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 thirteen-week period ended
September 29, 2001
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
incorporation) Number)
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 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, 2001, the Registrant had outstanding 4,065,612 shares of common
stock, $.001 par value.
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
September 29, June 30,
2001 2001
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 71,150 $ 232,635
Accounts receivable - trade, net of allowance
for doubtful accounts $ 2,501,236 $ 4,614,612
Inventories $ 3,031,430 $ 2,041,489
Other Current Assets $ 325,095 $ 258,858
------------ ------------
Total current assets $ 5,928,911 $ 7,147,594
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Property and equipment - net of accumulated
depreciation $ 5,474,291 $ 5,640,355
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OTHER ASSETS $ 105,426 $ 91,788
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Total assets $ 11,508,628 $ 12,879,737
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 414,286 $ 420,344
Current portion of capital lease obligations $ 114,207 $ 111,762
Accounts payable $ 2,678,604 $ 3,039,566
Accrued liabilities $ 512,265 $ 509,952
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Total current liabilities $ 3,719,362 $ 4,081,624
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LONG TERM DEBT
Long-term debt $ 4,903,376 $ 5,420,261
Capital lease obligations $ 126,918 $ 156,402
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Total long-term liabilities $ 5,030,294 $ 5,576,663
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Total liabilities $ 8,749,656 $ 9,658,287
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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 29, 2001 and
June 30, 2001 $ 4,066 $ 4,066
Additional paid in capital $ 7,286,714 $ 7,269,556
Accumulated deficit $ (4,255,808) $ (3,776,172)
Notes receivable from stockholders $ (276,000) $ (276,000)
------------ ------------
Total stockholders' equity $ 2,758,972 $ 3,221,450
------------ ------------
Total liabilities and stockholders' equity $ 11,508,628 $ 12,879,737
------------ ------------
The accompanying notes are an integral part of these financial statements.
2
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 Wks Ended 14 Wks Ended
Sept. 29, 2001 Sept. 30, 2000
------------ ------------
Net sales $ 12,960,018 $ 19,473,798
Cost of goods sold $ 12,448,577 $ 18,233,530
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Gross profit $ 511,441 $ 1,240,268
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Selling, general and administrative expense $ 821,095 $ 1,048,638
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Operating profit (loss) $ (309,654) $ 191,630
------------ ------------
Other income (expense)
Other income (expense) $ (54,990) $ (5,970)
Interest expense $ (114,992) $ (131,018)
------------ ------------
Total other income (expense) $ (169,982) $ (136,988)
------------ ------------
Income (loss) before income tax expense $ (479,636) $ 54,642
Income tax expense (benefit) $ -- $ --
Net income (loss) $ (479,636) $ 54,642
------------ ------------
Net earnings (loss) per common share $ (0.12) $ 0.01
Diluted earnings (loss) per common share * $ 0.01
* exercise of warrants and options would be anti-dilutive
The accompanying notes are an integral part of these financial statements.
3
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
13 Wks Ended 14 Wks Ended
Sept. 29, 2001 Sept. 30, 2000
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Cash flows from operating activities:
Net income (loss) $ (479,636) $ 54,642
----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by/(used in) operating activities:
Depreciation $ 156,116 $ 126,170
Stock options issued for services $ 17,158 $ --
(Increase) Decrease in operating assets:
Accounts receivable $ 2,113,375 $ 566,728
Inventories $ (989,941) $ 380,961
Other assets $ (79,875) $ (578,911)
Increase (Decrease) in operating liabilities:
Accounts payable $ (360,960) $ 939,702
Accrued liabilities $ 2,313 $ (453,130)
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Net cash provided by/(used in)
operating activities $ 378,550 $ 1,036,162
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Cash flows from investing activities:
Proceeds from sale of fixed assets $ 37,086 $ --
Purchase of fixed assets $ (27,139) $ (11,519)
----------- -----------
Net cash provided by/(used in) investing activities $ 9,947 $ (11,519)
----------- -----------
Cash flows from financing activities:
Net Borrowings from lenders $ -- $ 411,333
Net Payments of long term debt $ (549,982) $(1,887,928)
----------- -----------
Net cash provided by/(used in) financing activities $ (549,982) $(1,476,595)
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Increase/(Decrease) in cash $ (161,485) $ (451,952)
Cash at beginning of period $ 232,635 $ 577,052
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Cash at end of period $ 71,150 $ 125,100
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The accompanying notes are an integral part of these financial statements
4
Pallet Management Systems, Inc.
