U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fourteen-week period ended
September 30, 2000
Commission File Number 000-24405
PALLET MANAGEMENT SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-2197020
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(State or other jurisdiction of IRS Employer Identification Number)
incorporation)
2855 University Drive, Suite 510, Coral Springs, Florida 33065
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(Address of principal executive offices)
Registrant's telephone number, including area code:
(954) 340-1290
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(Former name or address if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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On November 8, 2000, the Registrant had outstanding 4,065,612 shares of common
stock, $.001 par value.
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PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, June 24,
ASSETS 2000 2000
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(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 125,100 $ 577,052
Accounts receivable - trade, net of allowance
for doubtful accounts 4,318,574 4,885,302
Inventories 1,878,149 2,259,110
Other Current Assets 229,268 237,577
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Total current assets 6,551,091 7,959,041
Property and equipment - net of accumulated
Depreciation 4,292,441 4,407,092
Other Assets
Vanderloo Pallet Machine - CIP 1,202,901 647,213
Palletnet - CIP 258,319 233,266
Other 110,863 104,384
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Total other assets 1,572,083 984,863
Total assets $ 12,415,615 $ 13,350,996
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,192,148 $ 1,190,138
Current portion of capital lease obligations 71,962 70,608
Accounts payable 3,699,919 2,760,217
Accrued liabilities 357,583 814,077
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Total current liabilities 5,321,612 4,835,040
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LONG TERM DEBT
Long-term debt 3,956,595 5,414,685
Capital lease obligations 164,300 182,805
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Total long-term liabilities 4,120,895 5,597,490
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Total liabilities 9,442,507 10,432,530
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STOCKHOLDERS' EQUITY
Preferred stock, authorized 7,500,000 shares at $.001 par
Value; no shares issued and outstanding -- --
Common stock, authorized 10,000,000 shares at
$.001 par value; issued and outstanding 4,065,612
shares at September 30, 2000 and
June 24, 2000 4,066 4,066
Additional paid in capital 7,269,556 7,269,556
Accumulated deficit (4,024,514) (4,079,156)
Notes receivable from stockholders (276,000) (276,000)
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2,973,108 2,918,466
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Total stockholders' equity
Total liabilities and stockholders' equity $ 12,415,615 $ 13,350,996
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
14 weeks ended 13 weeks ended
Sept. 30, 2000 Sept. 25, 1999
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Net sales $ 19,473,798 $ 12,278,269
Cost of goods sold 18,233,530 12,493,289
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Gross profit (loss) 1,240,268 (215,020)
Selling, general and administrative expense 1,048,638 1,382,513
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Operating income (loss) 191,630 (1,597,533)
Other income (expense)
Other income (expense) (5,970) (1,466)
Interest expense (131,018) (97,968)
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Income (loss) before income tax expense 54,642 (1,696,967)
Income tax expense (benefit) 0 0
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Net income (loss) $ 54,642 ($ 1,696,967)
============ ============
Net income (loss) per common share $ 0.01 $ (0.43)
============ ============
Diluted earnings (loss) per common share $ 0.01 $ (0.43)
============ ============
The accompanying notes are an integral part of these financial statements.
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PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
14 weeks ended 13 weeks ended
Sept. 30, 2000 Sept. 25, 1999
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 54,642 $(1,696,967)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation 126,170 149,943
(Increase) Decrease in operating assets:
Accounts receivable 566,728 (935,320)
Inventories 380,961 (499,576)
Other current assets 8,309 (72,329)
Other assets (587,220) (129,154)
Increase (Decrease) in operating liabilities:
Accounts payable 939,702 2,181,411
Accrued liabilities, taxes and current maturities
leases and debts (453,130) (56,760)
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Net cash provided by/(used in) operating activities 1,036,162 (1,058,752)
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Cash flows from investing activities:
Purchase of fixed assets (11,519) (805,324)
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Net cash used in investing activities (11,519) (805,324)
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Cash flows from financing activities:
Net borrowings from lenders 411,333
Net payments of long term debt (1,887,928) 2,085,605
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Net cash provided by financing activities (1,476,595) 2,085,605
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Increase/(Decrease) in cash (451,952) 221,529
Cash at beginning of period 577,052 262,117
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Cash at end of period $ 125,100 $ 483,646
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
Pallet Management Systems, Inc.
Notes to Financial Statements
September 30, 2000
Note 1. Consolidated Financial Statements:
The consolidated balance sheet as of September 30, 2000, the
consolidated statements of operations and cash flows for the fourteen-week
period ended as of September 30, 2000 and thirteen-week period ended September
25, 1999 have been prepared by the Company without audit in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations and
cash flows for the periods reported have been made. Operating results for the 14
weeks ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended June 30, 2001. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's annual report filed on Form
10-KSB as of June 24, 2000.
