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 29, 2001
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 February 11, 2002, the Registrant had outstanding 4,187,612 shares of common
stock, $.001 par value.
PALLET MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 29, June 30,
2001 2001
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 212,745 $ 232,635
Accounts receivable - trade, net of allowance
for doubtful accounts $ 3,059,725 $ 4,614,612
Inventories $ 1,766,443 $ 2,041,489
Other Current Assets $ 310,772 $ 258,858
------------ ------------
Total current assets $ 5,349,685 $ 7,147,594
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Property and equipment - net of accumulated
depreciation $ 5,328,990 $ 5,640,355
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OTHER ASSETS $ 98,433 $ 91,788
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Total assets $ 10,777,108 $ 12,879,737
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 618,725 $ 420,344
Current portion of capital lease obligations $ 124,178 $ 111,762
Accounts payable $ 2,820,276 $ 3,039,566
Accrued liabilities $ 381,755 $ 509,952
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Total current liabilities $ 3,944,934 $ 4,081,624
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LONG-TERM DEBT
Long-term debt $ 3,674,996 $ 5,420,261
Capital lease obligations $ 120,666 $ 156,402
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Total long-term liabilities $ 3,795,662 $ 5,576,663
------------ ------------
Total liabilities $ 7,740,596 $ 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
December 29, 2001 and 4,065,612 shares at June 30, 2001 $ 4,188 $ 4,066
Additional paid in capital $ 7,148,592 $ 7,269,556
Accumulated deficit $ (3,978,268) $ (3,776,172)
Notes receivable from stockholders $ (138,000) $ (276,000)
------------ ------------
Total stockholders' equity $ 3,036,512 $ 3,221,450
------------ ------------
Total liabilities and stockholders' equity $ 10,777,108 $ 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 26 Wks Ended 27 Wks Ended
Dec. 29, 2001 Dec. 30, 2000 Dec. 29, 2001 Dec. 30, 2000
------------- ------------- ------------- -------------
Net sales $ 15,734,615 $ 21,609,517 $ 28,694,633 $ 41,083,315
Cost of goods sold $ 14,520,867 $ 20,006,231 $ 26,969,444 $ 38,239,761
------------ ------------ ------------ ------------
Gross profit $ 1,213,748 $ 1,603,286 $ 1,725,189 $ 2,843,554
------------ ------------ ------------ ------------
Selling, general and administrative expense $ 879,975 $ 1,154,265 $ 1,701,071 $ 2,202,903
------------ ------------ ------------ ------------
Operating profit (loss) $ 333,773 $ 449,021 $ 24,118 $ 640,651
------------ ------------ ------------ ------------
Other income (expense)
Other income (expense) $ 34,415 $ (33,665) $ (20,575) $ (39,635)
Interest expense $ (90,647) $ (158,956)) $ (205,639) $ (289,974)
------------ ------------ ------------ ------------
Total other income (expense) $ (56,232) $ (192,621)) $ (226,214) $ (329,609)
------------ ------------ ------------ ------------
Income (loss) before income tax expense $ 277,541 $ 256,400 $ (202,096) $ 311,042
Income tax expense (benefit) $ -- $ -- $ -- $ --
Net income (loss) $ 277,541 $ 256,400 $ (202,096) $ 311,042
------------ ------------ ------------ ------------
Net earnings (loss) per common share $ 0.07 $ 0.06 $ (0.05) $ 0.08
Diluted earnings (loss) per common share $ 0.07 $ 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 STATEMENTS OF CASH FLOWS
(Unaudited)
26 Wks Ended 27 Wks Ended
Dec. 29, 2001 Dec. 30, 2000
------------- -------------
Cash flows from operating activities:
Net income (loss) $ (202,096) $ 311,042
Adjustments to reconcile net income (loss) to net
cash provided by/(used in) operating activities:
Depreciation $ 351,767 $ 254,420
Stock Options issued for Services $ 17,158 $ --
(Increase) Decrease in operating assets:
Accounts receivable $ 1,554,887 $ 770,771
Inventories $ 275,046 $ 131,025
Other assets $ (58,559) $ 28,839
Increase (Decrease) in operating liabilities:
Accounts payable $ (219,289) $ 26,133
Accrued liabilities $ (128,197) $ (66,514)
----------- -----------
Net cash provided by/(used in)
operating activities $ 1,590,717 $ 1,455,716
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Cash flows from investing activities:
Other assets $ -- $ 618,725
Purchase of fixed assets $ (80,587) $(1,285,968)
Proceeds from Disposal of fixed assets $ 40,184 $ --
----------- -----------
Net cash used in investing activities $ (40,403) $ (667,243)
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Cash flows from financing activities:
Net Borrowings from lenders $ -- $ 467,306
Net Payments of long-term debt $(1,570,204) $(1,651,686)
----------- -----------
Net cash provided by/(used in) financing activities $(1,570,204) $(1,184,380)
----------- -----------
Increase/(Decrease) in cash $ (19,890) $ (395,907)
Cash at beginning of period $ 232,635 $ 577,052
----------- -----------
Cash at end of period $ 212,745 $ 181,145
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4
Pallet Management Systems, Inc.
