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
March 30, 2002
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 Number)
incorporation)
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:
(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 May 14, 2002, the Registrant had outstanding 4,187,612 shares of common
stock, $.001 par value.
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 30, June 30,
2002 2001
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 13,385 $ 232,635
Accounts receivable - trade, net of allowance
for doubtful accounts $ 1,636,982 $ 4,614,612
Inventories $ 2,930,187 $ 2,041,489
Other Current Assets $ 305,582 $ 258,858
------------ ------------
Total current assets $ 4,886,136 $ 7,147,594
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Property and equipment - net of accumulated
depreciation $ 5,254,838 $ 5,640,355
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OTHER ASSETS $ 92,722 $ 91,788
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Total assets $ 10,233,696 $ 12,879,737
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 4,882,144 $ 420,344
Current portion of capital lease obligations $ 140,766 $ 111,762
Accounts payable $ 1,553,523 $ 3,039,566
Accrued liabilities $ 786,705 $ 509,952
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Total current liabilities $ 7,363,138 $ 4,081,624
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LONG-TERM DEBT
Long-term debt $ 135,400 $ 5,420,261
Capital lease obligations $ 167,893 $ 156,402
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Total long-term liabilities $ 303,293 $ 5,576,663
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Total liabilities $ 7,666,431 $ 9,658,287
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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 4,187,612
shares at March 30, 2002 and 4,065,612
June 30, 2001 $ 4,188 $ 4,066
Additional paid in capital $ 7,148,592 $ 7,269,556
Accumulated deficit $ (4,447,515) $ (3,776,172)
Notes receivable from stockholders $ (138,000) $ (276,000)
------------ ------------
Total stockholders' equity $ 2,567,265 $ 3,221,450
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Total liabilities and stockholders' equity $ 10,233,696 $ 12,879,737
------------ ------------
The accompanying notes are an integral part of these financial statements.
2
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
13 Weeks Ended 39 Wks Ended 40 Wks Ended
March 30, 2002 March 31, 2001 March 30, 2002 March 31, 2001
-------------- -------------- -------------- --------------
Net sales $ 8,691,034 $ 12,374,407 $ 37,385,667 $ 53,457,722
Cost of goods sold $ 8,223,874 $ 11,593,615 $ 35,193,999 $ 49,833,376
------------ ------------ ------------ ------------
Gross profit $ 467,160 $ 780,792 $ 2,191,668 $ 3,624,346
------------ ------------ ------------ ------------
Selling, general and administrative expense $ 856,369 $ 802,917 $ 2,556,758 $ 3,005,820
------------ ------------ ------------ ------------
Operating profit (loss) $ (389,209) $ (22,125) $ (365,090) $ 618,526
------------ ------------ ------------ ------------
Other income (expense)
Other income (expense) $ 7,525 $ 29,717 $ (13,050) $ (9,918)
Interest expense $ (87,564) $ (111,981)) $ (293,202) $ (401,955)
------------ ------------ ------------ ------------
Total other income (expense) $ (80,039) $ (82,264) $ (306,253) $ (411,873)
------------ ------------ ------------ ------------
Income (loss) before income tax expense $ (469,248) $ (104,389) $ (671,343) $ 206,653
Income tax expense (benefit) $ -- $ -- $ -- $ --
Net income (loss) $ (469,248) $ (104,389) $ (671,343) $ 206,653
------------ ------------ ------------ ------------
Net earnings (loss) per common share $ (0.11) $ (0.03) $ (0.16) $ 0.05
Diluted earnings (loss) per common share * * * $ 0.05
* 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)
39 Wks Ended 40 Wks Ended
March 30, 2002 March 31, 2001
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ (671,343) $ 206,653
----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by/(used in) operating activities:
Depreciation $ 530,453 $ 386,171
Loss on disposal of assets and investments $ -- $ 47,040
Stock Options issued for Services $ 17,158 $ --
(Increase) Decrease in operating assets:
Accounts receivable $ 2,977,629 $ 1,871,782
Inventories $ (888,698) $ 720,291
Other assets $ (47,658) $ 813,923
Increase (Decrease) in operating liabilities:
Accounts payable $(1,486,043) $ (306,274)
Accrued liabilities $ 496,625 $ (503,041)
----------- -----------
Net cash provided by/(used in)
operating activities $ 928,123 $ 3,236,545
----------- -----------
Cash flows from investing activities:
Other assets $ -- $ --
Purchase of fixed assets $ (185,769) $(1,807,936)
Proceeds from Disposal of fixed assets $ 40,834 $ --
----------- -----------
Net cash used in investing activities $ (144,935) $(1,807,936)
----------- -----------
Cash flows from financing activities:
Net Borrowings from lenders $ -- $ 1,031,297
Net Payments of long term debt $(1,002,438) $(2,830,463)
----------- -----------
Net cash provided by/(used in) financing activities $(1,002,438) $(1,799,166)
----------- -----------
Increase/(Decrease) in cash $ (219,250) $ (370,557)
Cash at beginning of period $ 232,635 $ 577,052
----------- -----------
Cash at end of period $ 13,385 $ 206,495
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The accompanying notes are an integral part of these financial statements
4
Pallet Management Systems, Inc.
