U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT ISSUED UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Twenty six-week period ended Commission file
December 25, 1999 Number 2-99212-A
PALLET MANAGEMENT SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 59-2197020
- ---------- ----------
(State or other jurisdiction of (IRS Employer Identification
Incorporation) Number)
ONE E. OCEAN BOULEVARD, SUITE 305, BOCA RATON, FLORIDA 33432
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(Address of principal executive offices)
Registrant's telephone number, including area code:
(561) 338-7763
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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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
On December 25, 1999, the Registrant had outstanding 3,917,612 shares of common
stock, $.001 par value.
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<TABLE>
<CAPTION>
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 25, June 26,
ASSETS 1999 1999
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 446,154 $ 262,117
Accounts receivable - trade, net of allowance
for doubtful accounts 3,227,240 2,652,599
Inventories 2,834,063 1,866,494
Other current assets 363,614 156,422
------------ ------------
Total current assets 6,871,071 4,937,632
Property and equipment - net of accumulated
Depreciation 5,597,489 4,259,038
Other assets 247,308 1,008,336
------------ ------------
Total assets $ 12,715,868 $ 10,205,006
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 4,406,328 $ 304,341
Accounts payable 4,326,452 1,123,515
Accrued liabilities 536,586 513,656
------------ ------------
Total current liabilities 9,269,366 1,941,512
------------ ------------
LONG TERM LIABILITIES
Long-term debt, net of current maturities 422,511 3,119,578
------------ ------------
Total long term liabilities 422,511 3,119,578
------------ ------------
Total liabilities 9,691,877 5,061,090
------------ ------------
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 3,917,612 shares at December 25,
1999 and June 26, 1999 3,918 3,918
Additional paid in capital 6,958,704 6,958,704
Accumulated deficit (3,949,115) (1,829,190)
Accumulated other comprehensive income 10,484 10,484
------------ ------------
Total stockholders' equity 3,023,991 5,143,916
------------ ------------
Total liabilities and stockholders' equity $ 12,715,868 $ 10,205,006
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
13 Weeks Ended 26 Weeks Ended
----------------------------- ------------------------------
Dec. 25, 1999 Dec. 26, 1998 Dec. 25, 1999 Dec. 26, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 17,817,051 $ 10,803,440 $ 30,095,342 $ 18,723,087
Cost of goods sold 16,917,384 9,518,497 29,410,695 16,231,032
------------- ------------- ------------ ------------
Gross profit 899,667 1,284,943 684,647 2,492,055
Selling, general and administrative expense 1,145,770 690,451 2,528,282 1,169,074
------------- ------------- ------------ ------------
Operating profit (loss) (246,103) 594,492 (1,843,635) 1,322,980
------------- ------------- ------------ ------------
Other income (expense)
Other income (expense) 502 23,137 (964) (65,955)
Interest expense (177,358) (97,203) (275,326) (180,913)
------------- ------------- ------------ ------------
Total other income (expense) (176,856) (74,066) (276,290) (246,868)
Earnings before income taxes (422,959) 520,426 (2,119,925) 1,076,113
------------- ------------- ------------ ------------
Income tax expense (benefit) 0 0 0 0
------------- ------------- ------------ ------------
Net earnings (loss) $ (422,959) $ 520,426 $ (2,119,925) $ 1,076,113
============= ============= ============ ============
Net earnings (loss) per common share $ (0.11) $ .11 $ (0.54) $ .33
============= ============= ============ ============
(reflects 1 for 4 reverse split)
Diluted earnings per common share * $ .10 * $ .25
============= ============= ============ ============
</TABLE>
* exercise of warrants and options would be anti-dilutive
The accompanying notes are an integral part of these financial statements.
