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 thirty-nine week period ended Commission file
March 25, 2000 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 (IRS Employer
of Incorporation) Identification 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 March 25, 2000, the Registrant had outstanding 4,055,612 shares of common
stock, $.001 par value.
<PAGE>
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 25, June 26,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS (unaudited)
CURRENT ASSETS
Cash $ 122,699 $ 262,117
Accounts receivable - trade, net of allowance
for doubtful accounts 4,358,785 2,652,599
Inventories 1,975,859 1,866,494
Other current assets 447,285 156,422
------------ ------------
Total current assets 6,904,628 4,937,632
NONCURRENT ASSETS
Property and equipment - net of accumulated
depreciation 4,512,626 4,259,038
Other assets 796,287 1,008,336
------------ ------------
Total noncurrent assets 5,308,913 5,267,374
Total assets $ 12,213,541 $ 10,205,006
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,973,234 $ 304,341
Accounts payable 3,596,246 1,123,515
Accrued liabilities 638,790 513,656
------------ ------------
Total current liabilities 6,208,270 1,941,512
LONG TERM LIABILITIES
Long-term debt, net of current maturities 3,169,610 3,119,578
------------ ------------
Total long term liabilities 3,169,610 3,119,578
Total liabilities 9,377,880 5,061,090
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 7,500,000 shares at .001
par value; no shares issued and outstanding 0 0
Common stock, authorized 10,000,000 shares at $.001
par value; issued and outstanding 4,055,612 shares at
March 25, 2000 and 3,917,612 shares at June 26, 1999 4,056 3,918
Additional paid in capital
7,234,566 6,958,704
Stockholders' notes receivable (276,000) 0
Accumulated deficit (4,126,961) (1,829,190)
Accumulated other comprehensive income 0 10,484
------------ ------------
Total stockholders' equity 2,835,661 5,143,916
------------ ------------
Total liabilities and stockholders' equity $ 12,213,541 $ 10,205,006
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
--------------- --------------
MARCH 25, MARCH 27, MARCH 25, MARCH 27,
------------ ------------ ------------ ------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales
Manufacturing sales $ 13,507,120 $ 8,169,819 $ 40,872,518 $ 22,445,717
Service sales 647,937 2,577,223 3,377,881 7,024,413
------------ ------------ ------------ ------------
Total net sales 14,155,057 10,747,042 44,250,399 29,470,130
Cost of goods sold 13,376,852 9,517,737 42,787,547 25,748,770
------------ ------------ ------------ ------------
Gross profit 778,205 1,229,305 1,462,852 3,721,360
Selling, general and administrative expense 842,733 770,882 3,371,015 2,159,956
------------ ------------ ------------ ------------
Operating profit (loss) (64,528) 458,423 (1,908,163) 1,561,404
------------ ------------ ------------ ------------
Other income (expense)
Other income (expense) 6,301 (155,823) 5,337 (1,778)
Interest expense (119,619) (67,707) (394,945) (248,619)
------------ ------------ ------------ ------------
Total other income (expense) (113,318) (223,530) (389,608) (250,397)
Earnings before income taxes (177,846) 234,893 (2,297,771) 1,311,007
------------ ------------ ------------ ------------
Income tax expense (benefit) 0 (221,881) 0 (221,881)
------------ ------------ ------------ ------------
Net earnings (loss) $ (177,846) $ 456,774 $ (2,297,771) $ 1,532,888
============ ============ ============ ============
Net earnings (loss) per common share:
Basic $ (.04) $ .11 $ (.58) $ .44
============ ============ ============ ============
Diluted * $ .08 * $ .33
============
Weighted average common shares: (`000's)
Basic 4,030 3,918 3,955 3,466
Diluted * 5,608 * 4,636
* exercise of warrants and options would be anti-dilutive
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
39 WEEKS ENDED
--------------------------
MARCH 25, MARCH 27,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(2,297,771) $ 1,532,888
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation 466,488 354,067
Loss on disposal of property and equipment 210,823 0
Loss on sale of investment 4,129 0
(Incr.) Decr. in operating assets:
Accounts receivable (1,706,186) (490,055)
Inventories (109,365) (781,250)
Other current assets (290,863) (328,750)
Other assets 889,181 (303,160)
Incr. (Decr.) in operating liabilities:
Accounts payable 2,472,731 693,724
Accrued liabilities and taxes 125,134 491,133
Deferred credits 0 (31,381)
----------- -----------
Net cash used in operating activities (813,864) 1,137,216
Cash flows from investing activities:
Purchase of property and equipment (574,440) (1,936,469)
Payments for deposits on equipment (706,727) 0
Proceeds from sale of property and equipment 221,706 0
Proceeds from sale of investment 14,982 0
----------- -----------
Net cash used in investing activities (1,044,497) (1,936,469)
Cash flows from financing activities:
Borrowing from (payments to) lenders 1,718,925 (1,676,572)
Capital contributed 0 2,423,940
----------- -----------
Net cash provided by (used in)
financing activities 1,718,925 747,368
----------- -----------
Decrease in cash (139,418) (51,885)
Cash at beginning of period 262,117 401,166
----------- -----------
Cash at end of period $ 122,699 $ 349,281
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Pallet Management Systems, Inc.
