FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-26331
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PALWEB CORPORATION
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(Name of small business issuer in its charter)
DELAWARE 75-1984048
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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1607 WEST COMMERCE STREET, DALLAS, TEXAS 75208
(Address of principal executive offices)
(214) 698-8330
(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
NONE NONE
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Securities registered under Section 12(g) of the Exchange Act:
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. [X ] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenue for the year ended May 31, 2001 was $89,211.
The aggregate market value of the voting Common Stock held by non-affiliates at May 31, 2001 was $12,396,993. This amount was computed using the average of the high and low price on May 31, 2001.
As of July 18, 2001, the issuer had outstanding a total of 231,973,244 shares of its $0.10 par value Common Stock.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PALWEB CORPORATION
FORM 10-KSB
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION PAGE
NUMBER
PART I
Item 1. Description of Business 4
Item 2. Description of Property 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 14
Item 6. Management's Discussion and Analysis or Plan of Operation 16
Item 7. Financial Statements 27
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 27
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 27
Item 10. Executive Compensation 29
Item 11. Security Ownership of Certain Beneficial Owners and Management 30
Item 12. Certain Relationships and Related Transactions 31
Item 13. Exhibits and Reports on Form 8-K 32
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
PalWeb Corporation ("PalWeb") is a Delaware corporation that was incorporated on February 24, 1969 under the name Permaspray Manufacturing Corporation. It changed its name to Browning Enterprises Inc. in April of 1982, to Cabec Energy Corp. in June of 1993 and became PalWeb Corporation in April of 1999. Unless otherwise noted, all references to PalWeb include PalWeb's wholly owned subsidiaries.
From April 1993 to December 1997, PalWeb was engaged in various businesses, including the business of exploration, production and development of oil and gas properties in the continental United States and the operation of related service businesses. In December 1997, PalWeb acquired all of the issued and outstanding stock of Plastic Pallet Production, Inc. or "PPP," a Texas corporation, in exchange for a majority of the issued and outstanding stock of PalWeb. Pursuant to the terms of the reverse acquisition contract, all of the assets, contract rights, and liabilities of PalWeb that related in any way to the oil and gas business were transferred to The Union Group, Inc., a Nevada corporation (the "Union Group"). In November 1998, PalWeb distributed all of the issued and outstanding stock of the Union Group to its stockholders (other than the former shareholders of Plastic Pallet Production, Inc.).
Since the acquisition of PPP, PalWeb's primary business is (i) manufacturing and selling plastic pallets, and (ii) the custom design, manufacture and sale of large plastic injection molding machines and systems. PalWeb is currently a development stage company. As of May 31, 2001, PalWeb has not sold any plastic injection molding machines and sales of plastic pallets have been limited.
In October 1998, PalWeb entered into an agreement for sale of a plastic injection molding machine with Pace Plastic Pallets, Inc. ("Pace") that was intended to provide for the sale of specified machinery to Pace to permit Pace to manufacture pallets for sale to PalWeb for further distribution by PalWeb under patent licenses granted by PalWeb to Pace. In exchange for Pace's agreement to purchase the machinery and make an earnest money deposit of $300,000, 10 million shares of PalWeb were transferred by the former Chairman of the Board and President of PalWeb, Michael John, to Pace. At the time of this transaction, Pace was principally owned by Paul Kruger; however, neither Paul Kruger nor any of his related entities, including Pace, were affiliated with or related to PalWeb or any of its subsidiaries. The terms of this transaction were entered into on an arm's length negotiated basis.
PalWeb encountered difficulties in connection with the manufacturing of the machinery required by this agreement due to the absence of available funding and other reasons. As a result, in January 1999, PalWeb entered into a consulting agreement with Paceco Financial Services, Inc. ("PFS"), an entity owned by Mr. Kruger, in which PFS provided $189,000 in cash and comprehensive management assistance to PalWeb in exchange for the issuance of 41 million
shares of PalWeb Common Stock. PalWeb recorded an expense of $4.1 million in connection with this transaction, which was equal to the estimated fair value of the shares issued at that time. At the time of this transaction, Mr. Kruger was not affiliated with PalWeb. This was an arm's length negotiated transaction entered into between PFS and the former management of PalWeb. This transaction was negotiated at a time when PalWeb was in serious financial difficulty. The services performed included strategic planning, marketing, general consulting and management services, including recovery of shares issued to other parties in transactions potentially detrimental to PalWeb. The number of shares issued in this transaction is roughly equal to the number of shares owned by Wolfgang Ullrich and Rosarin Chaisayan, which were recovered by PalWeb.
On July 9, 1999, Paul Kruger became Chairman of PalWeb. Subsequent to that date, Mr. Kruger has been actively involved in the day to day management of PalWeb in order to further its business plan. Also subsequent to that date through May 31, 2001, Mr. Kruger or his affiliated entities have provided approximately $2.48 million in funding for the operation of PalWeb in the form of $1,187,479 in stock purchases, $947,000 in cash advances, and $350,021 in consulting services. The cash advances have been made pursuant to various notes with face amounts aggregating a total of $1,150,000, which are secured by substantially all of the assets of PalWeb, including equipment, furniture, fixtures, inventory, accounts receivables and patents. For more information on these notes, see "Liquidity and Capital Resources" under Item 6 of this Form 10-KSB.
Subsequent to becoming more active in management, Mr. Kruger discovered various transactions and agreements that had been entered into with various parties by prior management that were detrimental to PalWeb. Under Mr. Kruger's guidance, PalWeb initiated litigation against these parties and recovered approximately 55 million shares of PalWeb's common stock.
ACQUISITION OF PACECO FINANCIAL
On April 3, 2000, PalWeb acquired Paceco Financial Services, Inc. ("PFS") by means of a merger of PFS's parent company, Pace Holding, Inc., into a wholly owned subsidiary of PalWeb, PP Financial, Inc. In the acquisition, PalWeb issued 50 million shares of its Common Stock in exchange for all the outstanding stock of Pace Holding and PFS became an indirect wholly owned subsidiary of PalWeb. All of the outstanding stock of Pace Holding was owned by Paul Kruger, the Chairman and Chief Executive Officer of PalWeb. PFS, in addition to its other assets, owned 43.5 million shares of PalWeb Common Stock, which by virtue of the acquisition, were treated as treasury stock on PalWeb's records and, accordingly, the acquisition resulted in the issuance of an additional 6.5 million shares of PalWeb Common Stock.
The 50 million shares of PalWeb's Common Stock that PalWeb exchanged for all of the outstanding stock of Pace Holding was authorized and approved by the directors of PalWeb other than Mr. Kruger, Mark R. Kidd and Lyle W. Miller. The 6.5 million incremental shares of PalWeb's Common Stock that were issued in the acquisition of Pace Holding represented the value attributable to Paceco's business, other than the ownership of PalWeb Common Stock.
PFS has been in business since 1952 and is engaged in the business of making consumer and small business loans primarily in Oklahoma and is regulated as an "investment certificate issuer" by the Oklahoma Department of Securities ("ODS"). PalWeb acquired PFS with the intent of using PFS to finance large purchases of pallets. However, PFS encountered regulatory difficulties with the ODS as described in "Investigation of PFS by the Oklahoma Department Securities" at the end of this Item 1. As a result of these difficulties, PFS has not engaged in any pallet financing activities as of May 31, 2001.
PalWeb's principal subsidiary, Plastic Pallet Production, Inc. or "PPP," is the entity through which PalWeb conducts its business of selling plastic pallets and plastic injection molding machines. As of May 31, 2001, PalWeb has not sold any plastic injection molding machines and the sales of plastic pallets have been limited. PalWeb holds two patents that PalWeb considers material to its business: a patent for the original design of a materials handling plastic pallet, and a patent on a plastic injection molding machine used to produce such pallets.
PalWeb's plastic pallets are much more durable and sanitary than traditional wood pallets. At PalWeb's request, its 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. ("Container Technologies"), Lenexa, Kansas, a nationally recognized independent testing facility. Container Technologies is certified as a Performance Oriented Packaging (POP) Laboratory by the U.S. Department of Transportation. Container Technologies is also an International Safe Transit Association (ISTA) Qualified Test Laboratory and a National Motor Freight Classification (NMFC) Association Certified Laboratory. Container Technologies 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.
At PalWeb's request, its plastic pallets were also tested by The Center for Unit Load Design of the Virginia Polytechnic Institute & State University ("Virginia Tech"). The Center for Unit Load Design is an outgrowth of Virginia Tech's William H. Sardo Jr. Pallet and Container Research Laboratory (the "Sardo Laboratory"), which is the only research facility in the United States that performs comprehensive research and development work, provides technical assistance, and offers educational programs focusing exclusively on pallets and containers, as well as the materials and fasteners with which the pallets and containers are assembled. The goal of the Sardo Laboratory is to provide leadership in conducting research, technical assistance, and continuing education programs directly applicable to the pallet and container industries and their clients. The Center for Unit Load Design expands the Sardo Laboratory's research into the field of design and evaluation of all elements of materials handling systems. PalWeb's pallets successfully passed tests using The Center for Unit Load Design's FasTrack handling protocol for forklift, pallet jack, racking and stacking under a 1,500-pound load, which further demonstrates the strength and durability of PalWeb's pallets.
PalWeb has conducted preliminary tests at the facilities of SGS US Testing Company, Inc. on the fire retardency of the plastic formula used in its pallets and has experienced favorable results. PalWeb anticipates that it will schedule a UL Lab testing (UL 2335 Classification Flammability of Plastic Pallets) prior to the quarter ending November 30, 2001.
PalWeb has fabricated an operational prototype plastic injection molding system. PalWeb is continually modifying and improving its equipment. PalWeb began utilizing the prototype equipment by running a 10 hour shift 4 days per week. As of August 24, 2000, PalWeb increased production by adding a second shift. Two shifts utilizing the current equipment 5 days per week can produce approximately 1,232 rackable and 196 floor pallets per month. As of June 1, 2001, PalWeb has sold 2,438 pallets and has approximately 2,000 rackable and 1,800 floor (non-rackable) pallets in inventory. With the addition of approximately two more shifts, PalWeb anticipates that production will increase to approximately 4,000 pallets per month. PalWeb expects to reach this production level if and when PalWeb secures the orders necessary to justify such production level. 4,000 pallets per month is the maximum capacity of PalWeb's research/prototype plastic injection molding system.
PalWeb is currently exploring methods to raise funds through various means including, but not limited to, the private placement of equity securities, private loans, commercial loans or technology licensing arrangements. Any loans to PalWeb will likely be required to be secured and guaranteed by Paul Kruger. PalWeb is dependent upon Mr. Kruger to provide and/or secure additional debt financing. Mr. Kruger has no obligation to provide additional debt financing to PalWeb or secure such financing on PalWeb's behalf and there is no assurance that Mr. Kruger will do so. PalWeb plans to use future funding to continue to build a fully functional plastic injection molding system comprised of multiple plastic injection molding machines with integrated material feed lines. If successful, the addition of these machines will permit PalWeb to expand its production of pallets. Should PalWeb successfully increase its production levels, it will need to employ additional production and supervisory employees, as described in this section.
In the past three years, approximately $2.5 million has been spent on the development of PalWeb's business by designing plastic pallets and building prototypes of the plastic injection molding machines that will be manufactured by PalWeb for its own use in manufacturing plastic pallets and for resale to industrial users of plastic injection molding systems. As of August 10, 2001, approximately $1.5 million has been spent and approximately $3.75 million worth of parts and materials have been ordered in connection with building a line of fully functional plastic injection molding machinery. PalWeb expects that its first line of fully functional plastic injection molding machinery, which will have a production capicity of approximately 40,000 pallets per month, will be in operation during the third quarter of fiscal year 2002.
Carving a niche in an industry as competitive as the pallet business will require more than just capital and equipment. PalWeb's future success will depend in large part on the strategic planning of its management. PalWeb has received very strong indications of interest from a number of extremely large users of pallets now that the material handling pallet has been successfully tested under applicable industry standards. This has substantially increased the level of interest and has greatly increased the viability of PalWeb's pallet being a large volume seller.
However, there is no assurance that PalWeb will be successful in marketing the pallets commercially.
The principal raw materials used in manufacturing PalWeb's plastic pallets are in abundant supply, and some of these materials may be obtained from recycled plastic containers. At the present time, these materials are being purchased from local suppliers and the supply is readily available.
PALLET INDUSTRY
According to the U. S. Forest Service, as printed in the National Wooden Pallet and Container Association publication, approximately 400 million new wood pallets are purchased in the United States each year, and some research sources estimate that even more than 400 million new pallets are purchased each year. At an overall average selling price of $9/pallet, the pallet manufacturing and sales business is approximately a $4 billion industry. It is estimated that the United States wood pallet industry is served by approximately 3,600 companies, most of which are small, privately held firms that operate in only one location. The industry is generally comprised of companies that manufacture new pallets or repair and recycle pallets. New pallet manufacturing generates about 60%-65% of the industry's revenues. The U.S. Forest Service estimates that approximately 1.9 billion wood pallets are in circulation in the United States today and that roughly 400 million of the wood pallets currently in circulation were newly manufactured. On an annual basis, approximately 175 million wood pallets are recycled through a process of retrieval, repair, re-manufacturing and secondary marketing, approximately 225 million are sent to landfills, and approximately 100 million are burned, lost, abandoned or leave the country.
Within the last few years, concerns regarding infestation have arisen in the wood pallet industry. For instance, according to Virginia Tech's Center for Unit Loan Design Center Tech Note No. 1 dated November 11, 1998, the Asian Longhorn Beetle ("ALB"), a devastating wood boring pest native to China and other Asian countries, has invaded hardwood trees in New York City and Chicago. The ALB outbreaks have been traced to solid wood packaging materials ("SWPM"), including wood pallets imported from China. As a result, the USDA Animal and Plant Health Inspection Service has proposed certain interim rules, which include upgrading treatment procedures for SWPM. These treatments are estimated to increase the cost of SWPM by at least 10%, and some treatments will double the price of SWPM.
Pallets are used in virtually all United States industries in which products are broadly distributed, including, but not limited to, the automotive, chemical, consumer products, grocery, produce and food production, paper and forest products, retailing and steel and metals industries. Forklifts, pallet trucks and pallet jacks are used to move loaded pallets, reducing the need for costly hand loading and unloading at distribution centers and warehouses.
Pallets come in a wide range of shapes and sizes. However, the grocery industry, which accounts for about one-third of the demand for new pallets, uses a standard 40 inch by 48 inch pallet and this has become the standard pallet size in most industries in the United States. Some
industries, however, have developed specialized pallet sizes. PalWeb's pallet is 40 inches by 48 inches in size.
Block edge, rackable pallets are heavy duty pallets with 9 blocks between the pallet decks, to allow true four-way entry by forklifts, pallet trucks and pallet jacks. Block edge, rackable pallets are often used to transport goods from manufacturers to distribution centers.
Nestable pallets have "feet" on them so that they can be easily stacked. Nestable pallets are often used to transport goods between distribution centers and retail stores.
Until very recently, plastic pallets had not penetrated the market significantly, due in part to their cost. Heavy duty plastic pallets cost $46-$100, heavy duty wood pallets typically cost approximately $26, and less sturdy wood pallets typically cost $8-$11. As stated in an article in the July 1996 issue of Material Handling Engineering, wood pallets have an estimated useful life of 7-10 trips before repair or recycling is required. A trip, or cycle, is defined as the movement of a pallet under a load from a manufacturer to a distributor (or from a distributor to a retailer) and the movement of the empty pallet back to the manufacturer. Heavy duty plastic pallets, as currently manufactured, have a useful life of 60 or more trips, on average.
According to a survey by the National Wooden Pallet and Container Association and Cahners, approximately 4% of the total pallet purchases in 1999 were plastic pallets while approximately 91% were wood pallets. However, the trend that appears to be emerging is a switch from wood to plastic, with the only limiting factor being price. As stated in the April 2001 issue of Pallet Enterprise magazine, one estimate projected that plastic pallet usage will reach about 20 million units in 2001, up from only 3 to 4 million in 1995. Therefore, PalWeb will target both wood and plastic pallet users during its market introduction phase.
PalWeb intends to stay on the "cutting edge" of the market by constantly conducting research on pallet design, plastic injection molding system design and the materials used to make the plastic pallets.
EMPLOYEES
As of July 1, 2001, PalWeb leases ten full time employees from Accord Human Resources, Inc., an independent employee leasing company. PalWeb decided to lease its employees because, considering the small number of employees currently required by PalWeb's level of operations, it is more cost effective than hiring its own employees.
If PalWeb increases production levels to 4,000 pallets per month, it will need to employ a total of eleven to thirteen production employees and three to four supervisory/staff employees. Should PalWeb successfully increase its production levels to 50,000 pallets per month, it will need to employ a total of twenty to thirty production employees and five to seven supervisory/staff employees. If PalWeb successfully increases its production levels to 100,000 pallets per month, it will need to employ a total of thirty-five to forty production employees and ten to fifteen supervisory/staff employees.
MARKETING
PalWeb plans to distribute its pallets and its plastic injection molding systems through a combination of a network of independent contractor distributors and sales by PalWeb officers and employees. PalWeb believes that PalWeb's patents on its plastic pallet designs and its plastic injection molding machines, along with appropriate pricing of its products, should give PalWeb a sales advantage with respect to its competition. PalWeb hopes to gain product acceptance by marketing the concept that the widespread use of plastic pallets could greatly reduce the destruction of trees on a worldwide basis.
As of February 28, 2001, PalWeb had begun building a sales team by engaging a full- time sales agent who will be paid a set amount per month for a period of approximately six months, at which time the sales agent will be paid commissions only. Also since February 28, 2001, PalWeb began advertising in Pallet Enterprise and Materials Handling Management, and PalWeb's Vice President of Marketing, Lyle Miller, has begun setting up a system of materials handling distributors at various locations throughout the world, which PalWeb anticipates will have a positive impact on sales. PalWeb's marketing efforts have also generated several leads with customers who are considering sizable orders of pallets. There is no assurance that PalWeb will secure any sizable orders of pallets or, if it does, that PalWeb will be able to manufacture the pallets necessary to fill such orders.
PATENTS
PPP currently holds the following patents, which are material to its business:
1. Materials Handling Plastic Pallet Application No. 09/421,766 Filing Date: October 19, 1999 U.S. Patent No. 6,109,190 issued on August 29, 2000 Expiration Date: August 28, 2017
2. Multiple Mold Workstation with Single Injection Feeder and Hydraulic Pumping Station Application No. 09/346,165 Filing Date: July 1, 1999 U.S. Patent No. 6,241,508 B1 issued on June 5, 2001 Expiration Date: June 4, 2018
The first patent is for a new concept in the construction of materials handling plastic pallets. These pallets are lighter, stronger and more durable than traditional wood pallets and have a unique two-part interlocking system.
The second patent is for a new concept in the construction of plastic injection molding machines. These machines are approximately 20% to 30% of the length of a traditional style plastic injection molding machine, use approximately one-third of the electricity used by a
traditional style machine, use approximately 10% of the oil (circulated) used by a traditional style machine, and can be profitably sold to the end user at a cost that is substantially less than the cost of a traditional style machine. However, it must be noted that there is no assurance that PalWeb will be able to sell any of the newly designed plastic injection molding machines.
