1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ PALWEB CORPORATION (Name of registrant as specified in its charter) Delaware 000-26331 75-1984048 -------------------------------- --------------- ------------------------------- (State or other jurisdiction of Commission File (I.R.S. Employer Identification incorporation or organization) Number No.) 1607 West Commerce Street Dallas, Texas 75208 ---------------------------------------- --------------------------- (Address of principal executive offices) (City, State, and Zip Code) (214) 698-8330 --------------------------- (Issuer's telephone number) 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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes X . No . ------------- -------------- The number of shares of common stock, $0.10 par value, outstanding at December 20, 1999 was 190,181,628. 2 INDEX ----- Page No. -------- PART I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheet -- August 31, 1999 and 1998 ............................ 3 Consolidated Statement of Operations -- Six Months Ended November 30, 1999 and 1998 ............................................ 4 Consolidated Balance Sheets as of November 30, 1999 and May 31, 1999 ................... 5 Consolidated Statement of Cash Flows -- Six Months Ended November 30, 1999 and 1998 ............................................ 6 Notes to Consolidated Financial Statements .......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... 8 PART II. Other Information: Item 6. Exhibit 27 - Financial Data Schedule ................ 11 -2- 3 Part I. Financial Information Item 1. Financial Statements PalWeb Corporation (a development stage company) Consolidated Statements of Operations (Unaudited) From Inception Six Month Period (November 20, 1995) Ended November 30, To November 30, ------------------------------ ------------------- 1999 1998 1999 ------------ ------------ ------------------- Sales $ -- $ 41,510 $ 92,694 Other income (loss) (6,337) 47,279 270,848 ------------ ------------ ------------ (6,337) 88,789 363,542 ------------ ------------ ------------ Expenses: Research and development -- -- 406,943 General and administrative expenses 1,062,453 501,601 8,864,280 Depreciation expense 75,700 70,954 484,814 Impairment -- -- 3,456,231 Interest expense 99,140 108,586 562,331 ------------ ------------ ------------ Total expenses 1,237,293 681,141 13,774,599 ------------ ------------ ------------ Loss before discontinued operations and extraordinary items (1,243,630) (592,352) (13,411,057) Loss from discontinued operation (7,300) (375,105) Extraordinary loss -- (76,155) 68,616 ------------ ------------ ------------ Net Loss $ (1,243,630) $ (675,807) $(13,717,546) ============ ============ ============ Loss Per Common Share: Loss before discontinued operations and extraordinary loss $ (0.01) (0.01) Loss from discontinued operation -- -- Extraordinary loss -- -- ------------ ------------ Loss per common share $ (0.01) $ (0.01) ============ ============ See notes to consolidated financial statements. -3- 4 PalWeb Corporation (a development stage company) Consolidated Statements of Operations (Unaudited) Three Month Period Ended November 30, ---------------------------- 1999 1998 --------- --------- Sales $ -- $ 29,925 Other income (loss) -- 19,879 --------- --------- -- 49,804 --------- --------- Expenses: Research and development -- -- General and administrative expenses 261,978 208,176 Depreciation expense 37,860 35,477 Impairment -- -- Interest expense 60,757 60,441 --------- --------- Total expenses 360,595 304,094 --------- --------- Loss before discontinued operations and extraordinary items (360,595) (254,290) Income from discontinued operation -- 6,564 Extraordinary loss -- (76,155) --------- --------- Net Loss $(360,595) $(323,881) ========= ========= Loss Per Common Share: Loss before discontinued operations and extraordinary loss $ -- -- Loss from discontinued operation -- -- Extraordinary loss -- -- --------- --------- Loss per common share $ -- $ -- ========= ========= See notes to consolidated financial statements. -4- 5 PalWeb Corporation (a development stage company) Consolidated Balance Sheets (Unaudited) November 30, May 31, 1999 1999 ------------ ------------ ASSETS ------ Current Assets: Cash $ 540 $ 710 Inventory 9,938 9,938 ------------ ------------ Total current assets 10,478 10,648 Property, Plant and Equipment, at cost 2,266,689 2,192,982 Accumulated depreciation (412,959) (373,766) ------------ ------------ Total Property, Plant and Equipment 1,853,730 1,819,216 Other Assets: Intangible assets 67,964 67,964 Accumulated Amortization (9,215) (7,215) Other 30,173 30,173 ------------ ------------ Total other assets 88,922 90,922 ------------ ------------ Total Assets $ 1,953,130 $ 1,920,786 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY - ---------------------------------------- Current Liabilities: Notes and mortgages payable $ 50,000 $ 50,000 Accounts payable and accrued expenses 689,961 472,671 Payable to related parties 2,588,992 2,222,992 Customer deposits 300,000 300,000 ------------ ------------ Total