3
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<TABLE>
<CAPTION>
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
13 Weeks Ended 26 Weeks Ended
----------------------------- ------------------------------
Dec. 25, 1999 Dec. 26, 1998 Dec. 25, 1999 Dec. 26, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $ (422,959) $ 520,426 $(2,119,925) $ 1,076,113
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Depreciation 161,451 121,076 311,862 229,846
Loss on disposal of assets 177,061 0 181,278 0
(Incr.) Decr. in operating assets:
Accounts receivable 360,679 254,191 (574,641) (167,832)
Inventories (467,992) (199,651) (967,569) (832,625)
Other current assets (134,864) 12,925 (207,192) (184,690)
Other assets 890,183 (74,364) 761,028 (77,495)
Incr. (Decr.) in operating liabilities:
Accounts payable 1,021,526 50,383 3,202,937 53,470
Accrued liabilities and taxes 79,690 (24,944) 22,930 245,804
----------- ----------- ----------- -----------
Net cash provided by
operating activities 1,664,775 660,042 610,708 342,591
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (1,021,583) (245,630) (1,831,591) (824,503)
----------- ----------- ----------- -----------
Net cash used in investing activities (1,021,583) (245,630) (1,831,591) (824,503)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Borrowing from (payments to) lenders (680,684) (644,339) 1,404,920 (570,874)
Capital contributed -0- -0- -0- 2,303,940
----------- ----------- ----------- -----------
Net cash (used in) provided by
financing activities (680,684) (644,339) 1,404,920 1,733,066
----------- ----------- ----------- -----------
Increase (decrease) in cash (37,492) (229,927) 184,037 1,251,154
Cash at beginning of period 483,646 1,882,247 262,117 401,166
----------- ----------- ----------- -----------
Cash at end of period $ 446,154 $ 1,652,320 $ 446,154 $ 1,652,320
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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Pallet Management Systems, Inc.
Notes to Financial Statements
December 25, 1999
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of December 25, 1999, the
consolidated statements of operations and cash flows for the
thirteen-week and twenty-six week periods ended as of December 25, 1999
and December 26, 1998 have been prepared by Pallet Management Systems,
Inc. (the "Company" or "Pallet") without audit. In the opinion of
management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the periods reported
have been made. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
the financial statements and the notes thereto included in the
Company's annual report to shareholders filed on Form 10-KSB as of June
26, 1999.
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's credit facility with the National Bank of Canada
has various covenants that require the Company to maintain certain
financial ratios. As of December 25, 1999 the Company was not in
compliance with several of these covenants and without amendments to
these covenants, also will be out of compliance in future periods.
Therefore, in accordance with generally accepted accounting principles,
all amounts outstanding under the credit facility have been classified
as current liabilities. On January 24, 2000, the Company signed a
forbearance agreement in which the Company agreed to seek another
financial institution and satisfy all debt with the National Bank of
Canada by April 3, 2000. The Company is pursuing several financing
proposals from other financial institutions.
NOTE 3. INVENTORIES
Inventories consisted of the following at June 26, 1999 and December
25, 1999:
June 26, 1999 December 25, 1999
--------------- -----------------
Raw material $ 1,513,657 $ 2,277,273
Work in process $ 244,136 $ 296,605
Finished goods $ 608,278 $ 260,185
--------------- ---------------
TOTAL $ 2,366,071 $ 2,834,063
=============== ===============
NOTE 4. NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Net earnings (loss) per share were computed using the weighted
average number of shares outstanding and consolidated results of the
Company for the period presented.
NOTE 5. LITIGATION
In June 1999, Pallet Management Systems, Inc. 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, that Pallet has valid defenses, and intends to vigorously
contest the claim. The outcome of the action as well as the extent of
Pallet's liability, if any, cannot be determined at this time. No
amount has been provided for in the accompanying financial statements.
5
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NOTE 6. SIGNIFICANT EVENTS
In mid-September, 1999 the Company discovered a theft at its
Bolingbrook facility, estimated to be $640,000, consisting of raw
material, work in process and finished goods. The Company has changed
the management at this facility, a private investigator has been
retained, and this theft is being pursued with the local authorities.
This loss has been included in cost of goods sold.