PPP's pallets and plastic injection molding machines have a broad spectrum of possible applications. As a result, it is not foreseen that sales will be dependent on one or a few major customers.
SUBSIDIARIES
PalWeb has two wholly owned subsidiaries and one indirect wholly owned subsidiary. A list of PalWeb's subsidiaries is set forth below:
Plastic Pallet Production, Inc., a Texas corporation;
PP Financial, Inc., a Texas corporation;
Paceco Financial Services, Inc., an Oklahoma corporation and a wholly owned subsidiary of PP Financial, Inc.
INVESTIGATION OF PFS BY THE OKLAHOMA DEPARTMENT OF SECURITIES
In connection with an examination of PFS in March 1999, the Oklahoma Department of Securities determined that certain of PFS's activities, including the ownership of real estate and the ownership of equity securities, did not comply with the provisions of the Oklahoma Securities Act relating to the permissible activities of investment certificate issuers. PFS sent a Notice to Depositors of Paceco Financial Services, Inc. dated October 10, 2000 (the "Initial Notice") stating that, at current market values, the net assets of PFS were inadequate to redeem 100% of the depositors' passbook savings accounts and time certificates (collectively referred to herein as "Deposits") as they come due. Effective October 5, 2000, PFS exercised its right to suspend redemptions of time certificates and withdrawals of passbook savings accounts and ceased accepting any Deposits.
PFS sent a Supplemental Notice to Investment Certificate Holders of Paceco Financial Services, Inc. dated November 3, 2000 (the "First Supplemental Notice") and a Second Supplemental Notice to Investment Certificate Holders of Paceco Financial Services, Inc. dated December 20, 2000, (the "Second Supplemental Notice") stating that PFS had amended its plan for redeeming PFS's outstanding Deposits as described in the earlier notices. The Initial Notice, the First Supplemental Notice, and the Second Supplemental Notice constitute the plan for redeeming the Deposits and are referred to herein as the "Plan."
In general, as a result of a negotiated arrangement with the ODS, the Plan provides a method for redeeming the outstanding Deposits through the transfer of 43,500,000 shares of PalWeb common stock owned by PFS ("PFS Shares") to an independent trustee and the sale of
the PalWeb Shares by the trustee on or before December 31, 2004 either through open market or private sales or by exercise of an option to put the shares to Paul Kruger, the Company's chairman, Chief Executive Officer and principal shareholder, with the net sales proceeds being used to redeem the Deposits. Pursuant to that certain Put Agreement by and between Paul A. Kruger, Bill J. English as Trustee and Paceco Financial Services, Inc. dated December 20, 2000, the percentage of PFS shares to be purchased by Mr. Kruger shall be the difference between the amounts payable to Deposit holders each year (20% of account balances outstanding on December 1, 2000; 25% of account balances outstanding on January 1, 2001; 33 1/3% of account balances outstanding on January 1, 2002; 50% of account balances outstanding on January 1, 2003; and 100% of account balances outstanding on January 1, 2004, or such other amount as shall cause the account balances to equal zero at December 31, 2004) and the amount distributed to Deposit holders each year from sources other than the put, as a percentage of the outstanding balances. Mr. Kruger's obligations with regard to the puts are released in the event that any litigation is filed against Mr. Kruger, PFS, PalWeb or any other affiliates of PFS in connection with the passbook accounts or time certificates of PFS.
In December 2000, PFS sold its real estate holdings to Onward, L.L.C., a company 100% owned by Mr. Kruger, at appraised value and the proceeds were distributed to Deposit holders in accordance with the Plan. As of May 31, 2001, PFS had approximately $5.1 million in Deposits outstanding, and it has not been necessary to exercise any of the puts in connection with repaying the Deposit holders in accordance with the Plan.
PalWeb has not entered into any conditions, commitments or requirements with the Oklahoma Securities Department that would require it to fund or otherwise be financially responsible for the liabilities of PFS. However, if PFS is unable to make payment to investment certificate holders as described above, it is possible that holders of investment certificates may assert claims against PalWeb that it is liable for the liabilities of PFS under legal theories relating to piercing the corporate veil or otherwise. In such event, PalWeb might incur additional costs to contest such claims and could ultimately be found to be liable. The effect of any such claims being made against PalWeb could also have an adverse effect on the value of PalWeb's common stock and make it even more difficult for PFS to fund the repayment of its investment certificate liability from liquidation of the PalWeb common stock owned by it. Accordingly, PalWeb may be adversely affected if PFS is unable to meet its obligations. However, the Company believes it is unlikely that PalWeb will be sued in connection with PFS's Deposits because such litigation would invalidate the puts described above.
ITEM 2. DESCRIPTION OF PROPERTY
PalWeb currently leases approximately five acres of land in an industrial area of Dallas, Texas that is improved with 119,000 square feet of manufacturing and warehouse space, and approximately 6,500 square feet of office space. PalWeb leases this land from Onward, L.L.C., a an entity 100% owned by Paul A Kruger, under a lease agreement that expires on April 30, 2002. Under the terms of the lease agreement, PalWeb has the option to extend the Lease for four additional terms of one year each. The lease agreement was approved by the Board of Directors of PalWeb, other than Mr. Kruger.
PalWeb has sufficient office equipment, such as computers, printers, copiers, etc., to operate effectively. PalWeb has six computer stations, five printers, and two copy machines in good working order.
Except for the electrical service, the warehouse/manufacturing facility is sufficiently equipped and designed to accommodate the manufacturing of plastic pallets and plastic injection molding systems. The ceilings are very high, which will allow for the use of cranes, if needed. The warehouse currently has four heavy duty cranes installed above the work areas, and is situated on an operational railroad spur. PalWeb will have to incur costs of approximately
$41,000 to upgrade the electrical wiring before the fully functional plastic injection molding machine is completed and installed.
ITEM 3. LEGAL PROCEEDINGS
As of May 31, 2001, there was one material legal proceeding in which PalWeb was involved.
PALWEB CORPORATION, INC. AND PLASTIC PALLET PRODUCTION, INC.,
PLAINTIFFS V. VIMONTA AG, DEFENDANTS, Case no. 3-00CV1388-P, filed in the United
States District Court for the Northern District of Texas on June 26, 2000.
Service was made on Vimonta on August 14, 2000. PalWeb and PPP allege that Vimonta claims that it is entitled to exclusive rights in all of PalWeb's technology and formulas for plastic pallet production in Europe, Asia, the territories of the former USSR and South America; that it is entitled to immediately receive all of the valuable patents and proprietary information of PalWeb and PPP; that PalWeb and PPP must ship products to Vimonta at cost and without profit or margins of any kind and that PalWeb and PPP's only rights are to receive whatever benefits PalWeb derives from being a 20% shareholder of Vimonta.
Vimonta bases its claims on certain alleged agreements that were purportedly signed by PalWeb's former Chief Executive Officer, Michael John. PalWeb and PPP contend that the purported agreements upon which Vimonta relies to assert its claims are vague and incomplete and do not contain the requisite information to form a valid contract. PalWeb and PPP have requested declaratory judgment determining that Vimonta has no enforceable rights to the patents, technology and other proprietary information and that the alleged agreements are unenforceable and void. In addition, PalWeb and PPP contend that Vimonta and Michael John, PalWeb's former Chief Executive Officer, have acted in concert to deprive PalWeb and PPP of their valuable rights by creating documents that purport to be binding agreements but which are unclear, incomplete and full of confusion and which purport to convey valuable rights to Vimonta without consideration. As a result, PalWeb and PPP have incurred damages in their business and expenses due to these unfounded claims, which they seek to recover from Vimonta.
On September 25, 2000, Vimonta filed a Motion to Dismiss for Lack of Personal Jurisdiction contending, INTER ALIA, that the agreements between Vimonta and PalWeb were negotiated and signed in Europe and that no representative of Vimonta came to the United States until April 2000, after the dispute between Vimonta and PalWeb arose. PalWeb disputed the allegations regarding the purported lack of personal jurisdiction and filed an objection to the jurisdictional motion. The court denied the objection to personal jurisdiction on May 17, 2001.
Subsequently, on July 20, 2001, Vimonta's counsel of record in this case sought and was granted leave by the court to withdraw. On July 25, 2001, the court entered an order requiring Vimonta to obtain new counsel by August 23, 2001. The order provides that if Vimonta fails to do so, a default judgement will be entered against Vimonta. As of August 27, 2001, PalWeb had not received notice that Vimonta had obtained new counsel as required by the order.
The following describes legal proceedings involving PalWeb that were settled during the fiscal year ended May 31, 2001.
RALPH CURTON, JR. VS. PALWEB CORPORATION, CV 00-8683-C, filed in the County
Court at Law No. 3, Dallas County, Texas on July 27, 2000, and PALWEB
CORPORATION V. CRESCENT ROAD CORPORATION, CURTON CAPITAL CORPORATION AND
CONSOLIDATED CAPITAL CORPORATION, CV 01-1225-K, filed in the 192nd Judicial
District, District Court of Dallas County, Texas on February 15, 2001.
As of May 31, 2001, PalWeb settled all litigation between PalWeb and Ralph Curton, Jr., and certain of his affiliated entities. Under the terms of the settlement, PalWeb paid Mr. Curton $300,000 in satisfaction of a $500,000 promissory note of PalWeb held by Mr. Curton. Funding for this settlement was provided by a loan from Yorktown Management and Financial Services, L.L.C. of which Warren Kruger, Paul Kruger's brother, is the principal shareholder. Simultaneously, Mr. Curton and his affiliates agreed to surrender to PalWeb for cancellation certificates representing 11 million shares of PalWeb's common stock previously issued for consulting services that were not provided as agreed. PalWeb dismissed a lawsuit filed by PalWeb against Mr. Curton and certain related entities relating to these shares. PalWeb and Mr. Curton and certain of his related entities executed mutual releases of all claims, bringing to a conclusion all pending disputes between these parties; however, Mr. Curton has yet to return 300,000 of the shares described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of PalWeb, through solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by the report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION:
From August 1999 through October 6, 1999, PalWeb's Common Stock traded on the National Association of Securities Dealers Automatic Quotation (NASDAQ) over-the-counter bulletin board system ("OTCBB"), with "PAEB" as its trading symbol from August 1999 through September 13, 1999 and "PAEBE" as its trading symbol from September 13, 1999 through October 6, 1999. The following table sets forth the range of high and low bid prices for PalWeb's Common Stock during the time periods indicated. Prices, as reported by NASDAQ, reflect quotations between dealers without adjustment for retail mark-up, mark-down or commission and may not represent actual transactions.
QUARTER ENDING HIGH BID LOW BID
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Aug. 31, 1999 0.27 0.12
Nov. 30, 1999(1) 0.175 0.70
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(1) Information presented for the period ended November 30, 1999 is high and low bid prices until PalWeb was de-listed from the NASDAQ over-the-counter bulletin board system on October 6, 1999.
On October 6, 1999, PalWeb's Common Stock was de-listed from the OTCBB. From October 6, 1999 through February 1, 2001, PalWeb's common stock traded on the NASDAQ over-the-counter pink sheet system, with "PAEB" as its trading symbol. On February 2, 2001, PalWeb's common stock was re-listed on the OTCBB. Since such time, PalWeb's common stock has traded on the OTCBB, with "PAEB" as its trading symbol. The following table sets forth the range of high and low prices at which PalWeb's common stock traded during the time periods indicated, as reported by NASDAQ.
QUARTER ENDING HIGH LOW
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Nov. 30, 1999(1) $0.16 $0.07
Feb. 29, 2000 0.25 0.02
May 31, 2000 0.285 0.06
Aug. 31, 2000 0.0825 0.011
Nov. 30, 2000 0.023 0.007
Feb. 29, 2001 0.075 0.005
May 31, 2001 0.08 0.02
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(1) Information presented for the period ended November 30, 1999 is high and low prices from the date when PalWeb was de-listed from the OTCBB (October 6, 1999) through the end of the quarter on November 30, 1999.
HOLDERS:
As of July 18, 2001, PalWeb had approximately 1,272 common stockholders of record.
DIVIDENDS:
PalWeb paid no cash dividends to its common stockholders during the last two fiscal years and does not plan to pay any cash dividends in the near future.
RECENT SALES OF UNREGISTERED SECURITIES:
During the fiscal year ended May 31, 2001, PalWeb issued certain promissory notes to Hildalgo Trading Company, L.C. with face amounts aggregating $1,150,000 pursuant to which PalWeb had been loaned $947,200 as of May 31, 2001 and Yorktown Management and Financial Services, L.L.C. with face amonts aggregating $3,000,000 pursuant to which PalWeb had been loaned $1,536,559 as of May 31, 2001. For more information on these notes, please see "Liquidity and Capital Resources" under Item 6 and "History" under Item 1 of this Form 10-KSB.
In June 2000, PalWeb issued 250,000 shares of its common stock in a no-sale transaction upon the conversion of 250,000 shares of preferred stock.
PalWeb relied on the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended, in connection with the issuances of the notes set forth above. All parties listed above are sophisticated persons or entities. There was no underwriting and no commissions were paid to any party upon the issuance of such notes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This annual report on Form 10-KSB contains "forward-looking" statements regarding potential future events and developments affecting the business of PalWeb. Such statements relate to, among other things: future operations of PalWeb, the development of distribution channels and product sales and the introduction of new products into the market. Forward- looking statements may be indicated by the words "expects," "estimates," "anticipates," "intends," "predicts," "believes," or other similar expressions. Forward-looking statements appear in a number of places in this Form 10-KSB and may address the intent, belief, or current expectations of PalWeb and its Board of Directors and management with respect to PalWeb and its business. The forward-looking statements are subject to various risks and uncertainties described in this Form 10-KSB. For these reasons, PalWeb's actual results may vary materially from the forward-looking statements.
PALWEB IS A DEVELOPMENT STAGE COMPANY AND MAY NOT ACHIEVE PROFITABILITY.
PalWeb was incorporated on February 24, 1969. From April 1993 to December 1997, PalWeb was primarily engaged in various businesses, including the business of exploration, production, and development of oil and gas properties in the continental United States and the operation of related service business. In December 1997, PalWeb acquired all of the issued and outstanding stock of Plastic Pallet Production, Inc. and its principal business changed to selling plastic pallets and plastic injection molding machines. As of May 31, 2001, PalWeb was using a prototype plastic injection molding machine to produce plastic pallets. PalWeb is in the process of building a fully operational plastic injection molding machine. PalWeb is in the development stage, it has incurred significant losses from operations and there is no assurance that it will achieve profitability or obtain funds to finance continued operations.
PALWEB HAS LIMITED EXPERIENCE IN MANUFACTURING AND MARKETING.
PalWeb's business strategy relies primarily on its success in manufacturing and marketing, an area in which PalWeb has limited experience. The success of its business strategy should be considered in light of the risks, expenses and difficulties frequently encountered in entering into industries characterized by intense competition. There can be no assurance that PalWeb will be able to manufacture or market its products or proposed products, maintain or expand its market share or achieve commercial revenues from its products or proposed products in the future. In addition, certain aspects of PalWeb's business strategy can only be implemented if PalWeb successfully secures additional capital. Some of the foregoing factors are not within PalWeb's control, and there can be no assurance that PalWeb will be able to implement its business strategy, or that PalWeb's business strategy will result in profitability.
PALWEB'S BUSINESS COULD BE AFFECTED BY CHANGES IN AVAILABILITY OF RAW MATERIALS.
PalWeb uses a proprietary mix of raw materials to produce its plastic pallets. Such raw materials are generally readily available and some may be obtained from recycled plastic containers. At the present time, these materials are being purchased from local suppliers. The availability of PalWeb's raw materials could change at any time for various reasons. For example, the market demand for PalWeb's raw materials could suddenly increase or the rate at which plastic materials are recycled could decrease, affecting both availability and price. Additionally, the laws and regulations governing the production of plastics and the recycling of plastic containers could change and, as a result, affect the supply of PalWeb's raw materials. Any interruption in the supply of raw materials or components could have a material adverse effect on PalWeb. Furthermore, certain potential alternative suppliers may have pre-existing exclusive relationships with competitors of PalWeb and others that may preclude PalWeb from obtaining its raw materials from such suppliers.
THE MARKET MAY NOT ACCEPT PALWEB'S PRODUCTS.
Any unexpected developmental, regulatory or manufacturing problems could delay the commercialization of PalWeb's proposed products and may have a material adverse effect on PalWeb and its prospects. In addition, the market acceptance of any of PalWeb's plastic pallets will be substantially dependent on the ability of PalWeb to demonstrate to the business community the capabilities and benefits of PalWeb's plastic pallets as well as to sell commercial quantities of the plastic pallets at acceptable prices. There can be no assurance that PalWeb will be able to gain market acceptance for its plastic pallets.
PALWEB MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING NECESSARY TO SUSTAIN AND GROW ITS OPERATIONS.
PalWeb's financial statements have been qualified on a going concern basis principally due to lack of long term financing to achieve its goal of producing and marketing plastic pallets to compete with wood pallets. PalWeb has funded its operations to date primarily through equity and debt financings. PalWeb may need additional debt or capital in order to begin generating a
sufficient cash flow to sustain operations for the foreseeable future. PalWeb will need to raise substantial additional funds to continue to fund operating expenses or its expansion strategy. There can be no assurance that additional financing will be available, or, if available, that such financing will be on terms favorable to PalWeb. Failure to obtain such additional financing would have a material adverse effect on PalWeb.
PALWEB'S BUSINESS COULD BE AFFECTED BY COMPETITION AND RAPID TECHNOLOGICAL CHANGE.
PalWeb currently faces competition from many companies that produce wooden pallets at prices that are substantially lower than the prices PalWeb charges for its plastic pallets. It is anticipated that the plastic pallet industry will be subject to intense competition and rapid technological change. PalWeb could potentially face competition from recycling and plastics companies, many of which have substantially greater financial and other resources than PalWeb and, therefore, are able to spend more than PalWeb in areas such as product development, manufacturing and marketing. Although a company with greater resources will not necessarily be able to bring a new product to market before its smaller competitors, substantial resources enable a company to support many new products simultaneously, thereby improving the likelihood of at least some of its new products being among the first to make it to market. PalWeb's revenues and profitability could be adversely affected by technological change. Competitors may develop products that render PalWeb's products or proposed products uneconomical or result in products being commercialized that may be superior to PalWeb's products. In addition, alternatives to plastic pallets could be developed, which would have a material adverse effect on PalWeb.
PALWEB MAY NOT BE ABLE TO EFFECTIVELY PROTECT ITS PATENTS AND PROPRIETARY RIGHTS.
PalWeb relies on a combination of patents and trade secrets to protect its proprietary technology, rights and know-how. There can be no assurance that such patent rights will not be infringed upon, that PalWeb's trade secrets will not otherwise become known to or independently developed by competitors, that non-disclosure agreements will not be breached, or that PalWeb would have adequate remedies for any such infringement or breach. Litigation may be necessary to enforce proprietary rights of PalWeb or to defend PalWeb against third-party claims of infringement. Such litigation could result in substantial cost to, and a diversion of effort by, PalWeb and its management and may have a material adverse effect on PalWeb. PalWeb's success and potential competitive advantage is dependent upon its ability to exploit the technology under these patents. There can be no assurance that PalWeb will be able to exploit the technology covered by these patents or that it will be able to do so exclusively.
