================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2004
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ________
Commission file number 000-26331
--------------------------------------------------
PALWEB CORPORATION
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
OKLAHOMA 75-2954680
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1613 EAST 15TH STREET, TULSA, OKLAHOMA 74120
--------------------------------------------------------------------------------
(Address of principal executive offices)
(918) 583-7441
--------------------------------------------------------------------------------
(Issuer's telephone number)
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: October 8, 2004 - 12,790,451
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT(CHECK ONE): Yes [_] No [X]
================================================================================
PALWEB CORPORATION
FORM 10-QSB
FOR THE PERIOD ENDED FEBRUARY 29, 2004
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets as of August 31, 1
2004 and May 31, 2004
Condensed Consolidated Statement of Operations 3
For the Three Month Periods Ended August 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows 4
For the Three Month Periods Ended August 31, 2004 and 2003
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 6
ITEM 3. CONTROLS AND PROCEDURES 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS 10
SIGNATURES 10
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALWEB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2004 2004
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash $ 227,634 $ 274,085
Accounts receivable 1,060,541 951,596
Inventory 700,395 521,376
TOTAL CURRENT ASSETS 1,988,570 1,747,057
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost 7,481,333 7,330,179
Less: Accumulated depreciation (851,062) (741,151)
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 6,630,271 6,589,028
OTHER ASSETS:
Goodwill 6,164,435 6,164,435
Patents and deposit 487,582 490,441
TOTAL OTHER ASSETS 6,652,017 6,654,876
------------ ------------
TOTAL ASSETS $ 15,270,858 $ 14,990,961
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,532,463 $ 2,352,667
Notes payable 2,928,628 1,503,612
Accounts payable and accrued liabilities 1,810,061 1,578,917
Preferred dividends payable 62,295 60,582
TOTAL CURRENT LIABILITIES 6,333,447 5,495,778
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION 6,182,468 6,390,499
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value,
20,750,000 shares authorized; 50,000
shares of Series 2003 outstanding 5 5
1
Common stock, $.0001 par value,
5,000,000,000 authorized;
outstanding - 12,790,451 1,279 1,279
Additional paid-in capital 48,265,496 48,265,496
Deficit (45,511,837) (45,162,096)
TOTAL STOCKHOLDERS' EQUITY 2,754,943 3,104,684
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,270,858 $ 14,990,961
============ ============
The accompanying notes are an integral part of this consolidated financial
statement.
2
PALWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
August 31,
---------------------------------
2004 2003
------------ ------------
SALES $ 2,170,230 $ 193,219
COST OF SALES, including depreciation
of $109,911 and $41,351, respectively 1,910,568 385,915
------------ ------------
GROSS PROFIT (LOSS) 259,662 (192,696)
EXPENSES:
General and administrative expenses 337,920 235,912
------------ ------------
OPERATING LOSS (78,258) (428,608)
OTHER INCOME (EXPENSE):
Other income 8,006 3,656
Interest expense (187,400) (175,934)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (179,394) (172,278)
------------ ------------
NET LOSS (257,652) (600,886)
PREFERRED DIVIDENDS 92,089 224,384
------------ ------------
NET LOSS TO COMMON STOCKHOLDERS $ (349,741) $ (825,270)
============ ============
NET LOSS PER COMMON SHARE $ (0.03) $ (0.13)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 12,790,000 6,317,000
============ ============
The accompanying notes are an integral part of this consolidated financial
statement.
3
PALWEB CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
August 31,
-----------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operations $ (292,078) $ (243,126)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (151,154) (550)
---------- ----------
Net cash used in investing activities (151,154) (550)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 925,000 243,676
Payments on notes (528,219) --
---------- ----------
Net cash provided by financing
activities 396,781 243,676
---------- ----------
NET DECREASE IN CASH (46,451) --
CASH, beginning of period 274,085 6,209
---------- ----------
CASH, end of period $ 227,634 $ 6,209
========== ==========
NONCASH ACTIVITIES:
Issuance of common stock in lieu of
cash payment of preferred dividends $ -- $ 224,384
SUPPLEMENTAL INFORMATION:
Interest paid $ 148,122 $ 150,932
The accompanying notes are an integral part of this consolidated financial
statement.
4
PALWEB CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments and reclassifications, which
are of a normal recurring nature, necessary to present fairly its financial
position as of August 31, 2004, and the results of its operations and its
cash flows for the three month periods ended August 31, 2004 and 2003.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements as of and for the
year ended May 31, 2004 and the notes thereto included in the Company's
Form 10-KSB. The financial statements have been prepared assuming that
PalWeb will continue as a going concern. The working capital deficit of
approximately $4,232,000 at August 31, 2004, reflects the uncertain
financial condition of PalWeb and its inability to obtain long term
financing until it is able to attain profitable operations.
2. The results of operations for the three month period ended August 31,
2004 are not necessarily indicative of the results to be expected for the
full year.
