS, INC., a Florida
corporation, PALLET RECYCLING TECHNOLOGIES, INC., a Delaware corporation, ABELL
LUMBER CORPORATION, a Virginia corporation d/b/a PALLET MANAGEMENT SYSTEMS,
PALLET MANAGEMENT SYSTEMS OF ALABAMA, INC., an Alabama corporation, and PALLET
MANAGEMENT SYSTEMS OF ILLINOIS, INC., an Illinois corporation.
(d) "Borrower Security Agreement": A Security Agreement from Borrower
to Lender securing the Notes and all other obligations and indebtedness of
Borrower to Lender, which is a valid first lien on all of each Borrower's
accounts, accounts receivable, inventory, chattel paper, general intangibles,
fixtures, furniture, instruments, equipment and personal property now owned or
hereafter acquired by Borrower and all proceeds of the foregoing.
(e) "Borrowers' Counsel Opinion Letter": A letter from Borrowers'
Florida Counsel, a letter from Borrowers' Delaware Counsel, a letter from
Borrowers' Virginia Counsel, a letter from Borrowers' Alabama Counsel and a
letter from Borrowers' Illinois Counsel in form and substance satisfactory to
Lender and Lender's Counsel, opining as to certain matters concerning the Loans.
(f) "Business Days": Days upon which the Lender is open for normal
business.
(g) "CAPEX Line/Term Loan": A CAPEX Line/Term Loan in the principal
amount of up to Four Million and 00/100 Dollars ($4,000,000.00) from Lender to
Borrowers.
(h) "CAPEX Line/Term Note": A CAPEX Line/Term Loan Promissory Note in
the principal amount of Four Million and 00/100 Dollars ($4,000,000.00) from
Borrowers to Lender of even date herewith and any modifications, amendments or
renewals thereof, evidencing the CAPEX Line/Term Loan.
(i) "Cash Collateral Account". A cash collateral account pledged by
Borrower in favor of Lender, into which all collections shall be remitted from a
lockbox account into which Borrowers' account debtors remit all payments, which
collections shall be applied against the Loan, the Term Loan and the CAPEX
Line/Term Loan facility balances in accordance with the terms and provisions of
the Security Cash Collateral Account and Lockbox Agreement. The Borrowers shall
not have access to the Lockbox(s) or the Cash Collateral Account.
(j) "Closing": The time of the execution and delivery of this Agreement
by Borrower and Lender.
(k) "Code": The Internal Revenue Code of 1986, as amended from time to
time, and applicable Department of Treasury regulations thereunder.
(l) "Conversion Date": The 22nd day of April, 2000.
(m) "Credit Facility Letter": That certain credit facility letter dated
April 1, 1999 executed by Lender and Borrowers.
-2-
<PAGE>
(n) "Dollars" or "$": United States Dollars.
(o) "Due Diligence": A due diligence review and investigation of the
Borrowers by the Lender, including without limitation, a field examination of
each Borrower's books and records, as well as its business plans and products,
and, financial projections of Borrower for the term of the Loans, together with
any other matters which Lender wishes to investigate and review, which must
result in findings satisfactory to Lender, in Lender's sole and absolute
discretion.
(p) "Eligible Inventory": All inventory of raw materials and finished
goods then owned by the Borrower and held for sale in the ordinary course of
business as then conducted. However, Eligible Inventory shall not include any
item of inventory that: (i) is not in good condition or of merchantable quality;
(ii) is defective or does not meet the established specifications of the
Borrower for its type; (iii) is obsolete or infrequently sold (unless the
subject of a current purchase order); (iv) together with other items of its type
exceed reasonably expected sales over the next 12 months by more than 50%; (v)
is held by any person other than a Borrower or a party to a bailment agreement
with the Lender (in such form and substance as may be acceptable to the Lender);
(vi) is located at any location other than each Borrower's principal place of
business; (vii) is located on any leased premises where the landlord is not a
party to a waiver and access agreement with the Lender (in such form as may be
acceptable to the Lender); (viii) is located at any location outside the United
States of America; (ix) is subject to any prior lien, encumbrance or claim so
that the Lender does not hold a perfected first priority security interest in
the inventory; (x) is the subject of any financing statement, lien or other
encumbrance other than in favor of the Lender; or (xi) is the subject of any
other person's claim of ownership, whether legal, beneficial or otherwise.
Eligible Inventory shall exclude any inventory on which the Lender, for any
reason, does not hold a perfected security interest subject to no prior liens or
claims. In addition, Lender has the right to deem any inventory as ineligible
for lending purposes if it is not in the Lender's judgment adequately documented
by the Borrower's books and records or if the Lender otherwise deems such
inventory as ineligible for any reason, as determined by Lender in its sole and
absolute discretion.
(q) "Eligible Receivables": Accounts receivable of Borrower which are
accounts receivable arising out of sales of tangible personal property made by
Borrower in the ordinary course of its business, which are no more than sixty
(60) days old from its original due date and no more than ninety (90) days old
from its original invoice date, according to the original terms of sale, and,
the payment of which is not in dispute and in which the Lender has a first
priority security interest; provided however, that if fifty percent (50%) or
more of the Receivables from any account debtor are more than sixty (60) days
old from the original due date and more than ninety (90) days old from the
original invoice date, all of said account debtor's Receivables shall be deemed
ineligible. Notwithstanding the last sentence as to Eligible Receivables, the
Eligible Receivables from Chep only, shall be defined as accounts receivable of
Borrower which are accounts receivable arising out of sales of tangible personal
property made by Borrower in the ordinary course of its business, which are not
more than thirty (30) days old from its original due date and no more than sixty
(60) days old from its original invoice date, according to the original terms of
sale, and, the payment of which is not in dispute and in which the Lender has a
first priority security interest ("Chep Eligible Receivables"); provided
however, that if fifty percent (50%) or more of the Receivables from Chep
-3-
<PAGE>
are more than thirty (30) days old from the original due date and more than
sixty (60) days old from the original invoice date, all of Chep's Receivables
shall be deemed ineligible. The Lender may treat any Receivable as ineligible
(i) if any warranty contained in this or any related agreement is breached with
respect thereto; (ii) if the customer or account debtor has disputed liability
or made any claim with respect to the Receivable or the merchandise covered
thereby or with respect to any other Receivable due from said customer to the
Borrower; (iii) if the customer or account debtor has filed a petition for
bankruptcy or any other application for relief under the Bankruptcy Act,
assigned for the benefit of creditors, or if any petition or any other
application for relief under the Bankruptcy Act has been filed against the said
customer or account debtor, or if the customer or account debtor has failed,
suspended business, become insolvent, or had or suffered a receiver or trustee
to be appointed for any of its assets or affairs; (iv) if the customer or
account debtor is located outside the United States or Canada; (v) if the
Receivable is a government receivable in which the Lender will not be able to
perfect its lien under the Federal Assignment of Claims Act for any reason
whatsoever; (vi) if the Receivable is offset, in whole or in part, by a credit
due and owing from the Borrower to that account debtor; (vii) if the Receivable
is due and owing from an account debtor who is also a creditor of Borrower;
(viii) if any portion of the Receivable represents finance and service charges
due and owing to Borrower from said account debtor; (ix) if any portion of the
Receivable represents a deposit already collected by the Borrower, the amount of
the Receivable which is eligible for financing hereunder shall be reduced by an
amount equal to the amount of the deposit which has been collected by the
Borrower from the account debtor; (x) if the Receivable represents sums due and
owing for work and/or service currently being rendered by Borrower but not yet
completed by Borrower; (xi) if the Receivable is due and owing from an affiliate
corporation or related entity of any Borrower; (xii) if the Receivable
represents a consignment sale or warranty work; (xiii) if the Receivable
represents a C.O.D. sale; (xiv) if the Receivable represents sums due and owing
from an employee of any Borrower; (xv) if the Receivable represents retainage
due and owing to Borrower; (xvi) if the Receivable represents a Bill and Hold
Invoice for items which have been billed and are not yet due and payable; (xvii)
if the account debtor is located in the State of Minnesota or State of New
Jersey and the Borrower, as the owner of such receivable, has neither qualified
as a foreign corporation to do business in such state nor filed a Notice of
Business Activities report with the appropriate officials in such state for the
then current year; or (xviii) if the Lender believes, in its credit judgement in
Lender's sole discretion, that collection of such Receivable is insecure or that
it may not be paid by reason of financial inability to pay or otherwise or that
such Receivable is not suitable for use as collateral hereunder.
(r) "Equipment Appraisal": An MAI Machinery and Equipment appraisal
prepared by Daley-Hodkin, which appraisal must result in findings satisfactory
to Lender, in Lender's sole and absolute discretion, which appraisal shall be
performed at Borrowers' sole cost and expense. The Equipment Appraisal shall be
in the nature of an "auction sale value" appraisal.
(s) "ERISA": The Employee Retirement Income Security Act of 1974, as
amended from time to time.
(t) "Event of Default": The occurrence of any one or more of the Events
of Default described in Article 9 hereof.
-4-
<PAGE>
(u) "Financing Statements": Financing Statements from Borrower to
Lender to perfect Lender's security interest in the property described in the
Security Agreements.
(v) "Generally Accepted Accounting Principles" or "GAAP": Those
principles of accounting set forth in opinions of the Financial Accounting
Standards Board of the American Institute of Public Accountants or which have
other substantial authoritative support and are applicable in the circumstances
as of the date of any report required herein or as of the date of an application
of such principles as required herein.
(w) "Governmental Authority": Any federal, state, provincial, county,
municipal or other governmental department, commission, board, bureau, court,
agency, or any instrumentality of any other governmental entity.
(x) "Governmental Requirements": Any law, statute, code, ordinance,
order, rule, regulation, judgment, decree, writ, injunction, franchise, permit,
certificate, license, authorization, or other direction or requirement of any
Governmental Authority now existing or hereafter enacted, adopted, promulgated,
entered or issued applicable to the Loans or to the Borrower.
(y) "Indebtedness": Collectively, all of the Borrowers' presently
existing or hereafter created or assumed obligations to the Lender, including,
without limitation, obligations for borrowed money, notes payable and drafts
accepted representing extensions of credit (whether or not representing
obligations for borrowed money), obligations representing the Loans and any
modifications or renewals thereof, obligations representing indebtedness to the
Lender whether or not assumed, secured or unsecured, however and wherever
incurred, acquired or evidenced, whether primary or secondary, direct or
indirect, absolute or contingent, joint or several or due or to become due,
including without limitation, all such obligations, liabilities and all
indebtedness and obligations now or hereafter owed by Borrower to Lender, its
affiliates, successors and/or assigns.
