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U.S. 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 NOVEMBER 30, 2002
[_] 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
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PALWEB CORPORATION
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(Exact name of small business issuer as specified in its charter)
OKLAHOMA 75-2954680
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1607 WEST COMMERCE STREET DALLAS, TEXAS 75208
------------------------- -------------------
(Address of principal executive offices) (City, State and Zip Code)
(214) 698-8330
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(Issuer's telephone number)
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(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: NOVEMBER 30, 2002 - 5,155,373
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(CHECK ONE):
Yes [_] No [X]
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PALWEB CORPORATION
FORM 10-QSB
FOR THE PERIOD ENDED NOVEMBER 30, 2002
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Balance Sheets as of November 30, 1
2002 and May 31, 2002
Statement of Operations 2
For the Six Month Periods Ended
November 30, 2002 and 2001
Statements of Operations 3
For the Three Month Periods Ended
November 30, 2002 and 2001
Statements of Cash Flows for the 4
For the Six Month Periods Ended
November 30, 2002 and 2001
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 7
ITEM 3. CONTROLS AND PROCEDURES 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 16
CERTIFICATIONS 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALWEB CORPORATION
CONSOLIDATED BALANCE SHEETS
November 30, May 31,
2002 2002
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ASSETS
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CURRENT ASSETS:
Cash $ 10,109 $ 13,521
Accounts receivable 481,448 43,646
Inventory 354,735 204,446
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TOTAL CURRENT ASSETS 846,292 261,613
PROPERTY, PLANT AND EQUIPMENT, at cost 8,210,777 7,453,529
Accumulated depreciation (624,002) (509,199)
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TOTAL PROPERTY, PLANT AND EQUIPMENT 7,586,775 6,944,330
OTHER ASSETS 153,268 161,396
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TOTAL ASSETS $ 8,586,335 $ 7,367,339
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 4,242,700 $ 3,777,700
Notes payable - related party 2,150,000 --
Accounts payable and accrued liabilities 1,114,911 570,868
Preferred dividends payable -- 211,440
------------ ------------
TOTAL CURRENT LIABILITIES 7,507,611 4,560,008
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par, 20,750,000 shares
authorized; 750,000 outstanding 75 75
Common stock, $.0001 par value, 5,000,000,000
authorized, outstanding - 5,155,373 and 4,691,625 516 469
Additional paid-in capital 41,517,969 40,732,767
Deficit (40,439,836) (37,925,980)
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TOTAL STOCKHOLDERS' EQUITY 1,078,724 2,807,331
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,586,335 $ 7,367,339
============ ============
The accompanying notes are an integral part of this consolidated financial statement.
1
PALWEB CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
November 30,
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2002 2001
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SALES $ 573,929 $ 38,788
COST OF SALES 1,439,863 315,053
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GROSS PROFIT (LOSS) (865,934) (276,265)
EXPENSES:
General and administrative expense 752,281 634,518
Impairment of fixed assets 310,875 --
Interest expense 135,833 105,094
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TOTAL EXPENSES 1,198,989 739,612
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LOSS, BEFORE DISCONTINUED OPERATIONS (2,064,923) (1,015,877)
LOSS FROM DISCONTINUED OPERATIONS -- (104,818)
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NET LOSS $(2,064,923) $(1,120,695)
=========== ===========
LOSS PER COMMON SHARE:
LOSS BEFORE DISCONTINUED OPERATIONS $ (0.51) $ (0.22)
DISCONTINUED OPERATIONS -- (0.02)
----------- -----------
LOSS PER COMMON SHARE $ (0.51) $ (0.24)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,934,000 4,644,000
=========== ===========
The accompanying notes are an integral part of this consolidated financial
statement.
2
PALWEB CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
November 30,
-------------------------------
2002 2001
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SALES $ 513,012 $ 26,547
COST OF SALES 813,218 220,414
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GROSS PROFIT (LOSS) (300,206) (193,867)
EXPENSES:
General and administrative
expense 408,809 292,750
Impairment of fixed assets 310,875 --
Interest expense 78,026 50,941
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TOTAL EXPENSES 797,710 343,691
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LOSS, BEFORE DISCONTINUED OPERATIONS (1,097,916) (537,558)
LOSS FROM DISCONTINUED OPERATIONS -- (64,093)
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NET LOSS $ (1,097,916) $ (601,651)
=========== ===========
LOSS PER COMMON SHARE:
LOSS BEFORE DISCONTINUED OPERATIONS $ (0.26) $ (0.12)
DISCONTINUED OPERATIONS -- (0.01)
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LOSS PER COMMON SHARE $ (0.26) $ (0.13)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 5,073,000 4,650,000
=========== ===========
The accompanying notes are an integral part of this consolidated financial
statement.