Notes to Financial Statements
March 30, 2002
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of March 30, 2002, the consolidated
statements of operations and cash flows for the thirty-nine week period ended
March 30, 2002 and forty week period ended March 31, 2001 and consolidated
statements of operations for the thirteen week periods ending March 30, 2002 and
March 31, 2001 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
thirty-nine weeks ended March 30, 2002 are not necessarily indicative of the
results that may be expected for the year ended June 29, 2002. 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 30, 2001.
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. The
Company did not pass the Consolidated Tangible Net Worth, the Consolidated
Interest Coverage Ratio or the Consolidated Debt Service Coverage Ratio due to
the net loss for the thirty-nine weeks ending March 30, 2002 of ($671,000)
compared with the net income for the forty weeks ending March 31, 2001 of
$207,000. As of March 30, 2002 the Company received waivers for its loan
covenants. The waivers were accompanied by a 50 basis point increase to our
borrowing rate on all of the loans.
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 plus one point
five percentage points. 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 March 30, 2002, the Company
had $ 1,220,000 of availability under the revolving agreement.
The three term loans as of March 30, 2002 were at $1,122,000,
$1,322,000 and $ 894,000. These loans are collateralized by substantially all
the assets of the Company. The Company has reclassified the debt from LaSalle
Business Credit from Long-Term to Short-Term due to the probability that the
loan covenants will not be met in the coming twelve months. The Company is
continuing to work on its financing needs, as well as focusing on improving
operating results to decrease this probability.
NOTE 3. INVENTORIES
Inventories consisted of the following at March 30, 2002:
Raw material $1,071,202
Work in process $ 277,317
Finished goods $1,581,668
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TOTAL $2,930,187
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5
NOTE 4. NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Net earnings (loss) per share of common stock was determined by
dividing net income (loss) applicable to common shares by the weighted average
number of common shares outstanding during each period. Diluted earnings/(loss)
per common share reflects the potential dilution that could occur assuming
exercise of all issued and unexercised stock options. A reconciliation of the
net income/(loss) and numbers of shares used in computing basic and diluted
earnings/(loss) per common share is as follows (in thousands, except per share
data):
39 Weeks Ended 40 Weeks Ended
March 30 March 31
2002 2001
----- -----
Basic earnings/(loss) per common share:
Net income/(loss) ($ 671) $ 207
Weighted average common shares
outstanding for the period 4,110 4,065
Basic earnings per share of
common stock ($ 0.16) $ 0.05
Diluted earnings/(loss) per common share:
Net income/(loss) ($ 671) $ 207
Weighted average common shares
outstanding for the period 4,110 4,065
Increase in shares which would
result from exercise of stock options * 256
Weighted average common shares,
assuming conversion of the above
securities * 4,321
Diluted earnings/(loss) per share of
common stock * $ 0.05
* exercise of warrants and options would be anti-dilutive
6
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.
The Company's Board of Directors terminated the employment of Mr.
Zachary Richardson as President of the Company effective March 15, 2002. Prior
to the date of termination, Mr. Richardson notified the Company in writing that
he would consider any such termination to be a breach of his Employment
Agreement and that the Company would owe him approximately $675,000. The Company
disagrees with Mr. Richardson's contention and would defend vigorously against
any claim brought by Mr. Richardson in this regard.
NOTE 6. 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 7. 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 8. 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.
7
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.
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 not yet determined what the effects of these Statements
will be on its financial position and results of operations.
NOTE 9. STOCKHOLDERS' EQUITY
In October 2001, the Company granted options to purchase approximately
660,000 shares of common stock to employees and directors of which 280,000 were
granted to the President. 460,000 of these options vested upon grant while the
remainder vest through July 1, 2006.