Notes to Financial Statements
March 25, 2000
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of March 25, 2000, the consolidated
statements of operations for the thirteen-week and thirty-nine week periods
ended as of March 25, 2000 and March 27, 1999, and the consolidated statement of
cash flows for the thirty-nine week period ended as of March 25, 2000, 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 had
various covenants that required the Company to maintain certain financial
ratios. As of March 25, 2000, the Company was not in compliance with several of
these covenants. On April 14, 2000, the Company completed a new financing
agreement with LaSalle Business Credit to replace the National Bank of Canada
facility and as of that date was in full compliance with all loan covenants.
The new financing consists of a revolving loan and two term loans. On
April 14, 2000, the Company borrowed $1,504,874 under the revolving loan and
$1,821,000 and $1,388,000 under the two term loans. These funds were used to
repay the existing indebtedness.
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 (9.0% at April 14,
2000). 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 April 29, 2000, the Company had $1,957,389 of
availability under the revolving agreement. Borrowings under the revolving loan
are reflected as current liabilities.
The $1,821,000 term loan is payable in monthly installments of $21,679
plus interest at the bank's prime rate plus 0.25% (9.25% at April 14, 2000)
through April 2003, with possible year to year renewals through 2007. The loan
is collateralized by substantially all of the assets of the Company.
The $1,388,000 term loan is payable in monthly installments of $11,567
plus interest at the bank's prime rate plus 0.5% (9.5% at April 14, 1000)
through April 2003, with possible year to year renewals through 2010. The loan
is collateralized by substantially all of the assets of the Company.
Long term debt on the accompanying balance sheet reflects the terms of
the new financing.
<PAGE>
NOTE 3. INVENTORIES
Inventories consisted of the following at March 25, 2000 and June 26,1999:
March 25, 2000 June 26, 1999
------------------------------
Raw material $1,630,629 $ 999,992
Work in process 99,860 640,274
Finished goods 245,370 226,228
---------------------------
TOTAL $1,975,859 $1,866,494
===========================
NOTE 4. NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Net earnings (loss) per share of common stock were determined by
dividing net income applicable to common shares by the weighted average number
of common shares outstanding during each year. Diluted earnings per share
reflect the potential dilution that could occur assuming exercise of all issued
and unexercised stock options. A reconciliation of the net income and numbers of
shares used in computing basic and diluted earnings per share is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $ (178) $ 457 $ (2,298) $1,533
--------- ------ -------- ------
Weighted average common shares
outstanding for the period 4,030 3,918 3,955 3,466
--------- ------ -------- ------
Basic earnings per share of
common stock $ (.04) $ .11 $ (.58) $ .44
========= ====== ======== ======
Diluted earnings per share:
Net income $ (178) $ 457 $ (2,298) $1,533
--------- ------ -------- ------
Weighted average common shares
outstanding for the period 4,030 3,918 3,955 3,466
--------- ------ -------- ------
Increase in shares which would
result from exercise of stock options * 1,690 * 1,170
Weighted average common shares,
assuming conversion of the above
securities * 5,608 * 4,636
--------- ------ -------- ------
Diluted earnings per share of
common stock * $ .08 * $ .33
========= ====== ======== ======
</TABLE>
* exercise of warrants and options would be anti-dilutive
<PAGE>
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.