Although PalWeb is not aware of any claim against it for infringement, there can be no assurances that parties will not bring claims against PalWeb for infringement in the future. PalWeb's ability to commercialize its products and proposed products depends, in part, on its ability to avoid claims for infringement brought by other parties. Laws regarding the
enforceability of intellectual property vary from jurisdiction to jurisdiction. There can be no assurance that intellectual property issues will be uniformly resolved, or that local laws will provide PalWeb with consistent rights and benefits. In addition, there can be no assurance that competitors will not be issued patents that may prevent the manufacturing or marketing of PalWeb's products or proposed products.
PALWEB'S BUSINESS COULD BE AFFECTED BY NEW LEGISLATION REGARDING ENVIRONMENTAL MATTERS.
The business operations of PalWeb are subject to extensive and changing federal, state and local environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to the protection of the environment. As is the case with manufacturers in general, if a release of hazardous substances occurs on or from PalWeb's properties or any associated off-site disposal location, or if contamination from prior activities is discovered at any of PalWeb's properties, PalWeb may be held liable. No assurances can be given that additional environmental issues will not require future expenditures.
Both the plastics industry, in general, and PalWeb are subject to existing and potential federal, state, local and foreign legislation designed to reduce solid wastes by requiring, among other things, plastics to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees and limits on the use of plastic products. In addition, various consumer and special interest groups have lobbied from time to time for the implementation of these and other such similar measures. Although PalWeb believes that the legislation promulgated to date and such initiatives to date have not had a material adverse effect on PalWeb, there can be no assurance that any such future legislative or regulatory efforts or future initiatives would not have a material adverse effect on PalWeb.
PALWEB'S BUSINESS WILL BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
The testing, manufacturing and marketing of PalWeb's products and proposed products involve the inherent risks of product liability claims or similar legal theories against PalWeb, some of which may cause PalWeb to incur significant defense costs. Although PalWeb currently maintains product liability insurance coverage that it believes is adequate, there can be no assurance that the coverage limits of its insurance are adequate or that all such claims will be covered by insurance. In addition, these policies generally must be renewed every year. While PalWeb has been able to obtain product liability insurance in the past, there can be no assurance it will be able to obtain insurance in the future on its products or proposed products. Product liability insurance varies in cost, is difficult to obtain and may not be available in the future on terms acceptable to PalWeb, if at all. A successful product liability claim or other judgment against PalWeb in excess of its insurance coverage could have a material adverse effect upon PalWeb.
PALWEB CURRENTLY DEPENDS ON CERTAIN KEY PERSONNEL.
PalWeb is dependent on the experience, abilities and continued services of its current management personnel. In particular, Mr. Kruger, its Chairman of the Board and President, has played a significant role in the development and management of PalWeb. The loss or reduction of services of Mr. Kruger or any other key employee could have a material adverse effect on PalWeb. There is no assurance that additional managerial assistance will not be required.
PALWEB'S STOCK TRADES IN A LIMITED PUBLIC MARKET, IS SUBJECT TO PRICE VOLATILITY AND THERE CAN BE NO ASSURANCE THAT AN ACTIVE TRADING MARKET WILL BE SUSTAINED.
There has been a limited public trading market for PalWeb's Common Stock and there can be no assurance that an active trading market will be sustained. There can be no assurance that the Common Stock will trade at or above any particular price in the public market, if at all. The trading price of the Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results or even mild expressions of interest on a given day. Accordingly, the Common Stock should be expected to experience substantial price changes in short periods of time. Even if PalWeb is performing according to its plan and there is no legitimate company-specific financial basis for this volatility, it must still be expected that substantial percentage price swings will occur in PalWeb's securities for the foreseeable future.
CERTAIN RESTRICTED SHARES OF PALWEB WILL BE ELIGIBLE FOR SALE IN THE FUTURE AND CERTAIN SHARES OF FREE TRADING COMMON STOCK ARE HELD IN TRUST FOR THE BENEFIT OF THE DEPOSIT HOLDERS OF ONE OF PALWEB'S INDIRECT WHOLLY OWNED SUBSIDIARIES AND ARE LIKELY TO BE SOLD IN THE FUTURE, BOTH OF WHICH COULD AFFECT THE PREVAILING MARKET PRICE OF PALWEB'S COMMON STOCK.
Certain of the outstanding shares of Common Stock are "restricted securities" under Rule 144 of the Securities Act, and (except for shares purchased by "affiliates" of PalWeb as such term is defined in Rule 144) would be eligible for sale as the applicable holding periods expire. In the future, these shares may be sold only pursuant to a registration statement under the Securities Act or an applicable exemption, including pursuant to Rule 144. Under Rule 144, a person who has owned Common Stock for at least one year may, under certain circumstances, sell within any three-month period a number of shares of Common Stock that does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume during the four calendar weeks prior to such sale. A person who is not deemed to have been an affiliate of PalWeb at any time during the three months preceding a sale, and who has beneficially owned the restricted securities for the last two years is entitled to sell all such shares without regard to the volume limitations, current public information requirements, manner of sale provisions and notice requirements. In addition, approximately 43,500,000 free trading shares are held in trust for the benefit of the deposit holders of one of PalWeb's indirect wholly owned subsidiaries and are likely to be sold in the future (for more information on the circumstances surrounding these shares, see Item 1, Current Business in this Form 10-KSB). Sales or the expectation of sales of a substantial number of shares of Common Stock in the public market by selling stockholders could adversely affect the prevailing market price of the Common Stock, possibly having a depressive effect on any trading market for the Common Stock, and may impair PalWeb's ability to raise capital at that time through additional sale of its equity securities.
PALWEB DOES NOT EXPECT TO DECLARE OR PAY ANY DIVIDENDS IN THE FORESEEABLE FUTURE.
PalWeb has not declared or paid any dividends on its Common Stock. PalWeb currently intends to retain future earnings to fund the development and growth of its businesses, to repay indebtedness and for general corporate purposes, and, therefore, does not anticipate paying any cash dividends in the foreseeable future.
PALWEB'S COMMON STOCK MAY BE SUBJECT TO SECONDARY TRADING RESTRICTIONS RELATED TO PENNY STOCKS.
Certain transactions involving the purchase or sale of Common Stock of PalWeb may be affected by a Securities and Exchange Commission rule for "penny stocks" that imposes additional sales practice burdens and requirements upon broker-dealers that purchase or sell such securities. For transactions covered by this penny stock rule, broker-dealers must make certain disclosures to purchasers prior to the purchase or sale. Consequently, the penny stock rule may impede the ability of broker-dealers to purchase or sell PalWeb's securities for their customers and the ability of persons now owning or subsequently acquiring PalWeb's securities to resell such securities.
THE RESULTS OF PENDING LITIGATION AGAINST PALWEB MAY HAVE AN ADVERSE AFFECT ON ITS FINANCIAL CONDITION OR BUSINESS PROSPECTS.
PalWeb is a party to a pending legal proceeding that involves claims or potential claims against PalWeb and if resolved unfavorably to PalWeb could have an adverse affect on PalWeb's financial condition or other effects on PalWeb. There is no assurance this proceeding will be resolved favorably.
GENERAL TO ALL PERIODS
PalWeb is in the development stage, it has incurred significant losses from operations and there is no assurance that it will achieve profitability or obtain funds to finance continued operations.
PalWeb's primary business is the manufacturing and selling of plastic pallets referred herein as manufacturing. It also indirectly owns a subsidiary finance company, Paceco Financial Services, Inc. ("PFS"), acquired in April 2000, which was previously engaged in consumer and small business lending and real estate activities. As described below, the finance activities have been curtailed until PFS is able to repay outstanding investment certificate liabilities and in December 2000, the real estate activities were discontinued.
As of May 31, 2001, production of plastic pallets utilizing prototype production equipment is approximately 800 pallets per month and the current production capacity of the prototype machine is approximately 4,000 pallets per month. The recent hiring of two additional
employees will enable PalWeb to increase production to approximately 2,000 pallets per month. Production levels of approximately 4,000 pallets per month can be attained by adding approximately two more shifts. Based on current demand, management anticipates that it will produce about 800 pallets per month using existing personnel. Management will continue to increase production to achieve capacity as it receives orders for pallets that justify higher production levels. There is no assurance that the Company will receive orders for pallets that justify any significant increase to the Company's current production level.
Sales for fiscal year 2002 using existing production equipment are expected to total approximately 2,000 pallets per quarter. However, see discussion under "Prospects for Future" regarding acquisition of a new production line. Inventory levels at May 31, 2001 include approximately 1,800 stackable and 2,000 rackable pallets. As of May 31, 2001, PalWeb's sales team consists of one full-time sales agent who will be paid a set amount per month for a period of approximately three months, at which time the sales agent will be paid commissions only. PalWeb's marketing efforts have generated several leads with customers who are considering sizable orders of pallets. There is no assurance that PalWeb will secure any sizable orders of pallets or, if it does, that PalWeb will be able to manufacture the pallets necessary to fill such orders.
PalWeb has an EZ Pay Plan whereby certain qualified purchasers are able to purchase pallets in quantities of 1,000 pallets or more by financing the purchase of such pallets. Under the terms of the EZ Pay Plan, purchasers will pay $19 down and make payments of $19 in each of two subsequent years. The total sales price under the EZ Pay Plan of $57 factors in an interest rate of approximately 12% per year. After paying for the pallets in full, the purchaser may sell the pallets back to PalWeb for $19. PalWeb intends to resell these pallets on a used basis with a markup or to recycle the pallets to defray the cost of the raw materials of the pallets it later produces. As of May 31, 2001, PalWeb has not sold any pallets through the EZ Pay Plan.
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.
The consolidated statements include PalWeb Corporation and its wholly-owned active subsidiaries Plastic Pallet Production, Inc. ("PPP") and PFS. PPP represents the manufacturing segment of PalWeb and PFS represents the financial segment.
DISCONTINUED OPERATIONS
In December, 2000, PFS sold its real estate operations at appraised values to Onward, L.L.C., a company 100% owned by Mr. Paul Kruger, Chairman and President of PalWeb. The sales price was approximately $1,352,000 in cash and resulted in a gain of approximately $33,000. This sale was accomplished in connection with the plan to redeem all of PFS's
investment certificates to enable PFS to fund a portion of the required payments to depositors in 2000. See "Liquidity and Capital Resources." During the nine month period ended February 28, 2001, the real estate segment had revenues of $110,440 and a gain from disposition of assets of $31,099 for total income of $73,838.
YEAR ENDED MAY 31, 2001 COMPARED TO YEAR ENDED MAY 31, 2000
MANUFACTURING
During fiscal year 2001, PalWeb sold approximately 900 rackable pallets and 1,500 stackable pallets, generating revenues of $89,211. The stackable pallet sells for about one-half of the rackable pallet. However, sales revenues remained insufficient to cover material and operating costs. There were sales of $14,013 and approximately 325 pallets for the comparable period in the prior year.
During 2001, research and development consists of $95,000 paid to an independent laboratory. The expense is for the development of a patented formula for fire retardation in plastic pallets.
Salaries and benefits were $307,085 in 2001 compared to $357,226 in 2000 for a decrease of $50,141. This decrease is due to the resignation of the former President of PPP and to capitalization of a portion labor costs to inventory.
The general and administrative expenses decreased $1,042,047 from $1,949,987 in 2000 to $907,940 in 2001. This decrease is primarily due to reduction of consulting costs which were $1,489,000 in 2000.
Interest expense increased $111,629 from $188,822 in 2000 to $300,451 in 2001. The increase is due to the increase in notes payable to fund current operations and deposits to purchase production equipment.
During 2001, PalWeb recorded a gain on settlement of contracts and liabilities in the amount of $1,541,783. This gain results from $1,275,000 for cancellation of a consulting contract, $152,500 for settlement of notes payable to Ralph Curton and $114,283 from settlement of certain accounts payable. In 2000, PalWeb entered into a consulting agreement with Crescent Road Corporation and Consolidated Capital Group. The consultants received 11,000,000 shares of common stock for their services valued at $1,100,000 plus a penalty of $175,000 for failure to provide tradeable common stock. During 2001, the contract was terminated by mutual agreement, the common shares were returned and cancelled except for 300,000 shares yet to be returned, and a release of all remaining claims.
The loss from the manufacturing segment in 2001 and 2000 was $184,066 and $2,634,225, respectively. The decrease from fiscal 2000 to 2001 of $2,450,159 is primarily due to the reasons discussed above.
FINANCE
The finance segment was acquired April 3, 2000 and the operating results for 2000 includes two months of operations. Accordingly, 2001 results of operations are not comparable to 2000. The finance segment reported revenues of $200,183 in 2001 and a net loss of $1,368,493. Interest expense on thrift certificates was $319,381 in 2001. This loss resulted from, among other things, noncash depreciation and amortization charges of $782,398 including an additional charge of $426,980 to recognize impairment of goodwill and costs associated with the closing of the Company's Duncan, Oklahoma facility. Management also increased the allowance for doubtful accounts by $173,426. PalWeb expects that the finance segment will continue to record losses until the repayment of the outstanding thrift certificates.
COMBINED
PalWeb incurred net losses of $1,478,721, or $0.01 per share, and $3,095,442, or $0.02 per share, for 2001 and 2000, respectively. The decrease in the net loss of $1,616,721 resulted from the reasons described above.
Currently, PalWeb's management projects that the sale of approximately 4,000 pallets per month are necessary to break even. Sales at this level will provide revenues of approximately $200,000 and will provide sufficient cash flow to sustain manufacturing operations which includes cash operating expenses for labor, recurring overhead, and interest of approximately $100,000 per month and material costs of approximately 50% of sales or $100,000. There is no assurance that this sales level will be achieved. Until sales reach this level, PalWeb will remain dependent on outside sources of cash to fund its operations as its sales revenues will be insufficient to meet current liabilities.
Due to its development stage status, PalWeb has had difficulty in obtaining financing from third parties and PalWeb's attempts for bank financing have all been contingent on personal guarantees from its Chairman, Chief Executive Officer and principal shareholder, Mr. Paul Kruger. Accordingly, Mr. Kruger has elected to provide financing direct from his affiliated entities and has requested and received security equivalent to that which a bank would require.
As of May 31, 2001, Mr. Kruger's affiliated entities had loaned PalWeb approximately $947,200, pursuant to various notes with face amounts aggregating a total of $1,150,000. Mr. Kruger is not obligated to make further advances under these notes. All of these notes are due on October 15, 2001 and currently bear interest at the rate of 12% per year. Loans totaling $750,000 bore interest at 18% annually until December 1, 2000, when the rate was reduced to 12%. The notes had accrued interest owing as of February 28, 2001 in the amount of approximately $99,000 which had not been paid and is included in accrued liabilities. These loans are secured by substantially all of the assets of PalWeb and PPP, including equipment, furniture, fixtures, inventory, accounts receivables and patents.
Effective March 1, 2001, PalWeb entered into a $250,000 line of credit with Yorktown Management and Financial Services, LLC, for a six month term at 12% interest, of which all $250,000 is outstanding at May 31, 2001. An additional line of credit was provided on April 1, 2001 by Yorktown in the amount of $2,750,000, 12% interest and maturing October 15, 2001, of which $1,536,559 was outstanding at May 31, 2001. Yorktown is an entity principally owned by Mr. Kruger's brother, Warren Kruger. This line of credit is secured, subordinate to the lien described above, by substantially all of the assets of PalWeb and PPP, including equipment, furniture, fixtures, inventory, accounts receivables and patents. PalWeb is using the proceeds principally for the acquisition of a new production line of manufacturing equipment and to retire the Curton note payable.
On May 8, 2001, PalWeb announced that it had signed a letter of intent for a private placement of 500,000 shares of convertible preferred stock and warrants to purchase 150,000,000 shares of common stock for a total of $5,500,000. The letter of intent is with Westgate Capital Company, L.L.C., a Tulsa, Oklahoma based private investment group ("Westgate") and Hidalgo Trading Company, LLC, which is 100% owned by the Company's Chief Executive Officer, Paul Kruger. Of the total $5.5 million consideration, $1 million will be provided by Hidalgo through conversion of existing secured indebtedness of PalWeb and $4.5 million will be provided in cash from an investment fund managed by Westgate. One of the principals of Westgate is Warren Kruger, the bother of Paul Kruger. Proceeds will be used to construct pallet production equipment, repay loans made by Yorktown as described above, repay other current liabilities, and for working capital. Under the terms of the proposed investment, each share of the convertible preferred stock will be convertible into 350 shares of common stock of the Company or a total of 175,000,000 shares, which is an effective conversion price of $0.0286 per share. Holders of the preferred stock will also be entitled to cumulative dividends of 12% per annum, $1.20 per share, or a total of $600,000. The warrants will be exercisable at a price of $0.10 per share for a period of four years and 25% of the warrants will be callable by PalWeb if common stock trades at prices of $0.15, $0.20 and $0.25 per share, respectively. Closing of the proposed investment is subject to Westgate obtaining the necessary financing agreements and customary closing conditions and is expected to occur in one or more tranches during the second quarter of fiscal year 2002. Hidalgo is not required to convert its secured debt unless the entire $4.5 million in cash equity is raised. There is no assurance that this private placement will close. The ability to convert the preferred stock and exercise the warrants described above depends on PalWeb amending its certificate of incorporation to authorize additional capital and to reduce the par value of its common stock.
PalWeb is dependent upon Mr. Kruger and Yorktown 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.
The Company had accumulated a working capital deficit of $3,988,000 at May 31, 2001 in connection with its manufacturing operations, which includes $947,200 in loans due to Mr. Kruger or his affiliates, $1,536,559 in notes payable to Yorktown, and $1,705,033 in accounts payable and accrued liabilities, and approximately $118,000 of accrued interest owed to Mr. Kruger and Yorktown. This deficit reflects the uncertain financial condition of the Company
resulting from its inability to obtain long term financing to progress beyond the development stage. There is no assurance that the Company will secure such financing.
PalWeb occupies its facility under an arrangement whereby the plant was sold to Onward, LLC, an affiliate of Mr. Paul Kruger, and leased back with an option to purchase. Effective May 1, 2001, Onward and PalWeb entered into a new lease for a one year term with four one-year renewal options. The Board of Directors also elected to terminate the option to purchase provision in the original lease. Accordingly, the plant is no longer carried on the books of PalWeb and the gain of $707,044 is deferred to be amortized to additional paid in capital over the estimated period to utilize the facility.
As reported in prior Securities Exchange Commission filings, PalWeb's indirect wholly owned subsidiary, PFS, has ceased issuing any new investments certificates and is in the process of repaying depositor account balances. PFS and Mr. Kruger have entered into certain agreements to provide for the ultimate repayment of the investment certificates. In December 2000, PFS sold its real estate holdings to Onward, L.L.C., a company 100% owned by Mr. Kruger, at appraised value and the proceeds were distributed to security holders in accordance with one of these agreements. In addition, PFS has placed its 43,500,000 shares of PalWeb common stock with an independent trustee who will liquidate the stock over a four year period in an amount sufficient to distribute the funds to certificate holders in repayment of the depositor account balances. In December 2000, PFS made the first installment payment to investment certificate holders in the amount of $1,316,000.