Notes to Financial Statements
September 29, 2001
Note 1. Consolidated Financial Statements:
The consolidated balance sheet as of September 29, 2001 and the
consolidated statements of operations and cash flows for the thirteen week
period ended September 29, 2001 and fourteen week period ended September 30,
2000 have been prepared by the Company without audit in accordance with
accounting principles generally accepted in the United States for interim
financial information and with instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States 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 thirteen weeks ended
September 29, 2001 are not necessarily indicative of the results that may be
expected for the year ended June 29, 2002. 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-K as of
June 30, 2001.
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 29, 2001 the Company was in full compliance with 2 of its 3 covenants.
The Company did not pass the Consolidated Debt Service Coverage Ratio due to the
net loss for the thirteen weeks ending September 29, 2001 of ($480,000) compared
with the net income for the fourteen weeks ending September 30, 2000 of $55,000.
The Company has been granted a waiver of this covenant. LaSalle Business Credit
will be raising our interest rate by one percent on our revolving loans, by
three-quarters of one percent on our machinery and equipment loans and by
one-half of one percent on our real estate loan until approximately September
2002. If we meet all of the reset covenant goals, LaSalle Business Credit will
reduce the interest rate by one-half percent of one percent on our revolving
loans and by one-quarter of one percent on our machinery and equipment loans.
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 29, 2001, the Company had $ 2,005,000 of availability under the
revolving agreement.
The three term loans as of September 29, 2001 were at $1,191,000,
$1,452,000 and $997,000. These loans are collateralized by substantially all the
assets of the Company.
Note 3. Inventories
Inventories consisted of the following at September 29, 2001:
Raw material $1,554,157
Work in process $ 435,104
Finished goods $1,042,169
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TOTAL $3,031,430
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Note 4. Net Earnings (Loss) per Share of Common Stock:
Net earnings (loss) per share of common stock was determined by
dividing net income (loss) 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):
13 Weeks Ended 14 Weeks Ended
September 29 September 30
2001 2000
---- ----
Basic earnings/(loss) per common share:
Net income/(loss) ($480) $55
Weighted average common shares
outstanding for the period 4,065 4,065
Basic earnings per share of
common stock ($0.12) $0.01
Diluted earnings/(loss) per common share:
Net income/(loss) ($480) $55
Weighted average common shares
outstanding for the period 4,065 4,065
Increase in shares which would
result from exercise of stock options * 426
Weighted average common shares,
assuming conversion of the above
securities 4,065 4491
Diluted earnings/(loss) per share of
common stock * 0.01
* 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 and other property formerly leased to the Company in
Jessup, Maryland. Management believes the claim is without merit and intends to
vigorously contest the claim. St. Paul Insurance is currently paying defense
costs. 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
Note 6. Revenue Recognition
Sales revenue is generally recorded upon the delivery of goods or the acceptance
of goods by the customer according to contractual terms and represents amounts
realized, net of discounts and allowances.
Note 7. Accounting for Software Related Costs
The Company accounts for the costs of computer software developed or obtained
for internal use in accordance with Statement of Position 98-1 which generally
requires the capitalization of costs incurred during the application development
stage of computer software meeting certain characteristics. All costs incurred
during the preliminary project stage and post implementation / operation stage
are expensed as incurred.
Note 8. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
which applies to all business combinations initiated after June 30, 2001. This
statement requires that all business combinations be accounted for by the
purchase method and defines the criteria used to identify intangible assets to
be recognized apart from goodwill.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142), which is effective for fiscal years beginning after December 15,
2001, except goodwill and intangible assets acquired after June 30, 2001 are
subject immediately to the non-amortization and amortization provisions of this
Statement. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. Other intangible assets will
continue to be amortized over their useful lives.
In August 2001, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations", effective for fiscal years beginning after June 15, 2002. This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-lived Assets", effective for fiscal years beginning after
December 15, 2001. This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets.