(z) "Initial Advance": The first Advance of the Loan proceeds.
(aa) "Leases": Leases for all locations where each Borrower leases
property in connection with its business operations.
(bb) "Loan": A revolving line of credit in the maximum principal amount
of Five Million and 00/100 Dollars ($5,000,000.00) from Lender to Borrowers.
(cc) "Loan Account": Borrowers' account on the books of the Lender in
which Advances will be recorded, as well as payments made on the Loans and other
appropriate debits and credits as provided in this Agreement.
(dd) "Loan Documents": This Agreement, the Notes, the Security
Agreements, and all other associated loan documents executed in connection with
the making of the Loans (and any modification, renewal or extension thereof).
-5-
<PAGE>
(ee) "Loans": The Loan, the Term Loan and the CAPEX Line/Term Loan.
(ff) "Machinery and Equipment". All machinery, equipment, furniture,
fixtures, computer hardware and software, hand and power tools, trucks,
trailers, forklifts, automobiles, heavy equipment, and other motor vehicles,
trucks, trailers, machinery and equipment of all classes, together with all
parts thereof and all accessions thereto, wherever located, now owned or
hereafter acquired by the Borrower.
(gg) "Maturity Date": As to the Loan, April 22, 2002; as to the CAPEX
Line/Term Loan, April 22, 2002; and as to the Term Loan, April 22, 2002, upon
which date the entire principal balance and accrued interest and all other
applicable charges under the respective Loans shall become due and payable in
full.
(hh) "Note": A Master Revolving Promissory Note in the principal amount
of Five Million and 00/100 Dollars ($5,000,000.00) from Borrower to Lender of
even date herewith, and any modifications, amendments or renewals thereof,
evidencing the Loan.
(ii) "Notes": The CAPEX Line/Term Note, the Note and the Term Note,
together with all amendments, extensions and renewals thereof. The Notes shall
be and are cross-collateralized and cross-defaulted such that a default under
any of the Note shall be and constitute a default under all of the Notes.
(jj) "Person": As the case may be, any corporation, natural person,
firm, joint venture, partnership, trust, unincorporated organization and
government, or any department or agency of any government.
(kk) "Plan": Any pension plan which is governed by the terms and
provisions of Title IV of ERISA and in respect of which the Borrower or a
commonly controlled entity of the Borrower is an "Employer" (as defined in
Section 407(d)(7) of ERISA).
(ll) "Prime Rate". The interest rate announced from time to time
charged by National Bank of Canada as its United States Prime Lending Rate,
which rate is purely discretionary and is not necessarily the best or lowest
rate charged borrowing customers of the Lender.
(mm) "Receivables". All accounts, accounts receivable, general
intangibles, contract rights and other obligations of any kind, whether now
owned or hereafter acquired by each Borrower and all proceeds of the foregoing
and all rights now or hereafter existing in and to all security agreements,
leases and other contracts security or otherwise relating to any such accounts,
contract rights, chattel paper instruments, general intangibles and obligations
and all proceeds, profits, deposits, products and accessions of and to all of
the foregoing.
(nn) "Reportable Event": Any of the events set forth in Section 4043(b)
of ERISA or the regulations thereunder.
-6-
<PAGE>
(oo) "Security Agreements": Collectively, the Borrower's Security
Agreement and the Security Cash Collateral Account and Lockbox Agreement, which
provide a valid first lien on the property identified in the Security
Agreements.
(pp) "Security Cash Collateral Account and Lockbox Agreement". A
Security Cash Collateral Account and Lockbox Agreement whereby and whereunder
payment of all of Borrowers' Receivables shall be directed to a lockbox
maintained with NationsBank, N.A. (the "Lockbox") to flow through the Cash
Collateral Account, and, be applied against the Loan facility, the CAPEX
Line/Term Loan facility and the Term Loan facility in accordance with the terms
and provisions of said Agreement.
(qq) "Solvent": That, at the time of determination, (i) the fair market
value of each Borrower's assets (both at fair valuation and at present fair
saleable value on an orderly basis) is in excess of the total amount of its
liabilities, including contingent obligations; (ii) it is then able and expects
to be able to pay its debts as they mature; and (iii) it has capital sufficient
to carry on its business as conducted and as proposed to be conducted.
(rr) "Term Loan": A term loan in the principal amount of One Million
and 00/100 Dollars ($1,000,000.00) from Lender to Borrowers.
(ss) "Term Note": A Promissory Note in the principal amount of One
Million and 00/100 Dollars ($1,000,000.00) from Borrowers to Lender of even date
herewith, and any modifications, amendments or renewals thereof, evidencing the
Term Loan.
1.3 Other Definitional Provisions. (a) The terms "material" and
"materially" shall have the meanings ascribed to such terms under Generally
Accepted Accounting Principles as such would be applied to the business of the
Borrower, except as the context shall clearly otherwise set forth; (b) all of
the terms defined in this Agreement shall have such defined meanings when used
in other documents issued under, or delivered pursuant to, this Agreement,
unless the context shall otherwise require; (c) all terms defined in this
Agreement in the singular shall have comparable meanings when used in the
plural, and vice versa; (d) accounting terms to the extent not otherwise defined
shall have the respective meanings given them under, and shall be construed in
accordance with Generally Accepted Accounting Principles; (e) the words
"hereby", "hereto", "hereof", "herein", "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement; (f) the masculine and neuter genders
are used herein and whenever used shall include the masculine, feminine and
neuter as well; and (g) whenever in this Agreement any of the parties hereto is
referred to, such reference shall be deemed to include their heirs, personal
representatives, successors and assigns of such parties unless the context shall
expressly provide otherwise.
-7-
<PAGE>
Article 2
THE LOANS
2.1 Loan. Provided there does not exist an Event of Default, and no
event with which notice or lapse of time or both would become such an Event of
Default, and subject to the terms and provisions of this Agreement, Lender will,
under the Note, lend or advance for the account of Borrowers from time to time,
and, Borrowers may borrow, repay and re-borrow (provided that unless Borrower
intends to pay and satisfy the Loan in full, Borrower shall not reduce the
outstanding principal balance under the Loan to a sum of less than One Thousand
Dollars ($1,000.00)) such amounts as may be required to refinance existing
indebtedness and to provide working capital for the support of accounts
receivable and inventory of the Borrowers, not exceeding in the aggregate an
amount equal to (i) eighty-five percent (85%) of Eligible Receivables, including
the Chep Eligible Receivables, provided that a Receivable may be devalued in
such amount as shall be determined by Lender in its sole discretion due to
"Dilution" which is defined as and is the result of non-cash credits posted
against the Receivable which results in payment or other satisfaction of all or
any portion of the Receivable for reasons other than full payment of the
Receivable in cash, together with an amount equal to (ii) fifty-five percent
(55%) of the Borrowers' Eligible Inventory, the Eligible Inventory Loan Advances
not to exceed the aggregate sum of One Million Five Hundred Thousand and 00/100
Dollars ($1,500,000.00); or, the aggregate sum of Five Million and 00/100
Dollars ($5,000,000.00), whichever is less. In connection with Advances based
upon the Borrowers inventory, it is acknowledged that Lender shall determine, in
its sole discretion, which inventory shall constitute Eligible Inventory which
is eligible for financing hereunder. The aggregate amounts outstanding under the
Loan shall not at any time exceed the amount provided above, and in the event
the amount outstanding at any time exceeds the permitted amount, said excess
amount shall bear interest at the rate set forth in the Note and shall be due
and payable in full on DEMAND.
2.2 Term Loan. Borrower has additionally borrowed the sum of One
Million and 00/100 Dollars ($1,000,000.00) from Lender under the Term Loan for
the purposes set forth in this Agreement. It is acknowledged that the amount of
the Term Loan represents an amount not in excess of eighty percent (80%) of MAI
Appraised Auction Sale Value of Borrowers' existing Machinery and Equipment
specifically listed and set forth in the Equipment Appraisal (as said value is
set forth in the Equipment Appraisal).
2.3 CAPEX Line/Term Loan. Provided there does not exist an Event of
Default, and no event with which notice or lapse of time or both would become
such an Event of Default, and subject to the terms and provisions of this
Agreement, Lender will, under the CAPEX Line/Term Note, lend or advance for the
account of Borrower from time to time such amounts as may be required by the
Borrower to partially finance future machine and equipment capital expenditures
of Borrower. Advances may be made under the CAPEX Line/Term Loan until the
Conversion Date, provided that said advances shall be made for newly purchased
machinery and equipment within ninety (90) days of the date of purchase;
provided further, that said amounts may not be repaid and reborrowed by the
Borrower. Advances shall be made based upon an advance rate of eighty percent
(80%) of the original invoice purchase price amount (not including the cost of
delivery, installation, etc.) of future machinery and equipment purchases by
Borrower. Advances shall be made based upon Lender's
-8-
<PAGE>
review of the original invoice and any other documentation required by Lender in
connection with the purchase of the machinery and equipment, and shall be made
in the sole and absolute discretion of the Lender. The maximum amount which may
be advanced under the CAPEX Line/Term Loan is the sum of Four Million and 00/100
Dollars ($4,000,000.00).
2.4 Loan Fee, Audit Fees, Unused Line Fee and Prepayment Fees. In
connection with the Loans, the following fees and rates shall apply:
(a) LOAN FEE: A Loan Fee in the amount of Twenty Thousand and 00/100
Dollars ($20,000.00) which was paid by the Borrower prior to the time of
Closing.
(b) AUDIT FEES: There shall be quarterly audits of the Borrower
performed in each fiscal year of Borrower during the term of the Loans. There
shall be a quarterly audit fee due and owing from Borrower to Lender in
connection with said audits based upon a charge of Four Hundred and 00/100
Dollars ($400.00) per day plus expenses; provided, further, that so long as
audits are not conducted more often than on a quarterly basis and so long as no
Event of Default has occurred, the annual fees for said audits shall not exceed
the sum of Eight Thousand and 00/100 Dollars ($8,000.00), plus expenses. In the
event of the occurrence of an Event of Default, the frequency of said audits may
be adjusted by Lender as determined by Lender in its sole discretion.
(c) UNUSED LINE FEE: An unused line fee shall be charged in connection
with the Loan, such that the unused portion of the Loan shall be subject to an
annual fee of one-quarter of one percent (.25%) per annum to be calculated and
payable upon a monthly basis based on the average outstanding principal balance
under the Loan for the proceeding month. The unused line fee shall be paid on
the first day of each month for the preceding month by means of an Advance under
the Note; provided, however, that if there is not adequate availability under
the Loan to effectuate any such Advance, Borrower shall jointly and severally be
responsible for payment of the same.