PalWeb has not entered into any conditions, commitments or requirements with the Oklahoma Securities Department that would require it to fund or otherwise be financially responsible for the liabilities of PFS. However, if PFS is unable to make payment to investment certificate holders as described above, it is possible that holders of investment certificates may assert claims against PalWeb that it is liable for the liabilities of PFS under legal theories relating to piercing the corporate veil or otherwise. In such event, PalWeb might incur additional costs to contest such claims and could ultimately be found to be liable. The effect of any such claims being made against PalWeb could also have an adverse effect on the value of PalWeb's common stock and make it even more difficult for PFS to fund the repayment of its investment certificate liability from liquidation of the PalWeb common stock owned by it. Accordingly, PalWeb may be adversely affected if PFS is unable to meet its obligations.
PROSPECTS FOR FUTURE
Management has initiated the construction and installation of a new production line to manufacture plastic pallets at a cost of approximately $4,700,000. Substantially all major components have been ordered and installation is in process. The project is expected to be in operation during the third quarter of fiscal year 2002. At August 10, 2001 PalWeb had placed orders for production equipment totaling $3,755,000. Yorktown Management and Financial Services, LLC, is providing the interim financing for these purchases, as discussed above in "Liquidity and Capital Resources."
The new line will have the capacity of producing about 40,000 pallets per month. Gravity Management, an engineering firm in Tulsa, Oklahoma, has been engaged to engineer and oversee the project. Brian Kirchmer is the engineer in charge of the project. The United States market for new pallets is, at a minimum, approximately 400,000,000 annually. Projected sales of 40,000 pallets per month, or 480,000 pallets per year, is less than 1/10th of 1% of the total new pallet market, and it appears that the market trend is moving toward the use and purchase of plastic pallets.
As discussed above in "General to all Periods," management is currently enhancing its marketing program in anticipation of this additional capability. Efforts have included targeting major users of pallets and distributors.
In addition, PalWeb continues to test and improve its pallet with respect to strength, durability and fire retardency. Verbal notification has been received from the Virginia Polytech Institute & State University's ("Virginia Tech") Fastrack Evaluation that the pallet has successfully passed the Virginia Tech Fastrack strength and durability test. The successful completion of this test is a significant credential in marketing PalWeb's pallet. In addition, PalWeb has embarked in developing its own patented formula for fire retardency. Dr. James Pritchard, a respected technical advisor in the area of custom polymer formulations, has been engaged to oversee this project. Preliminary tests are being performed to qualify the product to meet the requirements of UL2335, Classification Flammability of Plastic Pallets.
Management's goal is to attain profitability during the fourth quarter of 2002.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of PalWeb are set forth on pages F-1 through F-18 inclusive, found at the end of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
The following lists the directors and executive officers of PalWeb. Directors of PalWeb are elected annually at each annual meeting of shareholders. Executive officers serve at the pleasure of the Board of Directors.
TERM AS DIRECTOR
NAME POSITION OR OFFICER EXPIRES
---- -------- ------------------
Paul A. Kruger Director, President and Chairman 2001
of the Board
Lyle W. Miller Director and Executive Vice 2001
President (Marketing)
Mark R. Kidd Director 2001
|
PAUL A. KRUGER
CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT
Mr. Kruger, age 47, earned a Bachelor of Business Administration degree in accounting from Cameron University, Lawton, Oklahoma, and earned a Juris Doctor degree from the University of Oklahoma City Law School. He has 25 years of experience in the financial services industry. Mr. Kruger co-founded United Bank Club Association, Inc. ("UBCA"), Norman, Oklahoma, in 1980, and served as its President and CEO until February 1996, when UBCA was sold. Mr. Kruger supervised and participated in every facet of UBCA's business, including strategic planning, sales, marketing, operations and service quality. Under Mr. Kruger's leadership, UBCA grew to more than 350 employees, and had operational and sales branches in Michigan, Florida, Arizona, Texas and Mexico. At the time UBCA was sold, it provided financial enhancement services to more than 2,000 client institutions serving more than 6,000,000 individual customers throughout the United States, Puerto Rico, the U.S. Virgin Islands and Mexico.
In 1997, Mr. Kruger became the Chairman of the Board of Directors of Paceco Financial Services, Inc. In February 1999, Mr. Kruger became Chief Executive Officer and a director of Foresight, Inc. in Norman, Oklahoma. Foresight, Inc. is a marketing company that develops membership and loyalty programs for companies that are designed to solidify and enhance customer relationships. Foresight, Inc. services over 250,000 customers nationwide through relationships with companies in numerous industries including rent-to-own, banking, and financial services. Effective December 7, 2000, Foresight, Inc. was aquired by a subsidiary of Precis, Inc., a publicly-held company. Precis, Inc. designs membership programs for rental-purchase companies, financial organizations, employer groups, retailers and association-based organizations. Membership in these programs are offered and sold as a part of point-of-sale transactions and through direct marketing. Since December 2000, Mr. Kruger has served as the Chairman of the Board of Directors and the Chief Executive Officer of Precis, Inc. His responsibilities and contributions to all of these companies include assisting in the development, implementation and execution of strategic planning. Mr. Kruger also currently holds managing officer positions in both Hildalgo, L.C. and Onward, L.L.C.
Mr. Kruger became a director of PalWeb on July 9, 1999 and became President on January 22, 2000.
LYLE W. MILLER
DIRECTOR AND EXECUTIVE VICE PRESIDENT (MARKETING)
Mr. Miller, age 57, earned a Bachelor of Business Administration degree from Michigan State University and attended Michigan State University's Master's program in Finance. For the past six years, Mr. Miller has been the President and a Director of McMiller Holding Company, Northern Leasing & Sales, Inc. and Northern Connections, Inc., which are based in Lansing, Michigan. Each of these companies are privately held and are engaged in the real estate
business. Additionally, Mr. Miller is a partner in MahMill Acres, a closely held real estate development partnership; President and a Director of Servco Incorporated, a privately-held company; and owner of Lansing Ice & Gymnastic Center, Inc., a privately held corporation that operates the Lansing Ice & Gymnastic Center and Landings Restaurant in Lansing, Michigan. Mr. Miller is a Director of Capital Bancorp Limited, a publicly-held bank holding company, and Precis, Inc., a publicly-held corporation.
Mr. Miller became a director of PalWeb and Vice President of Marketing on January 22, 2000.
MARK R. KIDD
DIRECTOR
Mr. Kidd, age 34, earned a Bachelor of Business Administration in Accounting from Southern Methodist University, Dallas, Texas, in 1988. Mr. Kidd began his career at the accounting firm of Arthur Andersen, L.L.P. where he earned the designation of Certified Public Accountant. He worked at Arthur Andersen for eight years where he served financing services clients ranging in size from less than $10,000,000 to greater than $2,000,000,000. Mr. Kidd served as the Chief Financial Officer for Republic Bank of Norman, Oklahoma, a financial institution with over $100,000,000 in assets. Mr. Kidd served as an Executive Vice President, Chief Financial Officer, and board member of Foresight, Inc. in Norman, Oklahoma from February 1999 to December 2000. Since December 2000, Mr. Kidd has served as the President and a board member of Foresight, Inc. Foresight, Inc. is a marketing company that develops membership and loyalty programs for companies that are designed to solidify and enhance customer relationships. Foresight, Inc. services over 250,000 customers nationwide through relationships with companies in numerous industries including rent-to-own, banking, and financial services. Since September of 1999, Mr. Kidd has served as the Chief Financial Officer of Precis, Inc., a publicly-held corporation. Precis, Inc. designs membership programs for rental-purchase companies, financial organizations, employer groups, retailers and association-based organizations. Membership in these programs are offered and sold as a part of point-of-sale transactions and through direct marketing. Effective December 7, 200, Foresight, Inc. was acquired by a subsidiary of Precis, Inc. Mr Kidd has served as a board member of Precis, Inc. since December 2000.
Mr. Kidd became a director of PalWeb on January 22, 2000.
ITEM 10. EXECUTIVE COMPENSATION
Other than Mr. Kruger, no other parties receive a salary as a part of executive compensation. The following table sets forth the compensation paid to Mr. Kruger during fiscal years 2000 and 2001.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------------- ------------
NAME AND FISCAL OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
Paul A. Kruger, 2001 $12,000 - 0 - - 0 - 2,500,000
Chairman of Board and 2000 $ 6,000(1) - 0 - - 0 - - 0 -
President
|
(1) MR. KRUGER WAS FIRST PLACED ON THE PAYROLL OF PALWEB ON DECEMBER 1, 1999.
THE FOLLOWING TABLE SETS FORTH INFORMATION RELATED TO OPTIONS GRANTED
TO NAMED EXECUTIVE OFFICERS AND DIRECTORS OF PALWEB.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF SECURITIES
UNDERLYING OPTIONS % OF TOTAL EXERCISE OR
NAME GRANTED OPTIONS GRANTED BASE EXPIRATION DATE
Paul A. Kruger 2,500,000 26.3 $0.04 MAY 11, 2011(1)
LYLE W. MILLER 2,500,000 26.3 $0.04 MAY 11, 2011(1)
MARK R. KIDD 2,500,000 26.3 $0.04 MAY 11, 2011(1)
|
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND FY-END OPTION VALUES
SHARES
ACQUIRED NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
ON VALUE UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
NAME EXERCISE REALIZED OPTIONS AT FY-END FY-END
Paul A. Kruger -0- N/A 2,500,000(1) $87,500
LYLE W. MILLER -0- N/A 2,500,000(1) $87,500
MARK R. KIDD -0- N/A 2,500,000(1) $87,500
|
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the shares of Common Stock and the shares of original issue Preferred Stock beneficially owned as of May 31, 2001, by (i) each person known by PalWeb to beneficially own five percent (5%) or more of the outstanding Common Stock or Preferred Stock, (ii) each current director and executive officer and (iii) all current directors and executive officers as a group. The original issue Preferred Stock is considered the equivalent of Common Stock, since it is voting and convertible into Common Stock on a share for share basis. As of July 18, 2001, PalWeb had 231,973,244 shares of Common Stock and 2,525,000 shares of Preferred Stock outstanding.
SHARES PERCENT
NAME BENEFICIALLY OWNED OWNED
---- ------------------ -----
Paul A. Kruger, Chairman of the Board and President ............. 59,800,000(1) 25.8%
|
SHARES PERCENT
NAME BENEFICIALLY OWNED OWNED
---- ------------------ -----
Lyle W. Miller, Director and Vice President (Marketing).......... 6,500,000 2.8%
Mark R. Kidd, Director .......................................... 500,000 0.2%
All Directors & Officers as a Group (3 persons).................. 66,680,000(1) 28.8%
|
The closing of the private placement of convertible preferred stock and warrants to purchase common stock described under "Liquidity and Capital Resources" in Item 6 of this Form 10-KSB could result in a change of control of PalWeb to the purchasing group.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a related party transaction involving funds advanced to PalWeb by affiliates of Paul Kruger, see "History" under Item 1, and "Liquidity and Capital Resources" under Item 6 of this Form 10-KSB.
For a related party transaction involving funds advanced by Yorktown Management and Financial Services, L.L.C., of which Warren Kruger, Paul Kruger's brother, is the principal shareholder see "History" under Item 1, and "Liquidity and Capital Resources" under Item 6 of this Form 10-KSB. For a related party transaction involving Westgate Capital Company, L.L.C., of which Warren Kruger is a principal beneficial owner, see "Liquidity and Capital Resources" under Item 6 of this Form 10-KSB.
For a related party transaction involving manufacturing and warehouse space leased from an affiliate of Paul Kruger, see Item 2 of this Form 10-KSB.
In April of 2001, PalWeb entered into an agreement with Foresight, Inc., a company of which Messrs. Paul Kruger, Miller and Kidd are on the Board of Directors and that is a wholly owned subsidiary of a publicly-held company of which Paul Kruger beneficially owns in excess of 10%, whereby Foresight agreed to make a portion of its leased premises available to one full- time employee of PalWeb, provide the services of a part-time employee of Foresight, and pay PalWeb's expenses in connection with normal office usage for telephone, fax, copying, postage and other expenses in exchange for the sum of $3,000 per month. The agreement was effective as of January 1, 2001 and may be terminated by either party at any time upon 30 days written notice.
For a related party transaction that occurred in February 2000 in connection with PalWeb's acquisition of Paceco Financial Services, Inc., see Item 1 of this Form 10-KSB.
On January 10, 2000, PalWeb issued the following number of shares of unregistered Common Stock to the following parties as consideration for the cancellation of the debt set forth opposite of such parties' name:
DEBT OWED NO. OF SHARES ISSUED IN
PARTIES' NAME BY PALWEB CANCELLATION OF SUCH DEBT
------------- ---------- -------------------------
Hildalgo Trading Co., L.C. $701,000 7,010,000
Onward, L.L.C. 312,429 3,124,786
Paul A. Kruger 174,000 1,740,000
|
Hildalgo Trading Co., L.C. and Onward, L.L.C. are wholly owned by Paul A. Kruger.
Also on January 10, 2000, PalWeb issued 3,500,210 shares of unregistered Common Stock of PalWeb to Hildalgo Trading Co., L.C. as consideration for consulting services provided to PalWeb by Hildalgo Trading Co., L.C.
On July 26, 1999, PalWeb issued 400,000 shares of preferred stock to Randall McClesky in consideration of management services for serving as an officer and director of PalWeb. Also on July 26, 1999, PalWeb issued 2,558,890 shares of preferred stock to Ralph Curton, Jr. and assigns in consideration of management services for serving as an officer and director of PalWeb and to reimburse Mr. Curton for certain expenses he incurred on behalf of PalWeb. Neither Mr. McClesky nor Mr. Curton is currently an officer or director of PalWeb.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Reorganization by and among PalWeb
Corporation, PP Financial, Inc. and Pace Holding, Inc. dated
January 21, 2000(1)
3.1 Certificate of Incorporation of PalWeb Corporation(1)
3.2 By-laws of PalWeb Corporation(1)
4.1 Certificate of Designation, Preferences and Rights of
Preferred Stock Providing for an Issue of Preferred Stock
Designated "Convertible Preferred Stock"(2)
10.1 Personnel Staffing Agreement by and between Accord Human
Resources, Inc. and Plastic Pallet Production Company, Inc.
dated January 19, 1999(1)
10.2 Pallet Test # 714 prepared dated November 24, 1999 for Plastic
Pallet Production, Inc. prepared by Container Technology
Laboratory, Inc.(2)
32
|
EXHIBIT NO. DESCRIPTION
10.3 Promissory Note in the amount of $400,000 payable to Hildalgo
Trading Company, L.C. dated July 27, 2000(2)
10.4 Security Agreement by and between PalWeb Corporation and
Hildalgo Trading Company, L.C. dated July 27, 2000(2)
10.5 Security Agreement by and between Plastic Pallet Production,
Inc. and Hildalgo Trading Company, L.C. dated July 27, 2000(2)
10.6 Promissory Note in the amount of $350,000 payable to Hildalgo
Trading Company, L.C. dated August 15, 2000(4)
10.7 Promissory Note in the amount of $400,000 payable to Hildalgo
Trading Company, L.C. dated November 15, 2000(4)
10.8 Extension and Modification Agreement by and between Hildalgo
Trading Company, L.C., PalWeb Corporation and Plastic Pallet
Production, Inc. dated December 1, 2000(4)
10.9 Promissory Note in the amount of $250,000 payable to Yorktown
Management and Financial Services, L.L.C. dated March 1,
2001(5)
10.10 Security Agreement between Yorktown Management and Financial
Services, L.L.C. and PalWeb Corporation dated March 1, 2001(5)
10.11 Security Agreement between Yorktown Management and Financial
Services, L.L.C. and Plastic Pallet Production, Inc. dated
March 1, 2001(5)
10.12 Promissory Note in the amount of $2,750,000 payable to
Yorktown Management and Financial Services, L.L.C. dated March
5, 2001
10.13 Agreement (relating to use of office space and employees)
dated April 27, 2001 by and between Foresight, Inc. and PalWeb
Corporation
10.14 Lease Agreement dated May 1, 2001, by and between Onward,
L.L.C. and PalWeb Corporation
10.15 Extension Agreement by and between Hildalgo Trading Company,
L.C. and PalWeb Corporation and Plastic Pallet Production,
Inc. dated June 1, 2001
10.16 Promissory Note in the amount of $850,000 payable to Hildalgo
Trading Company, L.C. dated June 1, 2001
33
|
EXHIBIT NO. DESCRIPTION
10.17 Extension Agreement by and between Yorktown Management and
Financial Services, L.L.C. and PalWeb Corporation and Plastic
Pallet Production, Inc. dated September 1, 2001
99.1 Notice to depositors of Paceco Financial Services, Inc. dated
October 10, 2000(6)
99.2 Supplemental Notice to Investment Certificate Holders of
Paceco Financial Services, Inc.(7)
99.3 Second Supplemental Notice to Investment Certificate Holders
of Paceco Financial Services, Inc.(8)
99.4 Put Agreement by and among Paul A. Kruger, Bill J. English as
Trustee and Paceco Financial Services, Inc. dated December 20,
2000(8)
99.5 Trust Agreement between Paceco Financial Services, Inc. and
Bill J. English dated December 20, 2000(8)
99.6 Letter from the State of Oklahoma Department of Securities
dated December 15, 2000 regarding Paceco Financial Services,
Inc.(8)
99.7 Stock Option Plan of PalWeb Corporation (effective May 11,
2001)
99.8 Form of Non-Qualified Stock Option Agreement
99.9 Form of Incentive Stock Option Agreement
99.10 Form of Nonemployee Director Stock Option Agreement
21.1 Subsidiaries of PalWeb Corporation
------------------
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(1) Incorporated herein by reference to Part III, Item 1 of Amendment No. 3 to PalWeb's Form 10-SB, which was filed on May 2, 2000.
(2) Incorporated herein by reference to Part III, Item 1 of Amendment No. 5 to PalWeb's Form 10-SB, which was filed on July 20, 2000.
(3) Incorporated herein by reference to Part III, Item 15 of PalWeb's Form 10-KSB for the period ended May 31, 2000, which was filed on May 15, 2001.