3
PALWEB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
November 30,
---------------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used) continuing
operations $(1,585,870) $ 543,272
Net cash provided by (used) discontinued
operations -- (24,244)
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Net cash flow provided by (used)
operations (1,585,870) 519,028
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,068,123) (4,272,534)
Decrease in loans receivable -- 225,389
Other 7,831 --
------------ ------------
Net cash used in investing activities (1,060,292) (4,047,145)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,650,000 3,721,820
Payments on notes payable (35,000) (20,398)
Proceeds from issuance of common stock 27,750 --
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Net cash provided by financing activities 2,642,750 3,701,422
------------ ------------
NET INCREASE (DECREASE) IN CASH (3,412) 173,305
CASH, beginning of period 13,521 80,469
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CASH, end of period $ 10,109 $ 253,774
============ ============
NONCASH ACTIVITIES:
Issuance of common stock in payment of
preferred dividends $ 660,374 --
Issuance of common stock in payment of
liabilities and claims 97,126 --
Conversion of preferred stock to common -- 55
Amortization of deferred income to
additional paid-in capital -- 70,704
The accompanying notes are an integral part of this consolidated financial statement.
4
PALWEB CORPORATION
NOTES TO 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 November 30, 2002, and the results of its operations and its cash flows for
the six month and three month periods ended November 30, 2002 and 2001. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements as of and for the year ended May 31, 2002 and
the notes thereto included in the Company's Form 10-KSB.
2. PalWeb was classified a development stage company from its inception November
20, 1995 to August 31, 2002. The accumulated deficit during the development
stage totaled $39,117,987.
3. The results of operations for the six month and three month periods ended
November 30, 2002 are not necessarily indicative of the results to be expected
for the full year.
4. The computation of loss per share is computed by dividing the loss available
to common stockholders by the weighted average shares outstanding for the
periods. For the six month and three month periods ended November 30, 2002, loss
available to common stockholders is determined by adding preferred dividends for
the periods in the amounts of $448,934 and $225,000, respectively, to the loss
from continuing operations and to net loss. There were no preferred dividends
for the comparable periods ended November 30, 2001. For the six month periods
ended November 30, 2002 and 2001, the average common shares outstanding are
4,934,000 and 4,644,000, respectively. For the three month periods ended
November 30, 2002 and 2001, the average common shares outstanding are 5,073,000
and 4,650,000, respectively. Convertible preferred stock is not considered as
its effect is antidilutive.
5. PalWeb incurred an expense of $310,875 in fiscal year 2003 to record the
impairment of certain production equipment. PalWeb wrote down the cost of its
original prototype injection molding machine and related molds to the value of
the expected future cash flows.
6. Effective October 17, 2002, PalWeb's Board of Directors authorized the
issuance of 15,584 shares of common stock at the then market rate of $1.50 per
share to Paul Kruger in payment of $23,376 of accrued interest as of October 31,
2002, on notes payable to Mr. Kruger.
7. Effective October 17, 2002, the Board of Directors authorized dividends on
the Series 2001 preferred stock in the amount of $223,934 as of September 30,
2002. Additionally, the Board authorized payment of such preferred dividends in
the form of restricted common stock at
5
the then market rate of $1.50 per share of common stock or 149,289 shares.
8. See "Management Discussion and Analysis, Liquidity and Capital Resources,"
for discussion regarding the January 10, 2003, refinancing of debt by Paul
Kruger through issuance of a $7,000,000 note payable at 3% above prime rate of
interest, due June 4, 2004.
6
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
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GENERAL TO ALL PERIODS
The consolidated statements include PalWeb and its wholly-owned
subsidiary, Plastic Pallet Production, Inc. ("PPP").
PalWeb has incurred significant losses from operations, and there is no
assurance that it will achieve profitability or obtain funds necessary to
finance continued operations.
PalWeb's primary business is the manufacturing and selling of plastic
pallets, which is referred to herein as continuing operations. During the period
ended November 30, 2002, PalWeb has continued to explore the possible marketing
of its patent-pending PIPER 600 equipment to third parties; however generating
pallet sales remain the company's main focus.
For the month of November 2002, production of plastic pallets was
approximately 10,000. PalWeb has a production capacity of approximately 40,000
pallets per month. As of November 30, 2002, PalWeb had 18 full-time and 18
temporary employees. Temporary employees are used to supplement the
manufacturing process as necessary.