(d) PREPAYMENT FEES: If during the first year of the Loan (i) the Loan
is paid down to a zero balance, or (ii) the Lender's obligation to make Advances
under the Loan ceases, the Borrower shall pay to the Lender a prepayment fee in
an amount equal to one percent (1%) of the face amount of the Note. After the
first year of the Loan, the Note may be prepaid in whole or in part at any time
without premium or penalty.
During the first year of the Term Loan, full (but not partial)
prepayment of the Term Loan shall be permitted, with payment of a prepayment fee
in an amount equal to one percent (1%) of the outstanding principal balance of
the Term Note at the time of prepayment. After the first year of the Term Loan,
the Term Loan may be prepaid in whole or in part at any time without premium or
penalty. Any partial prepayment shall be applied in the inverse order of
maturity, and shall not reduce or delay the payment of the next regularly
scheduled payment under the Term Loan.
If, during the first year of the CAPEX Line/Term Loan (i) the
CAPEX Line/Term Loan is paid down to a zero balance or (ii) the Lender's
obligation to make advances under the CAPEX Line/Term Loan ceases, the Borrower
shall pay to Lender a prepayment fee in an amount
-9-
<PAGE>
equal to one percent (1%) of the face amount of the CAPEX Line/Term Note. After
the Conversion Date, the CAPEX Line/Term Loan may be prepaid in whole or in part
at any time without premium or penalty. After the Conversion Date, any partial
repayment shall be applied in the inverse order of maturity, and shall not
reduce or delay the payment of the next regularly scheduled payment under the
CAPEX Line/Term Loan.
The above set forth prepayment fee(s) shall be due and payable
whether such prepayment or cessation of Lender's obligation to make advances is
voluntary or involuntary, or a result of an Event of Default and/or the result
of acceleration of all or other sums due as a result of such acceleration or
default and shall be due and payable in addition to any default rate interest
collected by Lender. The Borrower agrees that the Lender shall suffer losses and
damages from such early repayment and accordingly, it is difficult to determine
in advance what the amount of said loss or damage will actually be, and, the
foregoing formula is a reasonable estimate of such loss or damages, and,
Borrower jointly and severally agrees to pay the same.
2.5 Loan Account. All Advances hereunder and under the Note shall be
recorded by Lender in the Loan Account.
2.6 Loan Documents. Borrower's obligation to repay the Loans is
evidenced by the Notes delivered simultaneously herewith, which set forth the
method for payment, rates of interest, and such further terms as are therein set
forth. The repayment of the Notes and the Indebtedness is to be secured by the
following documentation, which documents Borrower shall deliver, or cause to be
delivered, to Lender simultaneously with the delivery of the Notes and which
documents must be received prior to any funding hereunder:
(a) The Security Agreements, in form and substance satisfactory to
Lender and Lender's counsel.
(b) Financing statements filed in such public offices as Lender and
Lender's counsel may deem necessary to perfect a security interest in any of the
personal property referred to in the Security Agreements.
(c) Borrower's Counsel Opinion Letter, in form and substance
satisfactory to Lender and Lender's Counsel, from Borrower's Counsel from the
States of Florida, Delaware, Virginia, Alabama and Illinois opining as to
certain matters concerning the Loans.
(d) Such policies of liability insurance, worker's compensation
insurance and hazard insurance (with fire, extended coverage, vandalism and
mischief protection) as the Lender may reasonably request, subject to standard
loss-payee's and additional insured's endorsements, as applicable, in the
Lender's favor, and providing at least thirty (30) days prior written notice of
any cancellation, modification or non-renewal of the insurance coverage.
(e) Incumbency Certificate and Resolutions of the directors of each
Borrower authorizing the Loans, and the execution of all Loan Documents related
thereto.
-10-
<PAGE>
(f) Certificates of Good Standing evidencing that each Borrower is in
good standing under the laws of the state of its incorporation and in each other
state in which each Borrower is required to be qualified to conduct business.
(g) Certified copies of the Articles of Incorporation and By-Laws of
each Borrower.
(h) Evidence of compliance by each Borrower with any applicable
Fictitious Name Statute.
(i) Certified copies of the Leases in connection with all leased
premises of each Borrower.
(j) Landlord's Waiver of Lien Agreement(s) executed by all landlords
and all other necessary parties at business locations of each Borrower or
storage locations of each Borrower's inventory, waiving the landlord's lien.
(k) Financial statements of each Borrower, in form and substance
acceptable to Lender.
(l) Such other documentation as may be required by Lender or Lender's
Counsel.
Article 3
MANNER OF MAKING LOAN ADVANCES
3.1 Advances. Each Advance to the Borrower under the Loan shall be made
by the Lender upon written request of the Borrower stating the date on which the
Advance is to be made (the "Borrowing Date"), and the principal amount of the
Advance requested, said Advance Request to be delivered by no later than 12:00
p.m. (New York time) on the day of the requested Advance. The above set forth
written form may be sent via facsimile, to be immediately followed by delivery
of the original form to Lender. Any notice delivered under this subsection shall
be irrevocable and bind the Borrower to consummate the Advance on the Borrowing
Date.
3.2 Borrowing Base Certificate. Advances will be made based on the most
recent Borrowing Base Certificate submitted by Borrower to Lender. The form of
the Borrowing Base Certificate is appended hereto and made a part hereof as
Exhibit "A" (the "Borrowing Base Certificate"). The Borrowing Base Certificate
shall be provided by Borrower to Lender, no less than one (1) time in each week
in each month in each fiscal year of the Borrower; provided further, that upon
the occurrence of an Event of Default, Lender may require that Borrower submit
the Borrowing Base Certificate on a more frequent basis at such intervals as
shall be determined by Lender in its sole discretion.
3.3 Supporting Documentation. At the time of the Advance, upon request
of Lender, the Borrower shall deliver to Lender, such listings of Eligible
Receivables and Eligible Inventory and such other reports and documentation as
shall be required by Lender to support the Advance.
-11-
<PAGE>
Article 4
INTEREST AND PAYMENTS
All interest under the Loans shall be computed on the basis of a year
containing three hundred sixty (360) days for the actual number of days elapsed.
Payments of interest (and principal under the Term Note and principal under the
CAPEX Line/Term Note after the Conversion Date) shall be due and payable to the
Lender in accordance with the terms and provisions of the Notes, and interest
shall accrue at the rate of interest provided in the Notes for each advance
thereunder. Each payment of principal, interest and/or fees, and any other
amounts required to be paid to the Lender with respect to the Loans, shall be
effectuated by means of an Advance under the Note; provide, however, that if
there is not adequate availability under the Loan to effectuate any such
Advance, Borrower shall be jointly and severally responsible for payment of the
same. Payments of principal, interest, fees or other amounts made by the
Borrower shall be made to the Lender at the Lender's offices located at 125 W.
55th Street, 23rd Floor, New York, New York 10019, for the account of Lender, in
Dollars and in immediately available funds before 12:00 p.m. (New York time) on
the date such payment is due. The Lender shall deem any payment made by or on
behalf of the Borrower that is not made in immediately available funds and prior
to 12:00 p.m. (New York time) to be a non-conforming payment, which shall not be
deemed to be received by the Lender until the later of (a) the time such funds
become available funds or (b) the next Business Day. Any non-conforming payment
may constitute or become an Event of Default hereunder. Interest shall continue
to accrue on any principal as to which a non-conforming payment is made until
the later of (a) the date such funds become available funds or (b) the next
Business Day. All payments to be made by the Borrower on account of principal,
interest and/or fees, shall be made without diminution, setoff, recoupment or
counterclaim.
Article 5
CONDITIONS PRECEDENT TO FIRST ADVANCE AND ADDITIONAL ADVANCES
5.1 Conditions Precedent. The obligations of Lender to make the Initial
Advance and all additional Advances under the Loans are subject to the following
conditions precedent:
(a) Representations and Warranties. The representations, covenants and
warranties made by Borrower in this Agreement shall be true and correct on and
as of the date of such Advance.
(b) No Default. There shall be no Event of Default, and no event which
with notice or lapse of time or both would become such an Event of Default,
under this Agreement, any of the Notes, the Security Agreements, or any other
Loan Documents.
(c) Due Diligence. Lender shall have completed its Due Diligence, which
must have resulted in findings satisfactory to Lender, in Lender's sole
discretion.
-12-
<PAGE>
(d) No Material Adverse Change. There shall have been no material
adverse change in the business or financial condition of any of the Borrowers or
in the value of the Collateral (as defined in the Credit Facility Letter) since
the date of the Credit Facility Letter.
(e) Equipment Appraisal. The Equipment Appraisal shall have been
completed and delivered to Lender resulting in findings satisfactory to Lender,
in Lender's sole discretion.
(f) Lien and Judgment Searches: Lien and judgment searches of each
Borrower shall have been conducted in all jurisdictions required by Lender,
which must result in findings satisfactory to Lender, in Lender's sole
discretion.
(g) Delivery of Loan Documents. All of the Loan Documents shall have
been duly executed and delivered to Lender, and the Financing Statements and the
Security Agreements (if applicable) shall have been recorded in the appropriate
public offices.
(h) Delivery of Other Documents. Borrower shall have delivered, or
caused to be delivered to Lender, the other documents required under Article 2
hereof, and shall have also delivered or caused to be delivered to Lender, the
following:
(i) Annual audited financial statements of Borrower in form
and substance acceptable to the Lender, prepared in accordance with
GAAP, by a certified public accountant(s) acceptable to the Lender, in
form and substance acceptable to Lender.
(ii) Borrowers' Annual Report including its 10K.
(iii) Borrowers' 10-Q Statements.
(iv) Report on Receivables evidencing that there are adequate
Eligible Receivables to support the Initial Advance and each subsequent
Advance.
(v) Report on all of Borrowers inventory evidencing that there
is adequate Eligible Inventory to support the Initial Advance and each
subsequent Advance.
(vi) Such policies of liability insurance, flood insurance,
worker's compensation insurance and hazard insurance (with fire,
extended coverage, vandalism and mischief protection) as Lender may
reasonably request subject to standard loss-payee's and additional
insured's endorsements, as applicable, in the Lender's favor.