(4) Incorporated herein by reference to Part II, Item 6 of PalWeb's Form 10-QSB for the period ended November 30, 2000, which was filed on January 10, 2001
(5) Incorporated herein by reference to Part I, Item 6 of PalWeb's Form 10-QSB for the period ended February 28, 2001, which was filed on April 16, 2001
(6) Incorporated herein by reference to Part II, Item 6 of PalWeb's Form 10-QSB for the period ended August 31, 2001, which was filed on April 16, 2000
(7) Incorporated herein by reference to Item 7 of PalWeb's Form 8-K filed on November 17, 2000
(8) Incorporated herein by reference to Item 7 of PalWeb's Form 8-K filed on January 2, 2001
(b) Reports on Form 8-K:
On May 15, 2001, PalWeb filed a Form 8-K under Item 5, Other Events reporting that a letter of intent had been signed in connection with the private placement of convertible preferred stock and warrants to purchase common stock of PalWeb. No financial statements were filed in connection with such Form 8-K.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PALWEB CORPORATION
(Registrant)
Date: 08/12/01
/s/ Paul A. Kruger
--------------------------------------------
Paul A. Kruger, Chairman of the Board and
President
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In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: 08/12/01
/s/ Paul A. Kruger
--------------------------------------------
Paul A. Kruger, Chairman of the Board and
President (Chief Executive Officer,
Principal Financial Officer and Principal
Accounting Officer)
Date: 08/12/01
/s/ Lyle W. Miller
--------------------------------------------
Lyle W. Miller, Director and Vice-President,
Marketing
Date: 08/12/01
/s/ Mark R. Kidd
--------------------------------------------
Mark R. Kidd, Director
|
FINANCIAL STATEMENTS OF PALWEB CORPORATION
Independent Auditor's Report................................................F-1 Consolidated Balance Sheet..................................................F-2 Consolidated Statements of Operations ......................................F-4 Consolidated Statements of Changes in Stockholders' Deficiency..............F-5 Consolidated Statements of Cash Flows ......................................F-6 Notes to Consolidated Financial Statements..................................F-7 |
INDEPENDENT AUDITOR'S REPORT
Board of Directors
PalWeb Corporation
Dallas, Texas
|
We have audited the accompanying consolidated balance sheet of PalWeb Corporation and subsidiaries as of May 31, 2001, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the years ended May 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material aspects, the financial position of PalWeb Corporation and subsidiaries as of May 31, 2001, and the results of their operations and their cash flows for the years ended May 31, 2001 and 2000, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is in the development stage and has suffered significant losses from operations. Substantial additional funding will be required to implement its business plan and to attain profitable operations. The lack of adequate funding to maintain working capital and stockholders' deficits at May 31, 2001, raises substantial doubt about its ability to continue as a going concern. In addition, PalWeb has a wholly owned subsidiary which issues thrift accounts and savings certificates to investors. The subsidiary does not have sufficient assets to liquidate investors' thrift accounts and savings certificates. Management's plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
HULME RAHHAL HENDERSON, INC.
August 15, 2001
Ardmore, Oklahoma
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
MAY 31, 2001
MANUFACTURING:
Current Assets:
Cash $ 10,923
Accounts receivable 72,788
Inventory (Note 4) 142,689
Prepaid Expenses 95,000
----------
Total current assets 321,400
Property, Plant and Equipment, net
of accumulated depreciation (Note 6) 2,325,483
Other Assets (Note 7) 76,031
----------
TOTAL MANUFACTURING ASSETS 2,722,914
----------
FINANCE:
Cash 69,546
Loans receivable, net of allowance for
doubtful accounts (Note 5) 814,349
----------
TOTAL FINANCE ASSETS 883,895
----------
TOTAL ASSETS $3,606,809
==========
|
MANUFACTURING:
Current Liabilities:
Note payable (Note 8) $ 1,536,559
Note payable - related party (Note 8) 947,200
Accounts payable 1,705,033
Accrued interest payable 118,031
------------
Total current liabilities 4,306,823
Deferred Income (Note 12) 707,044
------------
TOTAL MANUFACTURING LIABILITIES 5,013,867
------------
FINANCE:
Thrift accounts and time certificates (Note 9) 5,107,257
Accrued interest payable 204,061
Notes payable (Note 8) 171,836
------------
TOTAL FINANCE LIABILITIES 5,483,154
------------
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COMMITMENT AND CONTINGENCY (Notes 18 and 19)
STOCKHOLDERS' DEFICIENCY (Notes 13 and 14):
Preferred stock, $.0001 par, 20,000,000 shares
authorized, 2,525,000 shares outstanding 253
Common stock, $.10 par value, 250,000,000
authorized, 231,928,244 shares outstanding 23,192,825
Additional paid-in capital 9,725,686
Deficit accumulated during development stage (35,258,710)
------------
(2,339,946)
Treasury stock, 43,500,000 shares common, at cost (4,550,266)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (6,890,212)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 3,606,809
============
|
The accompanying notes are an integral part of this consolidated financial statement.
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
From Inception
Year Ended May 31, (November 20,
------------------------------------- 1995) to
2001 2000 May 31, 2001
------------- ------------- -------------
MANUFACTURING:
Sales $ 89,211 $ 14,013 $ 195,918
Expenses:
Research and development 95,000 -- 501,943
Salaries and benefits 307,085 357,226 1,658,417
General and administrative
expenses 907,940 1,949,987 9,665,648
Depreciation expense 204,584 204,805 818,503
Impairment -- -- 3,456,231
Interest expense 300,451 188,822 952,464
------------- ------------- -------------
Total expenses 1,815,060 2,700,840 17,053,206
------------- ------------- -------------
Other income (expense):
Gain on settlement of contracts
and liabilities 1,541,783 57,479 1,599,262
Other -- (4,877) 272,308
------------- ------------- -------------
Total other income (expense) 1,541,783 52,602 1,871,570
------------- ------------- -------------
LOSS FROM MANUFACTURING OPERATIONS (184,066) (2,634,225) (14,985,718)
FINANCE:
Revenues -
Interest and fees on loans 177,580 68,906 246,486
Other income 3,988 1,004 4,992
Gain (loss) on sale of assets 18,615 (1,250) 17,365
------------- ------------- -------------
Total Revenues 200,183 68,660 268,843
------------- ------------- -------------
Expenses -
Interest on thrift accounts and
time certificates 319,381 72,514 391,895
Interest on notes payable 17,366 3,293 20,659
Salaries and benefits 40,311 16,864 57,175
Other operating expenses 235,794 141,871 377,665
Provision for credit losses 173,426 180,000 353,426
Depreciation and amortization 782,398 105,910 888,308
------------- ------------- -------------
Total expenses 1,568,676 520,452 2,089,128
------------- ------------- -------------
LOSS FROM FINANCE OPERATIONS (1,368,493) (451,792) (1,820,285)
------------- ------------- -------------
LOSS FROM TOTAL OPERATIONS, BEFORE (1,552,559) (3,086,017) (16,806,003)
DISCONTINUANCE AND EXTRAORDINARY ITEMS
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 73,838 (9,425) (792,648)
EXTRAORDINARY GAIN -- -- 68,616
------------- ------------- -------------
NET LOSS $ (1,478,721) $ (3,095,442) $ (17,530,035)
============= ============= =============
LOSS PER COMMON SHARE:
Loss before discontinued operations
and extraordinary loss $ (0.01) (0.02)
Loss from discontinued operation -- --
Extraordinary loss -- --
------------- -------------
Loss per common share $ (0.01) $ (0.02)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 198,293,000 207,608,000
============= =============
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The accompanying notes are an integral part of this consolidated financial statement.
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
Preferred Stock Common Stock Additional Total
---------------------------- ---------------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
May 31, 1999 880,000 88 217,981,046 21,798,105 2,027,465 (27,391,427) (3,565,769)
Issuance of stock for
services 125,000 13 14,625,210 1,462,521 18,737 -- 1,481,271
Contribution of debt
to capital -- -- -- -- 189,000 -- 189,000
Stock issued in
satisfaction of
debt 3,963,890 396 12,334,790 1,233,479 627,538 -- 1,861,413
Default judgement on
related party debt -- -- -- -- 1,619,422 -- 1,619,422
Preferred stock
converted to common (2,193,890) (219) 2,193,890 219,389 (219,170) -- --
Cancellation of
common stock -- -- (54,856,692) (5,485,669) 5,485,669 -- --
Stock issued in
acquisition -- -- 50,000,000 5,000,000 -- (3,293,120) 1,706,880
Net loss -- -- -- -- -- (3,095,442) (3,095,442)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
May 31, 2000 2,775,000 278 242,278,244 24,227,825 9,748,661 (33,779,989) 196,775
Stock issued in
satisfaction of
debt -- -- 100,000 10,000 2,000 -- 12,000
Preferred stock
converted to common (250,000) (25) 250,000 25,000 (24,975) -- --
Cancellation of
common stock -- -- (10,700,000) (1,070,000) -- -- (1,070,000)
Net loss -- -- -- -- -- (1,478,721) (1,478,721)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
May 31, 2001 2,525,000 253 231,928,244 $ 23,192,825 $ 9,725,686 $(35,258,710) $ (2,339,946)
============ ============ ============ ============ ============ ============ ============
|
The accompanying notes are an integral part of this consolidated financial statement.
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From Inception
Year Ended May 31, (November 20,
--------------------------------- 1995) to
2001 2000 May 31, 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,478,721) $ (3,095,442) $(17,530,035)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation and amortization 1,001,348 315,509 1,756,771
Extraordinary gain on debt retirement -- -- (68,616)
Consulting services paid by
issuance of common stock (1,070,000) 1,481,271 5,646,271
Impairment of investment -- -- 3,145,000
Loss (gain) of disposition of property (31,099) 4,877 285,009
Provision for credit losses 173,426 180,000 353,426
Changes in accounts receivable (71,988) (800) (72,788)
Changes in inventory (128,966) (3,785) (142,689)
Changes in other assets 58,918 (78,303) (105,222)
Changes in payable - related party -- 707,909 2,930,901
Changes in accounts payable
and accrued expenses 1,121,869 201,882 3,165,615
Increase in customer deposits -- -- 300,000
------------ ------------ ------------
Net cash provided by (used)
operating activities (425,213) (286,882) (336,357)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,804,231) (233,049) (5,252,853)
Decrease in loans receivable 1,380,379 89,483 1,469,862
Net liabilities from acquisition
of finance and real estate -- 230,724 230,724
Proceeds from sale of equipment 1,362,000 19,461 1,456,456
Proceeds from lease finance obligation -- -- 149,517
------------ ------------ ------------
Net cash provided by (used)
investing activities 938,148 106,619 (1,946,294)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and advances payable 1,898,759 452,500 3,365,066
Payments on notes payable (1,042,875) (9,355) (1,291,980)
Decrease in savings certificates (1,556,232) 4,290 (1,551,942)
Proceeds from mortgage payable -
related party -- -- 1,350,000
Proceeds from issuance of common stock -- -- 491,976
------------ ------------ ------------
Net cash provided (used) by
financing activities (700,348) 447,435 2,363,120
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (187,413) 267,172 80,469
CASH, beginning of period 267,882 710 --
------------ ------------ ------------
CASH, end of period $ 80,469 $ 267,882 $ 80,469
============ ============ ============
|
SUPPLEMENTAL INFORMATION (Note 16)
The accompanying notes are an integral part of this consolidated financial statement.
PALWEB CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective December 12, 1997, PalWeb Corporation ("PalWeb"), formerly Cabec Energy Corporation, was acquired in a reverse acquisition by the stockholders of Plastic Pallet Production, Inc.("PPP") whereby the stockholders of PPP became majority owners of PalWeb. Pursuant to the agreement, PalWeb exchanged its common stock for the outstanding common stock of PPP and the assets and liabilities of PalWeb and its subsidiaries as of the effective date were to be transferred into a new company whose stock was to be distributed to the stockholders of PalWeb, other than the new stockholders resulting from the PPP stock transfer. This latter distribution was effected November 10, 1998.
The business of PalWeb as of December 12, 1997 was principally involved in energy services. Since the disposition of the energy services net assets was approved at the time of approval of the PPP stock exchange, these net assets were accounted for as discontinued operations. Further, the distribution effected as of November 10, 1998 is accounted for as a spin off in accordance with APB Opinion No. 29, "Accounting for Nonmonetary Transactions."
PalWeb is principally engaged in the manufacture and marketing of plastic pallets and the related injection molding equipment necessary to produce plastic pallets. In addition, PalWeb is engaged in consumer loans through its indirect subsidiary, Paceco Financial Services, Inc. ("PFS").
The accompanying consolidated financial statements include the accounts of PalWeb and its subsidiaries. All material intercompany accounts and transactions have been eliminated.
PPP from its inception, November 20, 1995, has pursued the development of a plastic pallet which will compete with traditional wood pallets. Additionally, PPP has designed an injection molding machine which it anticipates can be built and operated more economically than competitive equipment. At May 31, 2001, a prototype model of the injection molding machine is in operation and producing plastic pallets for sale. Further, PalWeb is constructing an injection molding facility which will substantially increase PalWeb's productive capacity. However, PalWeb will retain its development stage status until it is capable of generating sufficient sales to maintain its operations.
PalWeb considers all short-term investments with an original maturity of three months or less to be cash equivalents.
The preparation of PalWeb's financial statements in conformity with U.S. generally accepted accounting principles requires PalWeb's management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ materially from those estimates.
Inventory consists of finished pallets and is stated at the lower of cost (first-in, first-out) or market value.
Installment loans are stated at the amount of unpaid principal and interest, reduced by unearned interest and an allowance for credit losses. Interest income is recognized when earned except where serious doubt exists as to the ultimate collectibility of the interest in which case no accrual of interest is made. At May 31, 2001, substantially all of the loans receivable are on a nonaccrual basis.
PFS performs ongoing credit valuations of customers and generally requires collateralization of the loan. The allowance for credit losses is maintained at a level adequate to absorb probable losses. Management determines the adequacy of the allowance based upon reviews of the installment loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans, and other pertinent factors. Loans deemed uncollectible are charged to the allowance. Provisions for credit losses and recoveries on loans previously charged off are added to the allowance.
PalWeb's property, plant and equipment is stated at cost. Depreciation expense is computed on the straight-line method over the estimated useful lives, as follows:
Manufacturing: Plant building 20 years Plant improvements 7 years Production machinery equipment 5-10 years Office equipment & furniture & fixtures 3- 5 years |
Upon sale, retirement or other disposal, the related costs and accumulated depreciation of items of property, plant or equipment are removed from the related accounts and any gain or loss is recognized. When events or changes in circumstances indicate that assets may be impaired, an evaluation is performed comparing the estimated future undiscounted cash flows associated with the asset to the assets carrying amount. If the asset carrying amount exceeds the cash flows, a write-down to market value or discounted cash flow value is required.
PalWeb's 20% ownership in Vimonta AG carried on the cost basis of accounting since management has no board representation, financial information or other influence on the operation of Vimonta AG. The asset is valued at $5,000 and is included in other assets in the manufacturing segment.
Amortization expense for the costs incurred by PalWeb to obtain the patents on the modular pallet system and accessories is computed on the straight- line method over the estimated life of 17 years.
The excess of cost over the value of net assets acquired (goodwill) is being amortized on a straight-line basis over thirty months, except that during fiscal year 2001, management recognized an impairment to its goodwill and incurred an additional charge of $333,480 to fully amortize the balance of its goodwill.
PalWeb applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations, in accounting for its stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, established accounting and disclosure requirements for stock-based employee compensation plans. As allowed by SFAS No. 123, PalWeb has elected to continue to apply the intrinsic value-based method of accounting under APB No. 25, and has adopted the disclosure requirements of SFAS No. 123 as reflected in Note 14.
Revenue is recognized when the product is shipped.
PalWeb accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based in the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Research and Development costs are charged to operations in the period incurred.
Loss per share is computed based on weighted average number of shares outstanding. Convertible preferred stock and stock options are not considered as their effect is antidilutive.
Recent pronouncements issued by the Financial Accounting Standards Board include SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, SFAS No. 139, RESCISSION OF FASB STATEMENT NO. 53 AND AMENDMENTS TO FASB STATEMENTS NO. 63, 89, AND 121, SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, and SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. The implementation of these standards are not expected to have a material effect on PalWeb's consolidated financial statements.
The accompanying financial statements have been prepared assuming that PalWeb will continue as a going concern. PalWeb is in the development stage and has suffered significant losses from operations. To date, PalWeb has received substantial advances from investors but will require additional substantial funding in order to implement its business plan and have an opportunity to achieve profitable operations. Management has been successful in financing its operations through short-term loans from an individual and advances and loans from its principal stockholder and officer. Management continues to seek long-term and/or permanent financing through pursuit of a private placement of securities. Neither the receipt of additional funding in adequate amounts nor the successful implementation of its business plan can be assured. The combination of these factors raise substantial doubt about PalWeb's ability to continue as a going concern. It is management's opinion that the funding required to reach necessary production levels will be obtained and, based upon expressions of interest from potential customers, PalWeb will obtain adequate sales to reach a profitable status, and will continue as a going concern.
Effective October 5, 2001, PFS notified its investment certificate holders that it was suspending redemptions of depositors' passbook savings accounts and time certificates. PFS has appointed a trustee to oversee a plan to liquidate the investment and savings certificates over a four year period ending December 31,2004. To facilitate the liquidation, PFS will be required to liquidate substantially all of its assets, including common stock holdings of PalWeb. As of May 31, 2001, there would not be sufficient funds to fully redeem the certificates; however, if necessary, the trustee can "put" certain shares to Paul Kruger, Chairman and CEO, and Mr. Kruger would agree to purchase ths shares at a price sufficient to effect the liquidation throughout the period of liquidation. At May 31, 2001, PFS had assets and liabilities as follows:
Liquid assets:
Cash $ 70,000
Loans receivable, net
of allowance for losses 814,000
PalWeb common stock, 43,500,000
shares at seven cents per share 3,050,000
-----------
3,934,000
Liabilities:
Thrift accounts and
time certificates 5,107,000
Accrued liabilities 204,000
Notes payable 172,000
-----------
5,483,000
Deficit $(1,549,000)
===========
3. SEGMENT OF BUSINESS
-------------------
|
The Company's business has two reportable segments - manufacturing, and finance. The manufacturing segment is the production of plastic pallets and the finance segment is the business of lending money. Both segments are individually presented in the accompanying financial statements. The accounting policies are the same as those described in the summary of significant accounting policies. Intersegment transactions are not significant.
Inventory at May 31, 2001 consists of:
Raw materials $ 31,793
Finished goods 110,896
----------
Total inventory $ 142,689
==========
5. LOANS RECEIVABLE
----------------
|
Loans for finance and real estate at May 31, 2001 consist of the following:
Installment loans $1,249,924
Unearned interest (10,207)
Allowance for credit losses (425,368)
----------
$ 814,349
==========
|
Changes in the allowance for credit losses for the year ended May 31, 2001 are as follows:
Balance, beginning of year $ 489,847
Provision 173,426
Loans charged-off (237,905)
Recoveries -
----------
Balance, end of period $ 425,368
==========
|
At May 31, 2001, substantially all loans are on a nonaccrual basis.
The installment loans, in order to reduce credit risk, are secured by various forms of collateral, including first mortgages on real estate, liens on personal property, savings deposits, etc. In the event of default by the borrower, the Company would incur a loss to the extent that the value of the collateral is less than the outstanding balance of the loan.
A summary of the property, plant and equipment is as follows:
Manufacturing:
Production machinery and equipment, including
construction in progress of $1,643,624 $ 2,602,718
Furniture and fixtures 127,936
-----------
2,730,654
Less: accumulated depreciation (405,171)
-----------
$ 2,325,483
|
Depreciation expense for the years ended May 31, 2001 and 2000 is $353,609 and $210,031, respectively.
For the manufacturing segment, at May 31, 2001, other assets consist of:
Patents, net of accumulated
amortization of $11,213 $ 60,431
Deposits and other 15,600
-----------
Total Other Assets $ 76,031
===========
8. NOTES PAYABLE
-------------
|
A summary of the notes and advances payable as of May 31, 2001 are as follows:
Manufacturing:
Finance:
Maturities of notes payable for years ended May 31 is as follows:
2002 $2,503,630 2003 21,789 2004 22,743 2005 107,433 |
The note payable to Yorktown Management and Financial Services, LLC is a line of credit totaling $3,000,000, 12% interest, due October 15, 2001. Effective June 1, 2001, the note payable to Hildalgo Trading Company, LLC, a company owned by Mr. Paul Kruger, Chairman and CEO, was renewed and extended into a line of credit totaling $2,000,000, 12% interest, due October 15, 2001. Both the Yorktown and Hidalgo notes are secured by PalWeb's equipment, inventory and accounts receivable.