The Company has not yet determined what the effects of these Statements will be
on its financial position and results of operations.
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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 and the Form
10-K for the year ended June 30, 2001. The financial statements in this Report
reflect the consolidated operations of Pallet Management Systems, Inc. (the
"Company" or "Pallet Management") for the thirteen-week period ended September
29, 2001 and for the fourteen-week period ended September 30, 2000.
The following discussion regarding Pallet Management and its business
and operations contains "forward-looking statements" within the meaning of the
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 "Risk Factors" in the Annual Report on Form
10-K for the year ended June 30, 2001. 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
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Pallet Management has grown to be one of the largest pallet companies
in the estimated $6 billion U.S. pallet industry, by providing value-added
products and services to our customers. Our customer base has remained stable.
The majority of our revenues have traditionally been generated from
providing high quality, specially engineered pallets to manufacturers,
wholesalers and distributors. As supply chain logistics have become increasingly
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 us.
With this shift in focus toward services and cost efficiency, we are
providing "state of the art" logistical services known as reverse logistics.
Reverse logistics 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 efficiency by our customer base
is by far our industry's most dramatic shift in focus and provides the most
8
opportunity for our company. Driven mainly by economics, reusable packaging in a
reverse logistics system also has environmental marketing benefits.
Reverse logistics, a sub-industry of the logistics industry, is growing
rapidly and is estimated to have reached $7.7 billion. 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.
The Company has two lines of revenue, manufacturing and services:
Manufacturing: Our Company has two primary categories of manufacturing:
CHEP grocery pallets and specifically engineered niche market pallets. The
Company has multi-year contracts to manufacture high quality grocery pallets for
CHEP, the world's largest pallet rental pool. The Company is currently operating
two manufacturing facilities, which currently produce CHEP pallets; Bolingbrok,
Illinois and Plainfield, Indiana. In Rogersville, Alabama, our contract expired
on September 7th, 2001. The Company is currently winding down operations and is
closing the Rogersville facility in fiscal year 2002. In Bolingbrook, Illinois,
our contract expires on April 30th, 2002 and in Plainfield, Indiana, our
contract expires on March 1, 2003.
Pallets that are specially 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. Niche pallets
are lower volume and higher margin than CHEP pallets.
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.
Services: Our company provides a variety of retrieval, sortation,
repair, warehouse and return services that 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. Despite recent increases in levels of automation,
pallet return operations remain a labor-intensive process.
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 remain a labor-intensive process.
9
As part of the Company's strategy to use the Internet to improve the
effectiveness of its service offerings, it developed PalletNetTM , a service
brand providing a logistics and information system that manages the flow of
shipping platforms and containers throughout industrial supply chains (excluding
the grocery industry). PalletNetTM creates a closed loop delivery, recovery and
recycling system, which enables customers to treat pallets as assets rather than
expendables.
The principal services PalletNetTM 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 reducing inventories and enhancing customer satisfaction. By coupling
PalletNetTM with the Internet, the Company is creating value for the customer
through substantially lower costs and improved efficiencies.
The PalletNetTM Application 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 PalletNetTM to their
operations. In addition, PalletNetTM 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 management of valuable transport packaging from any location in
which they can access the Internet.
In order to fulfill the increasing demand for transport management
services, Pallet Management plans to expand its service offerings and service
revenues by hiring additional key sales personnel during this fiscal year.
Though expanding sales of services will not require any significant capital
expenditures other than possibly additional computer equipment and application,
it will increase Selling, General and Administrative expenses as a percentage of
sales until newly hired sales personnel are trained. In addition, the cycle for
completing a sale of services is significantly longer than that for selling
manufactured pallets. We anticipate that service will become a greater percent
of net sales as we expand our sales personnel.