(vii) Such other certification or documentation to be executed
by Borrower as may be reasonably required by Lender or Lender's counsel
pertaining to the closing of the Initial Advance and all subsequent
Advances of the proceeds hereunder, it being understood that all such
items shall be promptly delivered prior to Lender's obligation to
making further Advances hereunder.
-13-
<PAGE>
Article 6
USE OF LOAN PROCEEDS; MARGIN STOCK
The proceeds of the Loans shall be used for the purposes set forth in
this Agreement. Borrowers do not own any margin securities and no portion of any
Advance or any of the Loans will be used for the purpose of reducing or retiring
any indebtedness which was originally incurred by Borrower to purchase any
margin securities, and neither the making of any and all Loans and Advances nor
the use of the proceeds thereof will violate or be inconsistent with the
provisions of Regulations G, T, U or X of the Board of Governors of the Federal
Reserve System of the United States.
Article 7
REPRESENTATIONS AND WARRANTIES
7.1 Representations and Warranties. Borrower represents and warrants to
Lender that, so long as credit remains available to the Borrower or there is any
outstanding balance due under any of the Notes as secured by the Loan Documents:
(a) Each Borrower has the power to engage in all the transactions
contemplated by this Agreement and have full power, authority and legal right to
execute and deliver, and to comply with their respective obligations under the
Loan Documents, which documents constitute the valid and legally binding
obligations of Borrower enforceable against Borrower in accordance with their
respective terms.
(b) To the best of its knowledge and belief, there is no suit, action,
or proceeding pending or threatened against or affecting any Borrower, before or
by any court, administrative agency or other Governmental Authority which brings
into question the validity of the transactions contemplated hereby or would
interfere with the ability of each Borrower to comply with the terms hereof.
(c) Each Borrower is in good standing under the laws of the state of
its incorporation and each Borrower is in good standing and fully qualified and
authorized to do business in all states where each Borrower conducts business.
Borrower, prior to Closing, will deliver to Lender: (i) resolutions certified as
true by the secretary of each Borrower authorizing each Borrowers' participation
in connection with the transactions contemplated herein and execution of the
Notes, and related Loan Documents; (ii) incumbency certificates of each
Borrower; (iii) certified copies of the Articles of Incorporation and By-laws of
each Borrower; and (iv) Corporate Certificates of Good Standing for each
Borrower.
(d) Except as otherwise disclosed on Exhibit "B" appended hereto and
made a part hereof, during the one (1) year period preceding the date of
Closing, the Borrowers have not been known as or used any corporate or
fictitious names other than the corporate name of the Borrowers on the Closing
date. All trade names or styles under which the Borrowers sell inventory or
-14-
<PAGE>
equipment or create Receivables or to which instruments in payment of
Receivables are made payable, are set forth on Exhibit "B".
(e) The Borrowers own or possess all intellectual property required to
conduct its businesses as now and presently planned to be conducted without, to
their knowledge, conflict with the rights of others.
(f) Each Borrower is Solvent after giving effect to the transactions
contemplated by the Loan Documents.
(g) Neither the execution nor delivery of any of the Loan Documents,
nor any other document relating hereto, will conflict with or result in a breach
of any of the provisions of the Charter, Articles of Incorporation, By-Laws or
Partnership Agreement, where applicable, of any Borrower or of any applicable
law, judgment, order, writ, injunction, decree, rule or regulation of any court,
administrative agency or other Governmental Authority, or of any agreement or
other instrument to which any Borrower is a party or by which any of them is
bound or constitute a default under any thereof, or result in the creation or
imposition of any lien, charge or encumbrance upon any property of any Borrower,
other than those created under this transaction in favor of Lender.
(h) No consent, approval or other authorization of or by any
Governmental Authority is required in connection with the execution or delivery
by Borrower of the Loan Documents, or compliance with the provisions hereof or
thereof.
(i) There are no actions, suits or proceedings pending or, to the
knowledge of the Borrower, overtly threatened against or affecting any Borrower,
at law or in equity, or before or by any Federal, State, Provincial, municipal
or other Governmental Authority, which involve any of the transactions herein
contemplated or the possibility of any judgment or liability which would, in the
case of the Borrower, result in any material adverse change in the business,
operations, properties or assets or in the financial condition of the Borrower.
No Borrower is in default with respect to (a) any judgment, order, writ,
injunction or decree or (b) any rule or regulation of any court or Federal,
State, Provincial, municipal or other Governmental Authority, which would have a
material adverse effect on its business, properties or condition (financial or
otherwise).
(j) Subject to any limitation stated thereon or by Borrower in writing,
all balance sheets, earnings statements and other financial data which have been
or shall hereafter be furnished to the Lender to induce it to enter into this
Agreement or otherwise in connection herewith, do or will fairly represent the
financial condition of the Borrower as of the dates and the results of their
operations for the period for which the same are furnished to the Lender and
have been or will be prepared in accordance with Lender's requirements, and that
all other information, reports and other papers and data furnished to the Lender
are or will be, at the time the same are so furnished, accurate and correct in
all material respects and complete insofar as completeness may be necessary to
give the Lender a true and accurate knowledge of the subject matter. There are
no material liabilities of any kind of any Borrower as of the date of the most
recent financial statements which are not reflected therein.
-15-
<PAGE>
There have been no materially adverse changes in the financial condition or
operation of the Borrower since the date of such financial statements.
(k) Borrower will pay all obligations, including tax claims, when due,
except such as the Borrower contests in an appropriate proceeding, in which
event Borrower shall furnish to Lender, if requested, a bond or other security
satisfactory to Lender in an amount sufficient to protect Lender and its
interest herein.
(l) There is no default on the part of Borrower under this Agreement,
any of the Notes, either of the Security Agreements, or any of the other Loan
Documents.
(m) The Borrowers hereby agree to jointly and severally indemnify the
Lender and to hold the Lender harmless of and from any and all claims for
broker's or finder's fees or commissions in connection with the Loans, and
agrees to pay all expenses (including but not limited to attorney's fees and
expenses) incurred by the Lender in connection with the defense of any action or
proceeding brought to collect any such fees and commissions, or otherwise
relating to any such broker's claims resulting from or arising out of any claim
that the Borrower consulted, dealt or negotiated with the person or entity
making such brokerage claim.
(n) Each Plan, pension, profit sharing or other employee benefit plan,
maintained by each Borrower is in material compliance with ERISA, the Code, and
all applicable rules and regulations adopted by regulatory authorities pursuant
thereto. The Borrowers have filed all material reports required to be filed by
ERISA, the Code, and such rules and regulations. In addition, any qualified
Plans subject to the minimum funding standards, do not, as of the date hereof,
have a funding deficiency, as defined by ERISA. No Reportable Event material in
relation to the business operations, property, financial or other conditions of
the Borrower has occurred with respect to any Plan. No tax penalty nor other
liability in the aggregate material in relation to business operations,
property, or financial conditions of the Borrower has been assessed against any
Borrower with respect to a Plan.
(o) Each Borrower has filed or caused to be filed all tax returns,
which to the knowledge of the Borrower, are required to be filed, and has fully
paid all taxes shown to be due and payable on said returns or any assessments
made against it or its property, and all other taxes, fees, or other charges
imposed on it or any of its property by any Governmental Authority. No tax liens
have been filed and, to the knowledge of Borrower, no claims are being made or
may hereafter be asserted with respect to any such taxes, fees or other charges
except for (i) those, the amount or validity of which is currently being
contested in good faith by appropriate proceedings and with respect to which
reserves in conformity with Generally Accepted Accounting Principles have been
provided on the books of Borrower; and (ii) such failures to file or pay such
tax liens or claims as could not, in the aggregate, reasonably be expected to
have a material adverse effect on the business operations, property or financial
or other condition of the Borrower, and can not reasonably be expected to have
an adverse effect on the ability of the Borrower to perform any of its
obligations in any material respect under this Agreement, the other Loan
Documents, or under any other contractual obligation.
-16-
<PAGE>
(p) All copies of all documents, reports, and statements heretofore
furnished by or on behalf of Borrower or in connection with this Agreement, to
the Lender are, and those delivered subsequent to the date hereof will be, true
and correct copies of the originals of such documents, reports and statements.
All matters stated or certified in any written statement, certificate, report or
other writing heretofore furnished pursuant to this Agreement by or on behalf of
the Borrower to the Lender are, and all matters stated or certified subsequent
to the date hereof will be, true and correct as of the date stated or certified.
All such documents, reports, statements, writings and certifications shall be in
form and detail satisfactory to the Lender.
(q) The Borrowers own or lease all of their properties and assets
reflected on the balance sheets referred to in Section 7.1(j) hereof.
(r) All of the properties and assets of the Borrower set forth in
Section 7.1(q) are free and clear of all mortgages, pledges, liens, charges and
other encumbrances of any nature whatsoever, excepting for Permitted
Encumbrances (as defined and set forth in the Borrower Security Agreement).
(s) The Borrowers are not in default in the performance, observance of
fulfillment of any of the obligations, covenants or conditions contained in any
lease for real or personal property, which would have a material adverse affect
on their businesses and all such leases are valid and existing and in full force
and effect.
(t) No Borrower is an "investment company" within the meaning of the
Investment Company Act of 1940 and any amendments thereto.
(u) None of the employees of any Borrower or any of their subsidiaries
are subject to any collective bargaining agreement and there are no strikes,
work stoppages, election or decertification petitions or proceedings, unfair
labor charges, equal opportunity proceedings, or other material labor/employee
related controversies or proceedings pending, or, to the best knowledge of the
Borrower, threatening any Borrower or any of their subsidiaries, or between any
Borrower (or any of its subsidiaries) and any of their employees, other than
employee grievances arising in the ordinary course of business which could not
reasonably be expected, individually or in the aggregate, to have a materially
adverse effect on the Borrower.
Article 8
COVENANTS OF BORROWER
8.1 Each Borrower shall do, or cause to be done, all of the things
necessary to preserve, renew and keep in full force and effect, its corporate
existence and its rights, licenses, franchises and permits and shall comply with
all laws applicable to it, operate its business in a proper and efficient
manner, and substantially as presently operated or proposed to be operated, and
at all times shall maintain, preserve and protect all franchises and trade names
and preserve all property used or useful in the conduct of its business, and
keep the same in good repair, working order and condition, and from time to time
make or cause to be made any needed and proper repairs, renewals, replacements,
-17-
<PAGE>
betterments and improvements thereto so that the business carried on in
connection therewith may be properly and advantageously conducted at all times.
8.2 Each Borrower shall at all times maintain true and correct books
and records and shall keep its books and records in accordance with Generally
Accepted Accounting Principles, and shall furnish the Lender with such financial
statements as may be required by Lender on a yearly and interim basis as set
forth in this paragraph and other parts of this Agreement.