As discussed in Note 2, PFS has suspended redemption of thrift and time certificates and will redeem the accounts annually over four years in substantially equal installments with the last installment to be made in December, 2004. As the time certificates mature, PFS will accrue interest at the passbook rate of 6%. At May 31, 2001, the thrift and time certificates total $5,107,257 and accrued interest totals $204,061.
In September 1999, PalWeb obtained a $20,000,000 default judgement against a stockholder/investor. Additionally, the judgement canceled 41,443,308 shares of common stock held by the investor. The investor has four years from the date of judgement to file an action seeking to set aside the judgement. The cancellation of the common stock was accounted for as a contribution to additional paid in capital.
In March 2000, PalWeb obtained a default judgement against certain related parties, Chartex AG and New Inter HKB AG, causing the cancellation of 13,413,384 shares of common stock and advances from related party in the amount of $1,619,422. The cancellations were recorded as a contribution to additional paid in capital.
During fiscal year 2000, the chairman and principal stockholder received 11,874,790 shares of common stock in exchange for debt in the amount of $1,187,479. The exchange ratio was based on fair value of the common stock. In addition, the individual received 3,625,210 shares of common stock in exchange for services totaling $362,521. The value of the services is based on the fair value of the common stock. Also, the chairman and principal stockholder received 50,000,000 shares of common stock in exchange for the outstanding common stock of Pace Holding, Inc. and its subsidiary, PFS.
PalWeb leases commercial space from Onward, LLC, owned by Mr. Paul Kruger, chairman and CEO. Total rentals paid to these entities were $199,380 and $153,820 in fiscal years 2001 and 2000, respectively. At May 31, 2001, prepaid rent in the amount of $95,000 had also been paid to these entities.
Mr. Kruger provides working capital to the company under a note as described in Note 8. The outstanding balances of the note and accrued interest payable at May 31 2001 are $947,200 and $98,994, respectively.
In December, 2000, the real estate segment was sold to Mr. Paul Kruger for appraised value of $1,352,000. A gain of $31,099 was recorded from the sale.
Deferred taxes as of May 31, 2001 are as follows:
Net operating loss $4,421,443
Loss on impairment of investment 1,151,070
Stock based compensation 34,447
Allowance for credit losses 161,640
----------
5,768,600
Less: Valuation allowance (5,768,600)
----------
Total $ -
==========
|
Management has provided a valuation allowance for the full amount of the deferred tax asset as PalWeb has yet to progress beyond the development stage of its operations. While management projects that the products being developed will be profitable and the deferred asset will ultimately be realized, PalWeb has not yet reached such stage in its development to place reasonable reliability on product acceptance and marketability
The net change in deferred taxes is as follows:
Year Ended May 31,
2001 2000
----------- -----------
Net operating loss $ 326,925 $ 1,001,163
Accrued liabilities (41,800) 41,800
Allowance for credit losses 93,240 68,400
Gain on sale of plant
for tax purposes (160,681) -
Stock based compensation 34,447 -
Change in Valuation
allowance (252,131) (1,111,363)
----------- -----------
Tax Benefit $ - $ -
=========== ===========
|
PalWeb's effective tax rate differs from the federal statutory rate as follows:
Year Ended May 31,
2001 2000
----------- -----------
Tax benefit using statutory tax rate $ 534,419 $ 1,052,450
Effect of state tax rates 47,155 97,475
Net change in valuation allowance (252,131) (1,111,163)
Amortization of goodwill (244,059) -
Other deductions (85,384) (38,762)
----------- -----------
Tax benefit, per financial statements $ - $ -
=========== ===========
|
PalWeb has a net operating loss (NOL) for Federal income tax purposes as of May 31, 2000 of $11,086,000 as follows:
Year of
Amount Expiration
------ ----------
$1,290,000 2012
1,291,000 2018
5,871,000 2019
2,634,000 2020
883,000 2021
12. DEFERRED INCOME
---------------
|
In April 1999, an entity owned by Mr. Paul Kruger, chairman and CEO, acquired PalWeb's plant in Dallas, with a three year option, expiring April 2002, to purchase the property. Due to the existence of the option to repurchase the property, the transaction had been accounted for as a financing arrangement whereby the plant and related mortgage debt assumed by the buyer was maintained as an asset and depreciated and liability, respectively, for financial statement purposes. Effective May 1, 2001, PalWeb entered into a new lease with the entity and the option was cancelled. Accordingly, the asset and related liability were removed from the financial statements and the gain from the transaction is deferred to be amortized over the estimated use of the property. Since the transaction is with a related party, the amortization of the gain will be to additional paid in capital.
Reference is made to Note 9, regarding certain stock transactions with related parties.
PalWeb issued 12,334,790 shares of common stock and 3,963,890 shares of preferred stock in fiscal year 2000 to retire certain liabilities.
In fiscal year 2000, PalWeb entered into consulting agreements with certain consultants in exchange for 11,000,000 shares of PalWeb common stock valued at $1,100,000. In fiscal year 2001, management and the consultants agreed to terminate the agreements and cancel the shares previously issued. As of May 31, 2001, the consultants have returned 10,700,000 shares. Management recorded a $175,000 charge to income in the first quarter of fiscal year 2001 resulting from penalty for failure to perform certain requirements under the agreements. The settlement released both parties from further liability including the penalty. A credit of $1,275,000 was recorded as gain on settlement on contracts and liabilities.
During 2001, PalWeb issued 100,000 shares of common stock to a creditor in settlement of $12,000 of accounts payable.
Preferred stock is convertible into common stock at a ratio of one to one. Preferred stock outstanding at May 31, 2001 totals 2,525,000 shares.
Effective May 1, 2001, PalWeb issued options to certain employees to purchase 9,500,000 shares of its common stock at $0.04 per share. The options are vested immediately and exercisable for a period of ten years. PalWeb applies APB Opinion No. 25 in accounting for its stock options and accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had PalWeb determined compensation cost at the grant date based on fair value under SFAS No. 123, PalWeb's net loss would have been increased to the pro forma amount indicated below:
Net loss, as reported $ (1,478,721)
Net Los, Pro forma $ (1,571,821)
The fair value of the options used to compute the compensation cost is estimated using the Black-Scholes option pricing model using the following assumptions:
Dividend Yield None Expected Volatility 1.47 Risk Free Interest Rate 5% Expected Holding Period 5 years |
Following is a summary of option activity for the year ended May 31, 2001:
Shares Exercise
(000's) Price
----- -------
Options outstanding at May 31, 2000 - $ -
Granted 9,500 .04
----- -------
Options outstanding at May 31, 2001 9,500 .04
|
The options are currently not exercisable since the exercise price of $0.04 is less than the common stock's par value of $0.10. Management anticipates proposing a change in the common stock's par value and expects to receive shareholder approval. Once the par value is appropriately reduced, all outstanding options will be exercisable.
PalWeb's financial instruments consist principally of accounts payable, accrued liabilities and notes and mortgages payable. Management estimates the market value of the notes and mortgage payable based on expected cash flows and believes these market values approximate carrying values at May 31, 2001 and 2000.
As discussed in Note 9, PalWeb sold its real estate segment for $1,352,000. Information relating to operations discontinued in 2001 and
2000 is as follows:
2001 2000
--------- ----------
Rental Income $ 110,040 $ 28,114
Income (loss) from operations 42,739 (9,425)
Gain on disposal 31,099 --
17. SUPPLEMENTAL INFORMATION OF CASH FLOWS
--------------------------------------
|
Non-cash investing and financing activities for the year ended May 31, are as follows:
2001 2000
--------- ----------
Common stock issuances in exchange for
(cancellations):
Consulting services (1,070,000) 1,481,271
Retirement of debt through
issuance of common stock 12,000 1,861,413
Acquisition of Pace Holding, Inc. -- 1,706,880
Elimination of related party debt
through default judgement -- 1,619,422
Conversion of preferred stock 25,000 239,389
Contribution of related party debt
to paid in capital -- 189,000
Reduction of debt and accrued interest
through foreclosure, negotiated settle-
ment or issuance of common stock 471,783 --
Interest paid 341,908 53,347
18. LEASE AGREEMENT
---------------
|
PalWeb leases commercial space from Onward, LLC, owned by Mr. Paul Kruger, chairman and CEO. The lease dated May 1, 2001, provides for a triple-net lease at the rate of $258,750 per year and is for one year with four one-year renewals.
Rental expense on operating leases totaled $199,380 and $153,830 for 2001 and 2000, respectively.
PFS is regulated by the Oklahoma Department of Securities. Under the Oklahoma Securities Act, PFS is required to maintain stockholder's equity, which is defined as stockholder's equity plus the allowance for credit losses and valuation allowances, if any, equal to at least 10 percent of thrift accounts, time certificates, and accrued interest
payable thereon. As of May 31, 2001, PFS is not in compliance with the Act as it pertains to the stockholder's equity requirement.
As discussed in Note 2, PFS has implemented a plan to liquidate the investment and savings certificates. PFS will redeem the securities over a four-year period ending December, 2004. A trustee has been appointed to oversee the redemption which requires liquidating substantially all of PFS' assets including its 43,500,000 shares of PalWeb common stock. If necessary, the trustee can "put" certain shares to Paul Kruger, Chairman and CEO, and Mr. Kruger would agree to purchase ths shares at a price sufficient to effect the liquidation throughout the period of liquidation.
In May 2001, PalWeb signed a letter of intent for a private placement of 500,000 shares of convertible preferred stock and warrants to purchase 150,000,000 shares of common stock for a total of $5,500,000. The letter of intent is with Westgate Capital Company, L.L.C., a Tulsa, Oklahoma based private investment group ("Westgate") and Hidalgo Trading Company, LLC, which is 100% owned by the Company's Chief Executive Officer, Paul Kruger. Of the total $5.5 million consideration, $1 million will be provided by Hidalgo through conversion of existing secured indebtedness of PalWeb and $4.5 million will be provided in cash from an investment fund managed by Westgate. One of the principals of Westgate is Warren Kruger, the bother of Paul Kruger. Proceeds will be used to construct pallet production equipment, repay current liabilities and for working capital. Under the terms of the proposed investment, each share of the convertible preferred stock will be convertible into 350 shares of common stock of the Company or a total of 175,000,000 shares, which is an effective conversion price of $0.0286 per share. Holders of the preferred stock will also be entitled to cumulative dividends of 12% per annum, $1.20 per share, or a total of $600,000. The warrants will be exercisable at a price of $0.10 per share for a period of four years and all but 25% of the warrants will be callable by PalWeb if common stock trades at prices of $0.15, $0.20 and $0.25 per share, respectively. Closing of the proposed investment is subject to Westgate obtaining the necessary financing agreements and customary closing conditions and is expected to occur in one or more tranches within 120 days. Hidalgo is not required to convert its secured debt unless the entire $4.5 million in cash equity is raised. There is no assurance that this private placement will close. The issuance of the convertible preferred will necessitate an adjustment to PalWeb's authorized common stock to accommodate the conversion provisions.
$2,750,000.00 Tulsa, Oklahoma March 5, 2001
FOR VALUE RECEIVED, the undersigned Borrowers, jointly and severally, promise to pay to the order of Yorktown Management and Financial Services, L.L.C. (the "Lender") at Tulsa, Oklahoma, or such other place as the holder may designate in writing, the principal sum of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000.00), or so much thereof as shall be disbursed, with interest thereon from the date of any advance hereunder until maturity at twelve percent (12%) per annum. The outstanding principal and accrued interest shall be payable in a single lump sum payment at maturity on October 15, 2001.
The undersigned agree that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the holder's rights hereunder, the undersigned will pay to the holder a reasonable attorney's fee, together with all court costs and other expenses of collection paid by such holder.
On the breach of any provision of this Note or of any other instrument evidencing or securing payment of this Note, at the option of the holder, and, should the undersigned fail to cure the breach within ten (10) days after receipt of written notice specifying the breach, the entire indebtedness hereby evidenced will become due, payable and collectible then or thereafter as the holder may elect, regardless of the date of maturity hereof.
This Note may be prepaid in whole or in part at any time, without penalty.
This Note is made, executed, delivered and to be performed in Tulsa, Oklahoma and shall be governed by and construed in accordance with the laws of the State of Oklahoma applicable to promissory notes made and to be performed therein, without reference to its conflict of laws provisions. Any suit, action or proceeding with respect to this Note shall be brought exclusively in the Oklahoma State courts of competent subject matter jurisdiction sitting in Tulsa County, Oklahoma, or in the United States District Court for the District of Oklahoma in which Tulsa County is located. The Borrowers hereby irrevocably waive any objections which Borrowers may now or hereafter have to the jurisdiction or venue of any suit, action or proceeding, arising out of or relating to this Note, brought in such courts, and hereby further irrevocably waive any claim that such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The Borrowers hereby further irrevocably waive any right to a jury trial in any action arising out of or in connection with this Note or any related agreements.
For the purpose of computing interest under this Note, payments of all or any portion of the principal sum owing under this Note will not be deemed to have been made until such payments are received by the Lender in collected funds.
All agreements between the Borrowers and the Lender are expressly limited so that in no event whatsoever, whether by reason of disbursement of the proceeds hereof or otherwise, shall the amount of interest or finance charge (as defined by the laws of the State of Oklahoma) paid or agreed to be paid by the Borrowers to the Lender exceed the highest lawful contractual rate of interest or the maximum finance charge permissible under the law which a court of competent jurisdiction, by final non-appealable order, determines to be applicable hereto. If fulfillment of any agreement between the Borrowers and the Lender, at the time the performance of such agreement becomes due, involves exceeding such highest lawful contractual rate or such maximum permissible finance charge, then the obligation to fulfill the same shall be reduced so that such obligation does not exceed such highest lawful contractual rate or maximum permissible finance charge. If by any circumstance the Lender shall ever receive as interest or finance charge an amount which would exceed the amount allowed by applicable law, the amount which may be deemed excessive shall be deemed applied to the principal of the indebtedness evidenced hereby and not to interest. All interest and finance charges paid or agreed to be paid to the Lender shall be prorated, allocated and spread throughout the full period of this Note. The terms and provisions of this paragraph shall control all other terms and provisions contained herein and in any of the other documents executed in connection herewith. If any provision of this Note or the application thereof to any party or encumbrance is held invalid or unenforceable, the remainder of this Note and the application of such provision to other parties or circumstances shall not be affected thereby, the provisions of this Note being severable in any such instance.
The makers, endorsers, sureties, guarantors and all other persons who may be liable for all or any part of this obligation severally waive presentment for payment, protest, demand and notice of nonpayment. Said parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the security for the payment hereof, or release of any party liable for payment of this obligation. Any such extensions or release may be made without notice to any such party and without discharging said party's liability hereunder.
The failure of the Lender to exercise any of the remedies or options set forth in this Note or in any instrument securing payment hereof, or any agreement by the Lender to forebear from exercising any available remedy for any specified period upon the occurrence of one or more of the events of default shall not constitute a waiver of the right to exercise the same or any other remedy at law, or in equity, at any subsequent time in respect to the same or any other event of default. The acceptance by the Lender of any payment which is less than the total of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing remedies or options at that time or at any subsequent time, or nullify any prior exercise of any such remedy or option, without the express consent of the Lender, except as and to the extent otherwise provided by law.
"BORROWERS" PALWEB CORPORATION
By: /s/ Paul A. Kruger
----------------------------------
Paul A. Kruger, President
PLASTIC PALLET PRODUCTION, INC.
By: /s/ Paul A. Kruger
----------------------------------
Paul A. Kruger, President
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AGREEMENT
This Agreement is made and entered into this 27th day of April, 2001, by and between FORESIGHT, INC. (hereinafter referred to as "Foresight"), and PALWEB CORPORATION (hereinafter referred to as "PalWeb").
WITNESSETH:
For and in consideration of the mutual covenants hereinafter contained, the parties agree as follows:
1. Recitations. Foresight leases the property known as Suites 100, 147 and 200, 2500 McGee Drive, Norman, Oklahoma 73072 (the "Leased Premises") from Onward, L.L.C. (hereinafter referred to as "Onward"). With Onward's consent, Foresight has subleased a portion of the Leased Premises to PalWeb for the office of one of its employees, Arlin Plender. Additionally, Foresight permits PalWeb to utilize part of the time of its employees, Julie Barksdale and Myonza Jones, to assist PalWeb in the conduct of its business, and Foresight pays expenses for telephone, fax, postage, copying and miscellaneous other items that should be allocated to PalWeb.
The parties have agreed that PalWeb shall pay Foresight a fee for the services and space provided and expenses incurred, as set forth herein.
2. Agreement. Until this Agreement is terminated, Foresight will (i)
make available to PalWeb a portion of the Leased Premises for one full-time
employee, currently Arlin Plender; (ii) provide part-time services of its
employee, Julie Barksdale, to assist PalWeb in the conduct of its business; and
(iii) pay the expenses of usual and customary office usage for telephone, fax,
copying, postage and miscellaneous other expenses. In consideration therefor,
PalWeb shall pay Foresight monthly the sum of $3,000, effective January 1, 2001,
and on the fifth day of each month thereafter.
3. Termination. This Agreement may be terminated at any time by either party upon 30 days' written notice to the other.
4. Independent Relationship. Nothing in this Agreement or in the officing or expense sharing arrangements described herein shall, in any way, constitute and appoint either party as the agent for the other. Each party is an independent operating business, having no relationship whatsoever with the other, and neither party is authorized to enter into any agreement or, in any manner, bind the other. Each party agrees to indemnify the other from any claims or liabilities (including attorney's fees, as they are incurred) asserted against them as a consequence of the actions of the other or any of their employees.
5. Miscellaneous. It is further understood and agreed as follows:
5.1 Time. Time is of the essence of this Agreement.
5.2 Attorney's Fees. In the event either party hereto files suit in order to enforce or interpret the terms and provisions of this Agreement, the prevailing party in such litigation shall be entitled to recover from the other its reasonable attorney's fees and expenses incidental to the litigation.
5.3 Entire Agreement. This instrument constitutes the entire agreement of the parties. It supersedes any and all other agreements, either oral or in writing, between the parties hereto. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended by oral agreement, but only by an agreement in writing, signed by the parties hereto.
5.4 Binding Effect. The provisions of this Agreement shall inure to the benefit of and bind the executors, administrators, successors, heirs and legal representatives of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
"FORESIGHT" Foresight, Inc.
By: /s/ Mark R. Kidd
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Title: President
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"PALWEB" PalWeb Corporation
By: /s/ Paul A. Kruger
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Title: President
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LEASE AGREEMENT
THIS LEASE AGREEMENT, entered into effective the 1st day of May 2001, by and between ONWARD, L.L.C., an Oklahoma limited liability company ("Landlord"), and PLASTIC PALLET PRODUCTION, INC., a Texas corporation ("Tenant").
