U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 29, 2002
Commission file number 000-24405
PALLET MANAGEMENT SYSTEMS, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2197020
------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2855 University Drive, Suite 510
Coral Springs, Florida 33065
---------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 340-1290
---------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant is $ 551,378 based on the closing price
of $ 0.23 per share as of September 27, 2002.
As of September 27, 2002, there were 3,996,612 shares of the
registrant's common stock outstanding.
Documents Incorporated By Reference:
None.
PALLET MANAGEMENT, INC.
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page No.
--------
PART I ................................................................................................1
Item 1. Business........................................................................................1
Item 2. Properties.....................................................................................10
Item 3. Legal Proceedings..............................................................................11
Item 4. Submission of Matters to a Vote of Security Holders............................................11
PART II ...............................................................................................12
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..........................12
Item 6. Selected Financial Data........................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation...........14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................27
Item 8. Financial Statements and Supplementary Data....................................................27
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure...........27
PART III ...............................................................................................28
Item 10. Directors and Executive Officers of Registrant.................................................28
Item 11. Executive Compensation.........................................................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................38
Item 13. Certain Relationships and Related Transactions.................................................40
PART IV ...............................................................................................41
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................41
i
FORWARD-LOOKING STATEMENTS
Pallet Management Systems, Inc. ("Pallet Management," or the "Company")
cautions readers that certain important factors may affect Pallet Management's
actual results and could cause such results to differ materially from any
forward-looking statements which may be deemed to have been made in this Report
or which are otherwise made by or on behalf of Pallet Management. For this
purpose, any statements contained in this Report that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "expect," "believe,"
"anticipate," "intend," "could," "estimate," or "continue" or the negative other
variations thereof or comparable terminology are intended to identify
forward-looking statements. Pallet Management is also subject to risks detailed
in "Risk Factors" (included in Item 6, as well as elsewhere herein) or detailed
from time to time in Pallet Management's other filings with the Securities and
Exchange Commission.
PART I
ITEM 1. BUSINESS
--------
INTRODUCTION
Pallet Management is the first pallet company in the United States to
become publicly traded in the estimated $6 billion pallet industry. The Company
is a leader in total solutions for pallet and other transport packaging
requirements and offers a wide variety of products and services, from pallet
manufacturing, to reverse distribution of transport packaging assets. The
primary users of Pallet Management's services are companies from various
industries, including steel and metal, chemical and fluid, paper and fiber,
furniture, beverage and printing.
The Company is a leader in reducing product distribution costs for
major manufacturers and distributors by providing value-added transport
packaging products and logistical services. As one of the largest pallet
manufacturing companies in the United States, Pallet Management has expanded its
line of business to include related transport packaging, logistical and repair
services. With two related lines of business, manufacturing and services, Pallet
Management primarily manufactures wood pallets, which are the base of most
transport packaging assets. Services related to transport packaging, which are
focused on reducing customer distribution costs, include transport packaging
retrieval, repair, recycling, sorting, warehousing, reverse distribution,
tracking, logistics and value-added information services.
A significant portion of Pallet Management's current business is the
sale of pallets and services to CHEP, which is part of the international CHEP
organization that manages the world's largest pallet rental pool. CHEP service
spans 41 countries across six continents controlling more than 180 million
pallets and 35 million containers, primarily focused on the retail, grocery and
automotive industries.
Pallet Management's business strategy is to manufacture and service
pallets as well as other supply chain assets for niche markets. Manufacturing
operations complement expansion of the Company's related transport packaging
services that should increase gross margins. All of Pallet Management's products
and services are designed to assist its customers in reducing the cost per trip
for shipments of their goods.
In order to fulfill the increasing demand for transport packaging
management services, Pallet Management plans to expand its service offerings and
its network of facilities by opening company-owned facilities as well as
entering into affiliations with other pallet and logistics companies in
strategic locations. These additional locations will provide local retrieval,
repair, sortation, storage and recycling services for Pallet Management's
national customers. Pallet Management also plans to be able to accelerate its
internal growth by marketing expanded value-added information services to new
and existing customers using PalletNetTM, its proprietary software application
process for the tracking and management of transport packaging assets.
Industry Overview
Pallet Industry
A pallet is a platform, usually made of wood and assembled with metal
nails, that is used for storing and shipping goods. Pallets allow goods to be
transported or warehoused economically by providing a foundation for forklifts
and vertical storage. Pallets are used in virtually all U.S. industries where
products are physically distributed, including the automotive, chemical,
consumer products, grocery, produce and food production, paper and forest
products, retail, and steel and metals industries. Without pallets, shipping by
air, land and sea would be severely hampered.
Pallets come in a wide range of shapes and sizes. Although pallets are
primarily made of wood, they may also be made from steel, plastic, cardboard,
molded wood fiber and other materials to satisfy smaller niche markets. It is
estimated by industry sources that there are over seven pallets for each person
in the United States, and Pallet Management believes that there are over 1,000
different sizes and specifications of pallets used in North America.
According to a survey conducted in 2001 by the National Wooden Pallet
and Container Association ("NWPCA"), 91% of pallet users reported using wood
pallets, with just 5% or less using plastic, a combination of wood and plastic,
or other material. The wooden pallet has traditionally been the basis for the
design of storage racks, warehouse storage areas, forklifts, docks and
containers used in shipping goods.
In addition, the grocery industry, which accounts for approximately
one-third of the all new pallets produced in the United States, uses a standard
size 48 x 40-inch pallet referred to as a GMA pallet. Other industries also
utilize unique specifications that are appropriate for their particular needs.
Many pallets are not durable enough for multiple trips. The
manufacturing capacity for the standard GMA pallet is in excess of demand and
unless one is manufacturing a top quality durable pallet for a customer who
wants to use their pallets for multiple trips, the margins are very small.
Standard GMA pallets weigh approximately 45 lbs. and are designed to hold 1,500
pounds of goods. Since CHEP has a pool of 48 x 40-inch pallets that are
continually reused, it demands a higher quality, better-engineered pallet, which
is more durable. A CHEP pallet weighs approximately 60 lbs., and is engineered
to hold 2,800 pounds of goods.
Based on information supplied by industry sources, Pallet Management
estimates that the U.S. pallet industry currently generates revenues of
approximately $6 billion, and it is served by approximately 3,600 companies,
2
most of which are small, privately held entities. These companies are generally
operating in only one location and serving customers within a limited geographic
region. The industry is generally composed of companies that manufacture new
pallets and companies that repair and recycle pallets. The U.S. Forest Service
estimated last year that 475 million new wood pallets are produced annually, 300
million wood pallets are repaired and sent back into circulation, and 175
million wood pallets are sent to landfills.
The pallet industry, a generally mature industry, has experienced
significant changes during the past several years. These changes are due, among
other factors, to the focus by Fortune 1000 businesses on improving the
efficiency of their supply chain, manufacturing, and distribution systems. This
focus has caused many of these businesses to attempt to reduce significantly the
number of vendors serving them in order to simplify their procurement and
product distribution processes. It has also prompted large manufacturers and
distributors to outsource key elements of those processes that are not within
their core competencies and to develop just-in-time procurement, manufacturing,
and distribution systems. With the adoption of these systems, expedited product
movement has become increasingly important and the demand for a high quality
source of pallets has increased. Palletized freight facilitates movement through
the supply chain by reducing costly loading and unloading delays at distribution
centers and warehouse facilities. As a result, there has been an increased
demand for high-quality pallets in an attempt to decrease the cost per trip by
reducing product damage during shipping and storage, and increasing the number
of trips for which pallets can be used.
The broad changes affecting the U.S. industry have created significant
demand for higher quality pallets distributed through an efficient, more
sophisticated system. Environmental and cost concerns have also accelerated the
trend toward increased reuse or "recycling" of pallets and certain other
transport packing materials, further increasing the importance of the quality of
newly manufactured pallets.
Due to the high cost of plastics and other materials, wood is the
preferred and "more environmentally conscious" material (a renewable resource)
for pallets. Wood pallets are also generally stronger, more repairable, and less
expensive than comparable plastic pallets. Plastic pallets currently have a
limited market in "closed loop" systems where system leakage is minimal and
where the pallets can be tracked and retrieved for reuse.
Third-Party Logistics Industry
As manufacturers and retailers continue to drive down the costs of
distribution, they will continue to look to third party logistics companies to
handle supply chain systems. It is estimated that about 7%, or approximately $40
billion, of relevant logistic costs are currently managed by third party
logistics companies. Within the next three to five years, this sector could
capture 10% to 15% of the available market. Third party logistics companies
include outsourcing companies that manage portions of a company's supply chain.
Outsourcing supply chain management gives companies a competitive edge and
drives profitability up. The third party logistics industry is expected to
experience an annual growth rate of about 20%, driven primarily by the continued
outsourcing of specific supply chain logistics functions. Management believes
that this industry will eventually be ready for consolidation, as customers will
want third-party logistic companies to increase their scope of service offerings
on a global level.
3
"Reverse Distribution" is the opposite of direct distribution; it is
moving products back up the supply chain to the original manufacturer. As a
sub-industry of the logistics industry, it is estimated to have grown in the
United States to over $7.7 billion in 2000 from $4.6 billion in 1997. It is
rapidly growing and becoming more diverse and complex as its importance to the
supply chain becomes more evident. The increasing importance of Reverse
Distribution in the marketplace is a key factor in the dramatic changes taking
place in the pallet industry.
Until recently, pallet manufacturers were focused on producing the
cheapest pallet for their customers, who considered their packaging material an
expense. Manufacturers and distributors are now discovering that the lowest cost
per trip (the ultimate goal) for their packaging material is often realized when
high quality packaging is utilized and subsequently returned for re-use in a
reverse distribution system. Viewing packaging material as an asset instead of
an expense requires a reverse distribution system to return packaging assets.
Pallet Management is aggressively pursuing this market as a specialist in
reverse distribution for reusable transport packaging.
GROWTH STRATEGY
Pallet Management's goal is to become a leading national provider of
pallets and related transport packaging services by continuing to expand its
existing operations and seeking strategic acquisitions. Pallet Management
believes that a significant market opportunity exists for a company that can
consistently offer high-quality pallets and related value-added services to
large pallet users in the U.S. Pallet Management believes that its management's
experience, industry reputation, and existing customer base will provide the
Company with a significant competitive advantage as it pursues its growth
strategy. Elements of its strategy include:
o CHEP
o Specially Engineered Platforms - Niche Market Manufacturing
o Reverse Distribution Services
o Acquisitions
o Aggressive Marketing
CHEP
CHEP markets to the grocery, retail, and automotive industries, where
large volumes of standard size pallets can be contained in a closed loop-system.
Based on published information, CHEP has a market share of 88% of all leased
pallets worldwide and dominates 90% of the markets in which they operate. They
are by far the largest participant in the U.S. pallet industry and do not have a
significant pallet-pooling competitor.
They rent high quality, standardized, and easily identifiable (all of
their pallets are painted blue) 48" by 40" wooden pallets, primarily for use by
grocery and consumer product manufacturers and distributors. CHEP pallets are
manufactured to strict specifications by vendors, including Pallet Management,
that have been selected based on their ability to provide large volumes of high
quality pallets in a timely manner.
4
The Company entered into a series of multi-year manufacturing
agreements with CHEP to produce specially engineered grocery pallets in
strategic locations during a period when they experienced significant growth.
Pallet Management opened manufacturing facilities in Rogersville, Alabama, in
September 1998, Bolingbrook, Illinois, near Chicago, in April 1999, and
Plainfield, Indiana, near Indianapolis, in August 1999. Pallet Management has
invested over $4.2 million in "state-of the art" pallet manufacturing equipment
for these facilities, including a new $1.5 million "Vanderloo" nailing machine
system custom made for Pallet Management in Holland and installed at the
Company's Plainfield, Indiana facility.
The Alabama and Illinois contracts were completed in September 2001 and
April 2002. The Company consolidated most of the equipment into the Indiana
facility. The Indiana contract is scheduled to end on March 1st, 2003 and the
Company is currently in negotiations to extend this contract. Should the Indiana
contract not be extended, the Company may not be able to meet current cash needs
and may not be profitable.
In addition to pallet manufacturing, Pallet Management also offers to
CHEP Reverse Distribution Services. Pallet Management has a facility which
sorts, repairs, warehouses and returns pallets to the CHEP pallet pool.
Pallet Management has had a business relationship with CHEP for over
ten years and they are expected to be Pallet Management's largest customer for
the next several years, during which Pallet Management will support their
continued growth. While Pallet Management is continuously developing this
relationship, it is also continuing to aggressively pursue other areas of
growth.
Specially Engineered Platforms - Niche Market Manufacturing
Many manufacturers require specially engineered pallets to transport
their goods. Pallet Management targets these markets due to the limited number
of pallet manufacturers that can produce specialized pallets, the established
reputation of Pallet Management in the industry for being a high quality pallet
manufacturer, and the higher profit margins realized in the production of these
pallets.
Niche market pallets are uniquely engineered to transport a specific
product and are not universally used like the standard GMA pallet. Examples of
niche pallets Pallet Management builds include those for the metals and fibers
industries. These types of pallets are specially engineered by Pallet Management
using PDS (Pallet Design System), a system developed by Virginia Tech's Pallet
Laboratory in conjunction with the NWPCA.
Most niche market pallets cost more than high volume grocery pallets
and yield high margins due to their uniqueness and strict specifications, which
are required for automated warehousing operations. Pallet Management is
aggressively marketing its experience and expertise in this area, as it believes
that large manufacturing companies will always have a demand for specially
engineered pallets to transport certain kinds of goods.
5
Reverse Distribution Services
As large manufacturers have focused more of their attention on reducing
distribution costs, Pallet Management has expanded the marketing of its Reverse
Distribution services. Reverse Distribution includes the systematic retrieval,
sortation, repair, warehouse and return of pallets and other packaging material
that creates closed-loop return systems between manufacturers, their customers,
and their vendors. Pallet Management's customers own the pallets or containers
that are loaded with their products for transport. Large manufacturing companies
often make sizable investments in specially engineered and heavy-duty pallets.
Pallet Management can recover, sort, repair, warehouse and return a niche pallet
to a customer for significantly less than the cost of a new pallet, thereby
eliminating or reducing some of its customers' distribution expenses. At the
same time, Pallet Management generates greater margins than when a new pallet is
built. The key to successfully implementing a large-scale Reverse Distribution
program is to have an integrated network that encompasses information,
retrieval, and logistics capabilities. Pallet Management is actively seeking
strategic relationships to more fully develop its nationwide Reverse
Distribution network.
Pallet Management is forming the majority of its Reverse Distribution
network through the utilization of the over 3,600 existing pallet manufacturers
and recyclers across the United States, as well as creating its own facilities.
Many of the smaller pallet companies are looking for an affiliation with a
national company as they lack the ability to market their company beyond a
limited geographic region, customers demand more diverse geographical services,
and CHEP continues to impact the grocery pallet market. Pallet Management
believes that many of these companies have excess capacity and are willing to
affiliate with Pallet Management on a fee-for-service basis.
During the fiscal year 2000, the Company launched PalletNetTM, a
web-based tracking and information system that manages the flow of pallets and
other shipping platforms and containers throughout industrial supply chains. As
part of the Company's strategy to use the Internet to enhance customer service,
PalletNet provides Reverse Distribution information with a single source
national contact. This service is supported by leading edge technology that
enables users to improve asset control and reduce cost and waste from their
supply chain.