During the thirteen weeks ended December 25, 1999, the Company expensed
costs totaling approximately $500,000. Costs included in selling,
general and administrative expense consist of $32,000 for legal and
accounting expenses related to a postponed equity offering and The
Nelson Company transaction, $67,000 for closing the Cary, North
Carolina, and Richmond, Virginia offices, and $3,000 for custom
software which is outdated and no longer to be used. Costs included in
cost of goods sold consist of $77,000 for equipment at the Bolingbrook,
Illinois facility that is not economically efficient and no longer in
use and $250,000 related to the closing of the Lakeland, Florida
facility. The Lakeland, Florida facility generated $3.5 million in
service sales annually. Included in interest expense is $72,000
relating to costs of obtaining the National Bank of Canada loan, which
were being amortized over the life of the loan.
During the twenty-six week period ending December 25, 1999,
the Company expensed costs totaling $690,000. Costs included in
selling, general and administrative consist of $32,000 for legal and
accounting expenses related to a postponed equity offering and The
Nelson Company transaction, $67,000 for closing the Cary, North
Carolina and Richmond, Virginia offices, and $192,000 for custom
software which is outdated and no longer to be used. Costs included in
cost of goods sold consist of $77,000 for equipment at the Bolingbrook,
Illinois facility that is not economically efficient and no longer in
use and $250,000 related to the closing of the Lakeland, Florida
facility. The Lakeland, Florida facility generated $3.5 million in
service sales annually. Included in interest expense is $72,000
relating to costs of obtaining the National Bank of Canada loan, which
were being amortized over the life of the loan.
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in
conjunction with the financial statements appearing as Item 1 to this
Report. These financial statements reflect the consolidated operations
of Pallet Management Systems, Inc. (the "Company") for the thirteen and
twenty-six week periods ended December 25, 1999 and December 26, 1998.
The following discussion regarding Pallet Management Systems,
Inc. 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 26, 1999. 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.
6
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RESULTS OF OPERATIONS
GENERAL
At the December 1999 Board of Directors meeting, Donald Radcliffe was
elected as Chairman. Mr. Lucy III, the CEO, along with the Company
President, Zachary M. Richardson, will report directly to Mr.
Radcliffe.
Our company has grown to be one of the largest pallet companies in the
more than $6 billion United States pallet industry, by providing
value-added products and services to our customers. Our customer base
has grown to over 100 Fortune 1000 companies including AlliedSignal,
Bethlehem Steel, CHEP America, DuPont, IAMS, Monsanto, Mitsubishi,
Siemens, and various governmental agencies. Our sales for the first two
quarters of fiscal year 2000 were over $31 million with 6 facilities in
5 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
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.
Our company has two lines of business, 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 lessor of rental 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; 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 ("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.
Second - Reverse Distribution can carry the retrieval, sort, repair,
warehouse and return services one step further by contracting with a
customer to manage their pallet flow.
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.
7
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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 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 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.
THIRTEEN WEEKS ENDED DECEMBER 25, 1999 COMPARED TO THIRTEEN WEEKS ENDED
DECEMBER 26, 1998
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For the thirteen-week period ended December 25, 1999, net
sales increased 65.0% to $17,817,000 from $10,803,000 for the
comparable 1998 period.
During the thirteen-week period ended December 25, 1999,
manufacturing sales increased 70.2% to $14,632,000 from $8,599,000, and
services increased by 44.5% to $3,185,000 from the $2,204,000 recorded
for the same thirteen-week period ended December 26, 1998. This
increase in sales was due to two new manufacturing facilities that
commenced operations subsequent to December 26, 1998 and one that
opened during the period ending December 26, 1998. The result of
operations for this thirteen-week period was a loss of $422,000 as
compared to income of $520,000 achieved for the same thirteen-week
period ended December 26, 1998. During this period management
responsibilities were restructured and a number of middle management
positions eliminated. The Company closed an operating facility and
consolidated administrative activities, which resulted in closing two
administrative offices. The Company is presently in the process of
installing improved internal controls and more effective systems.
During the period substantial charges were incurred totaling
approximately $500,000. Costs included in selling, general and
administrative expense consist of $32,000 for legal and accounting
expenses related to a postponed equity offering and The Nelson Company
transaction, $67,000 for closing the Cary, North Carolina and Richmond,
Virginia offices, and $3,000 for custom software which is outdated and
outdated and no longer to be used. Costs included in cost of goods sold
consist of $77,000 for equipment at the Bolingbrook, Illinois facility
that is not economically efficient and no longer used and $250,000
related to the closing of the Lakeland, Florida facility. Included in
interest expense is $72,000 relating to costs of obtaining the National
Bank of Canada loan, which was being amortized over the life of the
loan. Operational profits before the special charges and interest were
$183,000 for the period.