W I T N E S S E T H:
In consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
1. LEASED PREMISES. Landlord does hereby lease, demise and let unto Tenant and Tenant does hereby lease from Landlord, the real property described on Exhibit "A" attached hereto and made a part hereof, located at 1607 West Commerce Street, Dallas, Texas, together with all buildings and other improvements being hereinafter collectively referred to as the "Leased Premises").
2. INITIAL LEASE TERM. This Lease shall be for an initial term of one
(1) year, commencing on the 1st day of May, 2001, and terminating on the 30th
day of April, 2002 (the "Initial Term").
3. RENEWAL TERM. Provided this Lease is still in effect and Tenant is
not in default hereunder, Tenant may extend this Lease, subject to Landlord's
rights of termination as set forth herein, for four (4) additional terms of one
(1) year each (each herein called the "Renewal Term"), each Renewal Term to
begin at the expiration of the preceding Initial Term or Renewal Term, whichever
is applicable. In order to exercise this option to extend, Tenant must provide
Landlord at least ninety (90) days written notice prior to the expiration of the
Initial Term or the applicable Renewal Term. If Tenant does not provide notice
exercising the option to extend, then this Lease shall terminate at the
expiration of the Initial Term or applicable Renewal Term.
4. RENTAL. During the Initial Term and any Renewal Term hereunder, Tenant hereby covenants and agrees to pay Landlord as rent for the Leased Premises, the sum of Two Hundred Fifty-Eight Thousand Seven Hundred Fifty and No/100 Dollars ($258,750.00) per year, in equal monthly installments of Twenty-One Thousand Five Hundred Sixty-Two and 50/100 Dollars ($21,562.50), each without demand, payable in advance on the first day of each and every calendar month during the term of this Lease. All rent and other amounts to be paid to the Landlord hereunder shall be payable and mailed to Landlord at Landlord's address set forth in the notice paragraph below, unless Landlord designates in writing a different mailing address or a different payee for said rent. Rent for any partial month shall be pro-rated based upon the number of days during such month that this Lease is in effect.
5. TRIPLE NET LEASE. This Lease shall be considered a "triple net lease" in all respects
and Landlord shall have no obligation or liability with respect to the Leased Premises, it being the intent of the parties that Landlord shall receive the rent reserved hereunder free from any charges, taxes, assessments, fees, impositions, expenses, deductions or offsets of every kind or nature.
6. PAYMENT OF REAL ESTATE TAXES AND ASSESSMENTS. Tenant shall pay all taxes and assessments against the Leased Premises during the Initial Term and any Renewal Term of this Lease. The taxes and assessments shall be adjusted and prorated so that the Landlord shall pay its prorated share for the periods preceding and following the term of this Lease and the Tenant shall pay its prorated share for such term. The Tenant shall furnish to the Landlord for its inspection, within fifteen (15) days after the date any amount is payable by the Tenant, official receipts from the appropriate taxing authority or other proof satisfactory to the Landlord evidencing payment.
7. INSURANCE. Landlord shall keep the Leased Premises insured at all times during the Initial Term and any Renewal Term of this Lease against loss or damage by fire and such other extended hazards as are embraced by the standard extended coverage endorsement approved for use in the State in which the Leased Premises are located covering the full insurable value of the improvements located on the Leased Premises. During the Initial Term and any Renewal Term of this Lease, Tenant shall reimburse Landlord for the cost of such insurance within fifteen (15) days after receipt of written notice from the Landlord setting forth the premium therefor. Landlord shall have no obligation to provide insurance covering the Tenant's contents, personal property, equipment, fixtures or alterations to the Leased Premises.
Tenant shall, at its sole cost and expense, carry on its personal property including, without limitation, fixtures, equipment and inventory in the Lease Premises, fire and such other extended hazards as are embraced by the standard extended coverage policy approved for use in the State in which the Leased Premises are located. Tenant shall, at Tenant's sole cost and expense, obtain and keep in force during the term hereof comprehensive general public liability insurance with minimum limits of $3,000,000 on account of bodily injuries or death and, property damage insurance with minimum limits of $1,000,000.
All policies of insurance provided for under this paragraph shall name Landlord, any mortgage lender as Landlord shall designate, and Tenant as named insureds to the extent of their respective interests. All such policies of insurance shall provide that any loss shall be payable as therein provided notwithstanding any act or negligence of Landlord, Tenant or any other occupant of the Leased Premises which might otherwise result in a forfeiture of said insurance.
All such insurance carried by Tenant shall further contain a clause that the insurer thereof will not cancel or amend the policy without first giving Landlord thirty (30) days advance written notice. All insurance required to be obtained and maintained hereunder shall be with an insurance company approved by Landlord and a copy of the policy and/or certificate of insurance shall be delivered to Landlord. If Tenant refuses or neglects to secure and maintain insurance policies in compliance with the provisions of this Section, Landlord may, but shall not be required to, secure and maintain such insurance and Tenant shall immediately pay the cost thereof to Landlord as additional rent.
8. MUTUAL WAIVER OF SUBROGATION. Notwithstanding anything to the contrary contained in this Lease, Landlord and Tenant do each hereby release the other from any and all liability or responsibility (to the other or to anyone claiming through or under the other by way of subrogation or otherwise) for any loss or damage to property caused by fire, any of the extended coverage perils, or any other insured peril, even if such fire or other casualty shall have been caused by the negligence of the other party or of anyone for whom such party may be responsible. Such waiver of subrogation shall be effective with respect to such loss or damage and each policy hereunder shall contain a clause of endorsement to the effect that any release shall not adversely affect or impair said policies or prejudice the right of the releasing party to recover thereunder. Landlord and Tenant each agree that their policies shall include such a clause or endorsement.
9. LIMIT TO LANDLORD'S LIABILITY. The Landlord shall not be liable for any damage to property of Tenant or of others located on the Leased Premises, nor for the loss of or damages to any property of Tenant or of others by theft, and Landlord shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, smoke, rain, or snow, bursting of or leaks from any part of the Leased Premises or from the pipes, appliances, or plumbing works, or from the roof, street or subsurface, or from any other place or by dampness, stoppage or leakage from sewer pipes or from any other cause whatsoever, provided, that nothing herein shall exempt the Landlord from liability as a result of injury to persons or property resulting from latent defects in the construction of the improvements on the Leased Premises by Landlord or breach by Landlord of any of Landlord's obligations under this Lease or unless the foregoing shall be caused by the willful, intentional or negligent act or omission of Landlord. All property of Tenant kept or stored on the Leased Premises shall be so kept and stored at the risk of Tenant only and unless herein otherwise provided, Tenant shall hold Landlord harmless from any claim arising out of damage to the same except for any willful, intentional or negligent act or omission of Landlord in connection with or arising out of said property.
10. REPAIRS AND MAINTENANCE. Tenant represents and warrants to Landlord
that it has had the opportunity to inspect the Leased Premises prior to the
execution of this Lease and that the same are clean and in good repair. Tenant
shall keep and maintain the interior and exterior of the Leased Premises in good
order, condition and repair including, without limitation, (a) the roof, down
spouts, gutters, sidewalks, walls, plate glass of windows and doors; (b) all
mechanical, electrical and heating and air conditioning systems (including but
not limited to all duct work and transmission conduits), and all plumbing pipes,
fixtures and connections both in and under the Leased Premises; (c) all interior
and exterior repairs of a structural nature or arising out of structural defect,
of which plastered surfaces shall be considered a part; (d) the parking area
(which shall include without limitation, keeping such area repaired, clear and
free of debris, lighted and striped); (e) the landscaping on the Leased
Premises; (f) all tubes and bulbs used in lighting in the Leased Premises; and
(g) all of Tenant's trade fixtures, equipment, furniture and other personal
property placed in or about the Leased Premises, regardless of whether or not
permanently affixed to the Leased Premises. Tenant shall make all repairs to
said improvements when necessary. Tenant shall keep and maintain all portions of
the Leased Premises and other improvements in a clean and orderly condition.
If Tenant fails to make the repairs required of Tenant herein, or in the event of an emergency, Landlord may, at its option, make the repairs in which event Tenant shall reimburse Landlord for the cost thereof, together with ten percent (10%) of said cost for administrative fees, as additional rent hereunder within five (5) days of demand therefor.
11. USE OF LEASED PREMISES. Tenant shall at all times during the Initial Term and any Renewal Term, occupy the Leased Premises and use the same solely for the design, development and manufacture of plastic pallets and related machinery and for no other use. Tenant shall not use the Leased Premises for any purpose that would constitute a nuisance or in any manner violate any ordinance, law, regulation or statute of any governmental authority.
12. EQUIPMENT, FIXTURES AND SIGNS. Tenant shall have the right, at Tenant's sole cost and expense to place, erect, install, maintain and operate on the Leased Premises, such equipment, fixtures, signs, awnings, advertising matter or other thing of any kind which Tenant may reasonably require for the purposes of its business so long as the same are not in violation of any existing laws, ordinances or governmental regulations. Upon termination or expiration of the Lease, any equipment, fixtures, signs, awnings advertising matter or other thing placed upon the Leased Premises by Tenant may be removed by Tenant at its sole cost and expense. In such event, Tenant shall repair any damage caused by such removal and shall restore the site to the same condition existing at the commencement of this Lease.
13. ENVIRONMENTAL MATTERS. Tenant, its agents, contractors, licensees, employees and invitees, shall not handle, use, manufacture, store, generate or dispose of any flammables, explosives, radioactive materials, hazardous waste or materials, toxic waste or materials or any other environmentally hazardous substances, petroleum products or derivatives (collectively the "Hazardous Materials"), on, under, in or about the Leased Premises except in strict and continuous compliance with all applicable laws, ordinances, regulations and orders. Tenant hereby agrees to defend, indemnify and hold Landlord harmless from and against any and all claims, losses, liabilities, assessments, remediation costs, damages, attorney's fees and expenses, of every type whatsoever, arising out of or in any way connected with the use, manufacture, storage, generation, release or disposal of any Hazardous Materials on or about the Leased Premises by Tenant, its agents, contractors, licensees, employees or invitees. The indemnity obligations of Tenant under this provision shall survive any termination of the Lease. Tenant shall take all reasonable steps and precautions to prevent the introduction onto the Leased Premises of any Hazardous Materials, caused by third parties.
14. TENANT ORGANIZATION; COMPLIANCE WITH LAWS, ORDERS, ORDINANCES. Tenant represents and warrants that Tenant is a Corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to execute and fulfill the obligations of this Lease. Tenant shall observe and comply with the requirements of all policies of public liability, fire and all other policies of insurance at any time in
force with respect to the Leased Premises or improvements or to the use or manner of use of the same.
15. ASSIGNMENT AND SUBLETTING. Tenant may not assign or sublet the Leased Premises, in whole or in part, or mortgage or otherwise encumber the Leased Premises, unless the prior written consent of Landlord is first obtained, which consent shall not be unreasonably withheld. Any such attempted assignment, sublease, mortgage, or other encumbrance without such consent shall be void and shall constitute a default under this Lease. Consent by Landlord to any assignment or sublease shall not be deemed to be consent to any further or other assignment or sublease.
16. INSPECTION OF LEASED PREMISES. Landlord shall have the right to enter upon the Leased Premises or any portion thereof during the regular business hours of Tenant for the purpose of inspecting the same or correcting any condition which may exist thereon which is or may be in violation of this Lease, but such rights shall be exercised in a manner so as not to interfere with the business of the Tenant. Nothing herein contained shall prevent Landlord from entering upon the Leased Premises at any time and under any condition for the purpose of correcting any emergency or the violation of any ordinance, statute or law by Tenant.
17. DAMAGE OR DESTRUCTION. In the event the Leased Premises should be partially destroyed (meaning less than twenty-five percent [25%]) as a result of fire or other casualty, regardless of the cause, then Tenant shall, at its sole cost and expense promptly, and in any event within thirty (30) days, commence to build or place the same in as good condition as prior to such casualty, which rebuilding or replacement shall be completed within six (6) months following such casualty. In the event the Leased Premises should be substantially (meaning twenty-five percent [25%] or more) destroyed as a result of fire or other casualty, or it should be untenable and unfit for occupancy, then, Tenant may at Tenant's sole option, expressed to Landlord in writing within thirty (30) days of such occurrence, (a) promptly, and in any event within thirty (30) days of such notice from Tenant, commence to build or replace the same as aforesaid, which rebuilding and replacement shall be completed within six (6) months following such substantial destruction, or (b) terminate this Lease, effective on the date of such casualty in which case Tenant shall assign to Landlord, all proceeds of insurance covering such casualty which relates solely to the Leased Premises and not to any of Tenant's personal property. Monthly rent shall equitably abate during such period any such portion of the buildings on the Leased Premises are untenable or unfit for occupancy, based upon the area of such portion of the buildings rendered untenable or unfit for occupancy in the event of partial destruction, or substantial destruction subsequent to which this Lease is not terminated by Tenant pursuant to the terms of this Lease, divided by the total area of the buildings on the Leased Premises.
18. UTILITIES. The Leased Premises are presently served by gas, water, electric, sewer and other utilities commonly used by commercial buildings similar to the Leased Premises. Tenant shall be responsible for the repair, reconnection or replacement of any of the lines, conduits, connectors or plumbing which connect the Leased Premises to any such utilities and their common source of supply. At all times during the term of this Lease, Tenant shall pay all deposits and charges for
water, sewer, electricity, gas, trash or refuse hauling and any other public or private utility service used or consumed by Tenant on the Leased Premises.
19. ADDITIONS, ALTERATIONS OR REMODELING. Tenant shall have the right, at Tenant's sole cost and expense and with the prior written consent of Landlord obtained in each instance, such consent to not be unreasonably withheld, to make any alterations, improvements or additions to the Leased Premises. Any such alterations, improvements or additions shall be made in compliance with all local ordinances and public authorities having jurisdiction thereof. All alterations, improvements or additions made by Tenant shall become the property of the Landlord. In such event, Tenant shall repair any damage caused by such removal and shall restore the site to the same condition existing upon commencement of this Lease.
20. CONDITION OF PROPERTY. Tenant has inspected the Leased Premises prior to the commencement of this Lease and accepts the same in its present condition. The Leased Premises are being leased to Tenant in an "AS IS, WHERE IS, WITH ALL FAULTS" condition as of the date first above written. Tenant's taking possession shall be conclusive evidence against Tenant that the Leased Premises were in good order, repair, and satisfactory condition on the effective date of this Lease. Landlord has made no promise to Tenant to alter, remodel, or improve the Leased Premises or any adjacent area, nor made any representation regarding the condition of the Leased Premises.
21. BROKERAGE FEES. The parties covenant, warrant, and represent to each other that no broker was instrumental in consummating this Lease and neither party had any conversation or prior negotiations with any broker concerning the renting of the Leased Premises. Each party shall protect, indemnify, save, and keep harmless the other against any brokerage commission allegedly due or attorney's fees, arising out of or from any claims for brokerage commissions and/or finders' fees resulting from any conversation or negotiations by such party with any broker or any other person.
22. EVENTS OF DEFAULT. The following events shall be deemed to be events of default by Tenant hereunder: (a) Failure by Tenant to pay any portion of the rent required to be paid hereunder or failure to pay any other financial obligation imposed upon Tenant by the terms hereof within five (5) days of when due; (b) Failure by Tenant to comply with any term, covenant or provision of this Lease, other than as referred to in subparagraph (a) above and failure to correct such failure within ten (10) days after written notice thereof to Tenant from Landlord specifying such failure and requesting that it be remedied, or if such failure cannot with due diligence be corrected within 10 days, failure to commence to correct the same and/or, having so commenced to correct such failure, neglecting to prosecute such correction with due diligence to completion; (c) Failure of Tenant to carry on its business continuously in the Leased Premises; (d) If an order, judgment or decree shall be entered by any court adjudicating the Tenant a bankrupt or insolvent, or approving a petition seeking reorganization of the Tenant or appointing a receiver, trustee or liquidator of the Tenant, or of all or a substantial part of its assets; (e) Tenant shall file an answer admitting the material allegations of a petition filed against the Tenant in any bankruptcy, reorganization or insolvency
proceeding or under any laws relating to the relief of debtors, readjustment or indebtedness, reorganization, arrangements, composition or extension; (f) Tenant shall make any assignment for the benefit of creditors or shall apply for or consent to the appointment of a receiver, trustee or liquidator of Tenant, or any of the assets of Tenant; (g) Tenant shall file a voluntary petition in bankruptcy, or shall admit in writing its inability to pay its debts as they come due or shall file a petition or an answer seeking reorganization or arrangement with creditors or take advantage of any insolvency laws; or (h) A decree or order appointing a receiver to the property of Tenant shall be made and such decree or order shall not have been vacated within sixty (60) days from the date of entry or granting thereof.
Upon the occurrence of any of the aforesaid events of default Landlord shall have the option to pursue any one or more of the following remedies without any demand or notice whatsoever: (a) terminate this Lease, in which event Tenant shall immediately surrender the Leased Premises to Landlord; (b) without terminating this Lease, enter upon the Leased Premises and perform whatever Tenant is obligated to do under the terms of this Lease and Tenant shall reimburse Landlord upon demand for any expenses which Landlord may incur in effecting compliance with Tenant's obligations under this Lease; (c) whether or not Landlord terminates this Lease, recover all rent for a period equal to the longer of (i) the remainder of the Initial Term or applicable Renewal Term of this Lease or (ii) two months of rent (and Landlord shall have no obligation to re-let the Leased Premises); or (d) take any other action allowed by law.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law. Nothing provided by law or contained herein shall be deemed to obligate Landlord to expend any funds.
Failure or delay by Landlord to enforce any one or more of the remedies herein provided or provided by law upon any event of default shall not be deemed or construed to constitute a waiver thereof or preclude the exercise thereof during the continuation of any default hereunder or be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants herein contained.
In the event of default by Tenant of any of the terms and conditions of this Lease, and upon such default, interest at the highest rate allowed by law in the State in which the Leased Premises are situated shall accrue on all amounts due or which will become due, including costs and attorney's fees.
23. REDELIVERY OF LEASED PREMISES. Tenant shall, upon termination or expiration of this Lease, peacefully quit, surrender and deliver the Leased Premises unto Landlord empty, broom clean and in as good a condition as when received, normal wear and tear excepted. If Tenant shall leave any personal property in or on the Leased Premises for more than three (3) days after termination, Tenant shall be conclusively deemed to have abandoned such personal property and Landlord may dispose of such property as it sees fit, with no obligation to account to Tenant.
24. INDEMNIFICATION. During the term hereof, Tenant covenants and agrees to hold Landlord harmless from any claims, demands, judgments, losses, costs, expenses or damages of any character or nature regardless of by whom imposed including but not limited to claims for loss or damage to any property or injury to or death of any person asserted by or on behalf of any person, arising out of, resulting from or in any way connected with Tenant's occupancy and/or use of the Leased Premises or the condition, occupancy, use, possession, conduct or management or any work done in or about the Leased Premises or any portion thereof attributable to Tenant or its assignees or subtenant. Tenant further covenants and agrees, at Tenant's expense, to pay, indemnify and save Landlord harmless of, from and against all costs, counsel fees, expenses and liabilities incurred in any action or proceeding brought by reason of any such claim or demand.