Notes to Financial Statements
December 29, 2001
Note 1. Consolidated Financial Statements:
The consolidated balance sheet as of December 29, 2001, the
consolidated statements of operations and cash flows for the twenty-six week
period ended December 29, 2001 and twenty-seven week period ended December 30,
2000 and consolidated statements of operations for the thirteen week periods
ending December 29, 2001 and December 30, 2000 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 twenty-six weeks ended December 29, 2001
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. As of
December 29, 2001 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 plus one
percentage point. 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 29, 2001, the Company had
$2,260,000 of availability under the revolving agreement.
The three term loans as of December 29, 2001 were at $1,157,000,
$1,387,000 and $ 945,000. These loans are collateralized by substantially all
the assets of the Company.
Note 3. Inventories
Inventories consisted of the following at December 29, 2001:
Raw material $ 1,112,534
Work in process $ 503,637
Finished goods $ 150,272
------------
TOTAL $ 1,766,443
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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):
26 Weeks Ended 27 Weeks Ended
December 29 December 30
2001 2000
----------- -----------
Basic earnings/(loss) per common share:
Net income/(loss) ($ 202) $ 311
Weighted average common shares
outstanding for the period 4,071 4,065
Basic earnings per share of
common stock ($ 0.05) $ 0.08
Diluted earnings/(loss) per common share:
Net income/(loss) ($ 202) $ 311
Weighted average common shares
outstanding for the period 4,071 4,065
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
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.
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.
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.
7
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. These transactions are
currently under review by the Company.
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.
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 twenty-six-week
periods ended December 29, 2001 and for the thirteen-week and twenty-seven week
periods ended December 30, 2000.
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.
Results of Operations
---------------------
General
-------
Pallet Management has grown to be one of the largest pallet companies
in the estimated $6 billion U.S. pallet industry, by providing value-added
products and services to our customers. Our customer base has remained stable.
The majority of our revenues have traditionally been generated from
providing high quality, specially engineered pallets to manufacturers,
wholesalers and distributors. As supply chain logistics have become increasingly
complex, our existing customers as well as prospective customers are seeking new
ways to streamline distribution and reduce costs, 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.
9
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 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. The Company is currently winding down operations and is
closing the facility in fiscal year 2002. In Bolingbrook, Illinois, our contract
expires on April 30th, 2002 and in Plainfield, Indiana, our contract expires on
March 1, 2003. The Company expects to close the Bolingbrook, Illinois facility
before the end of this fiscal year.
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.
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.
10
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
variable cost consumables.
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.
Thirteen Weeks Ended December 29, 2001 compared to Thirteen Weeks
-----------------------------------------------------------------
Ended December 30, 2000
-----------------------
For the thirteen-week period ended December 29, 2001, net sales
decreased 27% to $ 15,735,000 from $ 21,610,000 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 $ 4,554,000 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 December 29, 2001, manufacturing
sales decreased 28% to $ 15,245,000 from $ 21,099,000. The decrease in
manufacturing sales was primarily due to the reduction of orders received by our
11
major customer at our Alabama facility, 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 only runoff sales of
$36,000 during the thirteen-week period ending December 29, 2001 as compared to
$4,590,000 in the comparable period from fiscal year 2001.
Service sales decreased by 4% to $ 490,000 from $ 511,000. This slight
decrease in service sales is primarily due to the reduction of repair services
made at the Petersburg, Virginia facility as a result of reduced demand from the
facility's key customer.
Pallet Management had a 24% reduction in its selling, general and
administrative expenses from $ 1,154,000 to $ 880,000 for the thirteen-week
period ended December 29, 2001 when compared to the thirteen-week period ended
December 30, 2000. The decrease in selling, general and administrative expenses
is primarily due to the reduction of consulting expense. This 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
$100,000. 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.
A net income of $ 278,000 or $.07 per share was realized during this
thirteen-week period ended December 29, 2001 compared to a net income of
$256,000 or $.06 per share recorded for the thirteen-week period last fiscal
year. Compared to the same period last year, we were able to increase
profitability on less sales due to operational and management improvements, as
well as reducing our selling, general and administrative expenses associated
with consulting as described above. In addition, we had a decrease in interest
expense by approximately $ 68,000 caused by a lower effective interest rate on
our loans and by effective cash management. Pallet Management anticipates that
the third quarter will slow in demand from our largest customer as well as from
our niche pallet customers. With our controlled cost measures still in place,
and by operating under strict budget guidelines, we are working on reducing the
impact to income that these reduced demands may cause.