PalletNetTM is a browser-based user interface combined with multiple
levels of security management, which delivers safe and unlimited access to
customers. Customers can view exactly where their shipping platforms and
containers are in their supply chain at any given moment. The system, designed
to be easily customizable, also offers a full range of personalization options,
so each company can configure PalletNetTM to their specific operations. In
addition, PalletNetTM has the capacity to use bar codes and integrate radio
frequency identification ("RFID") tags to track individual pallets and the
equipment transported on them.
These additional services provide the Company's customers the
flexibility to meet almost any industrial needs in terms of Reverse Distribution
and transport packaging, and an even higher level of customer service and
improved supply chain efficiency.
Acquisitions
Pallet Management intends to pursue acquisitions within its existing
markets and new markets to increase its market penetration, as well as to
6
provide a broader range of services to existing customers in those markets.
These potential acquisitions will primarily involve transport services
businesses and smaller pallet companies whose operations can be incorporated
into Pallet Management's existing operations without a significant increase in
infrastructure, as well as those that will provide Pallet Management with the
ability to service new customers or existing customers in new locations. Pallet
Management does not currently plan to acquire any significant additional
manufacturing capacity and does not have any current agreements or
understandings for any acquisitions. The consideration for such acquisitions, if
consummated, could consist of cash, debt, equity or any combination thereof.
CURRENT OPERATIONS
Manufacturing
o High volume, high quality CHEP grocery pallet manufacturing
o Low volume, specially engineered niche pallet manufacturing
Services
o Reverse Distribution services
o Retrieval, Sort, Repair, Warehouse and Return services
o Other Products
Manufacturing. The manufacturing process for new pallets at each of
Pallet Management's facilities is generally the most capital intensive part of
the business, with the majority of assembly and construction being automated.
New pallets are manufactured from an assortment of wood products, varying in
type and quality, with construction specifications determined by the pallet's
end user. Pallet Management believes that approximately 70% of the wood used in
new pallets manufactured in North America consists of hardwood (including oak,
poplar, alder and gum), with the balance consisting of pine or other softwoods.
Pallet Management utilizes sawing equipment, which cuts large wood
sections to specification. The Company also purchases a vast quantity of pre-cut
lumber from outside vendors for pallet manufacturing. The cut wood is then
transported to assembly points where employees load the stringers ("runners") or
blocks and deck boards into nailing machines that nail the pallets together. A
typical nailing machine produces 1,500 - 2,000 pallets per 8-hour shift with
three to ten employees. After construction is completed, pallets are prepared
for shipment or storage.
All the high volume CHEP pallets and most of the lower volume specially
engineered niche pallets are manufactured on automated nailing machines. More
customized or smaller niche pallet orders may be manufactured by hand on
assembly tables utilizing two laborers with pneumatic nailers. Pallet Management
typically manufactures pallets upon receipt of customer orders and does not
generally maintain significant finished goods inventory.
Services. Reducing the cost of product distribution in the supply chain
is the focus of Pallet Management's value-added services. Retrieval, sortation,
7
repair, warehouse and return services enable customers to better utilize their
packaging assets. Besides being environmentally friendly, a properly repaired
used pallet will provide a customer significant savings over having to buy a new
pallet.
Pallet Management initiates the retrieval or purchase of used pallets
from a variety of sources. The condition and size of these pallets vary greatly.
Once obtained, the pallets are sorted by size, condition and potential customer.
Pallets that can be repaired have their damaged boards replaced with salvaged
boards or boards from new stock inventory at the facility. Pallets that cannot
be repaired are dismantled and the salvageable boards are recovered for use in
repairing and building other pallets. Pallet Management sells the remaining
damaged boards to be ground into wood fiber, which is used as landscaping mulch,
fuel, animal bedding, gardening material and other goods. Despite recent
increases in levels of automation, pallet return operations remain a
labor-intensive process.
Other Products and Services. Pallet Management functions as a wholesale
distributor of other 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.
MARKETING AND DISTRIBUTION
Pallet Management uses its internal sales force in marketing its
products and services. With services being the primary focus of all marketing
efforts, Pallet Management seeks to efficiently serve large numbers of customers
across diverse markets and industries to provide a stable and diversified base
for ongoing sales of services and products.
Pallet Management has many customers that are Fortune 1000 companies,
including Honeywell, DuPont, IAMS, Mitsubishi, Owens Corning and Scotts Company,
as well as various governmental agencies.
During the fiscal year ended June 29, 2002 CHEP accounted for
approximately 86% of Pallet Management's revenues, the same percentage for
fiscal year 2001. No other single customer accounted for 10% or more of Pallet
Management's revenues. The Company's depot/repair agreement with CHEP is not
finalized for fiscal year 2003 and it is anticipated that CHEP will ask that the
Company cease doing repair work, which has continued without a contract, at the
Petersburg, Virginia location by January 1st, 2003. Manufacturing contracts may
be on a multi-year basis and have varying minimum pallet purchase requirements.
The CHEP contract prohibits Pallet Management from engaging the corresponding
facility to compete with CHEP during the term of the agreement and for up to
three years thereafter in the pallet leasing business and from repairing pallets
for other pallet leasing companies.
SUPPLIERS
Pallet Management believes that there is an adequate supply of raw
material components for pallet production. The primary raw materials are
hardwood, softwood, used lumber, used pallets and nails. Pallet Management has
several principal suppliers, which are rotated depending on availability. During
the fiscal year ended June 29, 2002, Pallet Management purchased lumber and
8
plywood from over 50 vendors. The three largest suppliers accounted for
approximately 18.4%, 17.9% and 8.1 % of the lumber purchases, as compared to
29%, 22% and 5% for fiscal year 2001. During the fiscal year ended June 29,
2002, Pallet Management purchased approximately 4% of its lumber from Clary
Lumber Company, Inc., a North Carolina corporation ("Clary"), which is
consistent with the 4% from fiscal year 2001, at prices comparable to vendors
other than Clary. Clary is owned by John C. Lucy, Jr., a significant shareholder
and former Director of Pallet Management, and his son, John C. Lucy III, who is
Pallet Management's CEO. See Item 13, "Certain Relationships and Related
Transactions." Pallet Management does not believe that the loss of any vendor
would materially adversely affect its financial condition or results of
operations. Pallet Management intends to continue to pursue a strategy of
purchasing from alternative sources of lumber.
Pallet Management's sales prices are closely related to the changing
costs and availability of lumber. While Pallet Management believes that it will
benefit from strong relationships with multiple lumber suppliers, there can be
no assurance that Pallet Management will be able to secure adequate lumber
supplies in the future. Lumber supplies and costs are affected by many factors
outside Pallet Management's control, including governmental regulation of
logging on public lands, lumber agreements between Canada and the U.S., and
competition from other industries that use similar grades and types of lumber.
In addition, adverse weather conditions may affect Pallet Management's ability
to obtain adequate supplies of lumber at a reasonable cost. Though Pallet
Management has studied the broad use of alternative materials for the
manufacture of pallets, such as plastic, it believes that there is not currently
an available alternative raw material that possesses the tensile strength,
recyclability and low cost of wood. Pallet Management continues to evaluate
alternatives to wood and is receptive to their future use in pallet production.
COMPETITION
Pallet Management believes that the principal competitive factors in
the pallet industry are price, product quality, services, and on-time delivery.
With over 3,600 industry participants, the pallet manufacturing industry has
been and is expected to remain extremely fragmented and highly competitive.
While there are several companies that have attempted to establish national
pallet operations, most of Pallet Management's competitors are small, privately
held companies that operate in only one location and serve customers within a
limited geographic region. Pallet Management does not directly compete against
many of these companies to a large extent due to its concentration on specialty
pallets, which are not made by most of its competitors, although they may at any
time attempt to compete directly with Pallet Management. New pallet
manufacturers can typically service up to a 300-mile radius, although recyclers
typically market within a 100-mile radius. Pallet Management believes that it
will have a competitive advantage as it expands its national network of
facilities, thus benefiting from economies of scale while interfacing with
customers' nationwide distribution systems.
Competition is often intense and Pallet Management faces most of its
competition from other manufacturers. Pallet rental systems compete with new
pallet sales to the grocery and wholesales distribution industries, and may
expand into other industries in the future. Pallet Management does not compete
to any significant extent with pallet rental systems in the grocery industry and
intends to focus on industries and products in which pallet rental systems are
not competitive.
In addition, pallet manufacturing and recycling operations are not
highly capital intensive and the barriers to entry in such businesses are
minimal. Certain other smaller competitors may have lower overhead costs and,
9
consequently, may be able to manufacture or recycle pallets at lower costs than
Pallet Management. Other companies with significantly greater capital and other
resources than Pallet Management may enter or expand their operations in the
pallet manufacturing and recycling businesses in the future, changing the
competitive dynamics of the industry. While Pallet Management estimates, based
on industry sources, that non-wooden pallets currently account for less than 10%
of the pallet market, there can be no assurance that Pallet Management will not
face increasing competition from pallets fabricated from non-wooden components
in the future. Pallet Management does not believe that non-wooden pallets will
be widely used until it is demonstrated that they replicate the strength of wood
pallets and until their cost decreases from their current levels, which are well
above the cost of similar wood pallets.
EMPLOYEES
As of June 29, 2002, Pallet Management had 190 employees. This includes
production workers who work on new and recycled pallets, clerical personnel,
logistical and computer personnel, facility management personnel, regional
management personnel, sales force, customer service personnel, administrative
personnel, and executive personnel.
ITEM 2. PROPERTIES
----------
Current Manufacturing and Repair Facilities: Pallet Management
currently operates 3 facilities in 2 states:
Plainfield, Indiana - Manufacturing Plant: This facility opened at 6030
Gateway Dr., Plainfield, Indiana, in August 1999 in a 130,000-sq.-ft. facility
with a 5-year lease ending September 2004. As of June 29, 2002 there were 52
people employed at this facility, which manufactures wooden pallets on
high-speed automated manufacturing lines.
Lawrenceville, Virginia - Manufacturing Plant: Located at 10324 Liberty
Road, Lawrenceville, Virginia, new pallet manufacturing is performed at this
Company-owned facility using automated equipment. This facility's primary
production is specifically engineered niche pallets and cutting lumber to size
for pallet production at this facility and shipment to other company facilities.
In addition, pallet recycling and repair services are performed at this
location, which has 60,000 sq. ft. of manufacturing buildings located on 70
acres, a 3,000-sq.-ft. office building and employed 100 people as of June 29,
2002.
Petersburg, Virginia - Repair Depot: Located at 1925 Puddledock Road,
Petersburg, Virginia, this facility processes, repairs, and stores all types of
pallets. It contains a 40,000-sq.-ft. warehouse on eight acres owned by the
Company. As of June 29, 2002 there were 23 people employed at this facility,
which contains "state of the art" automated sorting and repair equipment.
Corporate and Regional Offices: Corporate and regional offices are
located at the following addresses:
2855 University Blvd, Suite 510, Coral Springs, Florida - Corporate
Headquarters - Five year lease expiring in October 2005.
10
2900 Highwoods Blvd., Suite 200, Raleigh, North Carolina - Regional
Offices - Three year lease expiring September 2002. This lease was extended by
one year until August 31, 2003.
Former Facilities:
Bolingbrook, Illinois - Manufacturing Plant: This facility opened in
April 1999 at 335 Crossroads Suite B, Bolingbrook, Illinois in a 110,000-sq.-ft.
facility. The lease was terminated in August 2002 based on a negotiated buyout
of the remaining lease payments for $25,000. The facility employed no people as
of June 29, 2002.
Rogersville, Alabama - Manufacturing Plant: Located at 120 Industrial
Park Road, Rogersville, Alabama, this facility opened in September 1998 in a
25,500-sq.-ft. facility. The Company closed this facility in March 2002.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company's Board of Directors terminated the employment of Mr.
Zachary Richardson as President of the Company effective March 15, 2002. Mr.
Richardson ceased acting on behalf of the Company on January 23, 2002. Prior to
the date of termination, Mr. Richardson notified the Company in writing that he
would consider any such termination to be a breach of his Employment Agreement
and that the Company would owe him approximately $675,000. The Company settled
with Mr. Richardson for approximately $54,000 in July 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
----------------------------------------------------
On May 13, 2002 the Company held its annual meeting of shareholders. At
the meeting the Company's shareholders:
(a) elected six of the seven director nominees (David Davidson,
the other nominee, withdrew his name from consideration a few
days prior to the meeting and the Board of Directors did not
designate a substitute director nominee in his place);
(b) did not approve the proposed amendments to the Company's 1998
Omnibus Stock Option Plan by a vote of 824,643 for, 703,512
against and 16,235 abstaining; and
(c) ratified the appointment of Kaufman, Rossin and Co. as the
independent auditors by a vote of 3,598,847 for, 5,500 against
and 20,935 abstaining.
11
The following individuals were elected to the Company's Board of
Directors for a one-year term by the votes indicated:
------------------------------------------- ------------------ ---------------
Name Votes For Authority
Withheld
------------------------------------------- ------------------ ---------------
Ira M. Goldberg 3,613,582 10,800
------------------------------------------- ------------------ ---------------
Michael D. Karsch 3,614,382 10,000
------------------------------------------- ------------------ ---------------
Richard J. Katz 3,614,382 10,000
------------------------------------------- ------------------ ---------------
Ronald Shindler 3,610,632 13,750
------------------------------------------- ------------------ ---------------
Alan P. Sklar 3,613,582 10,000
------------------------------------------- ------------------ ---------------
Robert Steiler 3,610,632 13,750
------------------------------------------- ------------------ ---------------
Mr. Shindler resigned from the Board on July 11, 2002, because of his
election to the management committee of the law firm in which he is a partner,
which will require a greater time commitment from him. The remaining Directors
elected Mr. Steiler as Chairman at that time.
12
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------
Pallet Management's Common Stock is quoted on the OTC Bulletin Board(R)
under the symbol PALT. The following table sets forth the average of the high
and low bid prices of Pallet Management's Common Stock as reported on the OTC
Bulletin Board(R) for each quarter from June 25, 2000 through June 29, 2002. The
quotations in the following table represent prices between dealers and do not
include retail markup, markdown, or commissions paid and may not represent
actual transactions. Such quotations are not necessarily representative of
actual transactions or of the value of the Company's securities.
FISCAL 2002
-----------
July 1, 2001 through September 29, 2001 $1.40 $0.73
September 30, 2001 through December 29, 2001 $1.75 $0.35
December 30, 2001 through March 30, 2002 $1.35 $0.35
March 31, 2002 through June 29, 2002 $0.75 $0.22
FISCAL 2001
-----------
June 25, 2000 through September 30, 2000 $3.875 $2.0625
October 1, 2000 through December 30, 2000 $3.0625 $1.375
December 31, 2000 through March 31, 2001 $3.09375 $1.50
April 1, 2001 through June 30, 2001 $1.70 $1.02
As of September 27, 2002, there were 74 holders of record of the
Company's Common Stock.
DIVIDEND POLICY
Pallet Management has not paid any cash dividends on its Common Stock
since its inception. Pallet Management presently intends to retain future
earnings, if any, to finance the expansion of its business and does not
anticipate that any cash dividends will be paid in the foreseeable future.
Future dividend policy will depend on Pallet Management's earnings, capital
requirements, expansion plans, financial condition and other relevant factors.
RECENT SALES OF UNREGISTERED SECURITIES
None.