In December 2001, the President of the Company exercised options to
acquire 280,000 shares of common stock through the transfer of 88,000 mature
shares. Upon exercise, the President was granted "reload" options to acquire
88,000 shares of common stock at $1.75 per share.
Also in December 2001, the President transferred 70,000 shares of
common stock to the Company in satisfaction of his note payable to the Company
in the amount of $138,000, as permitted by the original terms of the note.
NOTE 10. MANAGEMENT CHANGES
In March 2002, the Company's Board of Directors appointed Robert L.
Steiler as the interim leader of the company's executive management after
terminating the employment of Zachary M. Richardson as President. The Board of
Directors appointed a special committee from its members to conduct a search for
a new President of the Company. Mr. Steiler has been a Director of the Company
since April 2000 and was a business consultant to the Company from February 2000
to June 2001.
8
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 30, 2001. The financial statements in this Report
reflect the consolidated operations of Pallet Management Systems, Inc. (the
"Company" or "Pallet Management") for the thirteen-week and thirty-nine-week
periods ended March 30, 2002 and for the thirteen-week and forty week periods
ended March 31, 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 of 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 30, 2001. 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 (SFAS123), 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.
Results of Operations
---------------------
General
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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.
9
The majority of our revenues have traditionally been generated from
providing high quality, specially engineered pallets to manufacturers,
wholesalers and distributors. As supply chain logistics have become increasingly
complex, our existing customers as well as prospective customers are seeking new
ways to streamline distribution and reduce costs, which is opening a
service-orientated market for us.
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 marketing benefits.
Reverse logistics, a sub-industry of the logistics industry, is growing
rapidly and is estimated to have reached $7.7 billion. The third-party logistics
industry is estimated to be in excess of $35 billion and growing rapidly as
companies are discovering the benefits of outsourcing their logistical demands.
The Company has two lines of revenue, manufacturing and services:
Manufacturing: Our Company has two primary categories of manufacturing:
CHEP grocery pallets and specifically engineered niche market pallets. The
Company has had multi-year contracts to manufacture high quality grocery pallets
for CHEP, the world's largest pallet rental pool. The Company is currently
operating two manufacturing facilities, which currently produce CHEP pallets;
Bolingbrook, Illinois and Plainfield, Indiana. In Rogersville, Alabama, our
contract expired on September 7th, 2001 and the Company has ceased operations in
that facility. In Bolingbrook, Illinois, our contract expired on April 30th,
2002 and in Plainfield, Indiana, our contract expires on March 1, 2003. The
Company is considering closing the Bolingbrook, Illinois facility before the end
of this fiscal year and is currently winding down operations.
Pallets that are specially engineered to transport a specific product
are classified as niche market pallets. Besides CHEP, our Company's customer
base is primarily composed of customers who require niche pallets. Niche pallets
are lower volume and higher margin than CHEP pallets.
Pallet Management functions as a wholesale distributor of other various
returnable transport packaging such as plastic and metal pallets; collapsible
plastic bulk 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.
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.
10
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 an Internet Explorer browser-based user
interface which delivers secure access to customers who can view exactly where
their shipping platforms and containers are in the supply chain at any given
moment. PalletNetTM has the capability to use information from either bar codes
or radio frequency identification tags to track individual pallets and the
equipment transported on them. These new logistical and information systems
provide customers and Pallet Management the technical support requirements to
manage an efficient reverse distribution operation and the management of
valuable transport packaging from one location to another.
Pallet Management has hired key sales personnel during this fiscal year
to expand its service offerings and service revenues. Until the newly hired
sales personnel are trained, there will be an increase in the Selling, General
and Administrative expenses as a percentage of sales. In addition, the cycle for
completing a sale of services is significantly longer than that for selling
manufactured pallets. We anticipate that service will become a greater percent
of net sales as our new sales force begins to move forward.
11
Thirteen Weeks Ended March 30, 2002 compared to Thirteen Weeks Ended
--------------------------------------------------------------------
March 31, 2001
--------------
For the thirteen-week period ended March 30, 2002, net sales decreased
30% to $ 8,691,000 from $ 12,374,000 for the comparable fiscal year 2001 period.
This decrease is primarily due to the second quarter closing of our Alabama
facility whose sales were reduced $ 2,275,000 from the comparable period in
fiscal year 2001, as well as reduced demand for niche pallets from the
Lawrenceville, Virginia facility.
