U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the thirteen-week period ended
September 28, 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 (IRS Employer Identification Number)
incorporation)
2855 University Drive, Suite 510, Coral Springs, Florida 33065
--------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code:
(954) 340-1290
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(Former name or address if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
On November 6, 2002, the Registrant had outstanding 3,996,612 shares of common
stock, $.001 par value.
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
September 28, June 29,
2002 2002
------------- --------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 70,492 $ 72,561
Accounts receivable - trade, net of allowance
for doubtful accounts $ 2,675,655 $ 3,503,750
Inventories $ 1,285,134 $ 1,098,946
Other current assets $ 267,958 $ 203,091
----------- -----------
Total current assets $ 4,299,239 $ 4,878,348
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Property and equipment - net of accumulated
depreciation $ 4,830,570 $ 4,925,451
OTHER ASSETS $ 59,342 $ 91,447
----------- -----------
Total assets $ 9,189,151 $ 9,895,246
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 4,240,138 $ 947,060
Current portion of capital lease obligations $ 143,326 $ 139,740
Accounts payable $ 2,202,881 $ 2,062,277
Accrued liabilities $ 214,754 $ 426,503
----------- -----------
Total current liabilities $ 6,801,099 $ 3,575,580
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LONG TERM DEBT
Long-term debt $ 132,272 $ 4,072,936
Capital lease obligations $ 180,936 $ 152,546
----------- -----------
Total long-term liabilities $ 313,208 $ 4,225,482
----------- -----------
Total liabilities $ 7,114,307 $ 7,801,062
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STOCKHOLDERS' EQUITY
Preferred stock, authorized 7,500,000 shares at $.001 par
Value; no shares issued and outstanding
Common stock, authorized 10,000,000 shares at
$.001 par value; issued and outstanding 3,995,612
shares at June 29, 2002 and 3,996,612 shares
at September 28, 2002 $ 3,997 $ 3,996
Additional paid in capital $ 7,148,784 $ 7,148,784
Accumulated deficit $(4,939,937) $(4,920,596)
Note receivable from stockholder $ (138,000) $ (138,000)
----------- -----------
Total stockholders' equity $ 2,074,844 $ 2,094,184
----------- -----------
Total liabilities and stockholders' equity $ 9,189,151 $ 9,895,246
----------- -----------
The accompanying notes are an integral part of these financial statements.
2
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
13 Weeks Ended
Sept. 28, 2002 Sept. 29, 2001
-------------- --------------
Net sales $ 10,659,924 $ 12,960,018
Cost of goods sold $ 9,899,913 $ 12,448,577
------------ ------------
Gross profit $ 760,011 $ 511,441
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Selling, general and administrative expense $ 685,463 $ 821,095
------------ ------------
Operating profit (loss) $ 74,548 $ (309,654)8
------------ ------------
Other income (expense)
Other income (expense) $ (6,963) $ (54,990)3)
Interest expense $ (86,927) $ (114,992))
------------ ------------
Total other income (expense) $ (93,890) $ (169,982))
------------ ------------
Income (loss) before income tax expense $ (19,342) $ (479,636))
Income tax expense (benefit) $ -- $ --
Net income (loss) $ (19,342) $ (479,636))
------------ ------------
Net earnings (loss) per common share $ (0.005) $ (0.12)
Diluted earnings (loss) per common share * *
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* exercise of warrants and options would be anti-dilutive
The accompanying notes are an integral part of these financial statements.
3
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
13 Wks Ended 13 Wks Ended
Sept. 28, 2002 Sept. 30, 2001
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ (19,342) $ (479,636)
--------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by/(used in) operating activities:
Depreciation $ 183,891 $ 156,116
Stock options issued for services $ -- $ 17,158
(Increase) Decrease in operating assets:
Accounts receivable $ 828,095 $ 2,113,375
Inventories $(186,188) $ (989,941)
Other assets $ (32,761) $ (79,875)
Increase (Decrease) in operating liabilities:
Accounts payable $ 140,605 $ (360,960)
Other liabilities $(211,749) $ 2,313
--------- -----------
Net cash provided by/(used in)
operating activities $ 702,551 $ 378,550
--------- -----------
Cash flows from investing activities:
Proceeds from sale of fixed assets $ -- $ 37,086
Purchase of fixed assets $ (20,403) $ (27,139)
--------- -----------
Net cash provided by/(used in) investing activities $ (20,403) $ 9,947
--------- -----------
Cash flows from financing activities:
Net Payments of long term debt $(684,217) $ (549,982)
--------- -----------
Net cash provided by/(used in) financing activities $(684,217) $ (549,982)
--------- -----------
Increase/(Decrease) in cash $ (2,069) $ (161,485)
Cash at beginning of period $ 72,561 $ 232,635
--------- -----------
Cash at end of period $ 70,492 $ 71,150
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The accompanying notes are an integral part of these financial statements.