8.3 Each Borrower shall properly pay and discharge (a) all taxes,
assessments and governmental charges upon or against each Borrower or its assets
prior to the date on which penalties are attached thereto, unless, and to the
extent, such taxes are being diligently contested in good faith by appropriate
proceedings and appropriate reserves therefor have been established; and (b) all
lawful claims for labor, materials, supplies, services or anything else which
might or could, if unpaid, become a lien or charge upon the properties or assets
of the Borrower, unless and to the extent only that the same are transferred to
bond, being diligently contested in good faith, and by appropriate proceedings
and appropriate reserves therefor have been established.
8.4 The Borrowers shall maintain the Cash Collateral Account, into
which all proceeds of Receivables (as collected from the Lockbox and otherwise)
will be deposited on a daily basis.
8.5 The Borrowers shall, at their expense, comply with all of the
insurance requirements set forth in this Agreement and the Security Agreements
throughout the term of the Loans.
8.6 The Borrowers, jointly and severally, shall indemnify and save
harmless Lender from any and all loss or damage of whatsoever kind and from any
suits, claims, or demands, including, without limitation, Lender's reasonable
legal fees and expenses, at all trial and appellate levels, on account of any
matter or thing arising out of this Agreement or in connection herewith, or on
account of any act or omission to act by Borrower in connection with this
Agreement and the Loans. The Borrowers, jointly and severally, agree to pay any
and all taxes (other than taxes on or measured by net income of Lender) incurred
or payable in connection with the execution and delivery of this Agreement and
all Loans, as well as all costs and expenses (including attorneys' fees)
incurred by Lender in enforcing this Agreement. Such obligation shall survive
repayment of the Loans.
8.7 Lender shall have the right, from time to time hereafter and until
the maturity of the Loans, to secure printed publicity, in the form of tombstone
ads or other similar ads, through newspapers and other media concerning the
Loans.
8.8 The Borrower shall: (a) make full and timely payments of the
principal and interest due and owing under each of the Notes and the
Indebtedness of the Borrower to the Lender, whether now existing or hereafter
arising; (b) duly comply with all of the terms and covenants contained in each
of the Loan Documents; and (c) at all times maintain the liens and security
interests provided for under or pursuant to this Agreement and all other
applicable Loan Documents as valid and perfected liens and security interests on
the property intended to be covered thereby.
-18-
<PAGE>
8.9 The Borrower shall promptly notify the Lender upon the commencement
of any action, suit or claim or counter-claim or proceeding against or
investigation of any Borrower (except when such alleged liability is fully
covered by insurance).
8.10 Each Borrower shall pay all indebtedness and obligations promptly
and in accordance with its respective terms and pay and discharge promptly all
taxes, assessments, and governmental charges or levies imposed upon it or in
respect of its property, before the same shall become in default, as well as all
lawful claims for labor, materials, and supplies or otherwise which, if unpaid,
might become a lien or charge upon such property or any part thereof, and timely
comply with all applicable laws and governmental rules and regulations.
8.11 The Borrower shall promptly notify the Lender in writing of: (a)
any material assessments by any taxing authorities for unpaid taxes as soon as
Borrower has knowledge thereof; and (b) any alleged default by any Borrower in
the performance of or any modification of any of the terms and conditions
contained in any agreement, mortgage or indenture or instrument to which any
Borrower is a party, or which is binding upon any Borrower, and upon any default
by any Borrower in the payment of any of its indebtedness.
8.12 Borrower shall provide to Lender annual audited financial
statements of Borrower, in form and substance acceptable to Lender, prepared in
accordance with GAAP, by a certified public accountant(s) acceptable to Lender,
in form and substance acceptable to Lender, within one hundred twenty (120) days
following the end of each fiscal year of Borrower.
8.13 Borrower shall provide to Lender its annual report including its
10-K Statements within one hundred twenty (120) days following the end of each
fiscal year of Borrower.
8.14 Borrower shall provide to Lender 10-Q Statements within forty-five
(45) days of the end of each quarterly period in each fiscal year of Borrower.
8.15 Borrower shall provide to Lender monthly internally prepared
financial statements of Borrower, in form and substance acceptable to Lender,
certified by Borrowers' chief financial officer as being true and correct in all
respects and otherwise in form and substance acceptable to Lender within thirty
(30) days following the end of each monthly period in each fiscal year of
Borrower.
8.16 Borrower shall provide to Lender, a Covenant Compliance
Certificate in the form attached hereto and made a part hereof as Exhibit "C"
(the "Covenant Compliance Certificate"), within forty-five (45) days of the end
of each fiscal quarterly period in each fiscal year of the Borrower. The
Covenant Compliance Certificate will be certified by Borrower's chief financial
officer as being true and correct in all respects.
8.17 Borrower shall provide to Lender monthly, a Period End
Recapitulation Report, on National Bank of Canada form, in the form attached
hereto and made a part hereof as Exhibit "D", together with a Period End
Accounts Receivable and Loan Reconciliation Report, on National Bank
-19-
<PAGE>
of Canada form, in the form attached hereto and made a part hereof as Exhibit
"E", within twenty (20) days following the end of each monthly period in each
fiscal year of Borrower.
8.18 Borrower shall allow Lender to conduct an audit, examination and
inspection of the properties and places of business of Borrower, including the
Borrower's respective books and records (and to make extracts therefrom), and,
including an audit confirmation of the accounts receivable balances and
ownership interest in the inventory, assets and business property of Borrower.
Such audits, examinations and inspections shall be at the sole expense of
Borrower. The cost of such audits shall be Four Hundred and 00/100 Dollars
($400.00) per day plus expenses; provided, further, that so long as audits are
not conducted more often than on a quarterly basis and so long as no Event of
Default has occurred, the annual fees for said audits shall not exceed the sum
of Eight Thousand and 00/100 Dollars ($8,000.00), plus expenses subject to the
terms and provisions of Section 2.4(b). Said audits, examinations and
inspections shall be conducted on a quarterly basis unless adjusted by Lender
after the occurrence of an Event of Default as set forth in Section 2.4(b).
8.19 Borrower shall provide Lender, within thirty (30) days prior to
the end of each fiscal year of Borrower, projections reflecting the Borrowers'
performance for the next two (2) fiscal years, including a balance sheet and
profit and loss statement, with said projections to be broken down on a monthly
basis for the next fiscal year and on an annual basis for the second year.
8.20 Borrower shall provide to Lender monthly an aged analysis of all
outstanding accounts receivable and accounts payable of Borrower, in form and
substance acceptable to Lender, within twenty (20) days following the end of
each monthly period in each fiscal year of Borrower.
8.21 Borrower shall provide to Lender monthly a listing of all
inventory of Borrower, in form and substance acceptable to Lender, within twenty
(20) days following the end of each monthly period in each fiscal year of
Borrower.
8.22 Borrower shall provide to Lender on a semi-annual basis, a
complete and updated listing of all of its customers and account debtors, which
listing shall include all of the customers' and account debtors' addresses and
phone numbers.
8.23 Borrower shall not sell or convey any of its assets, except in the
normal and ordinary course of business. Additionally, no Borrower shall be a
party to any merger, consolidation or reorganization and there shall be no
change in the senior management of any Borrower unless consented to in writing
by Lender, which consent shall not be unreasonably withheld.
8.24 Borrower shall maintain a Debt Ratio (which is defined as
consolidated total liabilities, less subordinated debt, divided by tangible net
worth) of not greater than 2.0 to 1 from the date of Closing and at all times
thereafter.
8.25 Borrower shall maintain a Tangible Net Worth (which is defined as
book net worth plus subordinated debt less intangibles) of not less than
$5,000,000.00 from the date of Closing through and including June 30, 2000, to
be increased by a minium of $500,000 in each fiscal year
-20-
<PAGE>
thereafter, such that for each subsequent fiscal year, Borrower's Minimum
Tangible Net Worth shall be $500,000.00 or more greater than Borrower's Tangible
Net Worth as of the close of the previous fiscal year. Proceeds from any
secondary equity or subordinated debt offering will not count towards the
required Five Hundred Thousand and 00/100 Dollars ($500,000.00) annual increase.
8.26 Borrower shall maintain an Interest Coverage Ratio (which is
defined as earnings before interest and taxes divided by interest expense) of
not less than 2.0 to 1 from the date of Closing and at all times thereafter.
8.27 Borrower shall maintain a Fixed Charges Coverage (which is defined
as earnings before interest, taxes, depreciation, and amortization, less
unfinanced capital expenditures, divided by current maturities of long term
debt, plus interest, plus income tax, plus dividends) of not less than 1.1 to 1
from the date of Closing and at all times thereafter.
NOTE: Compliance with the above set forth covenants shall be tested on
a quarterly basis.
8.28 Borrower shall not incur any capital expenditures (excluding
acquisitions), in excess of Two Million Five Hundred Thousand and 00/100 Dollars
($2,500,000.00) in the aggregate from July 1, 1998 through and including June
30, 1999, in excess of Five Million and 00/100 Dollars ($5,000,000.00) in the
aggregate from July 1, 1999 through and including June 30, 2000, in excess of
One Million and 00/100 Dollars ($1,000,000.00) in the aggregate from July 1,
2000 through and including June 30, 2001, and in excess of One Million and
00/100 Dollars ($1,000,000.00) in the aggregate from July 1, 2001 through the
Maturity Date.
8.29 Borrower will not assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligation of any other
person, firm or corporation without Lender's prior written consent, which
consent shall be in Lender's sole discretion.
8.30 Borrower shall not incur any additional secured indebtedness in
excess of Two Hundred Thousand and 00/100 Dollars ($200,000.00) in the aggregate
in each fiscal year of Borrower, without the prior written approval of Lender,
which approval shall be in Lender's sole discretion.
8.31 Borrower shall not make loans in excess of Three Hundred Thousand
and 00/100 Dollars ($300,000.00) in the aggregate to officers, directors and/or
employees of Borrower during the term of the Loans, without the prior written
approval of Lender, in Lender's sole discretion. In the event that Borrower
currently has outstanding loans to officers, directors and/or employees of
Borrower, the aggregate of those outstanding loans shall reduce the Three
Hundred Thousand and 00/100 Dollar ($300,000.00) threshold, such that Borrower
shall not have on its books at any given time an excess of Three Hundred
Thousand and 00/100 Dollars ($300,000.00) in loans to officers, directors and/or
employees of Borrower during the term of the Loans.
