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
December 30, 2000
Commission File Number 000-24405
PALLET MANAGEMENT SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-2197020
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(State or other jurisdiction of (IRS Employer Identification
incorporation) Number)
2855 University Drive, Suite 510, Coral Springs, Florida 33065
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(Address of principal executive offices)
Registrant's telephone number, including area code:
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(954) 340-1290
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(Former name or address if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No _______
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On February 13, 2001, the Registrant had outstanding 4,065,612 shares of common
stock, $.001 par value.
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 30, June 24,
2000 2000
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 181,145 $ 577,052
Accounts receivable - trade, net of allowance
for doubtful accounts $ 4,114,531 $ 4,885,302
Inventories $ 2,128,085 $ 2,259,110
Other Current Assets $ 208,738 $ 237,577
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Total current assets $ 6,632,499 $ 7,959,041
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Property and equipment - net of accumulated
depreciation $ 5,438,640 $ 4,407,092
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OTHER ASSETS
Vanderloo Pallet Machine - CIP $ -- $ 647,213
Palletnet - CIP $ 267,769 $ 233,266
Other $ 98,368 $ 104,384
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Total other assets $ 366,137 $ 984,863
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Total assets $ 12,437,276 $ 13,350,996
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,202,963 $ 1,190,138
Current portion of capital lease obligations $ 73,342 $ 70,608
Accounts payable $ 2,786,348 $ 2,760,217
Accrued liabilities $ 732,005 $ 814,077
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Total current liabilities $ 4,794,658 $ 4,835,040
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LONG TERM DEBT
Long-term debt $ 4,256,498 $ 5,414,685
Capital lease obligations $ 156,612 $ 182,805
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Total long-term liabilities $ 4,413,110 $ 5,597,490
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Total liabilities $ 9,207,768 $ 10,432,530
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STOCKHOLDERS' EQUITY
Preferred stock, authorized 7,500,000 shares at $.001 par
Value; no shares issued and outstanding
Common stock, authorized 10,000,000 shares at
$.001 par value; issued and outstanding 4,065,612
shares at December 30, 2000 and
June 24, 2000 $ 4,066 $ 4,066
Additional paid in capital $ 7,269,556 $ 7,269,556
Accumulated deficit $ (3,768,114) $ (4,079,156)
Notes receivable from stockholders $ (276,000) $ (276,000)
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Total stockholders' equity $ 3,229,508 $ 2,918,466
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Total liabilities and stockholders' equity $ 12,437,276 $ 13,350,996
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The accompanying notes are an integral part of these financial statements
2
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
13 Weeks Ended 27 Wks Ended 26 Wks Ended
Dec. 30, 2000 Dec. 25, 1999 Dec. 30, 2000 Dec. 25, 1999
-------------- -------------- --------------- --------------
Net sales $ 21,609,517 $ 17,817,051 $ 41,083,315 $ 30,095,342
Cost of goods sold $ 20,006,231 $ 16,917,384 $ 38,239,761 $ 29,410,695
------------- ------------ ------------ ------------
Gross profit $ 1,603,286 $ 899,667 $ 2,843,554 $ 684,647
------------- ------------ ------------ ------------
Selling, general and administrative expense $ 1,154,265 $ 1,145,770 $ 2,202,903 $ 2,528,282
------------- ------------ ------------ ------------
Operating profit (loss) $ 449,021 $ (246,103) $ 640,651 $(1,843,635)
------------- ------------ ------------ ------------
Other income (expense)
Other income (expense) $ (33,665) $ 502 $ (39,635) $ (964)
Interest expense $ (158,956) $ (177,358) $ (289,974) $ (275,326)
------------- ------------ ------------ ------------
Total other income (expense) $ (192,621) $ (176,856) $ (329,609) $ (276,290)
------------- ------------ ------------ ------------
Income (loss) before income tax expense $ 256,400 $ (422,959) $ 311,042 $(2,119,925)
Income tax expense (benefit) $ -- $ -- $ -- $ --
Net income (loss) $ 256,400 $ (422,959) $ 311,042 $(2,119,925)
------------- ------------ ------------ ------------
Net earnings (loss) per common share $ 0.06 $ (0.11) $ 0.08 $ (0.54)
Diluted earnings (loss) per common share $ 0.06 * $ 0.07 *
* 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)
27 Wks Ended 26 Wks Ended
Dec. 30, 2000 Dec. 25, 1999
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Cash flows from operating activities:
Net income (loss) $ 311,042 $(2,119,925)
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Adjustments to reconcile net income (loss) to net