This production level will be maintained as sales dictate. There is no
assurance that PalWeb will receive orders for pallets that will maintain, or
justify any significant increase to, PalWeb's current production levels.
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.
PRODUCTS
PalWeb currently has three series of plastic pallets: Hawker, Granada
and Tank. The following is a description of each series and its pallet line.
o HAWKER SERIES PalWeb's Hawker Series pallets are all manufactured
using the Company's proprietary fire retardant plastic blend.
o THE HAWKER 4840 PICTURE-FRAME interlocking pallet is the
first in the Hawker Series. The Hawker 4840 utilizes a
patented inter-locking design featuring CJ2TM fire
retardant polymers that are UL 2335 certified. The Hawker
4840 has a static load capacity of 25,000 lbs., and weighs
approximately 53 lbs.
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o GRANADA SERIES The Granada series of pallets are manufactured
using a blend of recycled plastic developed by the Company. The
Granada series features a picture frame, nestable, stackable and
three-runner pallet.
o THE GRANADA PICTURE FRAME PALLET utilizes the patented
inter-locking design, and has a dynamic load of 5,000 lbs.,
rackable load of 2,800 lbs., and weighs approximately 47.5
lbs.
o THE GRANADA STACKABLE PALLET, which consists of the tops of
the Granada Picture Frame, has a dynamic load of 5,000 lbs.
and a static load of 7,000 lbs. The Granada Stackable
weighs approximately 32 lbs.
o THE GRANADA NESTABLE PALLET features a dynamic load of
5,000 lbs. and a static load of 7,000 lbs. The Granada
Nestable weighs approximately 30 lbs.
o THE GRANADA THREE-RUNNER PALLET with a free-span racking
capacity of 1,200 lbs., features a dynamic load of 5,000
lbs. and a static load of 12,000 lbs. The Granada
Three-Runner which weighs approximately 41 lbs., utilizes a
design that allows for easier handling by electric plastic
pallet trucks.
o TANK SERIES PalWeb's Tank Series pallets are manufactured using
virgin materials developed by the Company. The Tank Picture Frame
Pallet is the first in the Tank Series.
o The Tank Picture Frame Pallet which features the patented
interlocking design, has a static load of 30,000 lbs., and
weighs approximately 50 lbs.
The Hawker 4840, Granada Picture Frame, Granada Three- Runner and Tank
Picture Frame all successfully passed the CONTAINER TECHNOLOGIES LABORATORY
INC., TEST ASTM D1185-98A which included open rack bend, compression, free fall
impact, random vibration and incline impact tests.
SALES
PalWeb primary marketing efforts are the development of distributors in
key geographic locations and attendance at material handling trade shows.
Sales for the six months ended November 30, 2002, consisted of 230
Hawker 4840 Pallets, 13,807 Granada Picture Frame Pallets, 3,327 Granada
Nestable and Stackable Pallets, 4,650 Granada Three-Runner Pallets, and 1,638
Tank Picture Frame Pallets.
8
SIX MONTH PERIOD ENDED NOVEMBER 30, 2002, COMPARED TO SIX MONTH
PERIOD ENDED NOVEMBER 30, 2001
CONTINUED OPERATIONS
Sales for the six month period ended November 30, 2002 were $573,929
compared to $38,788 in fiscal year 2001. Sales revenues remained insufficient to
cover material and operating costs. The increase of $535,141 represents PalWeb's
ongoing sales efforts as described above.
Cost of sales was $1,439,863 in fiscal year 2003 compared to $315,053
in fiscal year 2002 for an increase of $1,124,810. The principal reason for this
increase is a combination of (1) start-up costs required to operate the new
production line and upgrade the original prototype equipment to produce nestable
pallets and (2) costs related to the increased production including the addition
of another production shift, materials, depreciation and utilities. Start-up
costs included training, building modifications to accommodate the production
line and reconfiguration of certain molds. PalWeb is currently operating two
shifts. Additional personnel may be required if sales increase further.
The general and administrative expenses increased $117,763 from
$634,518 for fiscal year 2002 to $752,281 for fiscal year 2003. This increase is
primarily due to the addition of personnel and commissions on sales of pallets.
In addition, PalWeb incurred $83,750 in settlement of a claim by Roger Landress
through payment of $50,000 cash and the issuance of 15,000 shares of common
stock. PalWeb intends to pursue indemnification from the Union Group Inc.;
however, there is no assurance that PalWeb will be successful in recovering the
costs.