13
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of securities
Number of securities remaining available for
to be issued Weighted - average future issuance under
upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
------------- ------------------- ------------------- ------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 1,767,505 $ 1.93 534,151
Equity compensation
plans not approved
by security holders -- $ -- --
Total 1,767,505 $ 1.93 534,151
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Fiscal Years Ended
29-Jun-02 30-Jun-01 24-Jun-00 26-Jun-99 27-Jun-98
--------- --------- --------- --------- ---------
Net Sales $ 47,799,439 $ 72,167,233 $ 62,445,175 $ 38,744,129 $ 23,214,020
Income (loss) from continuing operations $ (1,144,424) $ 302,984 $ (2,249,967) $ 537,529 $ 191,627
Income (loss) from continuing operations per share $ (0.28) $ 0.07 $ (0.57) $ 0.15 $ 0.12
Total Assets $ 9,895,246 $ 12,879,737 $ 13,350,996 $ 10,205,006 $ 6,432,589
Long-term debt $ 286,393 $ 5,576,663 $ 5,597,490 $ 3,119,578 $ 1,128,977
Cash dividends per share $ -- $ -- $ -- $ -- $ --
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATION
--------------------
Fifty-third Week in Fiscal Year 2001
------------------------------------
Comparisons of fiscal year 2002 to fiscal year 2001 are affected by an
additional week of results in fiscal 2001. Because our fiscal year ends on the
last Saturday in June, a fifty-third week is added every 5 or 6 years. The
fifty-third week increased 2001 net sales by an estimated $1.3 million and net
income by an estimated $6 thousand.
Cautionary Statements
---------------------
The following discussion and analysis should be read in conjunction
with Pallet Management's Consolidated Financial Statements and the Notes thereto
included in Part II, Item 8 of this Report.
The following discussion regarding Pallet Management and its business
and operations contains "forward-looking statements" within the meaning of
Private Securities Litigation Reform Act 1995. These statements consist of any
statements 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 a key customer, competition,
risks related to acquisitions, difficulties in managing growth, dependence on
key personnel and other risk factors discussed in this report. See "Risk
Factors." 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
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 the Company.
With this shift in focus toward services and cost efficiency, we are
offering "state of the art" logistical services known as "Reverse Distribution".
Reverse Distribution involves 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
opportunity for our Company. Driven mainly by economics, reusable packaging in a
Reverse Distribution system also has environmental benefits.
15
As this market of Reverse Distribution is just starting to be created,
the economic advantages to companies that are implementing it are huge. 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 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 a contract to manufacture high quality grocery pallets for CHEP, the
world's largest pallet rental pool. The Company has one manufacturing facility
currently producing CHEP pallets.
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; 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.
Companies currently discard a large portion of new pallets after one
use. The condition and size of these pallets vary greatly. The pallets are
retrieved, 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.
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
16
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 control and reduce cost and waste from the supply chain, while also
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 is also
designed to be easily customizable, so each company can configure PalletNetTM to
their specific operations. In addition, PalletNetTM 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" tracking, logistics and information system capabilities provide
customers and Pallet Management the technical support needed to manage an
efficient Reverse Distribution operation and valuable transport packaging from
any location where Internet access is available.
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 progress in our marketing and sales
effort within this area.
Discussion of fiscal year 2002
Fiscal year 2002 saw many changes within our Company. Two manufacturing
contracts with our largest customer in Alabama and Illinois were not renewed.
Compared to fiscal year 2001, the impact of those two contracts within the
fiscal year was a reduction in revenue of $20.4 million. The equipment for both
of those facilities was moved primarily to our Indiana facility to increase that
plant's production capacity for CHEP or other customers. Additionally, the
decline in business experienced by our Lawrenceville, Virginia facility, which
began in January 2001, continued until February 2002. That decline was caused
primarily by general economic conditions and negatively impacted sales during
fiscal year 2002 as compared with fiscal year 2001 by $3.4 million.
During March, the Company terminated its President, who, pursuant to
the request of the Company's Board of Directors, had relinquished executive
authority on behalf of the Company on January 23, 2002. The Company's Board of
Directors at that time appointed Robert Steiler, one of its members, to be the
Company's interim leader of its executive management . Numerous cost cutting
measures were implemented, and the Company reduced expenditures by over
$1,000,000 annually. The Company began an aggressive marketing campaign in March
2002, including a new brochure, media advertising and other marketing materials,
and began a direct mail campaign offering incentives to win new customers and
bring others more strongly into the fold.
As the fiscal year came to a close we experienced a continued increase
in the order rate into our Virginia facility, as well as strong orders from our
largest customer for our Indiana facility
17
Our current management team continues to recognize the dependency on a
single customer and is taking steps to expand our customer base for niche
pallets and PalletNetTM services. We are continuing with an aggressive marketing
campaign and are beginning implementation of our PalletNetTM Asset Tracking
System.
June 29, 2002 vs. June 30, 2001
For the year ended June 29, 2002, net sales decreased 34% to
$47,799,439 from $72,167,233 for the prior year. This decrease was due mainly to
the closings of the Alabama and Illinois facilities, which serviced one main
customer. The decrease in sales from these two facilities were $20.4 million in
fiscal 2002 as compared with fiscal 2001. Additionally, the decline in business
experienced by our Lawrenceville, Virginia facility, which began in January 2001
continued until February 2002. That decline was caused primarily by soft general
economic conditions and negatively impacted sales during fiscal year 2002 as
compared with fiscal year 2001 by $3.4 million. Sales other than new pallet
sales, comprised principally of service, accounted for 3% of net revenues, as
opposed to 4% of net revenues the previous year. These sales dropped from
approximately $2,047,000 in fiscal year 2001 to approximately $1,887,000 in
fiscal year 2001. The decrease is primarily due to a slightly reduced demand
from that facility's main customer.
Cost of sales for 2002 was $44,810,597 or 93.7% of net sales, as
compared to $67,035,408 or 92.9% of net sales for 2001. This increase in cost of
sales in relation to net sales, is primarily due to the mix in sales and still
reflects the more efficient operations that were achieved in production
throughout fiscal year 2001. In addition, we continued to focus on cost control
as production slowed in two facilities (Alabama in the beginning of the fiscal
year and Illinois at the beginning of the third fiscal quarter) and reduced
spending. Efficiencies were maintained in the plants by controlling machine down
time and improved production planning during periods of reduced demand.
Selling, general and administrative expenses were $3,681,120 or 7.7% of
net sales in 2002, as compared to $4,320,719 or 6.0% of net sales in 2001. This
increase is primarily due to decreased sales volume in Alabama and Illinois with
a lag in corresponding decreases in costs. Reductions were made in many areas
including travel, entertainment, legal and salaries to offset the decrease in
revenues, however, we incurred runoff expenses as these operations wound down
inclusive of salaries, severance payments and rent/utilities without production
and sales. Additionally, the Company has not put its nailing machine from the
Alabama facility into service since the latter plant's closure. The nailing
machine has not been used in over 12 months and is sitting idle in the Company's
Indiana facility. The Company took an impairment write down of $154,740 on this
machine as of June 29, 2002. Customers are still being sought for production
utilizing this machine, but it appeared unlikely that the asset costs would have
been recovered at its then net book value and therefore, the write down was
required. Our corporate structure during the year became more streamlined as we
reduced headcount to offset the decreased revenues associated with these plant
closings.
Net interest expense decreased to $379,864 in 2002 from $528,078 in
2001. This decrease came as a result of both reductions to the prime interest
rate and reductions in our loan amounts. We no longer borrowed against
inventories in Alabama and Illinois (plant closings), which reduced our average
debt. Additionally, a tight focus on cash management allowed the Company to
reduce its net borrowings on an ongoing basis.
18
Net losses for 2002 were $1,144,424 compared to a net income of
$302,984 in 2001. This difference of over $1.4 million is primarily due to
reductions in sales from our Alabama and Illinois plants which closed during
fiscal year 2002. The reduction in gross sales from those two facilities totaled
$20.4 million. The Company also saw declining sales out of the Lawrenceville,
Virginia facility by $3.4 million from the prior year due to poor economic
conditions. The Company reacted to the facility closures by reducing costs in
the second half of the year. The impact of those reductions will not be felt
until fiscal year 2003 due to the timing of those reductions as some included
run-off costs through May and June (severance payments, rent, and contractual
obligations).
June 30, 2001 vs. June 24, 2000
For the year ended June 30, 2001, net sales increased 16% to
$72,167,233 from $62,445,175 for the prior year. This increase was due mainly to
an increase in new pallet sales, which accounted for 97% of net revenues, as
opposed to 92% of net revenues the previous year. New pallet sales increased due
to sales to one customer, which accounted for 86% of our sales. Sales other than
new pallet sales, comprised principally of service, accounted for 3% of net
revenues, as opposed to 8% of net revenues the previous year. These sales
dropped from approximately $4,996,000 in fiscal year 2000 to approximately
$2,047,000 in fiscal year 2001. The decrease is a result of closing the Lakeland
facility in fiscal year 2000, and a reduction in the order rate on services
experienced in our third quarter.
Cost of sales for 2001 was $67,035,408 or 93% of net sales, as compared
to $59,097,842 or 95% of net sales for 2000. This decrease in cost of sales in
relation to net sales, is due to becoming more efficient in production
throughout fiscal year 2001. In addition, we focused on cost control and reduced
spending. Efficiencies were gained in the plants by reducing machine down time
and by planning production during periods of reduced demand. By leveling our
production, we held down additional costs in our facilities and contributed to
the cost of sales percent decrease noted above. By decreasing down time, we were
able to produce more product without adding additional labor costs, which also
reduced our cost per unit.
Selling, general and administrative expenses were $4,320,719 or 6.0% of
net sales in 2001, as compared to $4,899,091 or 7.8% of net sales in 2000. This
decrease is primarily due to increased sales volume and cost control. Reductions
were made in many areas including travel, entertainment and legal expenses and
salaries. Our corporate structure during the year became more streamlined as we
set our management team in place and focused on putting controls in place while
developing new sales opportunities.
Net interest expense decreased to $528,078 in 2001 from $545,119 in
2000. This decrease came as a result of improved cash management. We changed our
approach on borrowing from our revolver loan to reduce the average outstanding
balance on a daily basis. We borrowed $1,031,000 in fiscal year 2001 for our new
Vanderloo nailing machine, which was installed in our Plainfield, Indiana
facility. By increasing our borrowings, we incurred more interest expense, which
offset the savings realized from our improved cash management policies and
procedures. Additionally, we were helped during the year by declining interest
rates that contributed to reduce expenses.
19
Net income for 2001 was $302,984 compared to a net loss of $2,249,967
in 2000. This was an improvement of over $2.5 million and signified a turnaround
to profitability. During 2001 manufacturing operations made many improvements
which led to our profitable year. Among those improvements were significant
reductions to machine downtime, process engineering to eliminate costs from our
manufacturing lines and reductions in staffing where appropriate. During
November we began planning for a slow down from our major customer in January.
We were prepared for and minimized losses during a slow third quarter and when
sales started coming back up in April, we were prepared to meet all of our
customer expectations.
The month of May saw the largest increase to pine lumber prices in
recent history of nearly 30% and contributed greatly to losses during that month
as we could not pass this cost increase on to our customers. We continued to
meet our customer demands and worked with our vendors on gaining price
reductions to counteract the May pine lumber price increases seen in May so that
our profitability for June would be maximized. During the course of this fiscal
year, we reorganized the business structure of the company by creating distinct
departments, which had clear lines of responsibility and authority. We also
hired a completely new senior management team. During the transition of
reorganizing, we relied upon outside consultants to fill some senior management
positions until the new management team was in place. Consultants were utilized
primarily for manufacturing operations, human resources, marketing, materials,
systems and logistics. The company expects to reduce expenditures on consultants
materially during fiscal year 2002. The total expenditures made during the
course of fiscal year 2001 for these consultants were $515,000.
Liquidity and Capital Resources
We had $72,561 of cash on hand at June 29, 2002, compared to $232,635
at the beginning of fiscal year 2002. Net cash provided from operating
activities was $845,014 for the year. We decreased our account receivables by
approximately $1,086,000 and our inventories by approximately $943,000 during
the fiscal year. The account receivables decreased as a result of improved
collections, and the reduction of sales due to two plant closings in fiscal year
ending June 2002. The inventories were reduced primarily due to the two plant
closings and the effort to reduce our on-hand balances and increase our turns to
generate effective uses of cash.
Our debt servicing with LaSalle Business Credit, Inc. remained
consistent with prior years. We both reduced our loan principal with timely
payments and continued to reduce our revolving loan down. We decreased our
borrowings from LaSalle Business Credit, Inc. by $ 799,500 during the fiscal
year ended June 29, 2002. This decrease was made up of a reduced revolver
borrowing base (plant closings) of $211,500 plus principal payments on our term
and real estate loans of $588,000.
In the first, third and fourth quarters of fiscal 2002, the Company did
not meet its covenants with LaSalle Business Credit, Inc. Although LaSalle
Business Credit, Inc., gave us waivers, it also increased our borrowing interest
rate to prime plus 2%. Due to the Company's performance in the fourth quarter of
fiscal 2002, it is likely that the reset covenants would be met by the end of
the first quarter in fiscal 2003. The Company is working with LaSalle Business
Credit, Inc., to adjust the covenants; however, it can not be ascertained how
LaSalle Business Credit, Inc. will react covenant violations in the future.
20
Pallet Management intends to pursue expansion and acquisition plans,
which may include the opening of additional facilities as well as the
acquisition of additional facilities or companies. The success and timing of any
such plans and required capital expenditures for them cannot be reasonably
estimated at this time and the Company has no current arrangements with respect
to any such acquisition or expansion. Funding for these plans and for ongoing
operations could be a combination of issuance of additional equity, working
capital, additional borrowings, and profits from operations. Pallet Management
cannot make any assurances that such funding would become available for such
plans.
Management believes that existing cash on hand, cash provided by future
operations and services, additional borrowings under its current line of credit,
and a negative net working capital of $2,636,000 as of June 29, 2002, may not be
sufficient to finance its operations, expected working capital and capital
expenditure requirements for the next twelve months. To have sufficient capital,
an increase in the order rate in the Lawrenceville, Virginia operation needs to
occur at a level twice that experienced in fiscal 2002, and continued,
consistent ordering, with or without a contract renewal/extension with CHEP,
needs to happen from them. If this does not occur, the Company may not be able
to meet its obligations without additional financing during fiscal year 2003.
RISK FACTORS
LIMITED HISTORY OF PROFITABLE OPERATIONS
The Company reported a net loss of $1,144,424 for the fiscal year ended
June 29, 2002, a net income of $302,984 for the fiscal year ended June 30, 2001,
a net loss of $2,249,967 for the fiscal year ended June 24, 2000, a net income
of $537,529 for the fiscal year ended June 26, 1999, and a net income of
$191,627 for the fiscal year ended June 27, 1998. The Company cannot guarantee
that it will be profitable or that it will sustain growth. The Company cannot
guarantee that it will sustain or increase profitability on a quarterly or
annual basis in the future.
DEPENDENCE ON KEY CUSTOMER
The Company currently depends on CHEP for a material portion of its
business. During the fiscal year ended June 29, 2002 and for the fiscal year
ended June 30, 2001, approximately 86% of the Company's revenues and a
significant percentage of its growth were attributable to CHEP. The Company
expects that the revenues from CHEP may account for up to 80% of its revenues
and will continue to be a material portion of its business for the next fiscal
year until the Company can diversify its customer base. In addition, CHEP is the
predominant customer of certain of the Company's facilities. If CHEP were to
materially decrease its purchase of pallets from the Company, the Company's
financial condition and results of operations would be materially adversely
affected. The Company has an agreement with CHEP for its Plainfield, Indiana
facility to perform CHEP pallet manufacturing. The repair and depot services
provided out of the Petersburg, Virginia facility are not under contract and
could end with 120 day notice, although this would not significantly impact the
profitability of the Company. The Company has been notified by CHEP that the
existing Indiana agreement will not be renewed on March 1, 2003. The Company is
currently negotiating a new agreement for its Plainfield, Indiana location, but
can not guarantee that this contract will be concluded prior to the expiration
of the original contract.