4
Pallet Management Systems, Inc.
Notes to Financial Statements
September 28, 2002
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of September 28, 2002 and the
consolidated statements of operations and cash flows for the thirteen week
periods ended September 28, 2002 and September 29, 2001 have been prepared by
the Company without audit in accordance with accounting principles generally
accepted in the United States for interim financial information and with
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments necessary to present fairly the financial position,
results of operations and cash flows for the periods reported have been made.
Operating results for the thirteen weeks ended September 28, 2002 are not
necessarily indicative of the results that may be expected for the year ended
June 28, 2003. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's annual report filed on Form 10-K as of June 29, 2002.
Certain prior year amounts within the accompanying financial statements
have been reclassified to conform to the current period presentation.
NOTE 2. 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.
Management believes that existing cash on hand, cash provided by future
operations and services, additional borrowings under its current line of credit,
and a net negative working capital of ($2.502) million as of September 28, 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.
NOTE 3. DEBT AGREEMENT
The Company has a revolving loan and three term loans with La Salle
Business Credit in a three year agreement, which commenced April 14, 2000. As of
September 28, 2002 the Company was in full compliance with its covenants that
were reset by the bank on October 9, 2002 due to the out of compliance
conditions present on June 29, 2002. The Company can not ensure it will remain
in compliance with the reset covenants in the coming months due to the
fluctuations in pricing and demand. Because it is probable that the Company will
not meet its covenants continuously in the next 12 months, the debt associated
with La Salle Business Credit is classified as current in the financial
statements. Additionally, the Company will need its Lawrenceville, Virginia
operations to continue its trend of increasing revenues to enable the Company to
reach its covenant levels. Should the Company not meet its covenants, the
Company cannot ascertain how La Salle Business Credit will proceed in its
ongoing relationship with the Company.
5
The Company also received an extension to its loans until October 15,
2003 with a condition that $350,000 be paid from the availability under the
revolver towards the term debt. This was completed on October 15, 2002. All of
our loans carry an interest rate of prime plus 2 (two) percent as of October 9,
2002 as part of the reset covenants, an increase of one-half of one percent.
Advances under the revolving agreement are based on the sum of 85% of
eligible accounts receivable, plus the lesser of 55% of eligible inventories or
$1,500,000. Interest is paid monthly at the bank's prime rate (plus 2 percent).
Principal is due in October 2003, with possible year to year renewals
thereafter. The revolving agreement is collateralized by substantially all of
the assets of the Company. At September 28, 2002, the Company had $1,649,000 of
availability under the revolving agreement.
The three term loans as of September 28, 2002 were at $1,053,000,
$1,192,000 and $791,000. These loans are collateralized by substantially all the
assets of the Company.
NOTE 4. INVENTORIES
Inventories consisted of the following at September 28, 2002:
Raw material $ 506,994
Work in process $ 378,649
Finished goods $ 399,491
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TOTAL $1,285,134
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6
NOTE 5. NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Net earnings (loss) per share of common stock was determined by dividing
net income (loss) applicable to common shares by the weighted average number of
common shares outstanding during each period. Diluted earnings/(loss) per common
share reflects the potential dilution that could occur assuming exercise of all
issued and unexercised stock options. A reconciliation of the net income/(loss)
and numbers of shares used in computing basic and diluted earnings/(loss) per
common share is as follows (in thousands, except per share data):
13 Weeks Ended 13 Weeks Ended
September 28 September 29
2002 2001
-------------- --------------
Basic earnings/(loss) per common share:
Net income/(loss) $ (19) $ (480)
Weighted average common shares
outstanding for the period 3,997 4,065
Basic earnings per share of
common stock $(0.005) $ (0.12)
Diluted earnings/(loss) per common share:
Net income/(loss) $ (19) $ (480)
Weighted average common shares
outstanding for the period 3,997 4,065
Increase in shares which would
result from exercise of stock options * *
Weighted average common shares,
assuming conversion of the above
securities 3,996 4,065
Diluted earnings/(loss) per share of
common stock * *
----------
* exercise of warrants and options would be anti-dilutive
7
NOTE 6. LITIGATION
In June 1999, the Company was named as a co-defendant in a lawsuit
whereby the plaintiff is alleging damages of up to $300,000 related to lost
income from a facility and other property formerly leased to the Company in
Jessup, Maryland. Management believes the claim is without merit and intends to
vigorously contest the claim. St. Paul Insurance is currently paying defense
costs. The outcome of the action as well as the extent of the Company's
liability, if any, can not be determined at this time.