3. The computation of loss per share is computed by dividing the loss
available to common shareholders by the weighted average shares outstanding
for the periods. Loss available to common shareholders is determined by
adding preferred dividends for the periods to the net loss. For the three
month periods ended August 31, 2004 and 2003, the weighted average common
shares outstanding are 12,790,000 and 6,317,000. Convertible preferred
stock is not considered as its effect is antidilutive.
4. During the three month period ended August 31, 2004, PalWeb received
advances totaling $925,000 from certain unrelated parties of which one
individual, Robert Rosene, was subsequently named as a member of the Board
of Directors. The advances are unsecured loans for which interest is being
accrued at the rate of 7.5% per annum.
5
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
---------------------
GENERAL TO ALL PERIODS
The consolidated statements include PalWeb and its wholly-owned
subsidiaries, Greystone Manufacturing, LLC, or GSM, and Plastic Pallet
Production, Inc., or PPP.
PalWeb has incurred significant losses from operations, and there is no
assurance that it will achieve profitability or obtain funds necessary to
finance its operations.
References to fiscal year 2005 refer to the three month period ended
August 31, 2004. References to fiscal year 2004 refer to the three month period
ended August 31, 2003.
SALES
PalWeb's primary business is the manufacturing and selling of plastic
pallets through its wholly owned subsidiaries, GSM and PPP. GSM is a newly
formed subsidiary of PalWeb that acquired substantially all the assets and
operations of Greystone Plastics, Inc, effective as of September 8, 2003. GSM
manufactures pallets for the beverage industry, operates at full capacity and
sells its product to one customer. PalWeb distributes its pallets through the
combination of a network of independent contractor distributors and sales by
PalWeb's officers and employees.
PPP also markets its own designed injection molding machine, the PIPER
600, through a licensing agreement with ForcePro, LLC, which gives ForcePro the
exclusive right to market and sell the PIPER 600. Pursuant to the terms of the
licensing agreement, PalWeb will receive a royalty of 5% of the gross proceeds
from sales of the PIPER 600.
PERSONNEL
PalWeb has approximately 62 full-time employees as of August 31, 2004
compared to 14 full-time employees as of August 31, 2003. The increase in
employees is due to the acquisition of the assets of Greystone Plastics, Inc.
TAXES
For all years presented, PalWeb's effective tax rate is 0%. PalWeb has
generated net operating losses since inception, which would normally reflect a
tax benefit in the statement of operations and a deferred asset on the balance
sheet. However, because of the current uncertainty as to PalWeb's ability to
achieve profitability, a valuation reserve has been established that offsets the
amount of any tax benefit available for each period presented in the
consolidated statement of operations.
6
THREE MONTH PERIOD ENDED AUGUST 31, 2004, COMPARED TO THREE MONTHPERIOD ENDED
AUGUST 31, 2003
Sales for fiscal year 2005 were $2,170,230 compared to $193,219 in
2004. The increase of $1,977,011 is primarily attributable to the acquisition of
the assets of Greystone Plastics, Inc. effective as of September 8, 2003. PalWeb
currently utilizes a total of seven production lines to produce its plastic
pallets, of which four production lines are utilizes by PPP and remaining three
are utilized by GSM. PalWeb anticipates that it will install an additional
production line in about November 2004 that will be utilized by GSM. The GSM
production lines operate at approximately full capacity, and it is expected that
the new line will also operate at approximately full capacity.
Cost of sales in fiscal year 2005 was $1,910,568, or 88% of sales,
compared to $385,915, or 200% of sales, in 2004. The decline of 112% from fiscal
year 2004 to 2005 is primarily attributable to the acquisition of the assets and
operations of Greystone Plastics, Inc. as discussed in the preceding paragraph.
General and administrative expenses increased $102,008 from $235,912 in
fiscal year 2004 to $337,920 in fiscal year 2005. This increase is principally
due to an increase of three persons charged to administrative salaries.
Interest expense increased $11,466 from $175,934 in fiscal year 2004 to
$187,400 in fiscal year 2005.
The net loss decreased $343,234 from $(600,886) in fiscal year 2004 to
$(257,652) in fiscal year 2005 for the reasons discussed above.
After deducting preferred dividends, the net loss available to common
shareholders is $(349,741), or $(0.03) per share, in fiscal year 2005 compared
to $(825,270), or $(0.13) per share, in fiscal year 2004 for a decrease of
$475,529. Approximately $0.07 of the decrease in the per share amounts is
attributable to the increase in the weighted average number of shares of common
stock outstanding for the quarter ended August 31, 2004 compared to the quarter
ended August 31, 2003 due principally to the conversion of 750,000 shares of
Series 2001 preferred stock converted into 5,250,000 shares of common stock
effective as of September 8, 2003.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
GENERAL
PalWeb's cash requirements for operating activities consist principally
of accounts receivable, inventory, accounts payable requirements, operating
leases and scheduled payments of interest on outstanding indebtedness. PalWeb is
currently dependent on outside sources of cash to
7
fund its operations. As of August 31, 2004, revenues from sales remain
insufficient to meet current liabilities.