During the period ended November 30, 2002, PalWeb wrote down the cost
of its original prototype injection molding machine and related molds. An
expense of $310,875 was recorded to reduce the cost of this equipment to the
expected future cash flows.
Interest expense increased $30,739 from $105,094 in fiscal year 2002 to
$135,833 in fiscal year 2003. The debt outstanding at November 30, 2001, was
exchanged for preferred stock on January 4, 2002. The debt outstanding at
November 30, 2002, was incurred subsequent to January 4, 2002, to fund additions
to property and equipment and working capital.
The loss from continuing operations increased $1,049,046 from
$1,015,877 for fiscal year 2002 to $2,064,923 for fiscal year 2003.
After deducting the loss from discontinued operations in fiscal year
2002, the net loss is $1,120,695, or $0.24 per share, compared to a net loss of
$2,064,923 or $0.51 per share in fiscal year 2003 for an increase of $944,228.
THREE MONTH PERIOD ENDED NOVEMBER 30, 2002, COMPARED TO THREE MONTH
PERIOD ENDED NOVEMBER 30, 2001
9
CONTINUED OPERATIONS
Sales for the three month period ended November 30, 2002 were $513,012
compared to $26,547 in 2001 and sales revenues remained insufficient to cover
material and operating costs. The increase was $486,465 and represents PalWeb's
ongoing sales efforts as described above.
Cost of sales were $813,218 in fiscal year 2003 compared to $220,414 in
fiscal year 2002 for an increase of $592,804. The principal reason is the
increased production of pallets including costs associated with the addition of
another production shift, materials, depreciation, repairs and maintenance and
utilities . PalWeb is currently operating two shifts. Additional personnel may
be required if sales increase further.
The general and administrative expenses increased $116,059 from
$292,750 for fiscal year 2002 to $408,809 for fiscal year 2003. This increase
is primarily due to the addition of personnel and commission on sales of
pallets.
During the three month period ended November 30, 2002, PalWeb wrote
down the cost of its original prototype injection molding machine and related
molds. An expense of $310,875 was recorded to reduce the cost of this equipment
to the expected future cash flows.
Interest expense increased $27,085 from $50,941 in fiscal year 2002 to
$78,026 in fiscal year 2003. The debt outstanding at November 30, 2001 was
exchanged for preferred stock on January 4, 2002. The debt outstanding at
November 30, 2002, was incurred subsequent to January 4, 2002 to fund additions
to property and equipment and working capital.
The loss from continuing operations increased $560,358 from $537,558
for fiscal year 2002 to $1,097,916 for fiscal year 2003.
After deducting the loss from discontinued operations in fiscal year
2002, the net loss is $601,651, or $0.13 per share, compared to a net loss of
$1,097,916 or $0.26 per share in fiscal year 2003 for an increase of $496,265.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
GENERAL
Currently, PalWeb's management projects that the sales of approximately
15,000 pallets per month are necessary to break even. Sales at this level would
provide monthly revenues of approximately $450,000 and should provide sufficient
cash flow to sustain its operations including about $225,000 in cash operating
expenses for labor, recurring overhead and interest and $225,000 for material
costs. Although significant sales orders have been executed, there is no
assurance that this sales level will be achieved. Until sales reach this level,
PalWeb will remain dependent on
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outside sources of cash to fund its operations as its sales revenues will be
insufficient to meet current liabilities.
PalWeb has had difficulty in obtaining financing from traditional
financing sources. Substantially all of the financing that PalWeb has received
through November 30, 2002, has been provided by loans from entities controlled
by Mr. Paul Kruger, PalWeb's former Chairman and Chief Executive Officer, and
from entities affiliated with Warren Kruger, Paul Kruger's brother and current
President and a director of PalWeb, and through the offering of 2001 Preferred
Stock. In addition, PalWeb's former bank line of credit, which was outstanding
on November 30, 2002, was obtained with the personal guarantees of Paul Kruger
and Warren Kruger plus a lien on all equipment. The bank line of credit is being
replaced with financing provided by Paul Kruger pursuant to an agreement with
PalWeb and PPP reached on January 10, 2003. For further discussion of the
financing provided by Paul Kruger, see "Paul Kruger Financing" below. There is
no assurance that Paul Kruger or Warren Kruger will continue to provide loans or
loan guarantees in the future.