cash provided by/(used in) operating activities:
Depreciation $ 254,420 $ 311,862
Loss on disposal of assets $ -- $ 181,278
(Increase) Decrease in operating assets:
Accounts receivable $ 770,771 $ (574,641)
Inventories $ 131,025 $ (967,569)
Other current assets $ 28,839 $ (207,192)
Increase (Decrease) in operating liabilities:
Accounts payable $ 26,133 $ 3,202,937
Accrued liabilities,and
current maturities of leases and debt $ (66,514) $ 22,930
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Net cash provided by/(used in)
operating activities $ 1,455,716 $ (150,320)
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Cash flows from investing activities:
Other assets $ 618,725 $ 761,028
Purchase of fixed assets $(1,285,968) $(1,831,591)
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Net cash used in investing activities $ (667,243) $(1,070,563)
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Cash flows from financing activities:
Net Borrowings from lenders $ 467,306 $ 1,404,920
Net Payments of long term debt $(1,651,686) $ --
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Net cash provided by/(used in) financing activities $(1,184,380) $ 1,404,920
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Increase/(Decrease) in cash $ (395,907) $ 184,037
Cash at beginning of period $ 577,052 $ 262,117
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Cash at end of period $ 181,145 $ 446,154
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The accompanying notes are an integral part of these financial statements.
4
Pallet Management Systems, Inc.
Notes to Financial Statements
December 30, 2000
Note 1. Consolidated Financial Statements:
The consolidated balance sheet as of December 30, 2000, the
consolidated statements of operations and cash flows for the twenty-seven week
period ended December 30, 2000 and twenty-six week period ended December 25,
1999 and consolidated statements of operations for the thirteen week periods
ending December 30, 2000 and December 25, 1999 have been prepared by the Company
without audit in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles 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 27 weeks ended December 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 2001. 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-KSB as of June 24, 2000.
Certain prior year amounts within the accompanying financial statements
have been reclassified to conform to the current period presentation.
Note 2. Debt Agreement
The Company has a revolving loan and three term loans with La Salle
Business Credit in a three year agreement, which commenced April 14, 2000. As of
December 30, 2000 the Company was in full compliance with all loan covenants.
Advances under the revolving agreement are based on the sum of 85% of
eligible accounts receivable, plus the lesser of 55% of eligible inventories or
$2,500,000. Interest is paid monthly at the bank's prime rate. Principal is due
in April 2003, with possible year to year renewals thereafter. The revolving
agreement is collateralized by substantially all of the assets of the Company.
At December 30, 2000, the Company had $1,301,000 of availability under the
revolving agreement.
The three term loans as of December 30, 2000 were at $1,295,000,
$1,648,000 and $411,000. These loans are collateralized by substantially all the
assets of the Company.
Note 3. Inventories
Inventories consisted of the following at December 30, 2000:
Raw material $1,404,292
Work in process $ 449,503
Finished goods $ 274,290
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TOTAL $2,128,085
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5
Note 4. Net Earnings (Loss) per Share of Common Stock:
Net earnings (loss) per share of common stock was determined by
dividing net income 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):
27 Weeks Ended 26 Weeks Ended
Dec. 30 Dec. 25
2000 1999
Basic earnings/(loss) per common share:
Net income/(loss) $311 ($2,120)
Weighted average common shares
outstanding for the period 4,065 3,918
Basic earnings per share of
common stock $0.08 ($0.54)
Diluted earnings/(loss) per common share:
Net income/(loss) $311 ($2,120)
Weighted average common shares
outstanding for the period 4,065 3,918
Increase in shares which would
result from exercise of stock options 317 *
Weighted average common shares,
assuming conversion of the above
securities 4,382 *
Diluted earnings/(loss) per share of
common stock $0.07 *
* exercise of warrants and options would be anti-dilutive
Note 5. Litigation
In June 1999, the Company was named as a co-defendant in a lawsuit
whereby the plaintiff is alleging damages of up to $300,000 related to lost
income from a facility and other property formerly leased to the Company in
Jessup, Maryland. Management believes the claim is without merit and intends to
vigorously contest the claim. St. Paul Insurance is currently paying defense
costs. The outcome of the action as well as the extent of the Company's
liability, if any, can not be determined at this time.