A summary of cash flows for the three months ended August 31, 2004 is
as follows:
Cash used in operating activities $(292,078)
Cash used in investing activities (151,154)
Cash provided by financing activities 396,781
Contractual obligations of PalWeb are as follows:
LESS THAN OVER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----------- ----------- ----------- ----------- -----------
Long-term debt $ 7,714,931 $ 1,532,463 $ 2,891,845 $ 1,760,364 $ 1,530,259
Operating leases 6,124,050 717,390 1,182,660 1,152,000 3,072,000
----------- ----------- ----------- ----------- -----------
Total $13,838,981 $ 2,249,853 $ 4,074,505 $ 2,912,364 $ 4,602,259
=========== =========== =========== =========== ===========
PalWeb anticipates that the cash necessary for funding its operating
activities will continue to decline in fiscal 2005 as compared to fiscal 2004
based on its projection of increased sales activities for fiscal 2005. To
provide for the additional cash to meet PalWeb's operating activities and
contractual obligations for fiscal 2005, PalWeb is exploring various options
including long-term debt and equity financing. However, there is no guarantee
that PalWeb will be able to raise sufficient capital to meet these obligations.
PalWeb has accumulated a working capital deficit of approximately
$4,232,000 at August 31, 2004, which includes approximately $4,461,000 of notes
payable and current portion of long-term debt and $1,872,000 in accounts payable
and accrued liabilities. The working capital deficit reflects the uncertain
financial condition of PalWeb resulting from its inability to obtain long term
financing until such time as it is able to achieve profitability. There is no
assurance that PalWeb will secure such financing.
PalWeb has had difficulty in obtaining financing from traditional
financing sources. Substantially all of the financing that PalWeb has received
through August 31, 2004, has been provided by loans from entities controlled by
Mr. Paul Kruger, a significant shareholder, entities affiliated with Warren
Kruger, President and Chief Executive Officer of PalWeb, through the offering of
preferred stock to essentially the same persons and advances from individual
investors principally through contacts of Warren Kruger. PalWeb has
traditionally been reliant on funds provided by Warren Kruger and its board of
directors through loans or the purchase of equity securities. There is no
assurance that Warren Kruger will continue to provide loans or loan guarantees
or purchase of equity securities of PalWeb in the future.
8
ADVANCES FROM UNRELATED PARTIES
During the three month period ended August 31, 2004, PalWeb has
received advances totaling $925,000 from certain unrelated parties of which one
individual, Robert Rosene, was later named as a member of the Board of
Directors. Interest expense is being accrued on these advances at the rate of
7.5%.
LOANS FROM WARREN KRUGER
At August 31, 2004, Warren Kruger or entities owned by Warren Kruger
had a note and advances totaling $791,171 due from PalWeb. Interest is accrued
at 7.5% on the note and advances.
At August 31, 2004, Westgate Capital LP, an entity controlled by Warren
Kruger, had an unsecured note $204,290 due from PalWeb. The note has an interest
rate of 7.5% and matures October 1, 2004.
WORKING CAPITAL LOAN
On September 30, 2003, PalWeb entered into a loan agreement with
BancFirst providing for a $900,000 line of credit at the prime rate of interest
plus 1% and a maturity of September 25, 2004. As of August 31, 2004, PalWeb had
drawn $899,980 on the line of credit. The loan is secured by accounts receivable
and inventory of its subsidiary, Greystone Manufacturing, LLC.
MATERIAL RISKS
--------------
PalWeb has incurred significant losses from operations and there is no
assurance that it will achieve profitability or obtain funds to finance
continued operations. For other material risks, see PalWeb's Form 10-KSB for the
period ended May 31, 2004, which was filed on August 30, 2004.
ITEM 3. CONTROLS AND PROCEDURES
PalWeb carried out an evaluation under the supervision of PalWeb's
Chief Executive Officer and Chief Financial Officer of the effectiveness of the
design and operation of PalWeb's disclosure controls and procedures pursuant to
the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this
evaluation, PalWeb's Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures as of the end of the
period covered by this report on Form 10-QSB are effective. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events and there can be no assurance that any design will
succeed in adhering to its stated goals under all potential future conditions.
During the first quarter ended August 31, 2004, there have been no material
changes in PalWeb's internal controls over financial reporting.
9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
11.1 Computation of Loss per Share is in Note 3 in the Notes to the
financial statements.
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, and Item 601(b)(31) of
Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (submitted herewith).
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, and Item 601(b)(31) of
Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (submitted herewith).
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (submitted herewith).
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (submitted herewith).
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be singed on its behalf by the undersigned, thereunto duly
authorized.
PALWEB CORPORATION
-------------------------
(Registrant)
Date: October 19, 2004 /s/ Warren F. Kruger
-------------------------
Warren F. Kruger
President and CEO
10