During the thirteen-week period ended March 30, 2002, manufacturing
sales decreased 32% to $ 8,226,000 from $ 12,011,000. The decrease in
manufacturing sales was primarily due to the reduction of orders received from
our major customer at our Alabama and Illinois facilities, as well as a general
slow down of orders received in the niche pallet sales at the Lawrenceville,
Virginia location. The Alabama facility was closed in September 2001 and
generated no sales during the thirteen week period ending March 30, 2002 as
compared to $2,275,000 in the comparable period from fiscal year 2001. The
Illinois facility remained with low demand from our major customer and generated
$ 507,000 in fewer sales during the thirteen-week period ending March 30, 2002
from the comparable period from fiscal year 2001. The Lawrenceville, Virginia
location continued to show soft demand for the niche pallets, as sales were down
$816,000 from the comparable thirteen-week period in the prior year.
Service sales increased by 28% to $ 465,000 from $ 363,000. This
increase in service sales is primarily due to our key customer placing steady
orders throughout the thirteen-week period ending March 30, 2002 compared with
the decline in orders during March 2001 made at the Petersburg, Virginia
facility.
Pallet Management had a 7% increase in its selling, general and
administrative expenses from $ 803,000 to $ 856,000 for the thirteen week period
ended March 30, 2002 when compared to the thirteen week period ended March 31,
2001. The increase in selling, general and administrative expenses is primarily
due to the addition of salespersons not on board during the prior fiscal year,
which is offset by the reduction of consulting expense over the comparable
thirteen week period from fiscal year 2001. Full time employees were hired to
handle the workload that consultants previously provided causing a reduction to
expenses. The sales team was expanded during the first twenty-six weeks of the
fiscal year to six salespersons. In an effort to gain further cost control, the
Company consolidated the sales department with new business development and
reduced its staffing by the end of the thirteen week period to four
salespersons.
A loss of ($ 469,000) or ($.11) per share was realized during this
thirteen-week period ended March 30, 2002 compared to a loss of ($ 104,000) or
($.03) per share recorded for the thirteen-week period last fiscal year. The
primary reasons for the loss was due to the low demand from our main customer in
our Alabama, Illinois and Indiana facilities whose sales were off $ 2,969,000
for the thirteen week period ending March 30, 2002 from the comparable thirteen
week period in the prior quarter. Additionally, we continued to see lower than
12
expected demand for our niche pallets from our Lawrenceville, Virginia facility
as our newly hired salespersons began bringing in new accounts. Pallet
Management anticipates that the fourth quarter demand from our largest customer
will remain slow, and that our niche pallet and service sales will begin to see
some growth over the third quarter levels. We have continued cost control
measures and are operating under strict budget guidelines and reduced staffing
to reduce the impact to income that these reduced demands may cause.
Thirty-nine Weeks Ended March 30, 2002 compared to Forty Weeks Ended
--------------------------------------------------------------------
March 31, 2001
--------------
For the thirty-nine week period ended March 30, 2002, net sales
decreased 30% to $ 53,458,000 from $ 37,386,000 for the forty-week period ended
March 31, 2001. This decrease is primarily due to the reduction in orders from
our Alabama facility, which was closed in September 2001. For the thirty-nine
week period ending March 30, 2002, the Alabama sales decreased to $ 1,274,000
from $ 11,832,000 for the forty-week period ending March 31, 2001, an 89%
reduction. Additionally, manufacturing sales from the Lawrenceville, Virginia
plant for the thirty-nine week period ending March 30, 2002 decreased to
$4,372,000 from $7,401,000 for the forty-week period ending March 31, 2001, a
41% reduction. This decreased has been due to soft demand from our customer base
starting in January 2001 and not returning during the fall season as many of our
large customers faced economic and cost cutting issues within their own
businesses.
During the thirty-nine-week period ended March 30, 2002, manufacturing
sales decreased 31% to $ 36,042,000 from $ 51,997,000 for the forty-week period
ended March 31, 2001. The decrease in manufacturing sales was primarily due to
the Alabama facility closing as described above, as well as reduced orders from
our Illinois facility as our primary customer changed its ordering to a just in
time philosophy and reduced its overall demand. The Illinois facility had
reduced sales over the prior year by $ 2,831,000. In addition to the above, we
have not increased our niche/specialty pallet sales from our Lawrenceville,
Virginia facility. That facility showed fewer sales over the prior year by
$3,029,000 caused by a softening market as our customers look to hold down costs
and reduce expenditures.