21
SUPPLY AND DEMAND FOR LUMBER
Pallet prices are closely related to the market price of lumber, the
principal raw material used in the manufacture and repair of wooden pallets. If
lumber prices increase sharply, the Company may not be able to pass this
increase on to its customers. The Company has attempted to index the sale prices
of its pallets based on its lumber costs, although the Company has not always
been able to do so.
The price of lumber has been volatile in recent years due to factors
beyond the Company's control, including:
o weather and other natural events;
o governmental regulation of logging on public lands;
o lumber agreements between Canada and the U.S.; and
o competition from other industries that use similar grades and
types of lumber.
Although the Company typically buys its lumber in the open market, the
Company purchased approximately 44% of its lumber from 3 suppliers in fiscal
2002. However, the Company might be unable to purchase adequate lumber supplies
to meet its needs. To the extent the Company encounters adverse lumber prices or
is unable to procure adequate supplies of lumber, the Company's financial
condition and results of operations could be materially adversely affected. The
Company purchased approximately 4.2% of its lumber from a related company, Clary
Lumber Company, Inc., a North Carolina corporation. See Item 13, "Certain
Relationships and Related Transactions."
COMPETITION FROM OTHER COMPANIES
There are over 3,600 companies that manufacture pallets or provide
pallet recycling services. Many of these are small companies that concentrate on
the grocery and retail businesses in which the Company does not generally
compete, although they might at any time attempt to compete directly with the
Company. The Company generally services specialty markets and other services in
which there are not as many competitors. CHEP's pallet rental system competes
with new pallet sales to the grocery and wholesale distribution industries, and
may expand into other industries in the future.
Pallet manufacturing and recycling operations are not highly capital
intensive, and the barriers to entry in these businesses are minimal. Smaller
competitors might have lower overhead costs and consequently, may be able to
manufacture or recycle pallets at lower costs than the Company. Other companies
with significantly greater capital and other resources than the Company
(including CHEP) might enter or expand their operations in the pallet
manufacturing and recycling businesses in the future, which could change the
competitive dynamics of the industry.
22
POTENTIAL INCREASE IN DEBT AND INTEREST EXPENSE AND FINANCING
On March 31, 2000, the Company established a $9,609,000 borrowing
facility with LaSalle Business Credit, Inc., of which approximately $4,880,000
was outstanding as of June 29, 2002.
The Company uses the borrowing facility to finance receivables,
inventory, and real estate as well as for various other corporate purposes
including the purchase of new equipment. Thus, the Company's debt and interest
expense may be substantially higher in the future, which could limit the
Company's flexibility. In addition, this bank has a lien on substantially all of
the Company's assets.
During fiscal year 2002, the Company did not pass the Consolidated Debt
Service Coverage Ratio for the thirteen weeks ending September 29, 2001, the
Company did not pass the Consolidated Tangible Net Worth, the Consolidated
Interest Coverage Ratio or the Consolidated Debt Service Coverage Ratio for the
thirty-nine week period ending March 30, 2002 and the Company did not pass the
Tangible Net Worth covenant for the period ending June 29, 2002. The Company has
received waivers for these covenant violations. LaSalle Business Credit raised
our interest rate to prime plus 2% on all of our outstanding loans when the
waivers were granted.
Should the Company not meet its reset covenants for fiscal 2003,
LaSalle Business Credit may not renew our loan which comes due in October, 2003
and could seek liquidation of our assets to satisfy our loan if we are unable to
secure new financing. If interest rates were raised by 100 basis points, given
our outstanding debt, the additional interest expense would be approximately
$50,000
POTENTIAL RISKS RELATED TO ACQUISITIONS
One of the Company's growth strategies is to acquire additional pallet
manufacturing and recycling companies to increase the Company's revenues and
markets. Acquisitions involve a number of risks, including:
o adverse short-term effects on the Company's operating results;
o difficulties in successfully integrating and managing
additional businesses;
o diversion of management's attention;
o dependence on retention, hiring and training of key personnel;
o loss of existing or anticipated customers of the acquired
companies;
o unanticipated problems or legal liabilities; and
o amortization of acquired intangible assets.
Some or all of these risks could have a material adverse effect on the
Company's financial condition or results of operations. In addition, to the
extent that consolidation becomes more prevalent in the industry, the prices for
attractive acquisition candidates might increase and the number of attractive
acquisition candidates might decrease. The Company cannot guarantee that it will
be able to acquire additional businesses or successfully integrate and manage
such additional businesses.
23
POTENTIAL PROBLEMS IN FINANCING ACQUISITIONS
The Company might potentially issue additional shares of its Common
Stock as partial consideration for future acquisitions. If the Common Stock does
not maintain a sufficient valuation or potential acquisition candidates are
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company might be required to use more cash or bank
financing, if available, in order to complete acquisitions. If the Company does
not have sufficient cash resources or borrowing availability, the Company's
growth could be limited unless the Company is able to obtain additional capital
through future debt or equity financing. The Company does not currently have
sufficient availability under its current facility to finance any additional
acquisitions. Using cash to complete acquisitions and finance internal growth
could substantially limit the Company's financial flexibility. Using debt could
result in financial covenants that limit the Company's operations and financial
flexibility. The Company might be unable to obtain financing if and when needed
on acceptable terms. As a result, the Company might be unable to pursue its
acquisition strategy successfully.
TRANSACTIONS WITH AFFILIATES
For fiscal 2002, the Company purchased approximately $1,539,000 or 4%,
as compared to $2,455,000 or 4% for fiscal 2001, of its lumber supply from Clary
Lumber Company, Inc., a North Carolina corporation ("Clary"), which is owned by
the family of John C. Lucy, Jr., a principal shareholder and former Director of
Pallet Management. John C. Lucy, III, Mr. Lucy's son, is Pallet Management's
Chief Executive Officer and is also President and a minority shareholder of
Clary. The Company closely monitors these transactions and believes that these
transactions were, and are, made at prices comparable to vendors other than
Clary in the ordinary course of business.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been, and in the
future is expected to be, volatile. The Company may experience further market
fluctuations as a result of a number of factors, including:
o current and anticipated results of operations;
o changes in the Company's business, operations or financial
results;
o general market and economic conditions;
o competition;
o the low number of shares outstanding;
o low trading volume;
o the number of market makers in the Company's stock; and
o other factors.
DIFFICULTIES IN OBTAINING NEW SALES
In the last year, the Company has brought in key personnel to sustain
current sales and focus on new sales. New sales will be required to sustain
current operations in all of our facilities. Should the Company not be able to
obtain adequate new sales we might be unable to:
24
o successfully implement its business and marketing strategy;
o generate sufficient cash flow from operations;
o manage its costs; and
o successfully manage continued growth.
The failure to obtain new sales might have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company materially depends upon the services of the following
individuals:
o John C. Lucy, III, Chief Executive Officer
o Marc Steinberg, Chief Financial Officer, Secretary and
Treasurer
o Ellen Chambers, Director of Information Technologies
The Company has a five-year employment agreement with Mr. Lucy that
expires October 2003. In addition, the Company currently has Key-man insurance
in the amount of $1,000,000 on Mr. Lucy. The Company would be adversely affected
by the loss of the services of any of the above-mentioned individuals.
NO DIVIDEND PAYMENTS
The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future. The future payment of dividends is directly dependent upon the Company's
future earnings, capital requirements, financial requirements and other factors
to be determined by the Company's Board of Directors. For the foreseeable
future, it is anticipated that earnings, if any, which may be generated from the
Company's operations will be used to finance the Company's growth.
VULNERABLE STOCK PRICE
If the Company's stockholders sell substantial amounts of their Common
Stock (including shares issued upon the exercise of outstanding options), the
market price of the Company's Common Stock could fall. As of September 27, 2002
the Company had outstanding 3,996,612 shares of Common Stock, of which 3,177,353
shares are freely tradable in the public market, and of which 819,259 shares are
"restricted securities" under the Securities Act of 1933, as amended (the
"Securities Act"). The Company's officers, directors and employees own options
to purchase up to 1,158,149 additional shares of Common Stock.
Restricted securities may only be sold pursuant to an effective
registration statement under the Securities Act or in compliance with Rule 144
under the Securities Act or other exemption from registration. Rule 144 provides
that a person holding restricted securities for a period of one year may sell
25
such securities during any three-month period, subject to certain exceptions, in
limited amounts. Rule 144 also permits, under certain circumstances, the sale of
shares without any quantity limitations by a person who is not our affiliate and
who has held the shares for a two year holding period. No predictions can be
made as to the effect, if any, that market sales of such shares or the
availability of such shares for future sale will have on the market price of the
Common Stock prevailing from time to time.
POTENTIAL ISSUANCE OF PREFERRED STOCK
The Company's Articles of Incorporation authorize 7,500,000 shares of
preferred stock, none of which are issued and outstanding as of the date hereof.
As provided in the Company's Articles of Incorporation, preferred stock may be
issued by resolutions of the Company's Board of Directors from time to time
without any action of the stockholders. These resolutions may authorize issuance
of the preferred stock and set dividend and liquidation preferences, voting
rights, conversion privileges, redemption terms and other privileges and rights.
Accordingly, the Company's Board of Directors may, without stockholder approval,
issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or the rights of the
holders of the Company's Common Stock. The preferred stock could be utilized,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in control of Pallet Management.
ANTITAKEOVER EFFECTS IN OUR CHARTER DOCUMENTS AND UNDER FLORIDA LAW
Certain provisions of our Articles and Bylaws may be deemed to have
antitakeover effects and may delay, defer or prevent a hostile takeover,
including prohibition of shareholder action by written consent and advance
notice requirements for shareholder proposals and director nominations In
addition, Florida has enacted legislation that may deter or hinder takeovers of
Florida corporations. The Florida Control Share Act generally provides that
shares acquired in excess of certain specified thresholds will not have any
voting rights unless such voting rights are approved by a majority of the
corporation's disinterested shareholders. The Florida Affiliated Transactions
Act generally requires supermajority approval by disinterested shareholders of
certain specified transactions between a public corporation and holders of more
than 10% of the outstanding voting shares of the corporation (or their
affiliates).
CRITICAL ACCOUNTING POLICIES
ESTIMATES
In preparing financial statements in accordance with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions that affect the reported amounts and disclosures of
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company has recorded deferred tax assets of approximately
$1,721,000 and $1,297,689 at June 29, 2002 and June 30, 2001, respectively,
which are completely offset by valuation allowances. Realization of the deferred
tax asset is dependent on generating sufficient taxable income in the future.
The amount of the deferred tax asset considered realizable could change in the
near term if estimates of future taxable income are modified.
26
STOCK OPTIONS (SFAS 123)
Options granted to employees under the Company's Stock Option Plan are
accounted for by using the intrinsic method under APB Opinion 25, Accounting for
Stock Issued to Employees (APB 25). In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123), which defines a fair value based method of accounting
for stock options. The accounting standards prescribed by SFAS 123 are optional
and the Company has continued to account for stock options under the intrinsic
value method specified in APB 25. Pro forma disclosures of net earnings and
earnings per share have been made in accordance with SFAS 123.
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" (SFAS 143), 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.
Management believes adoption of these statements will not have a
material effect on the financial statements of the Company.
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" (SFAS 144), effective for fiscal
years beginning after December 15, 2001 with earlier application encouraged.
This statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company adopted SFAS 144 during the
current year, which did not have a material impact on the Company's financial
statements. However, the Company did recognize an impairment loss on certain
long-lived assets as discussed in Note D.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statement No's. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" (SFAS 145). This statement, among other things, eliminates an
inconsistency between required accounting for certain sale-leaseback
transactions and provides for other technical corrections. Management believes
adoption of this statement will not have a material effect on the financial
statements of the Company.
27
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This statement
addresses accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3. The
statement is effective for exit or disposal costs initiated after December 31,
2002, with early application encouraged. The Company has not yet adopted this
statement, and management has not determined the impact of this statement on the
financial statements of the Company.
Refer to "Notes to Consolidated Financial Statements" in "Note A -
Summary of Significant Accounting Policies" as part of the Financial Statements
attached for other accounting policy discussions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements are attached at the end of this document.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
The following table sets forth the names, ages and positions held with
respect to each Director and Executive Officer of the Company.
Name Age Position
--------------------------- -------- --------------------------------
Robert L. Steiler 54 Interim President and Chairman
of the Board of Directors
John C. Lucy, III 43 Chief Executive Officer
Marc S. Steinberg 40 Chief Financial Officer and
Vice President
Ira M. Goldberg 46 Director
Michael D. Karsch 42 Director
Richard J. Katz 70 Director
Alan P. Sklar 63 Director
DIRECTORS AND OFFICERS
Robert L. Steiler was elected as the Interim President of the Company
on March 15, 2002, and a Director of the Company in April 2000. On July 11,
2002, Mr. Steiler became the Chairman of the Board of Directors. He has been a
principal of Lewis Management Group, a consulting firm specializing in business
strategy, business development, manufacturing operations and logistics, since
its founding in 1990. Mr. Steiler's firm has served as a manufacturing
consultant to the Company since his election to the Board. See "Certain
Relationships and Related Transactions." Prior to founding the Lewis Management
Group, Mr. Steiler was associated with KPMG Peat Marwick from 1988 to 1990.
Earlier in his career he was Vice President of Materials with Great Atlantic and
Pacific Tea Company, where he directed the material management functions and a
highly sophisticated computer-controlled picking and storage system. He was also
Vice President of Materials for SmithKline Beecham, a Fortune 100 pharmaceutical
company. Mr. Steiler graduated from St. John's University with an MBA in
Management.
John C. Lucy, III, has served as Chief Executive Officer of the Company
since 1995. In addition to being CEO of the Company, he is President of Clary
Lumber, a hardwood lumber sawmill located in Gaston, North Carolina. (see
"Certain Relationships and Related Transactions"), and is also Vice-President of
Blacksburg Enterprises, Inc., which operates a food service franchise in
29
Blacksburg, Virginia. From 1995 through 1999, Mr. Lucy served the Company as
both CEO and Chairman of the Board. Mr. Lucy has also been actively involved in
the NWPCA, where he served for two years as Chairman of the Military Packing
Task Force, and for three years as Chairman of the Research Steering Committee.
Mr. Lucy graduated from Virginia Tech with a B.S. degree in business.
Marc S. Steinberg joined the Company in July 2000 as its Corporate
Controller and became the Chief Financial Officer and Vice President in January
2002. Mr. Steinberg was also appointed Treasurer and Secretary effective August
2000. Mr. Steinberg has worked in the field of accounting for the past 18 years,
and has extensive experience in the manufacturing industry. Prior to joining the
Company, Mr. Steinberg served as the controller for the transportation and
education subsidiaries of TFG Corporation. Prior to that, Mr. Steinberg served
as the controller of RTP Corp. (an electronics equipment manufacturer),
controller for Mederer Corporation (a candy manufacturer), and cost accounting
manager for Sensormatic Electronics Corp. (an electronics equipment
manufacturer). Mr. Steinberg has a CPA license, a CMA license and is certified
in Production and Inventory Management. Mr. Steinberg graduated from the
University of Florida in 1984 with a B.S. degree in Accounting.
Ira M. Goldberg was appointed to the Board in November 2001. Mr.