We experienced a 66.0% increase in Selling, General and
Administrative expenses from $690,000 to $1,415,000 for the
thirteen-week period ended December 25, 1999 when compared to the
period ended December 26, 1998. This increase was a result of
additional management costs related to the sales volume increase and
expenses related to expanding our Reverse Distribution business. An
$80,000 (82.5%) increase in interest expense was recorded for this
thirteen-week period ended December 25, 1999 due to the increased sales
volume and a charge to interest for the National Bank of Canada loan.
The increased sales volume required increased borrowing to fund the
purchases of raw materials for production.
A net loss of $422,959 or ($0.11) per share was realized
during this thirteen week period ended December 25, 1999 compared to a
8
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net earning of $520,426 or $0.11 per share recorded for the same period
last year. We did not record any tax benefit on the loss due to net
operating losses previously experienced.
TWENTY-SIX WEEKS ENDED DECEMBER 25, 1999 COMPARED TO TWENTY-SIX WEEKS
ENDED DECEMBER 26, 1998
-----------------------------------------------------------------------
For the twenty-six week period ended December 25, 1999, net
sales increased 60.8% to $30,095,000 from $18,723,000 for the
comparable 1998 period.
During the twenty-six week period ended December 25, 1999,
manufacturing sales increased 64.2% to $23,441,000 from $14,276,000,
and services increased by 49.6% to $6,654,000 from the $4,447,000
recorded for the same twenty-six week period ended December 26, 1998.
This increase in sales was due to two new manufacturing facilities that
commenced operations subsequent to December 26, 1998 and one that
opened during the later half of the period ending December 26, 1998.
The results of operations for this twenty six-week period was a loss of
$2,119,000 as compared to earning of $1,076,000 achieved for the same
twenty-six week period last year. It was during this period that the
company underwent a reorganization of management in which management
positions were eliminated and substantial charges were incurred
totaling approximately $690,000. Costs included in selling, general and
administrative consist of $32,000 for legal and accounting expenses
related to a postponed equity offering and The Nelson Company
transaction, $67,000 for closing the Cary, North Carolina and Richmond,
Virginia offices and $192,000 for custom software which is outdated and
no longer to be used. Cost included in cost of goods sold consist of
$77,000 for equipment at the Bolingbrook, Illinois facility that is not
economically efficient and no longer used and $250,000 related to the
closing of the Lakeland, Florida facility. Included in interest expense
is $72,000 in costs relating to costs of obtaining the National Bank of
Canada loan, which were being amortized over the life of the loan.
Operational losses before these special charges and interest were
$1,354,000 for the period.
In addition, substantial expenses relating to the opening of
the three new facilities, operational inefficiencies, and an estimated
$640,000 theft at our Bolingbrook facility significantly impacted
earnings. We have hired a private investigator to work with the
authorities on the Bolingbrook situation. Internal controls have been
altered in our attempt to prevent reoccurrence.
We experienced a 116.3% increase in Selling, General and
Administrative expenses from $1,169,000 to $2,119,000 for the
twenty-six week period ended December 25, 1999 when compared to the
period ended December 26, 1998. This increase was a result of
additional management costs related to the sales volume increase and
expenses related to expanding our Reverse Distribution business. A
$94,000 (52.2%) increase in interest expense was recorded for this
twenty-six week period ended December 25, 1999 due to the increased
sales volume and a charge to interest for the National Bank of Canada
loan. The increased sales volume required increased borrowing to fund
the purchases of raw materials for production.
A net loss of $2,119,000 or ($0.54) per share was realized during this
twenty-six week period ended December 25, 1999 compared to a net
earnings of $1,076,000 or $0.33 per share recorded for the same period
last year. We did not record any tax benefit on the loss due to net
operating losses previously experienced.