OTHER
PalWeb has accumulated a working capital deficit of approximately
$6,661,000 at November 30, 2002, which includes $3,492,700 due to The F&M Bank &
Trust Company, $2,150,000 due to Paul Kruger, $750,000 mortgage payable to Texas
Capital Bank due January 1, 2003 and $1,114,911 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 it can generate sufficient sales to support its operations. There is no
assurance that PalWeb will secure such financing.
YORKTOWN FINANCING
Subsequent to November 30, 2002, Yorktown Management & Financial Services,
L.L.C. ("Yorktown"), an entity with which Warren Kruger is affiliated, agreed to
loan PalWeb and PPP up to $500,000 pursuant to an unsecured promissory note with
interest at the fixed rate of nine percent (9%) per annum. The principal and
interest due under the note mature on January 4, 2003, with automatic extensions
for successive thirty (30) day periods until Yorktown provides notice of its
election not to further extend such maturity. Through the filing date of this
report, Yorktown had advanced $402,953 under the note. Yorktown has not provided
any notice of an election not to extend the maturity of the note.
PAUL KRUGER FINANCING
At November 30, 2002, PalWeb had outstanding bank financing provided by
The F&M Bank and Trust Company ("F&M"), and PPP had granted a deed of trust on
its building to secure indebtedness to Texas Capital Bank ("Texas Capital"). The
F&M financing and the Texas Capital loan are being replaced by a loan provided
by Paul Kruger, PalWeb's former Chairman and Chief Executive Officer. The
Yorktown financing discussed above is not being repaid pursuant to the loan
11
from Paul Kruger. Effective January 10, 2003, PalWeb entered into a Loan
Agreement with Paul Kruger whereby Mr. Kruger will provide $7,000,000 in
financing at 3% above the prime rate of interest due June 4, 2004 (the "Loan
Agreement"). The proceeds will be used to pay the outstanding debt to F&M, Texas
Capital and to Paul Kruger. Mr. Kruger, along with an officer and two employees
associated with Mr. Kruger, and Lyle Miller, a director, will resign their
employment and director positions with PalWeb, and:
(1) Those resigning will become fully vested with respect to all PalWeb
common stock options previously granted to them and will receive extensions on
the exercise of such options for a period of five (5) years from the effective
date of the Paul Kruger loan, or until January 10, 2008, at the same exercise
price.
(2) Mr. Kruger will receive a non-exclusive distribution agreement to
acquire pallets at PPP's F.O.B. price at PPP's plant in Dallas, Texas, less the
greatest discounts or concessions made to any of PPP's other distributors for
similar kinds and quantities of products. The agreement may be terminated by
either party upon thirty (30) days written notice to the other party.
(3) Mr. Kruger will receive an assignment of a $20,000,000 default
judgement that PalWeb holds in its favor against Wolfgang Ullrich, a German
citizen. PalWeb will have the option to participate pro rata with Paul Kruger in
any or all of the judgment proceeds by electing to pay a share of the costs
associated with enforcement and collection of the judgment.
(4) Pursuant to the Loan Agreement, to secure the financing provided by
Mr. Kruger, PalWeb and PPP have granted to Mr. Kruger a lien on all assets of
PPP, and PalWeb has granted to Mr. Kruger a pledge of its stock in PPP.
In addition, in connection with the Loan Agreement, PalWeb and PPP have
agreed, among other things, not to engage in the following activities without
the written consent of Paul Kruger:
o create, assume or suffer to exist certain liens, charges or
encumbrances on the properties encumbered to Mr. Kruger;
o sell, assign, transfer, convey, or encumber their assets;
o create, assume or suffer to exist any indebtedness in excess of
$500,000 in any single year;
o make certain loans, advances or extensions of credit;
o merge, consolidate, enter into certain business combinations, or
acquire substantially all of the assets of any other corporation;
o liquidate either corporation;
12
o engage in any business activities substantially different from or
unrelated to their present or proposed business activities;
o declare or pay certain cash or asset dividends; or
o permit intercompany transfers, loans or advances to other companies
related to either PalWeb or PPP.
PalWeb continues to be dependent upon Paul Kruger and Warren Kruger to
provide and/or secure additional financing and there is no assurance that either
will do so. As such, there is no assurance that funding will be available for
PalWeb to continue operations.
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, 2002, which was filed on September 13, 2002.
ITEM 3. CONTROLS AND PROCEDURES
PalWeb's Chief Executive Officer and Chief Financial Officer
(collectively, the "Certifying Officers") are responsible for establishing and
maintaining disclosure controls and procedures. Such officers have concluded
that PalWeb's disclosure controls and procedures are effective to ensure that
information required to be disclosed by PalWeb in this report is accumulated and
communicated to allow timely decisions regarding required disclosure.