Goldberg has been involved in the financial services and mortgage lending
business since 1984. He is the owner of AM Mortgage LLC, a Florida licensed
correspondent lender. He previously served as Regional Vice President for
Countrywide Homes Loans, a Fortune 500 company, which he joined in February
2000. During 1999, Mr. Goldberg was the Managing Director of
Oceanmark/PrimeSource. From 1996 to 1998, Mr. Goldberg was the Senior Vice
President of Wholesale Lending for East Coast Operations for Southern Pacific
Funding. Prior to 1996, Mr. Goldberg held executive management positions in the
mortgage banking industry in New York and Florida. Mr. Goldberg is an active
member in the National, Florida and New York Associations of Mortgage Brokers,
where he is frequently called upon as a guest speaker and educator. Mr. Goldberg
received his B.A. degree in Economics and Business from the State University of
New York in New Paltz in 1978.
Michael D. Karsch was appointed to the Board in November 2001. Mr.
Karsch has been a partner in the Boca Raton, Florida law firm of Sachs Klein,
P.A. since November 2001, where he specializes in the practice of corporate and
securities laws. Mr. Karsch has been practicing law since 1985, including with
Skadden, Arps, Slate, Meagher & Flom in New York, Bachner Tally Polevoy & Misher
in New York, and Broad and Cassel in Florida. He also served as general counsel
of MerchantOnline.com, Inc., a provider of e-payment solutions, from May 2000 to
April 2001. MerchantOnline.com filed for bankruptcy in October 2001. Mr. Karsch
is also a director of Quick-Med Technologies, Inc,. a publicly-traded biotech
company. Mr. Karsch received his B.S. degree in Economics from the Wharton
School of Business, and his law degree from the University of Pennsylvania Law
School.
Richard J. Katz was appointed to the Board in November 2001. Mr. Katz
has over 45 years of experience in marketing, advertising, public relations and
sales. Upon discharge from the United States Air Force in 1965, he went to work
for the Lawrence Fertig Advertising Agency. Three years later, he opened up his
own marketing and advertising agency, the Katz, Jacobs and Douglas Advertising
Agency in New York, where he served as its president/creative director. In 1980,
Mr. Katz co-founded RAMS (real estate advertising, marketing and sales), a
provider of multi-services to developers and builders, including research,
market studies, architectural collaboration, marketing plan financial
presentations, advertising, public relations, sales office design, sales
30
training and on-site sales staffing. During the 1980's, RAMS grew to 200
employees and was involved in more than two billion dollars of properties. Mr.
Katz has received more than 100 awards for his creative and marketing
accomplishments, including two CLIOS. He also is a past member of the American
Management Association, the Presidents Club and the American Academy of
Consultants. Mr. Katz was also an instructor/lecturer of marketing/advertising
for real estate at the New School for Social Research, an active participant in
public service causes such as the New York Library of Presidential Papers, and
the author of many innovative recommendations designed to benefit first time
home buyers. Mr. Katz is a graduate of Brooklyn College, where he majored in
advertising and marketing. Mr. Katz is the father-in-law of David Davidson, who
controls, as part of a group, 621,729 shares of the Company's Common Stock, or
15.3% of the Company. See "Voting Security Ownership of Certain Beneficial
Owners and Management."
Alan P. Sklar was appointed a Director for the Company in August 2000.
Mr. Sklar has been a CPA for 41 years. Mr. Sklar founded the Chicago CPA and
management consulting firm, Gleeson, Sklar, Sawyers & Cumpata LLP in 1967, and
is presently a senior partner in the firm, where he primarily consults with
middle market manufacturers and distributors. Mr. Sklar serves as an advisor to
the board for many of his firm's clients. Mr. Sklar also serves on the board of
directors of several non-profit business related organizations, and is former
president of the International Group of Accounting Firms. Mr. Sklar is a
graduate of Northwestern University.
SIGNIFICANT EMPLOYEES
Ellen M. Chambers joined the Company in March 1999 as Controller and
became the Director of Information Technologies in March 2000. Ms. Chambers
previously acted as Information Systems Coordinator for AIDS Community Services,
Inc. She also served as Operations Manager at Advanced Logic Technologies, Inc.,
a company specializing in custom CAD/CAM design. Ms. Chambers has extensive
experience in both accounting and systems development, design and
implementation, and has worked in the accounting and information technology
fields for over 13 years. Ms. Chambers graduated from the University of Buffalo
with a B.S. in Accounting, Finance and Management Information Systems, as well
as an MBA in Management Information Systems and Management Science/Statistics.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and on representations that no other
reports were required, there were no reports required under Section 16(a) of the
Securities Exchange Act of 1934, which were not timely filed during fiscal 2002.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table summarizes all compensation paid by the Company in
each of the last three fiscal years to the Company's executive officers
currently serving as such whose annual compensation exceeded $100,000.
31
Long Term
Annual Compensation Compensation
Name and ------------------------------------------------------ ------------
Principal Position Year Salary($)(1) Bonus($) Other($)(2) Options
---------------------------- -------- -------------------- ----------- -------------- ---------------
Robert L. Steiler, 2002 0 0 57,924(3) 60,000
Acting President 2001 0 0 175,983(4) 50,000
2000 0 0 50,890(5) 0
John C. Lucy, III (12) 2002 167,084 0 15,196(6) 0
Chief Executive Officer 2001 172,262 0 14,348(7) 40,556
2000 161,451 0 16,800(8) 40,626
Marc S. Steinberg 2002 113,910 0 0 30,000
Chief Financial Officer 2001 88,725 0 0 7,500
Zachary M. Richardson, 2002 118,875 0 32,648(9) 280,000
President until March 2002. 2001 170,878 0 83,200(10) 40,556
2000 161,114 0 59,900(11) 40,626
(1) Includes medical insurance reimbursements.
(2) Includes car allowances and other miscellaneous benefits.
(3) The Company appointed Mr. Robert L. Steiler, a Director of the Company,
as acting President beginning in March 2002. The Board of Directors
agreed to pay Mr. Steiler a sum in addition to his Board Member
compensation equal to $2,000 per week plus expenses for these
additional responsibilities. The total amount paid by the Company to
Mr. Steiler for his services as acting President, inclusive of
expenses, was $44,259 during fiscal year 2002. Mr. Steiler also
received compensation for his duties as a board member throughout the
year for $13,665.
(4) The Lewis Management Group ("LMG"), a firm that provides manufacturing
consulting services to the Company, is partially owned by Robert L.
Steiler, a Director of the Company. Under a consulting agreement
between LMG and the Company, the Company paid LMG $25,000 per month
from July 2000 through November 2000 and the Company paid LMG or Mr.
Steiler directly for continued consulting services $5,000 per month
from December 2000 through June 2001. The total amount paid by the
Company to LMG and Mr. Steiler for consulting services, inclusive of
expenses, was $162,483 during fiscal year 2001. Mr. Steiler also
received compensation for his duties as a board member throughout the
year for $13,500.
(5) The Lewis Management Group ("LMG"), a firm that provides manufacturing
consulting services to the Company, is partially owned by Robert L.
Steiler, a Director of the Company. The Company paid Lewis Management
$47,390 during fiscal year 2000. Mr. Steiler also received compensation
for his duties as a board member throughout the year for $3,500.
(6) Includes $12,900 for car allowances and other miscellaneous benefits,
and $2,296 for payment of Mr. Lucy's Guardian Life policy.
(7) Includes $13,200 for car allowances and other miscellaneous benefits,
and $1,148 for payment of Mr. Lucy's Guardian Life policy.
(8) Includes $13,200 for car allowances and other miscellaneous benefits,
and $3,600 for reimbursement of moving costs incurred in connection
with the purchase of Mr. Lucy's home.
(9) Includes $9,848 for car allowances. Also, Mr. Richardson sold his home
at the request of the Company and incurred expenses in connection with
this sale. In fiscal year 2002, the Company reimbursed Mr. Richardson
$22,800 for his out of pocket costs.
32
(10) Includes $13,200 for car allowances. Also, Mr. Richardson sold his home
at the request of the Company and incurred expenses in connection with
this sale. In fiscal year 2001, the Company reimbursed Mr. Richardson
$70,000 for his out of pocket costs.
(11) Includes $13,200 for car allowances and $16,800 for reimbursement of
income taxes paid. Also, as noted in footnote 3 above, Mr. Richardson
sold his home at the request of the Company and incurred expenses in
connection with this sale. In fiscal year 2000, the Company reimbursed
Mr. Richardson for closing costs in connection with this sale, which
totaled $29,900.
(12) Per Mr. Lucy's employment agreement, Mr. Lucy is to receive a stock
option grant equal to 1% of the total outstanding at the time of the
grant. The Board has not yet approved the grant for fiscal year 2002.
The Board is currently in discussions with Mr. Lucy regarding changes
to his employment agreement prior to making that grant.
The following table sets forth information concerning individual grants
of stock options made during the fiscal year ended June 29, 2002 to each of the
Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF SHARES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE OR BASE
NAME GRANTED(#) IN FISCAL YEAR PRICE ($/SHARE) EXPIRATION DATE
---- ---------- -------------- --------------- ---------------
Robert L. Steiler 60,000 9% .55 10/15/11
John C. Lucy, III 0 0 0 0
Marc S. Steinberg 30,000 4.56% .55 10/15/11
Zachary M. Richardson, President 280,000 42% .55 10/15/11
until March 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Number Of
Securities Underlying Value Of
Unexercised Unexercised
Shares Options In-The-Money
Acquired at FY-End (#) Options
On Value Realized Exercisable/ at FY-End ($)
Exercise ($) Unexercisable Exercisable/
-------- --- -------------
Name (#) Unexercisable
Robert L. Steiler 0 0 110,000/0 $0/$0
John C. Lucy, III 0 0 558,562/50,583 $0/$0
Marc S. Steinberg 0 0 9,000/28,500 $0/$0
Zachary M. Richardson 0 0 448,075/0 $0/$0
33
COMPENSATION OF DIRECTORS
Starting in fiscal year 2001, the Chairman of the Board is paid a
monthly retainer of $1,000 and all other directors are paid a monthly retainer
of $500. The directors are paid $1,000 per board meeting day and $500 per
teleconference meeting plus all related business expenses. All audit committee
members are paid $250 per quarter. All directors are granted 30,000 ten-year
options when they are appointed or elected to the board and may be granted
additional options for each additional year they are on the board at the then
market value. These options may vest over two years at fifty percent per year or
upon issuance and when services are terminated, all unexercised options are
forfeited. See also "Stock Option Plans."
EMPLOYMENT AGREEMENTS
In November 1998, the Company entered into a five-year employment
agreement (the "Employment Agreement") with John C. Lucy, III. Pursuant to the
terms of the Employment Agreement, Mr. Lucy is entitled to receive (i) annual
base compensation of $156,000, with increases in future years by the percentage
increase of the Consumer Price Index and (ii) a bonus up to 100% of base salary
based on the increase in pretax earnings per share over the prior year. For the
year ending June 29, 2002, Mr. Lucy was not entitled to a bonus. The Employment
Agreement also provides for annual grants of common stock options commencing in
fiscal 2000 equal to 1% of the then outstanding number of common shares at an
exercise price of fair market value at date of grant, and the granting of
150,000 stock appreciation rights that vest only upon a "Change of Control" as
defined in the Employment Agreements.
During the term of the Employment Agreement, should there be a Change
of Control of the Company as that term is defined therein, the Company, at its
sole option, may terminate the Employment Agreement upon 30 days prior written
notice and thereafter will be obligated to pay the executive the balance of the
compensation payable under the Employment Agreement, had it not been terminated
prior to its expiration, together with an additional sum equal to 299% of
Executives' annual base compensation. The Employment Agreement also contain
non-competition and confidentiality provisions.
STOCK OPTION PLANS
Pallet Management has adopted two combined stock option and
appreciation rights plans (the "Plans") to attract and to induce officers,
directors and key employees of the Company to remain with the Company. The Plans
provide for options which qualify as incentive stock options under Section
422(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as well as
nonstatutory options. No more than fifteen percent (15%) of the Common Stock
outstanding will be reserved for issuance upon exercise of options to be granted
from time-to-time. The 1997 Omnibus Stock Option Plan (the "1997 Plan") was
approved in August, 1997. Pallet Management's 1998 Omnibus Stock Option Plan
(the "1998 Plan") became effective on September 1, 1998. An aggregate of 250,000
shares are reserved for issuance under the 1997 Plan and 1,000,000 shares are
reserved for issuance under the 1998 Plan.
34
As of September 27, 2002, an aggregate of 6,377 options were
outstanding under the 1997 Plan with an exercise price of $2.00, and an
aggregate of 510,472 options were outstanding under the 1998 Plan with exercise
prices ranging from $.54 to $5.25. These options generally vest over a five-year
period and expire ten years from date of grant. From 1997 through 2002, the
Company granted Messrs. Lucy, III and Steinberg options to acquire an aggregate
of 161,072 and 37,500 shares, respectively. See Item 12, "Security Ownership of
Certain Beneficial Owners and Management."
The Plans provide for a combined stock option and appreciation rights
plan. The Plans provide for options which will qualify as incentive stock
options under Section 422(a) of the Internal Revenue Code of 1986, as amended,
as well as for options which do not so qualify. Incentive Awards may be granted
under the Plans in the form of options, stock appreciation rights, restricted
stock, and performance awards.
No more than 50,000 common shares may be allocated to Incentive Awards
and no more than 300,000 common shares may be allocated to Non-Incentive Awards
granted to any one employee during a single calendar year.
All present and future employees of the Company or of any parent or
subsidiary of the Company ("Employee") and any person retained to provide
services to the Company (other than as an Employee, a member of the Board of
Directors or a member of the board of directors of any subsidiary or parent of
the Company), and who is selected by the committee, is eligible to receive
Incentive Awards under the Plan.
All present and future Non-Employee Directors are eligible to receive
Non-Statutory Options under the Plan. Non-Employee Directors shall not be
entitled to receive any other form of Incentive Award under the Plan.
The exercise price of shares of Company Stock covered by an Incentive
Stock Option cannot be less than 100% of the fair market value of such shares on
the date of grant; provided that if an Incentive Stock Option is granted to an
Employee who, at the time of the grant, is a 10% Shareholder, then the exercise
price of the shares covered by the Incentive Stock Option will not less than
110% of the fair market value of such shares on the date of grant. The exercise
price of Nonstatutory Stock Options will not be less than 85% of fair market
value of such shares on the date of grant.
Whenever the Board of Directors of the Company (the "Board") deems it
appropriate, stock appreciation rights may be granted in connection with all or
any part of an option, either concurrently with the grant of the option or, if
the option is a Nonstatutory Stock Option, by an amendment to the option at any
time thereafter during the term of the option. Stock appreciation rights may be
exercised in whole or in part at such times and under such conditions as may be
specified by the Committee in the participant's stock option agreement.
The Board may terminate or amend the Plans in such respects as it shall
deem advisable. The Board may unilaterally amend the Plans and Incentive Awards
as it deems appropriate to ensure compliance with Rule 16b-3 and to cause
Incentive Awards to meet the requirements of the Code, including Code section
422, and regulations thereunder.
35
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
The Company created its Compensation Committee during fiscal 2001. Mr.