NOTE 7. REVENUE RECOGNITION
Sales revenue is generally recorded upon the delivery of goods or the
acceptance of goods by the customer according to contractual terms and
represents amounts realized, net of discounts and allowances.
NOTE 8. ACCOUNTING FOR SOFTWARE RELATED COSTS
The Company accounts for the costs of computer software developed or
obtained for internal use in accordance with Statement of Position 98-1 which
generally requires the capitalization of costs incurred during the application
development stage of computer software meeting certain characteristics. All
costs incurred during the preliminary project stage and post implementation /
operation stage are expensed as incurred.
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
which applies to all business combinations initiated after June 30, 2001. This
statement requires that all business combinations be accounted for by the
purchase method and defines the criteria used to identify intangible assets to
be recognized apart from goodwill.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142), which is effective for fiscal years beginning after December
15, 2001, except goodwill and intangible assets acquired after June 30, 2001 are
subject immediately to the non-amortization and amortization provisions of this
Statement. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. Other intangible assets will
continue to be amortized over their useful lives.
In August 2001, the Financial Accounting Standards Board Issued
Statement of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations", effective for fiscal years beginning after June 15,
2002. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs.
8
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-lived Assets", effective for fiscal years
beginning after December 15, 2001. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets.
The Company has adopted these statements in the current quarter and such
adoption did not have a material affect on the Company's financial position and
results of operations.
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.
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with
the financial statements appearing as Item 1 to this Report and the Form 10-K
for the year ended June 29, 2002. The financial statements in this Report
reflect the consolidated operations of Pallet Management Systems, Inc. (the
"Company" or "Pallet Management") for the thirteen-week periods ended September
28, 2002 and September 29, 2001.
The following discussion regarding Pallet Management and its business
and operations contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act 1995. These statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The reader is cautioned that all forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward looking statements, including the limited
history of profitable operations, dependence on CHEP, competition, risks related
to acquisitions, difficulties in managing growth, dependence on key personnel
and other factors discussed under Risk Factors" in the Annual Report on Form
10-K for the year ended June 29, 2002. Pallet Management does not have a policy
of updating or revising forward-looking statements and thus it should not be
assumed that silence by management of Pallet Management over time means that
actual events are bearing out as estimated in such forward looking statements.
Critical Accounting Policy
--------------------------
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.
9
Results of Operations
---------------------
General
-------
Pallet Management has grown to be one of the largest pallet companies in
the estimated $6 billion U.S. pallet industry, by providing value-added products
and services to our customers. Our customer base has remained stable.
The majority of our revenues have traditionally been generated from
providing high quality, specially engineered pallets to manufacturers,
wholesalers and distributors. As supply chain logistics have become increasingly
complex, our existing customers as well as prospective customers are seeking new
ways to streamline distribution and reduce costs.
With this shift in focus toward services and cost efficiency, we are
providing "state of the art" logistical services known as reverse logistics.
Reverse logistics is simply defined as maximizing the use of transport
packaging, the base of which is the pallet, by reusing assets to reduce the
overall cost per trip.
This shift in focus toward supply chain efficiency by our customer base
is by far our industry's most dramatic shift in focus and provides the most
opportunity for our company. Driven mainly by economics, reusable packaging in a
reverse logistics system also has environmental benefits.
"Reverse Logistics" 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
Logistics in the marketplace is a key factor in the dramatic changes taking
place in the pallet industry.
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 had a multi-year contract to manufacture high quality grocery
pallets for CHEP, the world's largest pallet rental pool from our Plainfield,
Indiana facility. In Plainfield, Indiana, our contract is set to end on March 1,
2003. The Company is currently negotiating a new agreement to begin prior to the
end of the existing agreement.