6
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. These
financial statements reflect the consolidated operations of Pallet Management
Systems, Inc. (the "Company" or "Pallet Management") for the thirteen-week
period ended December 30, 2000 and for the thirteen-week period ended December
25, 1999.
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 "Factors That May Affect Future Results" in
the Annual Report on Form 10-KSB for the year ended June 24, 2000. Pallet
Management does not have a policy of updating or revising forward-looking
statements and thus it should not be assumed that silence by management of
Pallet Management over time means that actual events are bearing out as
estimated in such forward looking statements.
Results of Operations
General
Pallet Management has grown to be one of the largest pallet companies
in the more than $6 billion pallet industry, by providing value-added products
and services to its customers. Pallet Management has over 200 customers, many of
which are Fortune 1000 companies, including Honeywell, CHEP, DuPont, IAMS,
Mitsubishi, Monsanto, Scotts Company, and various governmental agencies. Our
sales for the first two-quarters of fiscal year 2001 were over $41 million with
5 facilities in 4 states.
The majority of our Company's revenues have traditionally been
generated from providing high quality, specially engineered pallets to
manufacturers, wholesalers and distributors. As supply chain logistics has
become more 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 oriented market for our Company. With this shift in focus toward
services and cost efficiency, our Company has started providing "state of the
art" logistical services known as reverse distribution. Reverse distribution is
simply defined as maximizing the use of transport packaging, the base of which
is the pallet, by reusing assets to reduce the overall cost per trip. This shift
in focus toward supply chain cost efficiency by our customer base is by far the
most dramatic shift in focus and provides the most opportunity for our Company.
8
Our Company has two lines of revenue, manufacturing and
services:
Manufacturing: We have two primary categories of
manufacturing: CHEP grocery pallets and specially engineered
niche market pallets. We have multi-year contracts to
manufacture high quality pallets for CHEP, the world's largest
pallet rental pool.
A significant portion of Pallet Management's current business
is the sale of pallets and services to CHEP, which is part of
the worldwide CHEP organization that manages the largest
pallet rental pool worldwide, with more than 134 million
pallets and over 20 million containers in 36 countries. CHEP
services the retail, grocery and automotive industries with
high quality pallets and containers. The Company focuses on
non-standard, specialized packaging and does not compete with
CHEP in its markets.
Pallets that are uniquely 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. These types of pallets are lower
volume and higher margin than CHEP pallets.
Services: The Company provides three types of services: 1)
Retrieval, sortation, repair, warehousing and return, 2)
reverse distribution, and 3) other products.
First - Retrieval, sortation, repair, warehouse and return
services 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. Pallet
users currently discard a large portion of new pallets after
one use. The condition and size of these pallets vary greatly.
The pallets are sorted and repaired as needed, placed in
storage and made available for return to service. Pallets that
can be repaired have their damaged boards replaced with
salvaged boards or boards from new stock inventoried at the
facility. Pallets that cannot be repaired are dismantled and
the salvageable boards are recovered for use in repairing and
building other pallets. Pallet Management sells the remaining
damaged boards to be ground into wood fiber, which is used as
landscaping mulch, fuel, animal bedding, gardening material
and other items. Despite recent increases in levels of
automation, pallet return operations remains a labor-intensive
process.
Second - Reverse distribution can carry the retrieval, sort,
repair, warehouse, and return services one step further by
contracting with a customer to manage, track and provide
valuable management information related to their pallet flow.
During the quarter ended March 25, 2000, the Company launched
"PalletNettm" a new value-added, "e-logistics" services
9
product. As part of the Company's strategy to use the Internet
to improve the functionality of its service offerings,
PalletNet is a service brand providing a logistics and
information system that manages the flow of shipping platforms
and containers throughout industrial supply chains (excluding
the grocery industry). The principal services PalletNet offers
include reverse distribution, single source national
contracts, high quality shipping platforms and transport
packaging, recovery, repair, recycling and export packaging.