Philip D. Feltman (not re-elected to the Board on May 13, 2002) and Mr. Steiler
(resigned from the compensation committee upon becoming acting President of the
Company) comprised the committee during fiscal year 2002. Michael D. Karsch
became Chairman and has served on this Committee since early fiscal 2003 and Ira
M. Goldberg began serving on the committee during fiscal 2003. They currently
comprise the Board's Compensation Committee.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General Compensation Policy. The three principal components of the
Compensation Committee's executive compensation are salary, bonus and stock
options. The components are designed to facilitate fulfillment of the
compensation objectives of the Compensation Committee, which objectives include
(i) attracting and retaining competent management, (ii) recognizing individual
initiative and achievement, (iii) rewarding management for short and long term
accomplishments and (iv) aligning management compensation with the achievement
of the Company's goals and performance.
The Compensation Committee endorses the position that equity ownership
by management is beneficial in aligning management's and shareholders' interest
in the enhancement of shareholder value. Base salaries for new management
employees are determined initially by evaluating the responsibilities of the
position held and the experience of the individual, and by reference to the
competitive marketplace for managerial talent, including a comparison of base
salaries for comparable position at similar companies of comparable sales and
capitalization. Annual salary adjustments are determined by evaluating (i) the
performance of and responsibilities assumed by the executive, (ii) the
competitive marketplace and (iii) the performance of the Company. The
Compensation Committee does not utilize any specific formula to determine
compensation based on Company performance.
The Compensation Committee periodically reviews the Company's existing
management compensation programs on an ongoing basis, including (i) meetings
with the acting President to consider and set mutually agreeable performance
standards and goals for members of senior management and/or the Company, as
appropriate or as otherwise required pursuant to any such officer's employment
agreement and (ii) modifications to such compensation programs as appropriate,
to ensure alignment with the philosophy and established standards and goals of
the Compensation Committee.
Compensation of President and Chief Executive Officer. The Company has
an employment agreement with Mr. John C. Lucy, III, its Chief Executive Officer
effective November 1st, 1998. The employment agreement provide for bonuses of up
to 100% of base salary based on the increase in pretax earnings per share over
the prior year. See "Employment Agreements." Aside from Company performance,
other factors that influence the compensation paid to Mr. Lucy includes
executive responsibilities and performance, and compensation levels at
comparable companies. During fiscal year 2002, Mr. Lucy was not paid a bonus due
to company performance.
36
Michael D. Karsch, Chairman
Ira M. Goldberg
COMPARE CUMULATIVE TOTAL RETURN
AMONG PALLET MANAGEMENT SYSTEMS, INC.,
NASDAQ MARKET INDEX AND SIC CODE INDEX
[GRAPHIC OMMITTED]
PERFORMANCE GRAPH
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Pallet Management Systems, Inc. 100.00 614.29 300.00 178.57 74.29 14.29
SIC Code Index 100.00 105.09 79.17 59.16 28.01 48.35
NASDAQ Market Index 100.00 132.56 185.76 279.51 154.79 104.99
Assumes $100 invested on July 1, 1997
Assumes Dividend Reinvested
Fiscal Year Ending June 29, 2002
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth, as of the close of business on
September 27, 2002 (a) the name, and number of shares of each person known by
the Company to be the beneficial owner of more than 5% of the Company's Common
Stock and (b) the number of shares of Common Stock owned by each director and
all officers and directors as a group, together with their respective percentage
holdings of such shares:
NAME AND PERCENT OF
ADDRESS OF AMOUNT OF BENEFICIAL CLASS
BENEFICIAL OWNER (1) OWNERSHIP OF STOCK OUTSTANDING
---------------------------------------- -------------------------------- --------------------
Robert L. Steiler 111,000 (2) 2.7%
John C. Lucy, III 292,584 (3) 7.1%
Marc S. Steinberg 9,000 (4) *
Ira M. Goldberg 30,000 (5) *
Michael D. Karsch 30,000 (5) *
Richard J. Katz 59,300 (6) 1.5%
Alan P. Sklar 65,000 (7) 1.6%
All Officers and Directors 596,884 (8) 13.0%
as a Group (seven persons)
Cromwell Group (9) 931,225 (10) 23.3%
John C. Lucy Jr. (11) 675,696 (12) 16.9%
* Less than 1%
(1) The address of the directors and officers listed above, except for Mr.
John C. Lucy, III, is 2855 N. University Drive - Suite 510, Coral
Springs, Florida 33065. The address for Mr. John C. Lucy, III is 2900
Highwoods Boulevard, Suite 200, Raleigh, North Carolina 27604.
(2) This figure includes 1,000 shares owned of record by Mr. Steiler and
options to acquire 110,000 shares, which options are exercisable within
60 days from the record date
(3) This figure includes 182,097 shares owned of record by Mr. Lucy and his
children and options to acquire 110,487 shares, which options are
exercisable within 60 days from the record date. This figure excludes
options to acquire 50,583 shares, which options are not exercisable
within 60 days from the record date. This figure also excludes
beneficial ownership of Mr. Lucy Jr., the father of Mr. Lucy III.
Together, Mr. Lucy III and Mr. Lucy Jr. (including Clary, see footnote
12 below) beneficially own 682,793 shares of record and options and
warrants to acquire 285,487 shares, which options and warrants are
exercisable within 60 days from the record date, representing
beneficial ownership of a 22.6% equity interest in the Company.
38
(4) This figure represents options to acquire 9,000 shares, which options
are exercisable within 60 days from the record date. It excludes
options to acquire 28,500 shares, which options are not exercisable
within 60 days from the record date.
(5) This figure represents options to acquire 30,000 shares, which options
are exercisable within 60 days from the record date.
(6) This figure includes 29,300 shares owned of record by Mr. Katz and
options to acquire 30,000 shares, which options are exercisable within
60 days from the record date.
(7) This figure includes 5,000 shares owned of record by Mr. Sklar and
options to acquire 60,000 shares, which options are exercisable within
60 days from the record date
(8) This figure includes 217,397 shares owned of record by the Company's
directors and executive officers as a group, and options to acquire
379,487 shares as a group, which options are exercisable within 60 days
from the record date. This figure excludes options to acquire 79,083
shares as a group, which options are not exercisable within 60 days
from the record date.
(9) The "Cromwell Group" consists of D.L. Cromwell LLC, a Florida limited
liability company ("Cromwell-Parent"), David Davidson ("Davidson"),
Lloyd Beirne ("Beirne"), and Lawrence and Connie Loscalzo (the
"Loscalzos"). Cromwell-Parent is a holding company for D.L. Cromwell
Investments, Inc. ("Cromwell Investments"), a registered broker-dealer
engaged in the securities business. Davidson and Beirne might be deemed
to control Cromwell-Parent and thus Cromwell Investments also. The
Loscalzos are individuals and clients of Cromwell Investments. Although
Cromwell-Parent, Cromwell Investments and the Loscalzos do not jointly
own any securities of the Company, they would likely act as a group in
voting their shares of the Company's common stock. The address of
Cromwell-Parent, Cromwell Investments and Messrs. Davidson and Beirne
is 1200 North Federal Highway, Boca Raton, Florida 33432. The address
of the Loscalzos is 1 Bouton Point, Lloyd Harbor, New York 11743. The
information disclosed by the Company about Cromwell-Parent, Cromwell
Investments and the Loscalzos is based upon a Schedule 13D jointly
filed by Cromwell and the Loscalzos with the United States Securities
and Exchange Commission on October 3, 2003, and updated information
supplied by Mr. Davidson.
(10) Cromwell-Parent and Cromwell Investments own 332,050 shares and 124,675
shares, respectively, for an aggregate of 456,725 shares or 11.4% of
the Company's Common Stock; the Loscalzos own 300,500 shares, or 7.5%,
of the Company's Common Stock; and Messrs. Davidson and Beirne directly
or indirectly beneficially own an additional 131,500 shares or 3.3%,
and 42,500 shares or 1.1%, respectively of the Company's Common Stock
besides the shares beneficially owned by Cromwell-Parent and Cromwell
Investments. Although Cromwell-Parent, Cromwell Investments, Messrs.
Davidson and Beirne, and the Loscalzos do not jointly own any
securities of the Company, they would likely act as a group in voting
their shares of the Company's Common Stock.
39
This 131,500 shares directly or indirectly owned by Mr. Davidson
consist of 35,400 shares owned of record by Mr. Davidson, 19,600 shares
held in individual retirement accounts for his benefit, and 50,000
shares held by MidSouth Ltd., 1,000 shares held by MidSouth LLC and
25,500 shares held by Rothchild Capital Holdings, in each of which Mr.
Davidson's wife has an ownership interest. The 42,500 shares directly
or indirectly owned by Mr. Beirne consist of 12,500 shares held by Mr.
Beirne as custodian for his minor children and 30,000 shares held by
MidAtlantic Partnership, LLC, in which Mr. Beirne's wife has an
ownership interest.
(11) The address of Mr. John C. Lucy, Jr. is 4755 Liberty Road, Dolphin,
Virginia 23843.
(12) This figure includes 450,696 shares owned of record by Mr. Lucy Jr.,
the father of Mr. Lucy III, and options to acquire 125,000 shares,
which options are exercisable within 60 days from the record date. This
figure also includes 50,000 shares owned of record by Clary Lumber
Company, Inc., a North Carolina corporation ("Clary"), and warrants to
acquire 50,000 shares, which warrants are exercisable within 60 days
from the record date. Mr. Lucy Jr. owns two-thirds of Clary, with the
other one-third ownership shared between Mr. Lucy III and his sister.
This figure does not include beneficial ownership of Mr. Lucy III.
Together, Mr. Lucy Jr. (including Clary) and Mr. Lucy III own 682,793
shares of record and options and warrants to acquire 285,487 shares,
which options and warrants are exercisable within 60 days from the
record date, representing beneficial ownership of a 22.6% equity
interest in the Company
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company's Board of Directors appointed Robert L. Steiler, a
Director of the Company, as acting President beginning in March 2002. The Board
of Directors agreed to pay Mr. Steiler a sum in addition to his Board Member
compensation equal to $2,000 per week plus expenses for these additional
responsibilities. The total amount paid by the Company to Mr. Steiler for his
services as acting President, inclusive of expenses, was $44,259 during fiscal
year 2002.
Mr. Steiler is also one of the owners of Lewis Management Group
("LMG"), a firm that provides manufacturing consulting services to the Company.
The Lewis Management Group ("LMG") employed Ed Carr, who acted in the capacity
for the Company as the Director of Manufacturing Operations from July 2000 until
June 2001. The Company began paying Integrated Consulting Associates, Inc., Mr.
Carr's consulting company, for his consulting services directly beginning in
December 2000 at the rate of $20,000 per month. The total amount paid by the
Company to Integrated Consulting Associates, Inc., inclusive of expenses, for
fiscal year 2002 was $19,889. Mr. Carr also received warrants for 10,000 shares
on May 17, 2001 with a $3.09 exercise price. The company discontinued Mr. Carr's
consulting services in August 2001 and re-established those services in June
2002.
Clary Lumber Company, Inc., a North Carolina corporation ("Clary"), which is
owned by the family of John C. Lucy, Jr., a principal shareholder and former
Director of Pallet Management, and his son, John C. Lucy III, who is Pallet
40
Management's CEO, sold $1,539,000, $2,455,000 and $2,633,000 of pallets and
lumber to the Company during the fiscal years 2002, 2001 and 2000, respectively.
Lumber purchases from Clary amounted to 4%, 4% and 6% of the Company's lumber
purchases for fiscal years 2002, 2001 and 2000, respectively. The Company
closely monitors these transactions and believes that these transactions were,
and are, made at prices comparable to vendors other than Clary in the ordinary
course of business.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Exhibits and Financial Statements and Schedules
(1) Financial Statements:
See Attached.
(2) Financial Statement Schedules:
See Attached.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K
None.
41
EXHIBIT INDEX
Exhibit
No. Description
------- -------------------------------------------------------------
3.1 Articles of Incorporation. (1)
3.2 Amendment to Articles of Incorporation filed June 7, 1985. (1)
3.3 Amendment to Articles of Incorporation filed July 10,1985. (1)
3.4 Amendment to Articles of Incorporation filed October 12, 1994. (1)
3.5 Amendment to Articles of Incorporation filed November 21, 1994. (1)
3.6 Amendment to Articles of Incorporation filed February 3, 1998. (2)
3.7 Amended and Restated By-Laws. (1)
4.1 Specimen Certificate of Common Stock. (1)
10.1 1997 Omnibus Stock Plan. (3)
10.2 1998 Omnibus Stock Plan. (4)
10.3 Employment Agreement between the Company and John C. Lucy, III. (5)
21 Subsidiaries *
(1) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1996.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (SEC File Number 333-46245).
(4) Incorporated by referenced to the Annual Report on Form 10-K for the
fiscal year ended June 30, 1998.
(5) Incorporated by reference to the Registrant's Proxy Statement filed
November 30, 1998.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the period ended December 26, 1998.
* Filed herewith.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: October 11, 2002 By: /s/ John C. Lucy III
--------------------
John C. Lucy III, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John C. Lucy, III Chief Executive Officer October 11, 2002
------------------------------------------------
John C. Lucy, III
/s/ Marc S. Steinberg Vice President, October 11, 2002
------------------------------------------------ Chief Financial Officer,
Marc S. Steinberg Secretary and Treasurer
/s/ Alan P. Sklar Director October 11, 2002
------------------------------------------------
Alan P. Sklar
/s/ Robert L. Steiler Director and Interim President October 11, 2002
------------------------------------------------
Robert L. Steiler
/s/ Michael D. Karsch Director October 11, 2002
------------------------------------------------
Michael D. Karsch
/s/ Ira M. Goldberg Director October 11, 2002
------------------------------------------------
Ira M. Goldberg
/s/ Richard J. Katz Director October 11, 2002
------------------------------------------------
Richard J. Katz
43
CERTIFICATIONS
--------------
I, John C. Lucy, III, certify that:
1. I have reviewed the Registrant's Form 10-K annual report for the
year ended June 29, 2002 (the "Report").
2. Based on my knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the Report.
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in the Report.
/s/ John C. Lucy, III
-----------------------------------
Name: John C. Lucy, III
Title: Chief Executive Officer
(Chief Executive Officer)
I, Marc S. Steinberg, certify that:
1. I have reviewed the Report.
2. Based on my knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the Report.
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in the Report.
/s/ Marc S. Steinberg
--------------------------------------------------
Name: Marc S. Steinberg
Title: Vice President and Chief Financial Officer
(Chief Financial Officer)
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the
Certification as set forth in this Form 10-K have been omitted, consistent with
the Transition Provisions of SEC Exchange Act Release No. 34-46427, because this
Annual Report on Form 10-K covers a period ending before the Effective Date of
Rules 13a-14 and 15d-14.
PALLET MANAGEMENT SYSTEMS, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
JUNE 29, 2002
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Pallet Management Systems, Inc.
We have audited the accompanying consolidated balance sheet of Pallet Management
Systems, Inc. and Subsidiaries as of June 29, 2002 and June 30, 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended June 29, 2002 (52 weeks), June 30, 2001 (53 weeks) and
June 24, 2000 (52 weeks). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pallet Management
Systems, Inc. and Subsidiaries as of June 29, 2002 and June 30, 2001, and the
results of their operations and their cash flows for the years ended June 29,
2002 (52 weeks), June 30, 2001 (53 weeks) and June 24, 2000 (52 weeks), in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B, the
Company may have difficulty meeting current and long-term obligations. This
factor raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans are also discussed in Note B. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
KAUFMAN, ROSSIN & CO.