Certain prior year amounts within the accompanying financial statements
have been reclassified to conform to the current period presentation.
Note 2. Debt Agreement
The Company has a revolving loan and three term loans with La Salle
Business Credit in a three year agreement, which commenced April 14, 2000. As of
September 30, 2000 the Company was in full compliance with all loan covenants.
Advances under the revolving agreement are based on the sum of 85% of
eligible accounts receivable, plus the lesser of 55% of eligible inventories or
$2,500,000. Interest is paid monthly at the bank's prime rate. Principal is due
in April 2003, with possible year to year renewals thereafter. The revolving
agreement is collateralized by substantially all of the assets of the Company.
At September 30, 2000, the Company had $1,013,000 of availability under the
revolving agreement. Borrowings under the revolving loan are reflected as
current liabilities.
The three term loans as of September 30, 2000 were at $1,330,000,
$1,713,000 and $411,000. These loans are collateralized by substantially all the
assets of the Company.
Note 3. Inventories
Inventories consisted of the following at September 30, 2000:
Raw material $ 1,214,186
Work in process $ 396,847
Finished goods $ 267,116
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TOTAL $ 1,878,149
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Note 4. Net Income (Loss) per Share of Common Stock:
Net earnings (loss) per share of common stock was determined by
dividing net income applicable to common shares by the weighted average number
of common shares outstanding during each period. Diluted earnings/(loss) per
common share reflects the potential dilution that could occur assuming exercise
of all issued and unexercised stock options. A reconciliation of the net
income/(loss) and numbers of shares used in computing basic and diluted
earnings/(loss) per common share is as follows (in thousands, except per share
data):
14 Weeks Ended 13 Weeks Ended
Sept. 30 Sept. 25
2000 1999
Basic earnings/(loss) per common share:
Net income/(loss) $ 55 $(1,697)
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Weighted average common shares
outstanding for the period 4,065 3,918
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Basic earnings per share of
common stock $ .01 $ (.43)
======= =======
Diluted earnings/(loss) per common share:
Net income/(loss) $ 55 $(1,697)
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Weighted average common shares
outstanding for the period 4,065 3,918
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Increase in shares which would
result from exercise of stock options 426 *
Weighted average common shares,
assuming conversion of the above
securities 4,491 *
------- -------
Diluted earnings/(loss) per share of
common stock $ .01 *
======= =======
* exercise of warrants and options would be anti-dilutive
Note 5. Litigation
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.
6
<PAGE>
PART I
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion and analysis should be read in conjunction
with the financial statements appearing as Item 1 to this Report. These
financial statements reflect the consolidated operations of Pallet Management
Systems, Inc. (the "Company" or "Pallet Management") for the fourteen-week
period ended September 30, 2000 and for the thirteen-week period ended September
25, 1999.
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
the Annual Report on Form 10-KSB for the year ended June 24, 2000. 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
Pallet Management over time means that actual events are bearing out as
estimated in such forward looking statements.
Results of Operations
General
Pallet Management 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 its customers. Pallet Management has over 200 customers, many of
which are Fortune 1000 companies, including Honeywell, CHEP Americas, DuPont,
IAMS, Mitsubishi, Monsanto, Scotts Company, and various governmental agencies.
Our sales for the first quarter of fiscal year 2001 were over $19.4 million with
5 facilities in 4 states.
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 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 oriented market for our Company. With this shift in focus toward
services and cost efficiency, our Company has started 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.
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<PAGE>
Our Company has two lines of revenue, manufacturing and
services:
Manufacturing: We have two primary categories of
manufacturing: CHEP grocery pallets and specially engineered
niche market pallets. We have multi-year contracts to
manufacture high quality pallets for CHEP, the world's largest
pallet rental pool.
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; first is
retrieval, sortation, repair, warehousing and return; second
is reverse distribution; and third is other products.
First - 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. Pallet
users currently discard a large portion of new pallets after
one use. The condition and size of these pallets vary greatly.
The pallets are sorted and repaired as needed, placed in
storage and made available for return to service. 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.