current liabilities 3,628,953 3,045,663 Lease Finance Obligation 1,766,958 1,766,958 Stockholders' Deficiency: Preferred stock, $.0001 par, 20,000,000 shares authorized - outstanding 2,785,000 and 880,000, respectively 289 88 Common stock, $.10 par value, 250,000,000 authorized, outstanding - 179,081,628, and 217,981,046, respectively 17,908,163 21,798,105 Additional paid-in capital 6,609,890 2,027,465 Deficit accumulated during development stage (27,961,123) (26,717,493) ------------ ------------ Total stockholders' deficiency (3,442,781) (2,891,835) ------------ ------------ Total Liabilities and Stockholders Deficiency $ 1,953,130 $ 1,920,786 ============ ============ See notes to consolidated financial statement. -5- 6 PalWeb Corporation (a development stage company) Consolidated Statements of Cash Flows (Unaudited) Six Month Period From Inception Ended November 30, (November 20, 1995) -------------------------------- To November 30, 1999 1998 1999 ----------- ----------- ------------------- Net cash provided from Operating activities $ 116,381 $ (40,443) $ 492,119 Cash Flows from Investing Activities: Purchase of property and equipment (134,551) (31,329) (3,350,124) Proceeds from sale of equipment 18,000 74,995 92,995 Proceeds from lease finance obligation -- -- 149,517 ----------- ----------- ----------- Net cash used by investing activities (116,551) 43,666 (3,107,612) Cash Flows from Financing Activities: Increase in notes and mortgage payable -- -- 2,124,057 Proceeds from issuance of common stock -- -- 491,976 ----------- ----------- ----------- Net cash provided by financing activities -- -- 2,616,033 ----------- ----------- ----------- Net Increase (Decrease) in Cash (170) 3,223 540 Cash, beginning of period 710 -- -- ----------- ----------- ----------- Cash, end of period $ 540 $ 3,223 $ 540 =========== =========== =========== See notes to consolidated financial statements. -6- 7 PALWEB CORPORATION AND SUBSIDIARIES 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, 1999, and the results of its operations and its cash flows for the three month and six month periods ended November 30, 1999 and 1998. These consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the years ended May 31, 1999 and 1998 and the notes thereto included in the Company's Form 10-SB. 2. The results of operations for the three month and six month periods ended November 30, 1999 is not necessarily indicative of the results to be expected for the full year. 3. During the three month period ended May 31, 1999, the Company issued 4,088,890 shares of preferred stock for services. The preferred stock is convertible into common stock on a one to one basis. The valuation of the services totalling $613,334 is based on the market value of the underlying common stock as of the effective date. During the three month period ended May 31, 1998, the Company issued 2,125,000 shares of common stock for services. The valuation of the services totalling $203,000 is based on the market value of the common stock as of the effective date. During the three month period ended November 30, 1999, the Company cancelled 41,443,308 shares of common stock as a result of a default judgement obtained against a shareholder. The shares were cancelled at par value ($0.10 per share) with an offsetting increase to additional paid in capital. During the three month period ended November 30, 1999, the Company issued 460,000 shares of common stock for services. The valuation of the services totaled $79,350 based on the market value of the stock as of the effective date. Also, 2,083,890 shares of preferred stock were converted into common stock on a one-to-one basis. 4. The computation of earnings per share is based on the weighted average shares outstanding. For the six month periods ended November 30, 1999 and 1998, the average shares outstanding are 211,074,000 and 168,620,000, respectively. For the three month periods ended November 30, 1999 and 1998, the average shares outstanding are 204,166,000 and -7- 8 168,956,000, respectively. Convertible preferred stock is not considered as their effect is antidilutive. Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations Results of Operations General to All Periods Sales reflected for all periods presented are occasional sales of prototype plastic pallets of a design which did not meet development standards. Accordingly, comparisons of operating results to sales have little or no value. As of November 30, 1999, PalWeb is in the final stages of development of both a plastic pallet to compete with wood pallets and injection molding systems to produce the plastic pallet. PalWeb has obtained short-term financing to meet its short term working capital needs. PalWeb's new plastic pallet design has been subjected to standard industry tests known as ASTM (American Society for Testing and Materials) Standard D 1185-98a (a strength test) and D 4728-91 (a vibration test), which were conducted by Container Technologies Laboratory, Inc., Lenexa, Kansas, an independent testing facility. Container Technologies Laboratory, Inc. certified PalWeb's plastic pallet as having