These physical activities are supported by leading edge
technology that enables users to improve shipping asset
controls and reduce cost and waste from the supply chain,
while improving inventories and enhancing customer
satisfaction. By coupling PalletNet with the Internet, the
Company is creating value for the customer through lower costs
and improved efficiencies. The PalletNet e-portal is a
browser-based user interface combined with three levels of
security management which delivers unlimited, safe access to
customers who can view exactly where their shipping platforms
and containers are in the supply chain at any given moment.
The system also offers a full range of personalization
options, so each company can configure PalletNet to their
operations. In addition, PalletNet has the capacity to use
either bar codes or radio frequency identification tags to
track individual pallets and the equipment transported on
them. These new, "state of the art", logistics and information
system capabilities provide customers and Pallet Management
the technical support requirements to manage an efficient
reverse distribution operation and management of valuable
transport packaging from any location in which they can access
the internet.
Third - Pallet Management functions as a wholesale distributor
of other various returnable transport packaging such as
plastic and metal pallets; collapsible plastic bulk boxes;
wood, plastic, and metal slave pallets; wooden boxes and
crates; and various other products. Due to lack of demand,
sales of pallets made from materials other than wood are
minimal.
In order to fulfill the increasing demand for transport
management services, Pallet Management expects to expand its
service offerings and its network of facilities. Additional
locations will provide local retrieval, repair, sortation,
storage and recycling services for Pallet Management's
customers. Pallet Management also expects to be able to
accelerate its internal growth by marketing expanded
value-added information services to new and existing
customers.
Thirteen Weeks Ended December 30, 2000 compared to Thirteen Weeks Ended
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December 25, 1999
-----------------
For the thirteen-week period ended December 30, 2000, net
sales increased 21% to $21,610,000 from $17,817,000 for the comparable
fiscal year 2000 period.
10
During the thirteen-week period ended December 30, 2000, manufacturing
sales increased 44% to $21,099,000 from $14,632,000, and services decreased by
84% to $511,000 from $3,185,000. The increase in manufacturing sales was
primarily due to the opening of two new facilities along with increased demand
from CHEP during the thirteen week period ending December 30, 2000, and the
decrease in services is primarily due to the closing of the Lakeland service
facility in December 1999.
Pallet Management had a .7% increase in selling, general and
administrative expenses from $1,146,000 to $1,154,000 for the thirteen week
period ended December 30, 2000 when compared to the thirteen week period ended
December 25, 1999. The selling, general and administrative expenses have only
slightly increased while sales have increased by 44%. This is primarily due to
the efforts to control expenses while bringing the focus on increased sales.
A profit of $256,400 or $.06 per share was realized during this
thirteen-week period ended December 30, 2000 compared to a net loss of
($423,000) or ($.11) per share recorded for the thirteen-week period last year.
Profit has grown as order rates and production have risen and variable costs in
our facilities were held down; additionally, during the thirteen week period
ended December 25, 1999, we closed one operating facility and two administrative
facilities incurring costs of approximately $310,000, and costs related to
inefficient equipment at one of our facilities and costs associated with
obtaining the loan from the National Bank of Canada were incurred for
approximately $150,000.
Twenty-seven Weeks Ended December 30, 2000 compared to Twenty-six Weeks Ended
-----------------------------------------------------------------------------
December 25, 1999
-----------------
For the twenty-seven week period ended December 30, 2000, net sales
increased 36.5% to $41,083,000 from $30,095,000 for the twenty-six week period
ended December 25, 1999.
During the twenty-seven week period ended December 30, 2000,
manufacturing sales increased 70.6% to $39,986,000 from $23,441,000 for the
twenty-six week period ended December 25, 1999, and services decreased by 83.5%
to $1,097,000 from the $6,654,000 recorded for the twenty-six week period ended
December 25, 1999. The increase in manufacturing sales was primarily due to the
opening of two new facilities along with increased demand during the period
ending December 30, 2000, and the decrease in services is primarily due to the
closing of the Lakeland service facility in December 1999.