Thirteen Weeks Ended September 29, 2001 compared to Fourteen Weeks Ended
--------------------------------------------------------------------------------
September 30, 2000
------------------
For the thirteen-week period ended September 29, 2001, net sales
decreased 33% to $ 12,960,000 from $19,474,000 for the fourteen-week period
ending September 30, 2000. This decrease is attributable to the period being one
week shorter than the reported period the prior year, our Alabama facility's
reduced sales, a sluggish economy and reductions in orders, below anticipated
contract minimums, from our major customer. We anticipated that our contract in
Alabama would continue until early September, but our sole customer for that
10
facility began reducing demand in July, which continued throughout the
thirteen-week period ending September 29, 2001. Sales for Alabama for the
thirteen-week period ending September 29, 2001 were $3,725,000 lower than the
fourteen-week period ending September 30, 2000. We have closed this facility and
have begun the process of relocating our equipment and inventories to be used in
production elsewhere. Additionally, demand was reduced by our sole customer for
our Bolingbrook, Illinois facility below the anticipated contract volumes. Our
Lawrenceville, Virginia operation has experienced a reduced order rate also as a
result of a general economic slowdown. Several customers have closed or scaled
down their operations, thus causing sales from Lawrenceville to be below
expectations.
During the thirteen-week period ended September 29, 2001, manufacturing
sales decreased 33% to $ 12,564,000 from $18,887,000. This reduction is
attributable to reduced sales from our Alabama facility and lower than
anticipated demand due to the economy down turn. Service sales decreased by 33%
also to $396,000 from $ 587,000. This decrease in service sales is primarily due
to the reduction of repair services made at the Petersburg, Virginia facility as
a result of reduced demand from the facility's key customer.
Pallet Management had a 22% reduction in its selling, general and
administrative expenses from $ 1,049,000 to $ 821,000 for the thirteen week
period ended September 29, 2001 compared to the fourteen week period ended
September 30, 2000. The selling, general and administrative expenses were
reduced based on management initiative to hold down costs as well as the one
less week in the current reported period as compared to the prior year.
A loss of ($480,000) or ($.12) per share was realized during this
thirteen-week period ended September 29, 2001 compared to a net income of
$55,000 or $.01 per share recorded for the fourteen-week period last fiscal
year. The loss includes a general accrual of $50,000 to cover our closing costs
in Alabama. Additionally our profitability was reduced due to the reduction in
sales in our Alabama facility from the prior year by $3,725,000. A higher and a
more consistent order rate was seen last year from our customers. During the
current year, as a result of the general slow-down in the economy, we have seen
that order rate lowered and become more volatile. We have hired five additional
salespeople to increase our sales and diversify our customer base for our
facilities.
Liquidity and Capital Resources
-------------------------------
Pallet Management had $71,000 cash on hand on September 29, 2001,
versus $233,000 at the beginning of the fiscal year. The decrease in cash is
primarily attributed to the increase in inventories, the reductions in the
revolvers and term loans, and the reductions in payables, as well as our posted
net loss of $480,000. During September 2001, as orders from our primary customer
in Illinois and Indiana dropped significantly, we increased our inventory to
meet anticipated future demand. Finished goods increased approximately $790,000
11
from June 30, 2001. Cash management continued to be strong as we reduced our
revolvers by $380,000 and our term loans by $135,000 from year-end at the same
time we reduced our payables by $360,000. We generated cash for our increased
levels of inventory by reducing our receivables by $2,110,000 over the
thirteen-week period ending September 29, 2001. The decrease in outstanding
accounts receivable is caused by the more timely customer payments for the
thirteen-week period ending September 29, 2001 along with the decreased
receivables from our major customer which accompanied a lower order rate.
The Company believes that existing cash on hand, cash provided by
future operations, additional available borrowings under its current line of
credit, increased orders and a net working capital of $ 2,210,000 as of
September 29, 2001, 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
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 and other property formerly leased to the Company in
Jessup, Maryland. Management believes the claim is without merit and intends to
vigorously contest the claim. St. Paul Insurance is currently paying defense
costs. The outcome of the action as well as the extent of the Company's
liability, if any, can not be determined at this time.
12
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 8, 2001 By: /s/ Zachary M. Richardson
----------------------------- ------------------------------------
Zachary M. Richardson, President
Dated: November 8, 2001 By: /s/ Marc S. Steinberg
----------------------------- ------------------------------------
Marc S. Steinberg, Treasurer, Vice
President of Finance and Secretary
(Principal Financial and Accounting
Officer)
13