LIQUIDITY AND CAPITAL RESOURCES
We had $446,000 cash on hand at December 25, 1999, versus
$262,000 at the beginning of the fiscal year. This $184,000 increase in
cash is primarily attributable to a $3,203,000 increase in accounts
payable and an increase in net borrowings of $1,405,000. These
increases were offset by $2,592,000 of cash used in operating
activities and $1,832,000 used in purchases of fixed assets.
9
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At the end of this period, we were in violation of several
loan covenants with the National Bank of Canada. On January 24, 2000,
the Company signed a forbearance agreement in which it agreed to seek
another financial institution and satisfy all debt with the National
Bank of Canada by March 13, 2000. The Company is pursuing several
financing proposals from other financial institutions.
During the thirteen weeks ended December 25, 1999, the Company
expensed costs totaling $500,000. Costs included in selling, general
and administrative expense consist of $32,000 for legal and accounting
expenses related to a postponed equity offering and The Nelson Company
transaction, $67,000 for closing the Cary, North Carolina and Richmond,
Virginia offices, and $3,000 for custom software which is outdated and
no longer to be used. Cost included in cost of goods sold consist of
$77,000 for equipment at the Bolingbrook, Illinois facility that is not
economically efficient and no longer in use and $250,000 related to the
closing of the Lakeland, Florida facility. The Lakeland, Florida
facility generated $3.5 million in service sales annually. Included in
interest expense is $72,000 relating to costs of obtaining the National
Bank of Canada loan, which was being amortized over the life of the
loan.
During the twenty-six week period ending December 25, 1999,
the Company expensed costs totaling $690,000. Costs included in
selling, general and administrative consist of $32,000 for legal and
accounting expenses related to a postponed equity offering and The
Nelson Company transaction, $67,000 for closing the Cary, North
Carolina and Richmond, Virginia offices, and $192,000 for custom
software which is outdated and no longer to be used. Cost included in
cost of goods sold consist of $77,000 for equipment at the Bolingbrook,
Illinois facility that is not economically efficient and no longer in
use, and $250,000 related to the closing of the Lakeland, Florida
facility. The Lakeland, Florida facility generated $3.5 million in
service sales annually. Included in interest expense is $72,000
relating to costs of obtaining the National Bank of Canada loan that
must be satisfied, which was being amortized over the life of the loan.
The completion of the acquisition of The Nelson Company has
been postponed until later this fiscal year as the transaction is being
restructured due to our recent losses and loan covenant violations.
We have suspended ISO 9000 registration until our operations
have stabilized as profitable. Profile Consulting Group, Ltd. of Troy,
MI had been engaged to assist in this endeavor.
Year 2000 Issues
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. During the transition from 1999 to 2000, the company did not
experience any year 2000 problems. Even though the January 1, 2000 date
has passed and we have not experienced any adverse impact from the
transition we cannot provide assurance that our suppliers and vendors
have not been affected in a manner that has yet to become apparent. In
addition, certain computer programs, which are date sensitive to the
Year 2000 may not have been programmed to process the year 2000 as a
leap year and any negative effects, remain unknown. Pallet Management
will continue to monitor our Year 2000 compliance and Year 2000
compliance of our suppliers and customers.
10
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, Pallet Management Systems 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, that Pallet has valid defenses and intends to vigorously contest
the claim. The outcome of the action as well as the extent of the
company's liability, if any, cannot be determined at this time.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company and The Nelson Company are continuing to negotiate
a restructuring of their previously announced transaction. The Company
expects that the new completion and effective date will be around the
end of fiscal 2000, subsequent to the satisfactory completion of
negotiations with a new lender, which must consent to the transaction.
Accordingly, the Company has not yet filed the financial statements for
The Nelson Company and will make such filing on a timely basis after
completion of the restructured transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulations S-B.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on behalf
by the undersigned thereunto duly authorized.
PALLET MANAGEMENT SYSTEMS, INC.
Dated: February __, 2000 By: /s/ ZACHARY RICHARDSON
-------------------------------
Zachary M. Richardson,
President
11
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<NAME> Pallet Management Systems, Inc.
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<FN>
Exercise of options and warrants would be anti-dillutive.
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