We experienced a 12.9% decrease in Selling, General and Administrative
expenses from $2,528,000 to $2,203,000 for the twenty-seven week period ended
December 30, 2000 when compared to the twenty-six week period ended December 25,
1999. This decrease was a result of additional management costs related to the
sales volume increase and expenses related to expanding our Reverse Distribution
business during the twenty-six week period ended December 25, 1999. During the
twenty-seven week period ended December 30, 2000, management was reorganized and
these additional costs have now been addressed and streamlined as we improved
our operational structure. Additionally, during the twenty-seven week period
ending December 30, 2000, we incurred less expenses due to the closing of two
administrative facilities in 1999.
11
A net income of $311,000 or $0.08 per share was realized during this
twenty-seven week period ended December 30, 2000 compared to a net loss of
($2,120,000) or ($0.54) per share recorded for the twenty-six week period ended
December 25, 1999. During the twenty-six week period ended December 25, 1999
management positions were eliminated and substantial charges were incurred
totaling $690,000. Costs included in selling, general and administrative consist
of $32,000 for legal and accounting expenses related to a postponed equity
offering and The Nelson Company transaction, $67,000 for closing the Cary, North
Carolina and Richmond, Virginia offices and $192,000 for custom software which
is outdated and no longer used. Costs included in cost of goods sold consist of
$77,000 for equipment at the Bolingbrook, Illinois facility that is not
economically efficient and no longer used and $250,000 related to the closing of
the Lakeland, Florida facility. During the twenty-seven week period ended
December 30, 2000, we have increased sales, streamlined our costs within our
manufacturing plants, and hired new leadership in management to spearhead our
goals toward profitability. This is our third consecutive quarter with gross
profit after our reorganization of management in fiscal year 2000.
Liquidity and Capital Resources
-------------------------------
Pallet Management had $181,000 cash on hand at December 30, 2000,
versus $577,000 at the beginning of the fiscal year. The decrease in cash is
primarily attributed to the use of $1,184,000 in financing activities and the
purchase of our Vanderloo Nailing Machine in Indiana and other assets netting a
change of $667,000, which was offset by $1,456,000 generated from operating
activities. The use in financing activities is primarily due to repayments on
the revolver loan to LaSalle Business Credit ($1,652,000) partially offset by
additions to our capital line and other financed activities of $467,000. The
repayment of the revolver to gain a lower average outstanding balance was caused
by utilizing a zero balance account and only funding when payables were
presented to the bank. This resulted in a decrease in interest expense estimated
at $125,000 annually.
The $1,456,000 in cash generated from operating activities is primarily
due to accounts receivable decreasing over the twenty seven week period ended
December 30, 2000 by $771,000, and the fiscal year to date net income of
$311,000. The decrease in outstanding accounts receivable is caused by the more
timely customer payments for the twenty-seven week period ending December 30,
2000. The Company decreased its borrowings from LaSalle Business Credit by
$1,184,000 over the twenty-seven week period ended December 30, 2000. This
decrease was made up of a reduced revolver borrowing base of $1,652,000 born
from effective cash management offset by the addition to the capital loan for a
portion of the Vanderloo Nailing Machine of $411,000. During the twenty-seven
week period ended December 30, 2000, we capitalized costs primarily associated
with the Vanderloo Nailing Machine, which was put into production at our Indiana
facility, and these assets were capitalized for $1,286,000.
The Company believes that existing cash on hand, cash provided by
future operations including PalletNet services, additional available borrowings
under its current line of credit, and a net working capital of $1,838,000 as of
December 30, 2000, will be sufficient to finance its operations and expected
12
working capital and capital expenditure requirements for at least the next
twelve months. The company will experience a reduction in its CHEP orders during
the thirteen week period ended March 30, 2001 to a comparable level experienced
in the thirteen week period ended March 25, 2000. Plans to manage this
anticipated reduction were begun in November, 2000 to reduce the impact to
earnings that this may cause.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Disclosed in audited financial statements and note 5 above.
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: February 15, 2001 By: /s/ Zachary M. Richardson
----------------------------
Zachary M. Richardson, President
Dated: February 15, 2001 By: /s/ Marc S. Steinberg
-----------------------------
Marc S. Steinberg, Treasurer, Controller
and Secretary (Principal Financial and
Accounting Officer)
13