Miami, Florida
August 22, 2002
F-1
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 29, 2002 AND JUNE 30, 2001
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 72,561 $ 232,635
Accounts receivable, net of allowance for doubtful accounts of
$106,749 and $156,655 3,503,750 4,614,612
Inventories 1,098,946 2,041,489
Prepaid expenses 203,091 258,858
------------ ------------
Total current assets 4,878,348 7,147,594
Property, plant and equipment - net 4,925,451 5,640,355
Other assets 91,447 91,788
------------ ------------
Total assets $ 9,895,246 $ 12,879,737
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 947,060 $ 420,344
Current portion of capital lease obligations 139,740 111,762
Accounts payable, including $115,081 and $17,392 to a related party 2,062,277 3,039,566
Accrued liabilities 426,503 509,952
------------ ------------
Total current liabilities 3,575,580 4,081,624
------------ ------------
LONG-TERM LIABILITIES
Long-term debt 4,072,936 5,420,261
Capital lease obligations 152,546 156,402
------------ ------------
Total long-term liabilities 4,225,482 5,576,663
------------ ------------
Total liabilities 7,801,062 9,658,287
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, authorized 7,500,000 shares at $.001 par
value; no shares issued and outstanding -- --
Common stock, authorized 100,000,000 shares at $.001 par value; issued
and outstanding 3,995,612 and 4,065,612 shares, respectively 3,996 4,066
Additional paid-in capital 7,148,784 7,269,556
Accumulated deficit (4,920,596) (3,776,172)
Notes receivable from stockholders (138,000) (276,000)
------------ ------------
Total stockholders' equity 2,094,184 3,221,450
------------ ------------
Total liabilities and stockholders' equity $ 9,895,246 $ 12,879,737
============ ============
The accompanying notes are an integral part of these statements.
F-2
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 29, 2002 (52 WEEKS) JUNE 30, 2001 (53 WEEKS),
AND JUNE 24, 2000 (52 WEEKS)
2002 2001 2000
------------ ------------ ------------
Net sales $ 47,799,439 $ 72,167,233 $ 62,445,175
Cost of goods sold, including approximately
$1,539,000, $2,455,000 and $2,633,000 from a
related party 44,810,597 67,035,408 59,097,842
------------ ------------ ------------
Gross profit 2,988,842 5,131,825 3,347,333
------------ ------------ ------------
OPERATING EXPENSES
Provision for bad debts 25,000 142,134 95,436
Selling, general and administrative 3,656,120 4,178,585 4,803,655
------------ ------------ ------------
Total operating expenses 3,681,120 4,320,719 4,899,091
------------ ------------ ------------
Operating income (loss) (692,278) 811,106 (1,551,758)
------------ ------------ ------------
Other income (expense)
Other income 16,513 41,655 84,629
Interest expense (379,864) (528,078) (551,444)
Other expense (88,795) (21,699) (231,394)
------------ ------------ ------------
Other income (expense) (452,146) (508,122) (698,209)
------------ ------------ ------------
Income (loss) before income taxes (1,144,424) 302,984 (2,249,967)
Income taxes -- -- --
------------ ------------ ------------
Net income (loss) $ (1,144,424) $ 302,984 $ (2,249,967)
============ ============ ============
Earnings (loss) per common share:
Basic $ (0.28) $ 0.07 $ (0.57)
============ ============ ============
Diluted $ (0.28) $ 0.07 $ (0.57)
============ ============ ============
Shares used in computing earnings (loss) per
common share:
Basic 4,028,973 4,065,612 3,981,199
============ ============ ============
Diluted 4,028,973 4,258,484 3,981,199
============ ============ ============
The accompanying notes are an integral part of these statements.
F-3
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS)
AND JUNE 24, 2000 (52 WEEKS)
Notes Accumulated
Common Stock Additional Receivable Other
------------ Paid-in From Accumulated Comprehensive
Shares Amount Capital Stockholders Deficit Income (1) Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 26, 1999 3,917,612 $ 3,918 $ 6,958,704 $ -- $(1,829,189) 10,484 $ 5,143,917
Exercise of options 138,000 138 275,862 (276,000) -- -- --
Common stock issued for services 10,000 10 34,990 -- -- -- 35,000
Sale of investments -- -- -- -- -- (10,484) (10,484)
Net loss -- -- -- -- (2,249,967) -- (2,249,967)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 24, 2000 4,065,612 4,066 7,269,556 (276,000) (4,079,156) -- 2,918,466
Net income -- -- -- -- 302,984 -- 302,984
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2001 4,065,612 4,066 7,269,556 (276,000) (3,776,172) -- 3,221,450
Repayment of shareholder note with
stock (70,000) (70) (137,930) 138,000 -- -- --
Common stock options issued for
services -- -- 17,158 -- -- -- 17,158
Net loss -- -- -- -- (1,144,424) -- (1,144,424)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 29, 2002 3,995,612 $ 3,996 $ 7,148,784 $ (138,000) $(4,920,596) $ -- $ 2,094,184
=========== =========== =========== =========== =========== =========== ===========
(1) Consisting of unrealized gains on available-for-sale securities.
The accompanying notes are an integral part of these statements.
F-4
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS)
AND JUNE 24, 2000 (52 WEEKS)
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,144,424) $ 302,984 $(2,249,967)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Bad debt expense 25,000 142,134 95,436
Depreciation and amortization 765,409 654,133 602,230
Impairment loss 154,750 -- --
Issuance of common stock and options for services 17,158 -- 35,000
Loss on disposal of property, plant and equipment 3,347 2,876 226,238
(Increase) decrease in operating assets:
Accounts receivable 1,085,861 128,556 (2,328,139)
Inventories 942,543 217,621 (392,615)
Prepaid expenses 55,767 (21,281) (81,156)
Other assets 341 12,596 12,989
Increase (decrease) in operating liabilities:
Accounts payable (977,289) 279,349 1,636,702
Accrued liabilities (83,449) (304,125) 300,421
----------- ----------- -----------
Net cash provided by (used in) operating
activities 845,014 1,414,843 (2,142,861)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (66,587) (905,805) (1,119,333)
Proceeds from sale of property, plant and equipment 8,000 -- 221,706
----------- ----------- -----------
Net cash used in investing activities (58,587) (905,805) (897,627)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds (repayments) under line of credit, net (211,195) (1,342,305) 1,837,346
Proceeds from lenders 230,657 1,170,264 3,631,804
Repayments to lenders (965,963) (681,414) (2,113,727)
----------- ----------- -----------
Net cash provided by (used in) financing
activities (946,501) (853,455) 3,355,423
----------- ----------- -----------
Increase (decrease) in cash (160,074) (344,417) 314,935
Cash at beginning of period 232,635 577,052 262,117
----------- ----------- -----------
Cash at end of period $ 72,561 $ 232,635 $ 577,052
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 387,893 $ 498,344 $ 512,289
=========== =========== ===========
Income taxes $ -- $ -- $ --
=========== =========== ===========
Schedule of non-cash investing and financing activities:
Capital lease obligations of $150,015, $103,988 and $78,896 were incurred
during the years ended June 29, 2002, June 30, 2001, and June 24, 2000,
respectively.
During the year ended June 30, 2001, $880,479 of deposits on machinery and
software costs were transferred to property and equipment.
In January 2000, stockholders of the Company issued notes receivable to the
Company in the aggregate amount of $276,000 for the exercise of stock
options.
In December 2001, 70,000 shares of common stock were submitted to the
Company to pay the principal balance of a $138,000 note receivable from a
stockholder.
The accompanying notes are an integral part of these statements.
F-5
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements is as follows:
1. Nature of Operations
Pallet Management Systems, Inc. and Subsidiaries (the "Company"/"Pallet") is
principally engaged in the manufacture and repair of wooden pallets in
Virginia, Alabama, Illinois and Indiana. The Company's revenues are derived
primarily from the sale of new and used pallets. The Company's fiscal year
ends on the Saturday closest to June 30. Fiscal years 2002 and 2000 included
52 weeks and fiscal year 2001 included 53 weeks.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries Pallet Recycling Technology,
Inc. ("PRTI"), Abell Lumber, Inc. ("Abell"), Pallet Management Systems of
Alabama, Inc., Pallet Management Systems of Illinois, Inc. and Pallet
Management Systems of Indiana, Inc. Intercompany balances and transactions
are eliminated in consolidation.
3. Accounts Receivable
Trade receivable accounts are principally comprised of uncollateralized
customer obligations due from large distributors, national retail chains and
major manufacturers under normal trade terms. The carrying amount of
accounts receivable is reduced by an allowance that reflects management's
best estimate of the amounts that will not be collected. Management
individually reviews all accounts receivable balances and based on an
assessment of current creditworthiness, estimates the portion, if any, of
the balance that will not be collected.
4. Inventories
Inventories, consisting of raw materials, work in process, and finished
goods, are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method and includes costs of materials, direct and
indirect labor and overhead attributable to production.
F-6
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Major renewals and improvements are capitalized. Repairs and
maintenance are expensed as incurred. Depreciation is principally computed
by using the straight-line method over the expected useful lives of the
related assets which are as follows:
Years
-----
Furniture and equipment 5 - 10
Vehicles 5 - 10
Machinery and equipment 5 - 15
Buildings and improvements 7 - 40
Depreciation on certain machinery in Indiana is based on the estimated units
to be produced by the machinery.
6. Estimates
In preparing financial statements in accordance with accounting principles
generally accepted in the United States of America, management makes
estimates and assumptions that affect the reported amounts and disclosures
of assets and liabilities at the date of the financial statements, as well
as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The Company has recorded deferred tax assets of approximately $1,721,000 and
$1,298,000 at June 29, 2002 and June 30, 2001, respectively, which are
completely offset by valuation allowances. Realization of the deferred tax
asset is dependent on generating sufficient taxable income in the future.
The amount of the deferred tax asset considered realizable could change in
the near term if estimates of future taxable income are modified.
7. Income Taxes
The Company accounts for income taxes under the liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the consolidated financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
F-7
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed using the weighted
average number of shares outstanding during the period. Diluted earnings
(loss) per common and common equivalent share is computed using the weighted
average number of shares outstanding during the period adjusted for
incremental shares attributed to outstanding options and warrants to
purchase common stock of 192,872 for the year ended June 30, 2001. For the
years ended June 29, 2002 and June 24, 2000, outstanding stock options and
warrants were not considered in the calculation of diluted earnings (loss)
per common and common equivalent share as their effect would have been
antidilutive. Securities that could potentially dilute basic earnings per
share in the future consist of 1,767,505 options to purchase common stock
discussed in Note N.
9. Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure of
the estimated fair value of financial instruments. The carrying values of
cash, accounts receivable and accounts payable approximate fair value due to
the short-term maturities of these instruments. The carrying value of debt
approximates fair value due to the length of the maturities, the interest
rates being tied to market indices and/or due to the interest rates not
being significantly different from the current market rates available or
offered to the Company.
10. Stock Options (SFAS 123)s
Options granted to employees under the Company's Stock Option Plan are
accounted for by using the intrinsic method under APB Opinion 25, Accounting
for Stock Issued to Employees (APB 25). In October 1995, the Financial
Accounting Standards Board issued Statement No. 123, Accounting for
Stock-Based Compensation (SFAS 123), which defines a fair value based method
of accounting for stock options. The accounting standards prescribed by SFAS
123 are optional and the Company has continued to account for stock options
under the intrinsic value method specified in APB 25. Pro forma disclosures
of net earnings and earnings per share have been made in accordance with
SFAS 123.
11. Concentration of Credit
The Company, from time to time, maintained deposits at financial
institutions in excess of federally insured limits. The Company is currently
monitoring amounts on deposit at the financial institutions.
12. Comprehensive Income
Comprehensive income is not reported in the accompanying consolidated
financial statements as it is not materially different from net income.
F-8
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. 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" (SFAS 143), 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.
Management believes adoption of these statements will not have a material
effect on the consolidated financial statements of the Company.
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" (SFAS 144), effective for fiscal years
beginning after December 15, 2001 with earlier application encouraged. This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The Company adopted SFAS 144 during the
current year, which did not have a material impact on the Company's
financial statements. However, the Company did recognize an impairment loss
on certain long-lived assets as discussed in Note D.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No's. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" (SFAS 145). This statement, among other things, eliminates an
inconsistency between required accounting for certain sale-leaseback
transactions and provides for other technical corrections. Management
believes adoption of this statement will not have a material effect on the
consolidated financial statements of the Company.
F-9
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. New Accounting Pronouncements (continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). This statement addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3. The
statement is effective for exit or disposal costs initiated after December
31, 2002, with early application encouraged. The Company has not yet adopted
this statement, and management has not determined the impact of this
statement on the financial statements of the Company.
14. Segment Reporting
The Company applies Financial Accounting Standards Board ("FASB") statement
No. 131, "Disclosure about Segments of an Enterprise and Related
Information". The Company has considered its operations and has determined
that it operates in a single operating segment for purposes of presenting
financial information and evaluating performance. As such, the accompanying
financial statements present information in a format that is consistent with
the financial information used by management for internal use.
NOTE B - GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, which contemplates continuation of the Company as a going
concern. However, as discussed in Note O, the Company's remaining
manufacturing agreement with its significant customer expires in March 2003.
This factor indicates that the Company may have difficulty meeting current
and long-term obligations as they become due.
The Company has had over a ten-year relationship with its significant
customer and is currently negotiating a new agreement with this customer.
Because of the new pricing arrangement between the significant customer and
the Company, the Company believes that, whether there is a new agreement or
not, the significant customer will continue to buy pallets from the Company.
However, the new pricing arrangement with the significant customer will put
added pressure on the Company's profit margins during the historically slow
period during the first calendar quarter of 2003. In order to compensate for
that and the loss of revenue and income from the closing of the Alabama and
Illinois facilities, the Company is 1) attempting to develop an increase in
its order base from its other existing customers and by developing a larger
market for the pallet manufacturing facility in Lawrenceville, Virginia and
2) developing and marketing its reverse distribution services.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financial obligations. Management believes that actions presently being
taken, as described in the preceding paragraph, provide the opportunity for
the Company to continue as a going concern, however, there is no assurance
this will occur.
F-10
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE C - INVENTORIES
Inventories consisted of the following:
June 29, 2002 June 30, 2001
------------- -------------
Raw materials $ 851,124 $1,333,846
Work in process 14,245 454,991
Finished goods 233,577 252.652
---------- ----------
$1,098,946 $2,041,489
========== ==========
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
June 29, 2002 June 30, 2001
------------- -------------
Machinery and equipment $6,363,692 $6,654,079
Building and improvements 1,623,000 1,623,000
Vehicles 403,439 541,709
Furniture and equipment 884,055 795,588
Land 136,044 136,044
---------- ----------
9,410,230 9,750,420
Less: accumulated depreciation
and amortization 4,484,779 4,110,065
---------- ----------
$4,925,451 $5,640,355
========== ==========
Depreciation and amortization expense was $ 765,409, $654,133, and $602,230
in 2002, 2001 and 2000, respectively, and is included in "cost of goods
sold" and "selling, general and administrative" expenses in the accompanying
consolidated statements of operations. Property, plant and equipment at June
29, 2002 and June 30, 2001 included assets recorded under capital leases and
related accumulated amortization of approximately $681,000 and $198,000, and
$467,000 and $104,000, respectively. Amortization expense related to assets
under capital leases was approximately $74,000, $43,000 and $38,000 in 2002,
2001 and 2000, respectively.
Due to the closing of the Alabama and Illinois facilities and the
notification of non-renewal of the manufacturing agreement in Indiana by the
Company's major customer, as discussed in Note O, in accordance with SFAS
No. 144, the Company tested certain long-lived assets for recoverability.