8.32 It is acknowledged that Borrower has entered into a substantial
contract or contracts with CHEP (collectively, the "Chep Contract"). Borrower
hereby covenants to immediately notify
-21-
<PAGE>
Lender, in writing, of the occurrence of any Event of Default by any Borrower or
Chep under the Chep Contract, or in the event that any account(s) receivable due
and owing under the Chep Contract, which, in the aggregate, equals or exceeds
the sum of $50,000.00, are not paid in full on or before their due date.
NOTE: In connection with the above, all accounting terms used shall be
construed in accordance with GAAP.
8.33 There shall be no subordinate financing of any of the property
encumbered by the Security Agreements, or otherwise included in the Collateral,
and, no changes in any borrowing entity without Lender's prior written approval.
8.34 The Borrower shall give the Lender prompt written notice of any
action, suit or proceeding at law or in equity or by or before any governmental
instrumentality or other agency, the outcome of which might adversely affect the
operations or financial condition of the Borrower or adversely affect the
ability of the Borrower to perform their respective obligations under the Loan
Documents.
8.35 The Borrower shall give Lender prompt written notice of any Event
of Default hereunder, or any event of default with respect to its obligations
under any of the other Loan Documents to which it is a party, indicating the
nature and status thereof and the action which the party giving such notice
proposes to take with respect thereto.
8.36 Borrower shall not directly or indirectly engage in any business
activity which would represent a material change from the kind of business
activity currently engaged in by it, which in the aggregate would have a
substantial and material effect on the Borrowers' businesses, without the prior
written consent of Lender, which consent shall be in Lender's sole discretion.
8.37 Borrower shall provide to the Lender all information reasonably
necessary for the Lender to verify the credit standing of each Borrower during
the term of the Loans.
8.38 The Borrower shall establish no additional employee benefit plans
of any nature without the prior written consent of the Lender, which consent
shall not be unreasonably withheld. Each pension, profit sharing, or other
employee benefit plan, at any time, maintained by the Borrower, shall be in
material compliance with ERISA, the Code and all applicable rules and
regulations adopted by regulatory authorities, pursuant thereto. The Borrower
will cause to be filed all material reports required to be filed by ERISA, the
Code and such rules and regulations.
8.39 The Borrower within ten (10) days after written request from the
Lender, will furnish a written statement in form satisfactory to the Lender,
duly acknowledged: (i) setting forth the unpaid principal balance of, and the
interest and other sums due on, the Indebtedness evidenced by the Notes and/or
secured by any of the other Loan Documents; (ii) stating whether or not any
offsets or defenses exist against the payments due under the Notes or any of the
other Loan Documents; (iii)
-22-
<PAGE>
stating the current maturity date of the Notes; and (iv) setting forth such
other information as the Lender may request from time to time.
8.40 The Borrower will not assume, guaranty, endorse or otherwise
become directly or contingently liable in connection with any obligation of any
other person, firm or corporation without Lender's prior written consent, which
consent shall be in Lender's sole discretion.
8.41 The Borrower shall notify the Lender immediately of any change in
the name of either Borrower, the principal place of business of the Borrower,
the office where the books and records of the Borrower are kept or any change in
the registered agent of the Borrower for the purpose of service of process.
8.42 The Borrowers shall use the funds borrowed by the Borrowers under
this Agreement solely for the purposes set forth in this Agreement.
8.43 Borrowers shall take all actions necessary to assure that
Borrowers' computer based systems are able to operate and effectively process
data including dates on and after January 1, 2000. At the request of Lender,
Borrowers shall provide Lender assurance acceptable to Lender of Borrowers' Year
2000 compatibility. Borrowers hereby covenant and agree that all of Borrowers'
information systems, including without limitation all computer hardware and
software, networks, databases, and all other electronic data storage, retrieval
and computation hardware, software and devices of any kind (collectively, the
"Information Systems"), have been and/or will be updated and modified to
accommodate and conform to the Year 2000 date change, and are and/or will be in
full compliance with any and all federal, state and local laws, regulations and
ordinances relating to the same, whether now in effect, or hereafter enacted
(collectively, the "Information System Laws").
Borrowers hereby jointly and severally agree, unconditionally,
absolutely, and irrevocably, to indemnify, defend, and hold harmless Lender, its
affiliates, successors, assigns, and its officers, directors, employees, and
agents against and in respect of any loss, liability, cost, injury, expense, or
damage of any and every kind whatsoever (including without limitation, court
costs and attorneys' fees and expenses) which at any time or from time to time
may be suffered or incurred, directly or indirectly, in connection with, with
respect to, or as a direct or indirect result of the failure of Borrowers to
update or modify their Information Systems to accommodate and conform to the
Year 2000 date change and/or fully comply with all Information System Laws
including, without limitation, any losses, liabilities, damages, injuries,
costs, expenses, or claims asserted or arising under the Information System
Laws, whether now known or unknown.
Article 9
EVENTS OF DEFAULT
9.1 Events of Default. Each of the following is an Event of Default
hereunder:
(a) If Borrower fails to pay any installment of interest or principal
under any of the Notes when the same shall become due;
-23-
<PAGE>
(b) The dissolution, termination of existence, merger, consolidation or
reorganization of any Borrower, subject to notice and a ten (10) business day
right to cure;
(c) If there occurs any default or Event of Default under any other
term of this Agreement, any of the Notes, either of the Security Agreements, or
any of the other Loan Documents relating hereto or thereto, subject to any
applicable notice and/or cure periods set forth therein, if and as applicable;
(d) The commencement of levy, execution or attachment proceedings
against any Borrower, or any principal thereof, or the application for or
appointment of a liquidator, receiver, custodian, sequester, conservator,
trustee, or other similar judicial officer (and such appointment continues for a
period of thirty (30) days in the case of an involuntary proceeding), or the
insolvency, in the bankruptcy or equity sense, of any Borrower or any principal
thereof;
(e) The assignment for the benefit of creditors, or the admission in
writing of any inability to pay any debts generally as they become due, or
ordering the winding up or liquidation of its affairs, by any Borrower or any
principal thereof, or the commencement of a case by or against any Borrower or
any principal thereof, under any insolvency, bankruptcy, creditor adjustment,
debtor rehabilitation or similar law, state or federal;
(f) The determination by any Borrower or any principal thereof, to
request relief under any insolvency, bankruptcy, creditor adjustment, debtor
rehabilitation or similar proceeding, provincial, state or federal, including
without limitation the consent by any of them to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator
or similar official for it or for any of its respective property or assets;
(g) There shall have occurred any material adverse change in the
financial condition of any Borrower, subject to notice and a ten (10) business
day right to cure;
(h) The issuing of any attachment or garnishment, or the filing of any
lien against the Collateral, or the pledge, assignment, transfer or granting of
a security interest by any Borrower of any equity in any of the Collateral
without the written consent of the Lender, subject to notice and a ten (10)
business day right to cure;
(i) The taking of possession of any substantial part of the property of
any Borrower at the instance of any Governmental Authority, subject to notice
and a ten (10) business day right to cure;
(j) Falsity in any material respect of, or any material omission in,
any representation or statement made to Lender by or on behalf of the Borrower
in connection with the Loans;
(k) If the Borrower shall have failed to comply with any other
agreement, covenant, condition, provision or term contained in this Agreement,
subject to notice and a ten (10) business day right to cure;
-24-
<PAGE>
(l) There shall be entered against any one or more of the Borrowers,
one or more judgments or decrees in excess of Two Hundred Thousand and 00/100
Dollars ($200,000.00) in the aggregate, which remain unsatisfied for a period of
thirty (30) days or which are not appealed and transferred to bond within thirty
(30) days of entry of the same;
(m) There shall occur an Event of Default by any Borrower in the
performance of its obligations under the Indebtedness, or under any other loan
agreement with the Lender and/or any other lender, subject to any applicable
notice and/or cure period set forth therein, if and as applicable;
(n) If any change or event shall occur which in Lender's judgment
impairs any security for the Loans, increases Lender's risk in connection with
the Loans, or indicates that Borrower may be unable to perform their respective
obligations under any of the Loan Documents, provided, that within thirty (30)
days after demand from Lender, Borrower does not deposit with Lender as part of
the Collateral, additional property which is satisfactory to Lender.
Article 10
SET-OFFS
In addition to any other rights the Lender may have at law or in
equity, if any Borrower becomes insolvent howsoever evidenced, or any Event of
Default occurs and is continuing, any indebtedness from the Lender to any
Borrower or all Borrowers, and any other property of any Borrower or all
Borrowers held by the Lender, may be set-off and applied towards the payment of
the Indebtedness of the Borrower under this Agreement (including, but not
limited to all Indebtedness evidenced by the Notes) to the Lender, including,
without limitation, any note payable to the Lender, whether or not such
Indebtedness of the Borrower to the Lender on such note or any part thereof
shall then be due.
Article 11
LENDER'S REMEDIES IN EVENT OF DEFAULT
11.1 Upon the occurrence of any Event of Default, subject only to any
notice requirement and grace period expressly provided in the Notes, the
Security Agreements, or any other Loan Documents, if any, the Lender shall be
entitled to all of its rights and remedies hereunder, at law or in equity and
under the Notes, the Security Agreements, and any of the other Loan Documents,
including, without limitation, the right to declare the outstanding principal
balance of the Notes, the accrued interest thereon, and all other obligations of
the Borrower to the Lender under this Agreement, the other Loan Documents or
otherwise to be immediately due and payable, without presentment, demand,
protest or other notice of any kind, all of which are hereby expressly waived,
anything in this Agreement, the Notes or any of the other Loan Documents to the
contrary notwithstanding, and the Lender's obligation to make any additional
Advances hereunder shall be permanently terminated.
-25-
<PAGE>
11.2 All of the remedies herein given to Lender or otherwise available
to it shall be cumulative and may be exercised concurrently. Failure to exercise
any of the remedies herein provided shall not constitute a waiver thereof by
Lender, nor shall use of any such remedies prevent the subsequent or concurrent
resort to any other remedy or remedies which shall be vested in Lender by this
Agreement or at law or in equity. To be effective, any waiver by Lender must be
in writing and such waiver shall be limited in its effect to the condition or
default specified therein; but no such waiver shall extend to any subsequent
condition or default or impair any right consequent thereon.