Second - Reverse distribution can carry the retrieval, sort,
repair, warehouse, and return services one step further by
contracting with a customer to manage, track and provide
valuable management information for their pallet flow. During
the quarter ended March 25, 2000, the Company launched
"PalletNettm" a new value-added, "e-logistics" services
product. As part of the Company's strategy to use the Internet
to improve the functionality of its service offerings,
PalletNet is a service brand providing a logistics and
information system that manages the flow of shipping platforms
and containers throughout industrial supply chains. The
principal services PalletNet offers include reverse
distribution, single source national contracts, high quality
shipping platforms and transport packaging, recovery, repair,
recycling and export packaging. These physical activities are
supported by leading edge technology that enables users to
improve shipping asset controls and reduce cost and waste from
the supply chain, while improving inventories and enhancing
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<PAGE>
customer satisfaction. By coupling PalletNet with the
Internet, the Company is creating value for the customer
through lower costs and improved efficiencies. The PalletNet
e-portal is a browser-based user interface combined with three
levels of security management which delivers unlimited, safe
access to customers who can view exactly where their shipping
platforms and containers are in the supply chain at any given
moment. The system also offers a full range of personalization
options, so each company can configure PalletNet to their
operations. In addition, PalletNet has the capacity to use
either bar codes or radio frequency identification tags to
track individual pallets and the equipment transported on
them. These new, "state of the art", logistics and information
system capabilities provide customers and Pallet Management
the technical support requirements to manage an efficient
reverse distribution operation and asset management of
valuable transport packaging.
Third - 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 an advantage
over competition from current logistic companies.
As the market for reverse distribution is just starting to be
created, the economic advantages to companies that are
implementing it are significant. 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 currently estimated to be $7.7
billion. 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 $40 billion and growing
rapidly as companies are discovering the benefits of
outsourcing their logistical demands.
9
<PAGE>
Fourteen Weeks Ended September 30, 2000 compared to Thirteen Weeks Ended
September 25, 1999
For the fourteen-week period ended September 30, 2000, net sales
increased 59% to $19,474,000 from $12,278,000 for the comparable fiscal year
2000 period.
During the fourteen-week period ended September 30, 2000, manufacturing
sales increased 106% to $18,887,000 from $9,157,000, and services decreased by
81% to $587,000 from $3,121,000. The increase in manufacturing sales was
primarily due to the opening of two new facilities and the decrease in service
is primarily due to the closing of the Lakeland service facility in December
1999. This overall increase in sales was due to increased production at three
manufacturing facilities and an additional week of production over the
comparable period ending September 25, 1999.
Pallet Management had a 24% decrease in selling, general and
administrative expenses from $1,383,000 to $1,049,000 for the fourteen week
period ended September 30, 2000 when compared to the thirteen week period ended
September 25, 1999. This decrease is due to the additional costs in 1999 for
various write-offs.
A profit of $54,600 or $.01 per share was realized during this
fourteen-week period ended September 30, 2000 compared to a net loss of
($1,697,000) or ($.43) per share recorded for the thirteen-week period last
year. Pallet Management did not record any tax benefit on the loss due to net
operating losses previously experienced.
Liquidity and Capital Resources
Pallet Management had $125,000 cash on hand at the end of the
fourteen-week period ending September 30, 2000, versus $577,000 at the beginning
of the fiscal year. The decrease in cash is primarily attributed to the use of
$1,477,000 in financing activities, which was partially offset by $1,036,000
generated from operating activities. The use in financing activities is
primarily due to repayments on the revolver loan to LaSalle Business Credit.
The $1,036,000 in cash generated from operating activities is primarily
due to accounts receivable decreasing over the 14 week period ending September
30, 2000 by $567,000 and inventories decreasing by $381,000. The decrease in
outstanding accounts receivable is caused by the more timely customer payments
for the fourteen week period ending September 30, 2000. The decrease in
inventory was primarily due to management's focus to operate more efficiently
with inventory planning at the facilities. Offsetting these decreases was the
increase in other assets for the 14 week period ending September 30, 2000 of
$587,000, primarily due to costs incurred for the Vanderloo pallet manufacturing
machine at the Indiana facility. These costs will be capitalized when the
machine is placed in service during October 2000.
The Company believes that existing cash on hand, cash provided by
future operations including both the expansion of the Plainfield manufacturing
facility and the PalletNet distribution products and services, additional
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available borrowings under its current line of credit, and a net working capital
of $1,229,000 as of September 30, 2000, will be sufficient to finance its
operations and expected working capital and capital expenditure requirements for
at least the next twelve months.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Disclosed in audited financial statements and note 5 above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K:
1. On August 1, 2000 Pallet Management filed a Current Report
on Form 8-K dated July 25, 2000, with respect to a change
in independent certified public accountants.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALLET MANAGEMENT SYSTEMS, INC.
Dated: November 10, 2000 By: /s/ Zachary M. Richardson
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Zachary M. Richardson, President
Dated: November 10, 2000 By: /s/ Marc S. Steinberg
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Marc S. Steinberg,
Treasurer, Controller and Secretary
(Principal Financial and Accounting
Officer)
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