NOTE 6. SIGNIFICANT EVENTS
In January 2000, the Company experienced a $273,000 loss at its
Lawrenceville facility. The loss is attributed to a number of factors which
occurred during that month including the facility being closed for almost two
weeks due to record snow and ice storms, a seasonal increase of raw material
prices, and a reduction and cancellation of anticipated sales of stringer
pallets which resulted in top graded lumber being utilized on lower graded and
lower priced pallets as a result of the order cancellation.
During the thirteen week period ended March 25, 2000, in connection
with the exercise of options by two stockholders, the Company received notes
receivable totaling $276,000.
At the April 27th annual shareholder's meeting, the shareholders
elected three new outside directors to its Board of Directors. Philip Feltman,
Robert Steiler and Ronald Shindler were elected to join David Sass on the Board.
Prior to the meeting, John C. Lucy III, Donald Radcliffe and Zachary Richardson
resigned from the Board. Mr. Lucy remains Chief Executive Officer and Mr.
Richardson remains President.
During the thirty-nine week period ended March 25, 2000, the Company
expensed costs totaling $765,000. Costs included in selling, general and
administrative consist of $32,000 of 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 $325,000 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.
<PAGE>
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 thirty-nine week periods
ended March 25, 2000, and March 27, 1999.
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.
RESULTS OF OPERATIONS
GENERAL
Pallet Management Systems Inc. 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 its customers. The customer base
has grown to over 100 Fortune 1000 companies including AlliedSignal, CHEP
America, DuPont, IAMS, Monsanto, Mitsubishi, Siemens, and various governmental
agencies. Sales for the first three-quarters of fiscal year 2000 were over $44
million with 5 facilities in 4 states.
The majority of the 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, 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 the Company. With this shift in focus toward
services and cost efficiency, the 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 the customer base is by far the
most dramatic shift in focus and provides the most opportunity for the Company.
The Company has two lines of business; manufacturing and services:
Manufacturing: The Company has two primary categories of manufacturing:
CHEP grocery pallets and specially engineered niche market pallets. The
Company has 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. In addition to CHEP, the
company's customer base is primarily composed of customers who require
niche pallets. These types of pallets provide lower volumes and higher
margins than CHEP pallets.
<PAGE>
Services: The Company has 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 customers to better utilize their packaging assets. In addition
to 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, 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 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 ("RFID") 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 Systems Inc. the
technical support requirements to manage an efficient reverse
distribution operation and asset management of valuable transport
packaging.
Third - Pallet Management Systems, Inc. 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, the Company is responding to customer
demands for Reverse Distribution through the pallet industry. This
approach will provide the Company a more cost-effective "seamless
system" which provides increased benefits to the customer base and will
give Pallet Management Systems, Inc. an advantage over competition from
current logistic companies.
<PAGE>
As the market for Reverse Distribution is just starting to be created,
the economic advantages to companies that are implementing it are
significant. The Company is 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 $6 billion in 2000. The Company is
positioning Pallet Management Systems, Inc. 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 outsourcing their logistical demands.
THIRTEEN WEEKS ENDED MARCH 25, 2000 COMPARED TO THIRTEEN WEEKS ENDED MARCH 27,
1999
For the thirteen-week period ended March 25, 2000, net sales increased
31.7% to $14,155,000 from $10,747,000 for the comparable 1999 period. During the
thirteen-week period ended March 25, 2000, manufacturing sales increased 65.3%
to $13,507,000 from $8,171,000, and services decreased by 74.9% to $648,000 from
the $2,577,000 recorded for the same thirteen-week period ended March 27, 1999.
The increase in manufacturing sales was due to sales from two new manufacturing
facilities that commenced operations subsequent to March 27, 1999. The decrease
in service sales is due to closing the Lakeland facility in December 1999.
The result of operations for this thirteen-week period was a loss of
$178,000 as compared to income of $457,000, achieved for the same thirteen-week
period ended March 27, 1999. During this period the Company was in the process
of installing improved internal controls and more effective systems. During this
period additional charges of $75,000 were experienced in the closing of the
Lakeland facility. The Lawrenceville facility experienced a loss of $273,000 in
the month of January. This loss is attributed to a number of factors which
occurred during that month including the facility being closed for almost two
weeks due to record snow and ice storms, a seasonal increase of raw material
prices, and a reduction and cancellation of anticipated sales of stringer
pallets which resulted in top graded lumber being utilized on lower graded and
lower priced pallets as a result of the order cancellation.