Twenty-six Weeks Ended December 29, 2001 compared to Twenty-seven Weeks Ended
-----------------------------------------------------------------------------
December 30, 2000
-----------------
For the twenty-six week period ended December 29, 2001, net sales
decreased 30% to $ 28,695,000 from $ 41,083,000 for the twenty-seven week period
ended December 30, 2000. This decrease is primarily due to the reduction in
orders from our Alabama facility, which was closed in September 2001. For the
twenty-six week period ending December 29, 2001, the Alabama sales decreased to
$ 1,274,000 from $ 9,558,000 for the twenty-seven week period ending December
30, 2000, an 87% reduction.
During the twenty-six-week period ended December 29, 2001,
manufacturing sales decreased 30% to $ 27,816,000 from $ 39,985,000 for the
twenty-seven week period ended December 30, 2000. The decrease in manufacturing
12
sales was primarily due to the Alabama facility closing as described above, as
well as, reduced orders from our Illinois facility during our first quarter 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 $ 2,324,000. 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 $ 2,213,000 caused by a
softening market as our customers look to hold down costs and reduce
expenditures. We have brought on additional sales persons in the first half of
this fiscal year in an effort to bolster these declining sales from our Virginia
facility.
Service sales decreased by 20% to $ 879,000 from the $ 1,098,000
recorded for the twenty-seven week period ended December 30, 2000. 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 from the facility's
key customer.
We experienced a 23% decrease in selling, general and administrative
expenses from $ 2,203,000 to $ 1,701,000 for the twenty-six week period ended
December 29, 2001 when compared to the twenty-seven week period ended December
30, 2000. The decrease in selling, general and administrative expenses is
primarily due to the reduction of consulting expense. This 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
$200,000. Selling, general and administrative expenses were also reduced by the
initiative of the company to hold down costs for travel, telephone and legal
expenses. Additionally, we had increased premiums for our insurance in fiscal
year 2001, which were favorably re-negotiated for fiscal year 2002.
A net loss of ($ 202,000) or ($ 0.05) per share was recorded during
this twenty-six week period ended December 29, 2001 compared to a net income of
$311,000 or $0.08 per share recorded for the twenty-seven week period ended
December 30, 2000. During the twenty-seven week period ended December 30, 2000
we had introduced new management and had consistent sales from our customer
base. The new management team streamlined processes and created opportunities
for profit. As that period ended and throughout the calendar year 2001, sales
from our facilities in Alabama and Lawrenceville, Virginia declined. During the
twenty-six week period ending December 29, 2001 the Alabama facility had a drop
off in sales of $ 8,284,000 and the Lawrenceville facility had a drop off in
sales of $ 2,213,000 as compared to the twenty-seven week period ending December
20, 2001. This reduction in sales caused by the plant closings and the weak
economy contributed to our year to date loss. In addition, we had a decrease in
interest expense by approximately $84,000 over the prior year caused by a lower
effective interest rate on our loans and by effective cash management. As we
entered this fiscal year, we sought and hired new sales persons to increase
sales and profitability. We anticipate growing our customer base and
diversifying our sales throughout the remainder of the fiscal year.
13
Liquidity and Capital Resources
-------------------------------
Pallet Management Systems had $213,000 cash on hand at December 29,
2001, versus $233,000 at the beginning of the fiscal year. The slight decrease
in cash is primarily attributed to the timing of our payables and receivables,
as well as the year to date net loss as of December 29, 2001. The cash used in
financing activities is primarily due to repayments on the revolver and term
loans to LaSalle Business Credit ($1,536,000). Net cash provided by operating
activities of $ 1,591,000 is primarily due to a decrease in our accounts
receivables balance of $ 1,555,000 due to the lower balance associated with our
primary customer in December 2001 as compared with June 2001 primarily caused by
the Alabama facility closing. Additionally, inventory decreased by $275,000
primarily due the reduction of inventory from our Alabama facility and an effort
to reduce inventory as we approached January 2002, which we anticipate having a
lower order rate, and therefore, a lower required inventory level.
The Company believes that existing cash on hand, cash provided by
future operations including PalletNetTM services, additional available
borrowings under its current line of credit, and a net working capital of
$1,405,000 as of December 29, 2001, will be sufficient to finance its operations
and expected working capital and capital expenditure requirements for the
remainder of this fiscal year.
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.
14
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 19, 2002 By: /s/ John C. Lucy III
-----------------------------------------
John C. Lucy III, Chief Executive Officer
Dated: February 19, 2002 By: /s/ Marc S. Steinberg
------------------------------------------
Marc S. Steinberg, Chief Financial
Officer
15