The Certifying Officers also have indicated that there were no
significant changes in PalWeb's internal controls or other factors that could
significantly affect such controls as of the date of this report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No changes during the period.
ITEM 2. CHANGES IN SECURITIES
Effective October 17, 2002, PalWeb authorized the issuance of 15,584
shares of common stock in payment of interest expense accrued through October
31, 2002, in the amount of $23,376 on notes payable to Paul Kruger.
Holders of PalWeb's Series 2001 12% Cumulative Convertible Senior
Preferred Stock ("2001
13
Preferred Stock") are entitled to cumulative dividends of 12% per annum, $1.20
per share, or a total of $900,000. In lieu of the quarterly payment of cash
dividends $223,934 due on September 30, 2002, the holders of such 2001 Preferred
Stock agreed to accept common stock of PalWeb, and PalWeb's Board of Directors
approved the payment of such dividends in the form of 149,289 shares of the
authorized but unissued shares of the company's common stock at an effective
price of $1.50 per share as of the date such payment of shares was authorized.
PalWeb relied on the exemption set forth in Section 4(2) of the
Securities Act of 1933, as amended, in connection with the issuance of the stock
and the stock dividend set forth above. All parties listed above are
sophisticated persons or entities. All of the purchasers executed investment
letters representing that they had sufficient access to information to make the
investment and acknowledging the restrictions on transfer of the stock. There
was no underwriting, and no commissions were paid to any party upon the issuance
of such stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Promissory Note in the amount of $500,000.00 executed by
PalWeb Corporation and Plastic Pallet Production, Inc., in
favor of Yorktown Management & Financial Services, Inc.,
dated December 4, 2002 (submitted herewith).
10.2 Letter Agreement between PalWeb Corporation, Plastic Pallet
Production, Inc., and Paul A. Kruger dated January 10, 2003
(submitted herewith).
10.3 Loan Agreement between PalWeb Corporation, Plastic Pallet
Production, Inc., and Paul A. Kruger dated January 10, 2003
(submitted herewith).
10.4 Promissory Note in the amount of $7,000,000.00 executed by
PalWeb Corporation and Plastic Pallet Production, Inc., in
favor of Paul A. Kruger dated January 10, 2003 (submitted
herewith).
10.5 Stock Pledge Agreement executed by PalWeb Corporation in
favor of Paul A. Kruger dated January 10, 2003 (submitted
herewith).
10.6 Security Agreement between PalWeb Corporation, Plastic
Pallet Production, Inc., and Paul A. Kruger dated January
10, 2003 (submitted herewith).
10.7 Deed of Trust executed by Plastic Pallet Production, Inc.,
in favor of Paul A. Kruger dated January 10, 2003
(submitted herewith).
10.8 Letter Agreement between PalWeb Corporation and Lyle W.
Miller dated
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January 10, 2003 (amending terms of outstanding stock
options)(submitted herewith).
11.1 Computation of Loss per Share is in Note 3 in the Notes to
the financial statements.
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350 (submitted herewith).
99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C.ss.1350 (submitted herewith).
B. Reports on Form 8-K
One report on Form 8-K was filed by PalWeb during the three months
ended November 30, 2002, regarding a change in auditors.
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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: January 14, 2003 /s/ Warren F. Kruger
------------------------------------
Warren F. Kruger
President and Chief Executive Officer
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CERTIFICATIONS
I, Warren F. Kruger, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of PalWeb Corporation;
2. Based on my knowledge, this quarterly 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 this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 this quarterly report;
4. 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 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 this quarterly
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
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. 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 registrant's board of directors (or persons performing the equivalent
functions):
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's 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
controls; and
17
6. The registrant's other certifying officers and I have indicated in this
quarterly 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.
Date: January 14, 2003 /s/ Warren F. Kruger
------------------------------------
Warren F. Kruger
President and Chief Executive Officer
(Principal Executive Officer)
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CERTIFICATIONS
I, William W. Rahhal, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of PalWeb Corporation;
2. Based on my knowledge, this quarterly 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 this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 this quarterly report;
4. 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 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 this quarterly
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
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. 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 registrant's board of directors (or persons performing the equivalent
functions):
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's 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
controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly 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.
Date: January 14, 2003 /s/ William W. Rahhal
------------------------------------
William W. Rahhal
Chief Financial Officer
(Principal Financial Officer)
20