Article 12
TAX INDEMNIFICATION
Borrower hereby agree to and do hereby jointly and severally indemnify
and hold harmless Lender of and from any and all liability in connection with
payment of any and all intangible, documentary stamp, transfer, recording and
other taxes due and owing to the States of Florida, Delaware, Virginia, Alabama
and Illinois, and all other applicable jurisdictions in connection with the
execution, delivery and/or enforcement of this Agreement, the Notes, the
Security Agreements, and all associated Loan Documents, together with all
penalties and interest associated therewith, if any. Accordingly, Borrowers do
hereby authorize Lender to reimburse itself for any such taxes that Lender pays
upon behalf of Borrower from the proceeds under the Note, in the event Lender,
at any time, in its sole discretion, deems it necessary to pay such taxes,
together with any penalties and interest associated therewith. This
indemnification shall survive repayment of the Loans.
Article 13
CROSS-DEFAULT AND CROSS-COLLATERALIZATION
It is agreed, acknowledged and understood that the Loans, as evidenced
by the Notes and the Loan Documents, are cross-defaulted such that an event of
default by Borrower under any of the Notes or any of the Loan Documents shall be
and constitute a default under all of the Notes, this Agreement and all of the
Loan Documents entitling Lender to exercise all remedies provided herein and in
the Loan Documents in connection with the Notes, the Indebtedness and all
obligations associated therewith.
It is additionally agreed, acknowledged and understood that the Loans,
as evidenced by the Notes and the Loan Documents, are cross-collateralized such
that no collateral which secures the Loans shall be released without the
Lender's prior written consent, which consent shall be in Lender's sole and
absolute discretion, until such time as all of the Notes are paid and satisfied
in full.
Article 14
LOAN RESERVE - LANDLORD'S WAIVER OF LIEN AGREEMENTS
Notwithstanding anything to the contrary set forth in this Agreement or
the Credit Facility Letter, Borrower shall use its best efforts to obtain
Landlord's Waiver of Lien Agreements from each Landlord at or prior to Closing.
In the event Borrower is unable to obtain said Agreement from each Landlord,
then and in that event a reserve from the Loan shall be established at Closing
equal to
-26-
<PAGE>
three (3) months rent and additional rent and applicable sales tax under the
applicable lease for each Landlord failing to provide Lender with the Landlord's
Waiver of Lien Agreement in form and content satisfactory to Lender and its
counsel. Said reserve will be held during the term of the Loan and shall reduce
the outstanding amount available to Borrower under the Loan on a dollar for
dollar basis. If Borrower is in default under any applicable Lease and fails to
cure any monetary default within any cure period available under the terms of
the applicable Lease, if any, Lender shall, upon three (3) days prior written
notice to Borrower, have the option, but not the obligation, to cure the
monetary default to the applicable Landlord and charge the Loan for said
payment, provided, however, that Lender shall not exercise the aforesaid option
in the event Borrower disputes the default claimed by Landlord and pays the same
into the registry of the court having jurisdiction of the dispute. Borrower upon
receipt shall provide Lender with copies of all notices of default received from
any Landlord at each business location of Borrower.
Article 15
MISCELLANEOUS
15.1 Verification of Facts. Any condition of this Agreement which
requires the submission of evidence of the existence or non-existence of a
specified fact or facts implies as a condition the existence or non-existence,
as the case may be, of such fact or facts, and Lender shall, at all times, be
free independently to establish to its satisfaction and in its absolute
discretion such existence or non-existence.
15.2 No Levy or Attachment. No part of the Loans will be, at any time,
subject or liable to attachment or levy at the suit of any creditor of any
Borrower or of any other interested party, or at the suit of any contractor,
subcontractor, sub-subcontractors or materialman, or any of their creditors.
15.3 Severability. If performance of any provision hereof or any
transaction related hereto is limited by law, then the obligation to be
performed shall be reduced accordingly, and if any clause or provision herein
contained operates or would operate to invalidate this Agreement in part, then
the invalid part of said clause or provisions only shall be held for naught as
though not contained herein, and the remainder of this Agreement shall remain
operative and in full force and effect.
15.4 Waiver. If Lender shall waive any provisions of the Loan
Documents, or shall fail to enforce any of the conditions or provisions of this
Agreement, such waiver shall not be deemed to be a continuing waiver, and shall
never be construed as such, and Lender shall thereafter have the right to insist
upon the enforcement of such conditions or provisions. Furthermore, no provision
of this Agreement shall be amended, waived, modified, discharged or terminated
except by instrument in writing, signed by the parties hereto.
15.5 Entire Agreement. This Agreement and the documents expressly
referred to herein embody the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof and supersede all prior
agreements and understandings relating to the subject
-27-
<PAGE>
matter. This Agreement may be changed, waived, discharged, or terminated only by
an instrument in writing duly executed by the party against which enforcement of
such change, waiver, discharge, or termination is sought.
15.6 No Violation. Anything in this Agreement to the contrary
notwithstanding, the Lender shall not be obligated to extend credit to the
Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
15.7 Notices. All notices given hereunder shall be in writing and
addressed as follows:
(a) Lender: NATIONAL BANK OF CANADA
5100 Town Center Circle, Suite 430
Boca Raton, Florida 33486
Attention: Frank H. D'Alto, Vice President
with copy to: Gary S. Singer, Esquire
MOMBACH, BOYLE & HARDIN, P.A.
500 East Broward Boulevard, Suite 1950
Fort Lauderdale, Florida 33394
(b) Borrower: PALLET MANAGEMENT SYSTEMS, INC.
PALLET RECYCLING TECHNOLOGIES, INC.
ABELL LUMBER CORPORATION d/b/a PALLET
MANAGEMENT SYSTEMS
PALLET MANAGEMENT SYSTEMS OF ALABAMA, INC.
PALLET MANAGEMENT SYSTEMS OF ILLINOIS, INC.
One South Ocean Boulevard, Suite 305
Boca Raton, Florida 33432
ATTN: Zachary Richardson, President
with copy to: Donald E. Kubit, Esquire
FOWLER, WHITE, BURNETT, HURLEY,
BANICK & STRICKROOT, P.A.
NationsBank Tower, Seventeenth Floor
100 Southeast Second Street
Miami, Florida 33131
15.8 Reproduction of Documents. This Agreement, the Loan Documents and
all other documents relating hereto or thereto may be reproduced by the Lender,
and, the Lender may destroy any original documents so reproduced. The Borrowers
agree and stipulate that any such reproduction shall be admissible in evidence
as the original itself in any jurisdiction or administrative proceeding (whether
or not the original is in existence and whether or not such reproduction was
made by the Lender in the regular course of business) and that any enlargement,
facsimile, or further reproduction of said document shall likewise be admissible
in evidence.
-28-
<PAGE>
15.9 No Partnership or Control. In no event shall the Lender's rights
hereunder or under any of the Loan Documents grant the Lender the right to or be
deemed to indicate that the Lender is in control of the business, management or
properties of the Borrower, or has power over the daily management functions and
operating decisions made by the Borrower. The Lender is the Lender only and
shall not be considered a shareholder, joint venturer or partner of the
Borrowers.
15.10 Headings. The headings preceding the text of the sections of this
Agreement are used solely for convenience of reference and shall not affect the
meaning, construction, or effect of this Agreement.
15.11 Assignment or Participation by Lender. Lender shall have the
right at any time to convey or assign the Loans or any portion thereof, and,
additionally, shall have the right to sell a participation in the Loans to
another lending institution at any time that the Loans are outstanding, in any
amount as solely determined by Lender, and Lender is hereby authorized to
release all financial information of the Borrower to said assignee or
participating lender(s).
15.12 No Assignment by Borrower. Borrower shall not assign this
Agreement without the prior written consent of Lender, and any assignment in
violation hereof shall be of no force and effect and shall constitute an Event
of Default herein. Subject to the previous sentence, this Agreement shall extend
to and bind the parties hereto, and their respective successors and assigns.
15.13 Survival of Representations and Warranties. Except as otherwise
noted herein, all covenants, agreements, representations and warranties made
herein and in the Loan Documents shall survive the respective dates of
effectiveness thereof and shall continue in full force and effect so long as the
Loan Documents, or any of them, remain in effect or any of the obligations
evidenced thereby are outstanding and unpaid.
15.14 Conflicts. In the event of any conflict, inconsistency or
ambiguity between the provisions of this Agreement and the provisions of the
Credit Facility Letter, the Notes, the Security Agreements or any other Loan
Documents, the provisions of this Agreement shall control and prevail.
15.15 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument. Any term used herein shall
be equally applicable to both the singular and plural forms.
15.16 Expenses. Borrower will pay all reasonable out-of-pocket expenses
incurred by Lender in connection with the preparation of the Loan Documents
(whether or not the transactions contemplated hereby shall be consummated), the
making of the Loans, the enforcement and protection in any legal or equitable
proceeding of the rights of the Lender in connection with the Loan Documents,
and in connection with any action or claim under the Loan Documents including
the Notes, or in any way related thereto, including, without limitation, the
reasonable fees and disbursements of counsel of the Lender.
-29-
<PAGE>
15.17 No Usury. It is the intention of the parties hereto to comply
with the usury laws of applicable governmental authorities; accordingly, it is
agreed that, notwithstanding any provision to the contrary in the Notes, this
Loan Agreement or any of the other documents securing payment thereof or
otherwise relating hereto, no such provision shall require the payment or permit
the collection of interest in excess of the maximum permitted by law. In
determining the maximum rate allowed, Lender may take advantage of any state or
federal law, rule or regulation in effect from time to time which may govern the
maximum rate of interest which may be charged. If any excess of interest in such
respect is provided for, or shall be adjudicated to be so provided for, in the
Notes, this Loan Agreement or in any of the other documents securing payment
thereof or otherwise relating hereto, then in such event: (a) the provisions of
this paragraph shall govern and control; (b) neither Borrower nor their heirs,
personal representatives, successors or assigns or any other party liable for
the payment thereof, shall be obligated to pay the amount of such interest to
the extent that it is in excess of the maximum amount permitted by law; (c) any
such excess which may have been collected shall be either applied as a credit
against the then unpaid principal amount of the Notes or refunded to Borrower;
and (d) the effective rate of interest shall be automatically reduced to the
maximum lawful contract rate allowed under the applicable usury laws.