Pallets that are specially engineered to transport a specific product
are classified as niche market pallets. Our Company's customer base from our
Virginia operation is primarily composed of customers who require niche pallets.
Niche pallets are low volume and high margin pallets.
Pallet Management functions as a wholesale distributor of other various
returnable transport packaging such as plastic and metal pallets; collapsible
plastic bulk boxes; wood, plastic, and metal slave pallets; wooden boxes and
crates; and various other products. Due to lack of demand, sales of pallets made
from materials other than wood have been minimal.
10
Services: Our Company provides a variety of retrieval, sortation,
repair, warehouse and return services that enable our customers to better
utilize their packaging assets. Besides being environmentally friendly, a
properly repaired used pallet will provide the customer significant savings over
having to buy a new pallet. Despite recent increases in levels of automation,
pallet return operations remain a labor-intensive process.
Pallet users currently discard a large portion of new pallets after one
use. The condition and size of these pallets vary greatly. The pallets are
sorted and repaired as needed, placed in storage and made available for return
to service. Pallets that can be repaired have their damaged boards replaced with
salvaged boards or boards from new stock inventoried at the facility.
Pallets that cannot be repaired are dismantled and the salvageable
boards are recovered for use in repairing and building other pallets. Pallet
Management sells the remaining damaged boards to be ground into wood fiber,
which is used as landscaping mulch, fuel, animal bedding, gardening material and
other items.
As part of the Company's strategy to use the Internet to improve the
effectiveness of its service offerings, it developed PalletNetTM , a service
brand providing a logistics and information system that manages the flow of
shipping platforms and containers throughout industrial supply chains (excluding
the grocery industry). PalletNetTM creates a closed loop delivery, recovery and
recycling system, which enables customers to treat pallets as assets rather than
expendables.
The principal services PalletNetTM offers include reverse distribution,
single source national contracts, high quality shipping platforms and transport
packaging, recovery, repair, recycling and export packaging. These physical
activities are supported by leading edge technology that enables users to
improve shipping asset controls and reduce cost and waste from the supply chain,
while reducing inventories and enhancing customer satisfaction. By coupling
PalletNetTM with the Internet, the Company is creating value for the customer
through substantially lower costs and improved efficiencies.
The PalletNetTM application is a 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.
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.
11
Thirteen Weeks Ended September 28, 2002 compared to
---------------------------------------------------
Thirteen Weeks Ended September 29, 2001
---------------------------------------
For the thirteen-week period ended September 28, 2002, net sales
decreased 18% to $ 10,660,000 from $12,960,000 for the thirteen-week period
ending September 29, 2001. This decrease is attributable to the closing of our
Alabama and Illinois facilities in the past 12 months which accounted for
$5,279,000 reduction in sales when compared to the thirteen week period ending
September 29, 2001. Our Lawrenceville, Virginia operation, increased its sales
for the thirteen week period ending September 28, 2002 by $582,000 when compared
to the thirteen week period ending September 29, 2001. This increase was
primarily due to more sales of our niche pallets as a result of the stronger
economy and the Company's marketing efforts for the past 6 months. Additionally,
our Indiana operation increased its sales by $2,315,000 over the same period in
the prior year due to that facilities main customer having a strong order
period.
During the thirteen-week period ended September 28, 2002, manufacturing
sales decreased 19% to $ 10,203,000 from $12,564,000. This reduction is
attributable to no sales from our Alabama and Illinois facilities due to those
plants' closures in fiscal year 2002, that was partially offset by the increase
in sales experienced at our Lawrenceville, Virginia facility as noted above.
Service sales increased by 15% also to $457,000 from $ 396,000. This increase is
primarily due to the repair services made at the Petersburg, Virginia facility
as a result of strong demand from the facility's key customer.
Pallet Management had a 17% reduction in its selling, general and
administrative expenses from $ 821,000 to $ 685,000 for the thirteen week period
ended September 28, 2002 compared to the thirteen week period ended September
29, 2001. The selling, general and administrative expenses were reduced
primarily due to the reduction in salaries due to layoffs experienced in the
third and fourth quarters as well as reduction to 401K, telephone and recruiting
expenses when compared to the period ending September 29, 2001.