Service sales decreased by 8% to $ 1,343,000 from the $ 1,461,000
recorded for the forty-week period ended March 31, 2001. The decrease in
services is primarily due to the reduction of repair services made at the
Petersburg, Virginia facility as a result of reduced demand during the first
twenty-six weeks of our fiscal year from the comparable twenty-seven weeks of
the prior fiscal year from the facility's key customer.
We experienced a 15% decrease in selling, general and administrative
expenses from $ 3,006,000 to $ 2,557,000 for the thirty-nine-week period ended
March 30, 2002 when compared to the forty-week period ended March 31, 2001. The
decrease in selling, general and administrative expenses is primarily due to the
reduction of consulting expense. The consulting expense reduction was made as we
currently have full time employees handling the workload that consultants
previously provided, causing a reduction to overall expenses by approximately
$250,000. Selling, general and administrative expenses were also reduced by the
initiative of the company to hold down costs for travel, telephone and legal
expenses. Additionally, we had increased premiums for our insurance in fiscal
year 2001, which were favorably re-negotiated for fiscal year 2002 and have
generated a savings in excess of $ 100,000.
13
A net loss of ($ 671,000) or ($ 0.16) per share was recorded during
this thirty-nine week period ended March 30, 2002 compared to a net income of
$207,000 or $0.05 per share recorded for the forty week period ended March 31,
2001. During the forty-week period ended March 31, 2001 we had consistent sales
from our key customer and had begun to see a decline in our niche pallet
customer base. During the thirty-nine week period ended March 30, 2002 we
continued to see our niche pallet sales decline and, additionally, started to
see low demand levels from our key customer. Our Alabama facility was closed and
demand from our Illinois facility was further reduced. Between the Alabama and
Illinois facility, which services our key customer, we saw reduced sales of
approximately $ 13,389,000.
The Company began cost cutting measures in November 2001 in
anticipation of reduced demand. The demand dropped below expectations, as March
2002 saw no increase in orders. The Company began a direct mailing campaign to
generate more sales. The Company will focus on sales and marketing as we
complete our fiscal year under a continued reduced demand from our key customer.
The Company is currently looking for a tenant for its Illinois facility and
anticipates closing this facility within the next quarter. We have continued
cost control measures and are operating under strict budget guidelines and
reduced staffing to reduce the impact to income that the reduced demand may
cause.
Liquidity and Capital Resources
-------------------------------
Pallet Management Systems had $13,000 cash on hand at March 30, 2002,
versus $233,000 at the beginning of the fiscal year. The decrease in cash is
primarily attributed to the year to date net loss and the build of inventory
which was done in anticipation of increased March 2002 demand from our key
customer which did not occur, as well as the timing of our payables and
receivables. The cash used in financing activities is primarily due to
repayments on the revolver and term loans to LaSalle Business Credit
($1,002,000). Net cash provided by operating activities of $ 775,000 is
primarily due to a decrease in our accounts receivables balance of $ 2,978,000
due to the lower balance associated with our primary customer in March 2002 as
compared with June 2001 primarily caused by the Alabama facility closing and the
reduced order rate.
The Company believes that existing cash on hand, cash provided by
future operations including PalletNetTM services, and additional available
borrowings under its current line of credit will be sufficient to finance its
operations and expected working capital and capital expenditure requirements for
the remainder of this fiscal year. The Company's net working capital is at a
negative ($3,136,000) due to the Company reclassifying the debt from LaSalle
Business Credit from Long-Term to Short-Term. This is due to the probability
that the loan covenants will not be met in the coming twelve months. The Company
is continuing to work on its financing needs, as well as focusing on improving
operating results to decrease this probability.
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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.
The Company's Board of Directors terminated the employment of Mr.
Zachary Richardson as President of the Company effective March 15, 2002. Prior
to the date of termination, Mr. Richardson notified the Company in writing that
he would consider any such termination to be a breach of his Employment
Agreement and that the Company would owe him approximately $675,000. The Company
disagrees with Mr. Richardson's contention and would defend vigorously against
any claim brought by Mr. Richardson in this regard.
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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: May 14, 2002 By: /s/ John C. Lucy III
--------------------------------
John C. Lucy III, Chief Executive Officer
Dated: May 14, 2002 By: /s/ Marc S. Steinberg
---------------------------------
Marc S. Steinberg, Chief Financial
Officer, Vice President, Treasurer and
Secretary
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