15.18 Waiver. The Borrower hereby waives any right to require a
proceeding first against any other party providing collateral, or to exhaust any
security for the performance of the Indebtedness. The Borrower further covenants
that no security now or subsequently held by the Lender for the payment of the
Indebtedness evidenced by the Notes made by Borrower under this Agreement, or
for the payment of any other Indebtedness of Borrower to the Lender under this
Agreement or the other Loan Documents, whether in the nature of a security
interest, pledge, lien, assignment, setoff, suretyship, guaranty, indemnity,
insurance or otherwise, and no act, omission or other conduct of the Lender in
respect of such security (excluding fraud, gross negligence or willful
misconduct), shall affect in any manner whatsoever the unconditional obligation
of the Borrower under this Agreement and the Notes, and the Lender may release,
exchange, enforce, apply the proceeds of and otherwise deal with any such
security without affecting in any manner the unconditional obligation of the
Borrower under this Agreement and the Notes.
Without limiting the generality of the foregoing, such obligations, and
the rights of the Lender to enforce the same, by proceedings, whether by action
at law, suit in equity or otherwise, shall not be in any way affected by (i) any
insolvency, bankruptcy, liquidation, reorganization, readjustment, composition,
dissolution, winding up or other proceeding involving or affecting the Borrower
or others, or (ii) any change in the ownership of any of the capital stock of
the Borrower or any other party providing collateral for any of the
Indebtedness, or any of their respective affiliates.
The Borrowers hereby waive to the fullest extent possible under
applicable law:
(a) any defense based upon the doctrine of marshaling of
assets or upon an election of remedies by the Lender, including, without
limitation, an election to proceed by nonjudicial rather than judicial
foreclosure;
-30-
<PAGE>
(b) any defense based upon any statute or rule of law which
provides that the obligation of a surety must be neither larger in amount nor in
other respects more burdensome than that of the principal; and
(c) any other event or action (excluding the Borrower's
compliance with the provisions hereof) that would result in the discharge by
operation of law or otherwise of the Borrower from the performance or observance
of any obligation, covenant or agreement contained in this Agreement, the Notes
or any other Loan Documents.
15.19 Indemnification. The Borrowers shall jointly and severally
indemnify and hold harmless the Lender, and its directors, officers, employees
and agents against all losses, claims, damages, penalties, judgments,
liabilities and expenses (including, without limitation, all expenses of
litigation or preparation therefor whether or not the Lender is a party thereto)
which it may pay or incur arising out of or relating to, directly or indirectly,
this Agreement, the Notes, the other Loan Documents, the transactions
contemplated hereby or the direct or indirect application or proposed
application of the proceeds of any Loans hereunder.
15.20 Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal statutes and laws of the State of New York
(other than with respect to conflicts of laws), but giving effect to federal
laws applicable to national banks to the extent applicable, except as required
by mandatory provisions of laws and except to the extent that the validity or
perfection of the security interest created hereby, or remedies hereunder, in
respect of any particular Collateral are governed by the laws of a jurisdiction
other than the State of New York.
15.21 THE BORROWERS HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMIT TO
THE NONEXCLUSIVE JURISDICTION OF ALL STATE AND FEDERAL COURTS SITTING IN NEW
YORK COUNTY, NEW YORK, AND AGREE THAT ALL SUMMONS AND OTHER COURT PROCESS ISSUED
BY SAID COURTS MAY BE SERVED UPON THE BORROWERS, WITHIN OR OUTSIDE OF SAID
COURTS' TERRITORIAL JURISDICTION, BY MAILING THE SAME, BY REGISTERED OR
CERTIFIED MAIL, OR BY PERSONAL SERVICE, TO THE BORROWERS AT THEIR ADDRESS
SPECIFIED HEREIN.
IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT NO SUIT OR ACTION SHALL BE
COMMENCED BY ANY BORROWER, OR BY ANY SUCCESSOR, PERSONAL REPRESENTATIVE OR
ASSIGN OF ANY BORROWER, WITH RESPECT TO THE LOANS, THIS LOAN AGREEMENT OR ANY
OTHER LOAN DOCUMENTS, OTHER THAN IN A STATE COURT OF COMPETENT JURISDICTION IN
AND FOR NEW YORK COUNTY, NEW YORK, OR IN THE UNITED STATES DISTRICT COURT FOR
THE DISTRICT IN THE UNITED STATES IN WHICH THE PRINCIPAL PLACE OF BUSINESS OF
THE LENDER IN THE STATE OF NEW YORK IS SITUATED, AND NOT ELSEWHERE. NOTHING
CONTAINED IN THIS PARAGRAPH SHALL PROHIBIT THE LENDER FROM INSTITUTING SUIT IN
ANY COURT OF COMPETENT JURISDICTION FOR THE ENFORCEMENT OF ITS RIGHTS HEREUNDER,
IN THE NOTES, IN THE SECURITY AGREEMENTS OR IN ANY OTHER LOAN DOCUMENT.
-31-
<PAGE>
WAIVER OF JURY TRIAL. LENDER AND BORROWERS HEREBY MUTUALLY, KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRIAL BY JURY
IN RESPECT TO ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH THIS AGREEMENT AND ANY AGREEMENT CONTEMPLATED OR TO BE EXECUTED
IN CONJUNCTION HEREWITH, UNDER ANY OF THE LOAN DOCUMENTS, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF
EITHER PARTY. THE BORROWER ACKNOWLEDGES THAT THIS WAIVER OF JURY TRIAL IS A
MATERIAL INDUCEMENT TO THE LENDER IN ACCEPTING THIS AGREEMENT, AND, THAT THE
LENDER WOULD NOT HAVE ACCEPTED THIS AGREEMENT WITHOUT THIS JURY TRIAL WAIVER,
AND, THAT THE UNDERSIGNED HAS BEEN REPRESENTED BY AN ATTORNEY OR HAS HAD AN
OPPORTUNITY TO CONSULT WITH AN ATTORNEY REGARDING THIS JURY TRIAL WAIVER, AND,
UNDERSTANDS THE LEGAL EFFECT OF THIS JURY TRIAL WAIVER.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
Signed, sealed and delivered in BORROWER:
the presence of:
PALLET MANAGEMENT SYSTEMS, INC.,
a Florida corporation
- ---------------------------
By: ___________________________________
___________________________ Zachary Richardson, President
(Corporate Seal)
PALLET RECYCLING TECHNOLOGIES,
INC., a Delaware corporation
- ---------------------------
By: ___________________________________
___________________________ Zachary Richardson, President
(Corporate Seal)
-32-
<PAGE>
ABELL LUMBER CORPORATION, a
Virginia corporation d/b/a PALLET
MANAGEMENT SYSTEMS
- ---------------------------
By: ___________________________________
___________________________ Zachary Richardson, President
(Corporate Seal)
PALLET MANAGEMENT SYSTEMS OF
ALABAMA, INC., an Alabama corporation
- ---------------------------
By: ___________________________________
___________________________ Zachary Richardson, President
(Corporate Seal)
PALLET MANAGEMENT SYSTEMS OF
ILLINOIS, INC., an Illinois corporation
- ---------------------------
By: ___________________________________
___________________________ Zachary Richardson, President
(Corporate Seal)
SECURED PARTY:
NATIONAL BANK OF CANADA, a
Canadian Chartered Bank
______________________________ By: ___________________________________
Title: __________________________________
- ------------------------------
______________________________ By: ___________________________________
Title: __________________________________
- ------------------------------
-33-
<PAGE>
STATE OF NORTH CAROLINA )
COUNTY OF _______________ )
The foregoing instrument was acknowledged before me this _____ day of
April, 1999, by ZACHARY RICHARDSON, as President of and on behalf of PALLET
MANAGEMENT SYSTEMS, INC., a Florida corporation, PALLET RECYCLING TECHNOLOGIES,
INC., a Delaware corporation, ABELL LUMBER CORPORATION, a Virginia corporation
d/b/a PALLET MANAGEMENT SYSTEMS, PALLET MANAGEMENT SYSTEMS OF ALABAMA, INC., an
Alabama corporation and PALLET MANAGEMENT SYSTEMS OF ILLINOIS, INC., an Illinois
corporation who |_| is personally known to me or |_| produced his/her driver's
license as identification.
-------------------------------------
NOTARY PUBLIC - State of North Carolina
Print/Type/Stamp Name:
Commission Expiration Date:
Notary Seal:
STATE OF NEW YORK )
COUNTY OF __________ )
The foregoing instrument was acknowledged before me this ___ day of
____________, 1999, by __________________________, as ______________ of and on
behalf of NATIONAL BANK OF CANADA, a Canadian Chartered Bank, who is personally
known to me or who has produced a __________ driver's license as identification.
-------------------------------------
NOTARY PUBLIC - State of New York
Print/Type/Stamp Name:
Commission Expiration Date:
Notary Seal:
STATE OF NEW YORK )
COUNTY OF __________ )
The foregoing instrument was acknowledged before me this ___ day of
____________, 1999, by __________________________, as ______________ of and on
behalf of NATIONAL BANK OF CANADA, a Canadian Chartered Bank, who is personally
known to me or who has produced a __________ driver's license as identification.
-------------------------------------
NOTARY PUBLIC - State of New York
Print/Type/Stamp Name:
Commission Expiration Date:
Notary Seal:
-34-
<PAGE>
EXHIBITS
--------
Description Exhibit
----------- -------
Borrowing Base Certificate..........................................A
Any corporate or fictitious names
used with respect to Receivables....................................B
Covenant Compliance Certificate.....................................C
Period End Recapitulation Report....................................D
Period End Accounts Receivable and
Loan Reconciliation Report..........................................E
<PAGE>
EXHIBIT "B"
CORPORATE OR FICTITIOUS NAMES
-----------------------------
USED WITH RESPECT TO RECEIVABLES
--------------------------------
Abell Lumber Corporation, a Virginia corporation, d/b/a Pallet
Management Systems
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUN-26-1999
<CASH> 262,117
<SECURITIES> 0
<RECEIVABLES> 2,657,599
<ALLOWANCES> 5,000
<INVENTORY> 1,866,495
<CURRENT-ASSETS> 4,937,632
<PP&E> 7,597,007
<DEPRECIATION> 3,337,969
<TOTAL-ASSETS> 10,205,006
<CURRENT-LIABILITIES> 1,941,511
<BONDS> 0
0
0
<COMMON> 3,918
<OTHER-SE> 5,139,999
<TOTAL-LIABILITY-AND-EQUITY> 10,205,006
<SALES> 38,744,129
<TOTAL-REVENUES> 38,744,129
<CGS> 35,012,585
<TOTAL-COSTS> 37,956,940
<OTHER-EXPENSES> 271,041
<LOSS-PROVISION> 6,857
<INTEREST-EXPENSE> 332,818
<INCOME-PRETAX> 516,148
<INCOME-TAX> 21,381
<INCOME-CONTINUING> 537,529
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 537,529
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.11
</TABLE>