Based on a future cash flow analysis, management determined that certain
equipment was impaired. Management obtained an independent valuation of the
equipment to determine its fair value and recorded an impairment loss of
approximately $155,000, which is included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
F-11
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE E - OTHER ASSETS
Other assets consisted of the following:
June 29, 2002 June 30, 2001
------------- -------------
Security deposits 87,572 84,463
Other 3,875 7,325
------- -------
$91,447 $91,788
======= =======
NOTE F - INCOME TAXES
The income tax benefit consisted of the following:
Years Ended
---------------------------------------
June 29, 2002 June 30, 2001 June 24, 2000
------------- ------------- -------------
Current:
Federal $ -- $ -- $ --
State -- -- --
--------- --------- ---------
-- -- --
--------- --------- ---------
Deferred:
Federal (383,211) 123,107 (759,622)
State (40,480) 11,952 (80,784)
Change in valuation allowance 423,691 (135,059) 840,406
--------- --------- ---------
-- -- --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
Deferred income taxes were recognized in the consolidated balance sheets due
to the tax effect of temporary differences and loss carryforwards as
follows:
June 29, 2002 June 30, 2001
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $2,163,879 $1,678,315
Other 80,285 106,590
---------- ----------
2,244,164 1,784,905
Deferred tax liabilities:
Depreciation 522,784 487,216
---------- ----------
Net deferred tax asset 1,721,380 1,297,689
Less: valuation allowance 1,721,380 1,297,689
---------- ----------
$ -- $ --
========== ==========
F-12
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE F - INCOME TAXES - Continued
The major elements contributing to the difference between the income tax
benefit and the amount computed by applying the federal statutory tax rate
to income (loss) before income taxes are as follows:
Years Ended
------------------------------------------
June 29, 2002 June 30, 2001 June 24, 2000
------------- ------------- -------------
Statutory rate $(389,104) $ 103,015 $(764,989)
State income taxes (40,480) 11,962 (80,784)
Change in valuation allowance 423,691 (135,059) 840,406
Permanent differences and other 5,893 20,082 5,367
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
As of June 29, 2002, the Company had net operating loss carryforwards of
approximately $5,750,000 which expire in various years through June 2022.
Approximately $976,000 of these net operating losses are subject to
substantial restrictions imposed under the change in ownership and separate
return limitation year rules.
NOTE G - LONG-TERM DEBT
June 29, 2002 June 30, 2001
---------------- ----------------
$5,000,000 revolving credit agreement with a bank. Interest is paid monthly
at the bank's prime rate plus 1.0% or at the borrower's election LIBOR plus
3.25%. As of June 29, 2002, interest was being charged at 5.75%, the bank's
prime rate plus 1.0%. The line is collateralized by substantially all the
assets of the Company, and expires on October 15, 2003 at which time all
principal and accrued interest is due. Advances are based on 85% of eligible
accounts receivable and 55% of eligible inventories, as defined, less
certain other outstanding obligations. $ 1,693,210 $ 1,904,405
Bank note payable in monthly installments of approximately $21,000 plus
interest at the bank's prime rate plus 1.0% or at the borrower's election
LIBOR plus 3.25%, through October 15, 2003 at which time all principal and
accrued interest is due. As of June 29, 2002, interest was being charged at
5.75%, the bank's prime rate plus 1.0%. The note is collateralized by
substantially all the assets of the Company. 1,257,357 1,517,500
Bank note payable in monthly installments of $11,567 plus interest at the
bank's prime rate plus 1.0% or at the borrower's election LIBOR plus 3.25%,
through October 15, 2003 at which time all principal and accrued interest is
due. As of June 29, 2002, interest was being charged at 5.75%, the bank's
prime rate plus 1.0%. The note is collateralized by substantially all the
assets of the Company. 1,087,267 1,226,067
F-13
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 ( 52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE G - LONG-TERM DEBT - Continued
Bank note payable in monthly installments of $17,188 plus interest at the bank's
prime rate plus 1.0% or at the borrower's election LIBOR plus 3.25%, through
October 15, 2003 at which time all principal and accrued interest is due. As of
June 29, 2002, interest was being charged at 5.75%, the bank's prime rate plus
1.0%. The note is collateralized by substantially all the assets of the Company. 842,226 1,031,297
Industrialized development notes payable in quarterly installments of $3,381,
including interest at 5.25%, maturing October 2017 and uncollateralized. 139,936 145,711
Notes payable in monthly installments of $440 to $3,343, including interest
ranging from 8% to 16%, collateralized by equipment and vehicles, maturing at
various dates through February 2002. -- 15,625
--------------- ----------------
Total debt 5,019,996 5,840,605
Less: current maturities of long-term debt 947,060 420,344
--------------- ----------------
Long-term debt $ 4,072,936 $ 5,420,261
=============== ================
The revolving credit agreement and bank notes payable are subject to certain
restrictive covenants including, but not limited to, minimum tangible net
worth and interest and debt service coverage ratios, as defined. The
agreement also provides restrictions as to the payment of dividends. The
Company was in violation of certain covenants at June 29, 2002 and received
waivers from the lender related to these violations.
Interest expense for the years ended June 29, 2002, June 30, 2001 and June
24, 2000 amounted to $379,864, $528,078 and $551,444, respectively, and is
included in other expense in the accompanying consolidated statements of
operations.
Scheduled maturities of long-term debt for years subsequent to June 29, 2002
are as follows:
2003 947,060
2004 3,945,516
2005 6,781
2006 7,155
2007 7,549
Thereafter 105,935
-------------
$ 5,019,996
=============
F-14
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE H - CAPITAL LEASE OBLIGATIONS
Minimum future annual lease payments under capital leases as of June 29,
2002, in the aggregate, including a $100,414 lease entered into in July
2002, are as follows:
2003 183,077
2004 109,995
2005 62,747
2006 49,825
2007 33,567
---------
Total minimum future lease payments 439,211
Less: imputed interest 75,889
---------
Present value of future minimum lease payments 363,322
Less: current portion of capital lease obligations 149,924
---------
Long-term portion of capital lease obligations $ 213,398
=========
NOTE I - ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
June 29, 2002 June 30, 2001
------------- -------------
Accrued compensation $ 122,929 $ 154,998
Other accrued liabilities 303,574 354,954
--------------- ---------------
$ 426,503 $ 509,952
=============== ===============
NOTE J - COMMITMENTS
1. Operating Leases
The Company leases manufacturing facilities, office space, equipment and
vehicles under non-cancelable operating leases. The following is a schedule,
by year, of the minimum rental commitments remaining on leased property and
equipment:
2003 $ 592,449
2004 441,913
2005 93,524
2006 23,622
---------------
Total $ 1,151,508
===============
Total rent expense was approximately $1,032,000, $999,000 and $1,030,000 for
the years ended June 29, 2002, June 30, 2001 and June 24, 2000,
respectively.
F-15
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE K - RELATED PARTY TRANSACTIONS
The Company purchased approximately $1,539,000, $2,455,000 and $2,633,000 of
lumber and pallets from Clary Lumber Company, Inc. ("Clary") a company
principally owned by a shareholder of Pallet, during the years ended June
29, 2002, June 30, 2001, June 24, 2000, respectively. Lumber purchases from
Clary amounted to approximately 4%, 4% and 6% of the Company's lumber
purchases for the years ended June 29, 2002, June 30, 2001 and June 24,
2000, respectively.
NOTE L - EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has an employment agreement with a senior executive that
provides for, among other things, annual compensation of $156,000, a bonus
based on diluted earnings per share, stock appreciation rights to vest upon
a change of control, as defined, and stock options to be granted annually.
The agreement is cancellable by the Company upon 30 days written notice to
the executive and payment of requisite compensation, and expires on October
31, 2003.
NOTE M - STOCKHOLDERS' EQUITY
In January 2000, the Company loaned two officers an aggregate of $276,000 to
exercise options to purchase an aggregate of 138,000 shares of common stock.
In December 2001, one shareholder satisfied his note of $138,000 by
submitting 70,000 shares of common stock to the Company. The remaining loan
bears interest at 5% per annum, with interest payments due annually and
principal due the earlier of January 12, 2003 or upon registering the
shares. The note is collateralized by mature shares of stock previously
owned by the stockholder. The loans receivable are recorded as a separate
component of stockholders' equity in the accompanying consolidated balance
sheets.
In October 2001, the Company granted options to purchase approximately
660,000 shares of common stock to employees and directors of which 280,000
were granted to the former President. 460,000 of these options vested upon
grant while the remainder vest through July 1, 2006. All options are
exercisable at $.55 per share and expire in October 2011.
In December 2001, the former President exercised options to acquire 280,000
shares of common stock through the transfer of 88,000 mature shares. On July
11, 2002, the former President and the Company entered into a settlement
agreement rescinding the exercise of the stock options. The accompanying
consolidated financial statements give effect to the rescission.
NOTE N - STOCK BASED COMPENSATION
In April 1997 and September 1998, the Company established Stock Option Plans
which authorize the Company to issue options to employees, directors and
outside consultants of the Company. The issuance and form of the options
shall be at the discretion of the Company's board of directors, except that
the exercise price may not be less than 85% of the fair market value at the
time of grant. The options vest over a four year period and expire in ten
years or three months after separation of service, whichever occurs earlier.
F-16
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 ( 52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE N - STOCK BASED COMPENSATION (Continued)
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25") in accounting for its
employees stock options. Under APB 25, because the exercise price of the
Company's employee stock options issued was greater than the market price of
the underlying stock on the date of grant, no compensation expense was
recognized.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-based Compensation," ("SFAS No. 123") requires the Company to provide
proforma information regarding net income (loss) and earnings (loss) per
common share as if compensation cost for the Company's Stock Option Plan had
been determined in accordance with the fair value based method prescribed in
SFAS No. 123. The Company estimated the fair value of each stock option on
the date of grant by using the Black-Scholes pricing model with the
following assumptions: expected volatility of 75%; expected life of the
option of 75% of the stated life for 10 year options and the stated life for
all others; no dividends; and a risk free interest rate of approximately 4%.
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) and basic and diluted earnings (loss) per common share for the years
ended June 29, 2002, June 30, 2001 and June 24, 2000 would have been
approximately ($1,680,000), ($0.42) and ($0.42), $6,000, $0.00 and $0.00,
and ($2,497,000), ($0.63) and ($0.63), respectively.
A summary of the Company's stock option activity, and related information
for the years ended June 29, 2002, June 30, 2001 and June 24, 2000, is as
follows:
# of Weighted Average
Options Exercise Price
--------- ---------------
Outstanding June 26, 1999 1,547,186 $ 2.56
Granted 240,709 4.06
Exercised 138,000 2.00
Forfeited 307,696 3.66
--------- --------
Outstanding June 24, 2000 1,342,199 $ 2.63
Granted 360,657 2.47
Exercised -- --
Forfeited 106,135 4.30
--------- --------
Outstanding June 30, 2001 1,596,721 $ 2.48
Granted 754,750 0.55
Exercised -- --
Forfeited 583,966 1.65
--------- --------
Outstanding June 29, 2002 1,767,505 $ 1.93
========= ========
Exercisable at June 29, 2002 1,244,044 $ 2.23
========= ========
F-17
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS) AND JUNE 24, 2000 (52 WEEKS)
NOTE N - STOCK BASED COMPENSATION (Continued)
The weighted-average fair value of options granted during the years ended
June 29, 2002, June 30, 2001 and June 24, 2000 was $0.40, $1.36 and $2.84,
respectively.
Exercise prices for options outstanding as of June 29, 2002 ranged from
$0.54 to $5.25. The weighted average remaining contractual life of these
options is as follows:
Weighted Average
Exercise # of Weighted Average Remaining
Price Options Exercise Price Contractual Life
----------- ----------- ----------------- -----------------
$0.54 - $0.55 341,500 $0.55 9.33
$1.50 - $3.01 1,289,839 $1.96 1.96
$5.00 - $5.25 136,166 $5.10 6.56
NOTE O - SIGNIFICANT CUSTOMERS
The Company entered into three multi-year manufacturing agreements each
covering a specific operating location with a significant customer, which
provide for, among other things, minimum purchase commitments. The
agreements were for initial terms expiring during 2001 through 2003 and
automatically continue in effect from year to year for successive one year
renewal terms unless cancelled in writing by either party at least 180 days
prior to the expiration date. The contract with the Indiana facility will
expire in March 2003 and the Company has been given notice of non-renewal.
The Indiana facility accounted for approximately $25,900,000 in net revenues
for the year ended June 29, 2002.
The contracts with the Alabama and Illinois facilities were not renewed and
the facilities were closed in October 2001 and May 2002, respectively. The
Alabama and Illinois facilities accounted for approximately $1,300,000 and
$12,800,000, respectively in net revenues for the year ended June 29, 2002.
Sales to this significant customer represented approximately 86%, 86% and
83% of net sales for the years ended June 29, 2002, June 30, 2001 and June
24, 2000, respectively. At June 29, 2002 and June 30, 2001, two customers
accounted for approximately 91% and 88% of trade accounts receivable,
respectively, with the above significant customer accounting for
approximately 81% and 78%, respectively.
NOTE P - PENSION AND PROFIT SHARING PLAN
The Company has a salary reduction / profit-sharing plan under the
provisions of Section 401(k) of the Internal Revenue Code. The Plan covers
all full-time employees who have completed one year of service with the
Company. The Company's contributions to the plan are made at the discretion
of the board of directors and amounted to approximately $50,000 and $40,000
for the years ended June 30, 2001 and June 24, 2000, respectively. The
Company made no contribution for the year ended June 29, 2002.
F-18
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS)
AND JUNE 24, 2000 (52 WEEKS)
NOTE Q - CONTINGENCY
In June 1999, the Company was named as a co-defendant in a lawsuit whereby
the plaintiff is alleging damages of up to $300,000 related to lost income
from a facility formerly leased to the Company in Jessup, Maryland.
Management believes the claim is without merit and intends to vigorously
contest the claim. The outcome of the action as well as the extent of the
Company's liability, if any, cannot be determined at this time.
NOTE R - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended June 29, 2002 and June
30, 2001 is summarized below (in thousands except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2002
----
Net sales $ 12,960 $ 15,735 $ 8,691 $ 10,414
Gross profit 511 1,214 467 797
Net income (loss) (480) 278 (469) (473)
Basic earnings (loss) per
common share (0.12) 0.07 (0.11) (0.12)
Diluted earnings (loss) per
common share (0.12) 0.07 (0.11) (0.12)
2001
----
Net sales $ 19,474 $ 21,610 $ 12,374 $ 18,709
Gross profit 1,240 1,603 781 1,508
Net income (loss) 55 256 (104) 96
Basic earnings (loss) per
common share 0.01 0.06 (0.03) 0.02
Diluted earnings (loss) per
common share 0.01 0.06 (0.03) 0.02
F-19
PALLET MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 29, 2002 (52 WEEKS), JUNE 30, 2001 (53 WEEKS)
AND JUNE 24, 2000 (52 WEEKS)
Balance
Beginning Charged to Costs Balance End
of Year and Expenses Deductions of Year
-------------- -------------- -------------- -----------
Allowance for doubtful accounts:
June 29, 2002 $ 156,655 $ 25,000 $ (74,906) $ 106,749
June 30, 2001 $ 100,436 $ 142,134 $ (85,915) $ 156,655
June 24, 2000 $ 5,000 $ 95,436 $ -- $ 100,436
Deferred tax asset valuation allowance:
June 29, 2002 $ 1,297,689 $ 423,691 $ -- $ 1,721,380
June 30, 2001 $ 1,432,748 $ -- $ 135,059 $ 1,297,689
June 24, 2000 $ 592,342 $ 840,406 $ -- $ 1,432,748
F-20