The Company experienced a 9.3% increase in Selling, General and
Administrative expenses to $843,000 from $771,000 for the comparable 1999
period. The increase was a result of additional administrative costs related to
the sales volume increase and expenses related to expanding the Reverse
Distribution business and investments in the PalletNet web page and PalletNet
e-portal. A $52,000 (76.7%) increase in interest expense was recorded for the
thirteen-week period ended March 25, 2000, due to the increased borrowing
related to increased sales volume. The increased sales volume required increased
borrowing to fund the purchases of raw materials for production.
A net loss of $178,000 or ($0.04) per share was realized during the
thirteen week period ended March 25, 2000, compared to net earnings of $457,000
or $0.11 per share recorded for the same period last year. The Company did not
record any tax benefit on the loss due to uncertainty regarding future
realizability.
THIRTY-NINE WEEKS ENDED MARCH 25, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED MARCH
27, 1999
For the thirty-nine week period ended March 25, 2000, net sales
increased 50.2% to $44,250,000 from $29,470,000 for the comparable 1999 period.
During the thirty-nine week period ended March 25, 2000, manufacturing
sales increased 82.1% to $40,873,000 from $22,446,000, and services decreased by
51.9% to $3,378,000 from the $7,024,000 recorded for the same thirty-nine week
period ended March 27, 1999. The increase in manufacturing sales was due to two
new manufacturing facilities that commenced operations subsequent to March 27,
1999. The decrease in service sales is due to closing the Lakeland facility in
December 1999. The result of operations for this thirty-nine week period was a
loss of $2,298,000 as compared to earnings of $1,533,000 achieved for the same
<PAGE>
thirty-nine week period last year. During this period that the company underwent
a reorganization of management in which management positions were eliminated and
substantial charges were incurred totaling approximately $725,000. Of this
amount, 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 $325,000 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.
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. The Company has hired
a private investigator to work with the authorities on the Bolingbrook
situation. Internal controls have been altered in our attempt to prevent
reoccurrence.
The Company experienced a 56% increase in Selling, General and
Administrative expenses to $3,371,000 from $2,160,000 for the comparable 1999
period. This increase was a result of additional administrative costs related to
the sales volume increase and expenses related to expanding the Reverse
Distribution business and investments in the PalletNet web page and PalletNet
e-portal. A $146,000 (58.9%) increase in interest expense was recorded for this
thirty-nine week period ended March 25, 2000, 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 $2,298,000 or ($0.58) per share was realized during the
thirty-nine week period ended March 25, 2000, compared to a net earnings of
$1,533,000 or $0.44 per share recorded for the same period last year. The
Company did not record any tax benefit on the loss due to uncertainty regarding
their future realizability.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $123,000 of cash on hand at March 25, 2000, versus
$262,000 at the beginning of the fiscal year, a decrease of $139,000. The
decrease in cash is primarily attributed to $813,864 used in operating
activities and $1,044,479 used in investing activities, which was offset by an
increase in net borrowings of $1,719,000.
The Company's credit facility with the National Bank of Canada had
various covenants that required the Company to maintain certain financial
ratios. As of March 25, 2000, the Company was not in compliance with several of
these covenants. On April 14, 2000, the Company completed a new financing
agreement with LaSalle Business Credit to replace the National Bank of Canada
facility and as of that date was in full compliance with all loan covenants.
During the first nine months ended March 25, 2000, the Company incurred
a net loss of $2,297,771 and had an accumulated deficit of $4,126,961 at March
25, 2000. The Company has already implemented certain steps in the first nine
months of the fiscal year to, among other things, reduce headcount, restructure
operations and eliminate various costs from the business. 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 borrowings under its current line
of credit, and a net working capital of $696,358 as of March 25, 2000, will be
sufficient to finance its operations and expected working capital and capital
expenditure requirements for at least the next twelve months.
<PAGE>
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
The Company's credit facility with the National Bank of Canada had
various covenants that required the Company to maintain certain financial
ratios. As of March 25, 2000, the Company was not in compliance with several of
these covenants. On April 14, 2000, subsequent to the quarter end, the Company
completed a new financing agreement with LaSalle Business Credit to replace the
National Bank of Canada facility and as of that date was in full compliance with
all loan covenants.
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. 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: May 15, 2000 By: /s/ ZACHARY RICHARDSON
------------------------------------
Zachary M. Richardson, President
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