A loss of ($19,000) or ($.005) per share was realized during this
thirteen-week period ended September 28, 2002 compared to a net loss of
($480,000) or ($.12) per share recorded for the thirteen-week period last fiscal
year. The near breakeven performance reflects the return of business to our
Lawrenceville, Virginia facility, the strong orders from our primary customer
out of our Indiana facility and our reductions to operating and selling, general
and administrative expenses while having $2,300,000 less sales volume when
compared to the same period in the prior year.
Liquidity and Capital Resources
-------------------------------
Pallet Management had $70,500 cash on hand on September 28, 2002, versus
$72,500 at the beginning of the fiscal year. The change in cash was primarily
attributed to the decrease in accounts receivable due to stronger collections
which was offset primarily by payments of our revolver debt caused by the timing
of borrowings and presentments of outstanding checks at September 28, 2002 as
compared with June 29, 2002. The company also experienced an increase in its
finished goods inventory levels in anticipation of a heavy order period in
October 2002 as well the associated increase in accounts payable at the end of
the quarter. Subsequent to the thirteen week period ending September 28, 2002,
the Company has experienced a tightening in the supply for hardwood lumber. This
has caused an upward movement of raw material costs associated with some of the
customers serviced by the Company, and may decrease profitability associated
with those customers.
12
Management believes that existing cash on hand, cash provided by future
operations and services, additional borrowings under its current line of credit,
and a net negative working capital of ($2.502) million as of September 28, 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.
PART I
ITEM 4. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer of the
Company have reviewed the disclosure controls of the Company. This review
entailed participation in the audit committee review, review of the minutes of
meetings of the Board of Directors, full review of the financial information,
direct involvement in all facets of the business of the Company and
participation in the quarterly audit review of our financial statements. The
Company will be drafting policies and procedures for disclosure controls, and is
currently following unwritten informal controls. These controls include, but are
not limited to, immediate communication of material issues with the Chairman of
the Board, weekly updates of all activities from each key member of the
management team, a review of each draft copy of this report, and a review of any
material transaction or occurrence within a short time frame. Due to the size of
the Company, just over 200 employees of which less than 20 are in a salaried,
supervisory role, the Chief Executive Officer and the Chief Financial Officer of
the Company believe that these controls have been effective to accumulate the
information about the Company required to be disclosed in the Company's reports
filed or submitted pursuant to the Securities Exchange Act of 1934 and to
communicate that information to the management of the Company, as appropriate,
to allow timely decisions regarding the required disclosure.
There have not been significant changes in the Company's internal
controls regarding financial reporting or in other factors that could
significantly affect those internal controls subsequent to the date of the
foregoing evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, the Company was named as a co-defendant in a lawsuit
whereby the plaintiff is alleging damages of up to $300,000 related to lost
income from a facility and other property formerly leased to the Company in
Jessup, Maryland. Management believes the claim is without merit and intends to
vigorously contest the claim. St. Paul Insurance is currently paying defense
costs. The outcome of the action as well as the extent of the Company's
liability, if any, can not be determined at this time.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALLET MANAGEMENT SYSTEMS, INC.
Dated: November 7, 2002 By: /s/ John C. Lucy, III
---------------------------------------------
John C. Lucy III, Chief Executive Officer
Dated: November 7, 2002 By: /s/ Marc S. Steinberg
--------------------------------------------
Marc S. Steinberg, Chief Financial Officer,
Vice President, Treasurer and Secretary
14
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
--------------------------------------------
I, John C. Lucy, III, the Chief Executive Officer of Pallet Management
Systems, Inc., a Florida corporation (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q for the fiscal
quarter ended September 28, 2002, of the Registrant (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.
The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which the Report is being prepared.
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
the Report (the "Evaluation Date"); and
c) presented in the Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the Audit
Committee of the Registrant's Board of Directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have identified for the
Registrant" auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the Registrant's internal
control; and
15
The Registrant's other certifying officers and I have indicated in the
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ John C. Lucy, III
---------------------------------------
Name: John C. Lucy, III
Title: Chief Executive Officer
(Chief Executive Officer)
16
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
--------------------------------------------
I, Marc S. Steinberg, a Vice President and the Chief Financial Officer of the
Registrant, 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.
The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which the Report is being prepared.
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
the Report (the "Evaluation Date"); and
c) presented in the Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have identified for the
Registrant" auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the Registrant's
internal control; and
17
The Registrant's other certifying officers and I have indicated in the
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Marc S. Steinberg
--------------------------------------
Name: Marc S. Steinberg
Title: Vice President and
Chief Financial Officer
(Chief Financial Officer)
18