passed the above referenced tests. The testing procedures found the pallet to be stronger and more versatile than the typical hardwood pallet. Additionally, PalWeb's plastic pallet was tested at the Frauenhofer Institute in Germany under ISO (International Standards Organization) testing procedures and reportedly passed in all areas of the testing. However, official results of the test have not yet been released to PalWeb. Production is currently limited to a maximum of 4,000 pallets per month utilizing prototype production equipment with production scheduled to begin March 2000. The company plans an initial commercial capacity of up to 100,000 pallets per month as soon as practical and is currently seeking long-term financing to acquire the equipment for same. For all periods 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 which offsets the amount of any tax benefit available for each period presented in the consolidated statement of operations. -8- 9 Six Month Period Ended November 30, 1999 Compared to the Six Month Period Ended November 30, 1998 General and administrative expenses for the six months ended November 30, 1999 increased $560,852 over November 30, 1998 primarily due to cost of consulting services. Consulting costs were $692,686 for the six months ended November 30, 1999 which is an increase of $489,686 over the period ended November 30, 1998. Other significant items were $48,151 for accounting expense. Interest expense declined $9,446 from $108,586 for the period ended November 30, 1998 to $99,140 for November 30, 1999. The decrease is attributable to the reduction in notes payable. During the fiscal year ended May 31, 1999, management negotiated a settlement of certain delinquent notes payable through foreclosure proceedings, cash payments or part cash, and part common stock. Other income in the period ended November 30, 1998 was primarily rental income from leasing a portion of its plant facilities. The plant was sold to a related party in April 1999 and PalWeb leases back only that portion of the facility it utilizes. Because PalWeb holds an option, expiring April 2002, to repurchase its current plant facility, the transaction was recorded as a financing arrangement wherein the plant remains an asset on the balance sheet until such time as the option expires without being exercised. As discussed in the preceding paragraph, certain delinquent loans were resolved resulting in an extraordinary loss of $76,155 during the three months ended November 30, 1998. Principally as a result of the above, PalWeb had a net loss of $1,243,630 for the six months ended November 30, 1999 compared to $675,802 for November 30, 1998 for an increase of $567,823. Three Month Period Ended November 30, 1999 to Three Month Period Ended November 30, 1998 General and administrative expenses increased to $261,978 for the period ended November 30, 1999, compared to $208,176 for the period ended November 30, 1998, for a total of $53,802, primarily due to consulting services in 1999 of $79,350. As discussed in the section above comparing the six months ended November 30, 1999 to the six months ended November 30, 1998, certain delinquent loans were resolved resulting in an extraordinary loss of $76,155 during three months ended November 30, 1998. As a result of the above, the net loss increased $36,714 from $360,595 for the period ended November 30, 1999 to $323,881 for the period ended November 30, 1998. -9- 10 Liquidity and Capital Resources PalWeb secured a line of credit of $500,000 to provide working capital for the short term. The credit line is being funded at the rate of $100,000 per month beginning December 1, 1999. Reference is made to the section above titled "General to All Periods" regarding the need for long term financing to acquire production equipment to attain commercial production levels. Reference is made to Note 3 of the Notes to the Financial Statements regarding the cancellation of 41,443,308 shares of common stock as a result of a default judgement. Material Risks Development risks include technological difficulties in regard to the continual improvement of the manufacturing process. The availability risks pertaining to raw material is quite remote; however, should recycling of plastic milk containers become in short supply, costs of virgin plastics would increase the cost of the product. The demand and market risk for new products, technologies, and services are always a business risk as well as those risks published in prior SEC filings can effect the growth and success of PalWeb. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K A. Exhibits 11. Computation of Loss per Share is in Note 4 in the Notes to the financial statements on page 7. B. Reports on Form 8-K No reports on Form 8-K were filed by PalWeb Corporation during the quarter ended November 30, 1999 -10- 11 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. DATE: JANUARY 4, 2000 PalWeb Corporation BY: /s/ RONALD G. HALE ----------------------------------------- Ronald G. Hale President 12 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 27 Financial Data Schedule