25. CONDEMNATION. In the event the entire Leased Premises shall be taken in condemnation proceedings or by exercise of any right of eminent domain for public or quasi public use, this Lease shall terminate as of the date of said taking and all unearned rent and other charges paid in advance shall be refunded to Tenant after deducting any charges owed by Tenant to Landlord, and Tenant shall surrender possession of the Leased Premises to Landlord. In the event a portion of the Leased Premises shall be taken by such proceedings, either party may terminate this Lease, in which event Landlord and Tenant shall be relieved of all further liability hereunder, or both parties may agree to continue this Lease in effect with an appropriate reduction of rent during the remainder of the lease term. The award for any such taking shall belong entirely to Landlord. The Tenant shall be entitled to make a claim in its own name to the condemning authority for the value of any furniture, trade fixtures, trade equipment, merchandise or personal property of any kind belonging to the Tenant, and not forming a part of the Leased Premises, or for the cost of moving all of the same or for moving such business as is necessary.
26. LIENS. Tenant shall at all times keep the Leased Premises free and clear of any liens, charges or claims arising from any act or omission to act on the part of Tenant in connection with the maintenance and repair of the Leased Premises or the installation therein of any fixtures and equipment. In the event any such liens, charges or claims are made or filed against the Leased Premises, Tenant agrees to promptly discharge the same and deliver to Landlord evidence thereof.
27. QUIET ENJOYMENT. So long as Tenant is not in default of the terms hereunder, Tenant shall peacefully hold and quietly enjoy the Leased Premises without interruption by Landlord, any mortgagee, or any other person claiming under Landlord or any mortgagee, except as otherwise provided herein.
28. SUBORDINATION. This Lease is subject and subordinate at all times to any present or future mortgage or deed of trust constituting a lien on the Leased Premises, and to all renewals, modifications, consolidations, replacements and extensions thereof, to the full extent of the indebtedness secured thereby, with the same force and effect as if the mortgage had been executed, delivered and duly recorded prior to the execution of the Lease. Tenant shall execute and deliver any instrument requested by Landlord in confirmation of such subordination within ten (10) days of Landlord's request.
29. ESTOPPEL CERTIFICATE. Within ten (10) days after request by the Landlord, Tenant shall, without charge, deliver a duly executed and acknowledged estoppel certificate to the Landlord or any mortgagee, purchaser, assignee of mortgagee or purchaser, or any other person, firm or corporation reasonably requested by Landlord. It is intended that any such statement delivered pursuant to this paragraph may be relied upon by Landlord or any mortgagee, purchaser, assignee of mortgagee or purchaser, or any other person, firm or corporation relying upon such statement.
30. ATTORNMENT. In the event that, by reason of the foreclosure of the mortgage for any reason or due to any exercise of a power of sale or as a result of the taking of a deed in lieu of foreclosure, mortgagee or any successor or assignee of mortgagee succeeds to the interest of the Landlord under this Lease, then upon receipt of notice from the mortgagee or such successor or assignee that it has succeeded to the rights of the Landlord under this Lease, Tenant hereby agrees to recognize mortgagee or such successor or assignee as Tenant's landlord under this Lease and hereby agrees to attorn to mortgagee or such successor or assignee. Said attornment is to be effective and self-operative without the execution of any other instrument immediately upon mortgagee or any successor or assignee of mortgagee succeeding to the rights of the Landlord under the Lease, and this Lease shall continue in accordance with its terms between Tenant and mortgagee or any successor assignee of mortgagee, as Landlord; provided, however, that mortgagee or any successor or assignee of mortgagee shall not: (a) be bound by any prepayment of rent more than 60 days in advance; (b) be bound by any amendment or modification of this Lease made without the consent of mortgagee or its successor or assignee; (c) be personally liable under this Lease, and mortgagee's or its successor's or assignee's liability under the Lease shall be limited to the interest of mortgagee or its successor or assignee in the Leased Premises; (d) be liable, except by way of set-off, for any act, omission, neglect, or default of any prior landlord under this Lease including, without limitation, the Landlord; and (e) be subject to any claims, credits, offsets, or defenses which Tenant might have against any prior landlord under this Lease including, without limitation, the Landlord. Tenant agrees to execute and deliver within ten (10) days of Landlord's request or such successor's request an attornment agreement certifying as to the matters set forth in this paragraph.
31. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of $0.00 as a security deposit (the "Security Deposit"), to be held by Landlord without liability for interest and as security for the performance by Tenant of Tenant's covenants and obligations under this Lease. Landlord may commingle the Security Deposit with Landlord's other funds, without liability to Tenant. Landlord may, from time to time, without prejudice to any other remedy, in each case with five (5) days prior written notice, use the Security Deposit to the extent necessary to make good any arrearage of rent or to satisfy any other covenant, provision or obligation of Tenant hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord, on demand, the amount so applied in order to restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease and has paid in full all rent, taxes, utility charges and any other amounts payable by Tenant hereunder, then within thirty (30) days after the termination of this Lease, the balance of the Security Deposit remaining after such application shall be returned by Landlord to Tenant. If Landlord transfers its interest in the Leased Premises during the term of this
Lease, Landlord may assign the Security Deposit to the transferee and thereafter shall have no further liability for the return of such Security Deposit.
32. TIME OF ESSENCE. Tenant agrees that time is of the essence in the performance of each and every term, covenant and condition of this Lease.
33. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Lease constitutes the entire understanding and agreement by and between the parties hereto relative to the subject matters herein set forth. There are no terms, obligations, covenants, statements, representations, warranties or conditions relating to the subject matters hereof other than those specifically contained herein. This Lease supersedes all prior oral or written negotiations, agreements and covenants relative to the subject matters herein contained including, without limitation, that certain Lease Agreement between Landlord and Tenant dated April 5, 1999, as amended by that certain Letter Agreement dated April 8, 1999. No amendment or modification of the terms of this Lease shall be deemed valid unless first reduced to writing and signed by both parties hereto and no waiver of any of the terms of this Lease shall be binding unless reduced to writing and signed by the party or parties sought to be charged with such waiver.
34. RELEASE OF PURCHASE OPTION. Tenant hereby releases its option to purchase the real property and improvements at 1607 Commerce Street, Dallas, Texas, as set forth in that certain Letter Agreement dated April 8, 1999, it being the intention of the parties hereto that such purchase option is hereby extinguished and Tenant shall have no right to purchase same.
35. SEVERABILITY. If any provision of this Lease is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Lease will remain in full force and effect. Any provision of this Lease held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.
36. BINDING EFFECT. It is agreed that the provisions, covenants and conditions of this Lease shall be binding upon each of the parties hereto, their heirs, successors and permitted assigns.
37. NOTICES AND COMMUNICATIONS. All notices consents, waivers and other communications under this Lease shall be deemed to be properly given and served if sent by registered or certified mail, postage prepaid, with return receipt requested, hand delivery (with confirmation of receipt), prepaid overnight delivery service, or facsimile with confirmation sheet if sent to the following:
If to Landlord: Onward, L.L.C.
2500 McGee Drive, Suite 100
Norman, Oklahoma 73072
Attention: Paul A. Kruger
- 10 -
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If to Tenant: PalWeb Corporation
2500 McGee Drive, Suite 147
Norman, Oklahoma 73072
Attention: Paul A. Kruger
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Unless otherwise stated, the effective date of any such notice or communication shall be the date on which the same is received. Either party hereto may change the address to which notice is to be sent by prior written notice to the other party.
38. APPLICABLE LAW. This Lease is to be interpreted, construed and enforced in accordance with the laws of the State in which the Leased Premises is located, without regard to its conflict of laws principles.
39. DUPLICATE ORIGINALS. Any fully executed copy of this Lease shall be deemed for all purposes as a duplicate original hereof.
40. AGENCY. Nothing herein contained shall be deemed or construed by the parties hereto nor by any third party as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, nor shall any act of the parties hereto be deemed to create any relationship between the parties hereto other than the relationship of landlord and tenant.
41. ATTORNEY FEES AND COSTS. In the event either party hereto shall file an action to enforce any agreement contained in this Lease or for breach of any covenant or condition hereof, then the prevailing party in any such action shall be entitled to recover from the other party or parties attorney's fee for the services of the prevailing parties' attorney, together with any and all costs of such action, said fees to be fixed by a court having competent jurisdiction over the subject matter in dispute.
42. EXECUTION IN COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which will be deemed an original copy of the Lease and all of which, when taken together will be deemed to constitute one and the same agreement.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease the day and year first above written.
"LANDLORD" ONWARD, L.L.C.
an Oklahoma limited liability company
By: /s/ Paul A. Kruger
----------------------------------
Name: Paul A. Kruger
--------------------------------
Title: Manager
-------------------------------
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"TENANT" PLASTIC PALLET PRODUCTION, INC.,
a Texas corporation
By: /s/ Paul A. Kruger
----------------------------------
Name: Paul A. Kruger
--------------------------------
Title: CEO
-------------------------------
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EXHIBIT "A"
LEGAL DESCRIPTION
BEING a tract of land in the City of Dallas, Texas, in the Wm. Coombs Survey Abstract No. 290, and being part of Block 26 through 31 in City Block 7263, according to the plat of West Dallas recorded in Volume 106, Page 170, of the Deed Records of Dallas County, Texas, and being a part of a tract of land conveyed to Wyatt Metal and Boiler Works by Texas Northern Railroad Company, dated November 7, 1919, and recorded in Volume 799, Page 571, of the Deed Records of Dallas County, Texas, and part of two tracts of land conveyed to Wyatt Metal and Boiler Works by Gulf Colorado, and Santa Fe Railroad Company, dated August 28, 1948, and recorded in Volume 3089, Page 321 and 327, of the Deed Records of Dallas County, Texas, and being more particularly described as follows:
BEGINNING at a 3/8" iron rod set for corner at the Northeast Intersection of the North line of West Commerce Street, with the East line of Vilbig Road, said point being the Southwest corner of City Block 31/7263;
THENCE North 0 degrees 06 minutes 19 seconds West, with the East line of said Vilbig Road, a distance of 313.88 feet to a 3/8" iron rod set for corner;
THENCE in a Easterly direction with the North line of a tract of land conveyed to Wyatt Metal and Boiler Works in deed filed in Volume 3089, Page 326, and Volume 3089, Page 321, of the deed records of Dallas County, Texas, and the following course and distances;
SOUTHEASTERLY direction with a curve to the right having a radius of 1091.34 feet, an angle of 02 degrees 56 minutes 25 seconds, a distance of 56.0 feet to a 3/8" iron rod set for corner;
SOUTH 80 degrees 55 minutes 26 seconds East, a distance of 750.50 feet to a 3/8" iron rod set for corner in a curve to the left having a radius of 3028.19 feet, an angle of 02 degrees 05 minutes 10 seconds, a distance of 110.25 feet, to a 1/2" iron rod found for corner;
THENCE South 0 degrees 03 minutes 32 seconds East, 174.17 feet to a 1/2" iron rod found for corner in the North line of West Commerce Street;
THENCE North 89 degrees 52 minutes 26 seconds West, 905.30 feet to the POINT OF BEGINNING and containing 220,922.916 square feet or 5.072 acres of land.
THIS EXTENSION AGREEMENT (the "Agreement") is made and entered into
effective as of June 1, 2001, by and between HILDALGO TRADING COMPANY, L.C. (
the "Lender") and PALWEB CORPORATION and PLASTIC PALLET PRODUCTION, INC. (the
"Borrowers").
R E C I T A L S:
A. Borrowers made, executed and delivered to Lender that certain Renewal Promissory Note dated July 27, 2000, payable to the order of Lender in the stated principal amount of $400,000.00 and maturing December 1, 2000 (the "Renewal Note").
B. Borrowers additionally made, executed and delivered to Lender that certain Promissory Note dated August 15, 2000, payable to the order of Lender in the stated principal amount of $350,000.00 and maturing December 1, 2000 (the "Additional Note").
C. Borrowers additionally made, executed and delivered to Lender that certain Promissory Note dated November 15, 2000, payable to the order of Lender in the stated principal amount of $400,000.00 and maturing June 1, 2001 (the "Second Additional Note").
D. Pursuant to that certain Extension and Modification Agreement between the Borrowers and Lender dated December 1, 2000, the maturity date of the Renewal Note and Additional Note were extended to June 1, 2001, and the interest rates applicable thereto were reduced from eighteen percent (18%) per annum to twelve percent (12%) per annum.
E. To secure payment of the Renewal Note, Additional Note and Second Additional Note, Borrowers each made, executed and delivered to Lender a certain Security Agreement dated July 27, 2000.
F. Borrowers and Lender desire to extend the maturity of the Renewal Note, Additional Note and Second Additional Note to October 15, 2001, effective as of the date of this Agreement.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the promises and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrowers and Lender agree as follows:
1. Extension of Maturity. Borrowers and Lender hereby agree to extend the maturity of the Renewal Note, Additional Note and Second Additional Note to October 15, 2001, effective as of the date of this Agreement. All other terms and conditions set forth in the Renewal Note, Additional Note and Second Additional Note shall continue in full force and effect, and all Security
Agreements, collateral documents and other instruments securing payment of the Renewal Note, Additional Note and Second Additional Note shall continue in full force and effect as security for payment of the indebtedness evidenced by said notes.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed effective as of the date first above written.
"Borrowers" PALWEB CORPORATION
By: /s/ Paul A. Kruger
------------------------------------
Paul A. Kruger, President
PLASTIC PALLET PRODUCTION, INC.
By: /s/ Paul A. Kruger
------------------------------------
Paul A. Kruger, President
"Lender" HILDALGO TRADING COMPANY, L.C.
By: /s/ Paul A. Kruger
------------------------------------
Paul A. Kruger, Manager
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$850,000.00 Norman, Oklahoma June 1, 2001
FOR VALUE RECEIVED, the undersigned Borrowers, jointly and severally, promise to pay to the order of Hildalgo Trading Company, L.C. (the "Lender") at Norman, Oklahoma, or such other place as the holder may designate in writing, the principal sum of Eight Hundred Fifty Thousand Dollars ($850,000.00), or so much thereof as shall be disbursed, with interest thereon from the date of any advance hereunder until maturity at twelve percent (12%) per annum. The outstanding principal and accrued interest shall be payable in a single lump sum payment at maturity on October 15, 2001.
The undersigned agree that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the holder's rights hereunder, the undersigned will pay to the holder a reasonable attorney's fee, together with all court costs and other expenses of collection paid by such holder.
On the breach of any provision of this Note or of any other instrument evidencing or securing payment of this Note, at the option of the holder, and, should the undersigned fail to cure the breach within ten (10) days after receipt of written notice specifying the breach, the entire indebtedness hereby evidenced will become due, payable and collectible then or thereafter as the holder may elect, regardless of the date of maturity hereof.
This Note may be prepaid in whole or in part at any time, without penalty.
This Note is made, executed, delivered and to be performed in Norman, Oklahoma and shall be governed by and construed in accordance with the laws of the State of Oklahoma applicable to promissory notes made and to be performed therein, without reference to its conflict of laws provisions. Any suit, action or proceeding with respect to this Note shall be brought exclusively in the Oklahoma State courts of competent subject matter jurisdiction sitting in Cleveland County, Oklahoma, or in the United States District Court for the District of Oklahoma in which Cleveland County is located. The Borrowers hereby irrevocably waive any objections which Borrowers may now or hereafter have to the jurisdiction or venue of any suit, action or proceeding, arising out of or relating to this Note, brought in such courts, and hereby further irrevocably waive any claim that such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The Borrowers hereby further irrevocably waive any right to a jury trial in any action arising out of or in connection with this Note or any related agreements.
For the purpose of computing interest under this Note, payments of all or any portion of the principal sum owing under this Note will not be deemed to have been made until such payments are received by the Lender in collected funds.
All agreements between the Borrowers and the Lender are expressly limited so that in no event whatsoever, whether by reason of disbursement of the proceeds hereof or otherwise, shall the amount of interest or finance charge (as defined by the laws of the State of Oklahoma) paid or agreed to be paid by the Borrowers to the Lender exceed the highest lawful contractual rate of interest or the maximum finance charge permissible under the law which a court of competent jurisdiction, by final non-appealable order, determines to be applicable hereto. If fulfillment of any agreement between the Borrowers and the Lender, at the time the performance of such agreement becomes due, involves exceeding such highest lawful contractual rate or such maximum permissible finance charge, then the obligation to fulfill the same shall be reduced so that such obligation does not exceed such highest lawful contractual rate or maximum permissible finance charge. If by any circumstance the Lender shall ever receive as interest or finance charge an amount which would exceed the amount allowed by applicable law, the amount which may be deemed excessive shall be deemed applied to the principal of the indebtedness evidenced hereby and not to interest. All interest and finance charges paid or agreed to be paid to the Lender shall be prorated, allocated and spread throughout the full period of this Note. The terms and provisions of this paragraph shall control all other terms and provisions contained herein and in any of the other documents executed in connection herewith. If any provision of this Note or the application thereof to any party or encumbrance is held invalid or unenforceable, the remainder of this Note and the application of such provision to other parties or circumstances shall not be affected thereby, the provisions of this Note being severable in any such instance.
The makers, endorsers, sureties, guarantors and all other persons who may be liable for all or any part of this obligation severally waive presentment for payment, protest, demand and notice of nonpayment. Said parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the security for the payment hereof, or release of any party liable for payment of this obligation. Any such extensions or release may be made without notice to any such party and without discharging said party's liability hereunder.
The failure of the Lender to exercise any of the remedies or options set forth in this Note or in any instrument securing payment hereof, or any agreement by the Lender to forebear from exercising any available remedy for any specified period upon the occurrence of one or more of the events of default shall not constitute a waiver of the right to exercise the same or any other remedy at law, or in equity, at any subsequent time in respect to the same or any other event of default. The acceptance by the Lender of any payment which is less than the total of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing remedies or options at that time or at any subsequent time, or nullify any prior exercise of any such remedy or option, without the express consent of the Lender, except as and to the extent otherwise provided by law.
"BORROWERS" PALWEB CORPORATION
By: /s/ Paul A. Kruger
-----------------------------------
Paul A. Kruger, President
PLASTIC PALLET PRODUCTION, INC.
By: /s/ Paul A. Kruger
-----------------------------------
Paul A. Kruger, President
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EXTENSION AGREEMENT
THIS EXTENSION AGREEMENT (the "Agreement") is made and entered into
effective as of September 1, 2001, by and between YORKTOWN MANAGEMENT AND
FINANCIAL SERVICES, L.L.C. ( the "Lender"), and PALWEB CORPORATION and PLASTIC
PALLET PRODUCTION, INC. (the "Borrowers").
R E C I T A L S:
A. Borrowers made, executed and delivered to Lender that certain Promissory Note dated March 1, 2001, payable to the order of Lender in the stated principal amount of $250,000.00 and maturing September 1, 2001 (the "Initial Note").
B. To secure payment of the Initial Note, Borrowers each made, executed and delivered to Lender a certain Security Agreement dated March 1, 2001.
C. Borrowers and Lender desire to extend the maturity of the Initial Note to October 15, 2001, effective as of the date of this Agreement.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the promises and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrowers and Lender agree as follows:
1. Extension of Maturity. Borrowers and Lender hereby agree to extend the maturity of the Initial Note to October 15, 2001, effective as of the date of this Agreement. All other terms and conditions set forth in the Initial Note shall continue in full force and effect, and all Security Agreements, collateral documents and other instruments securing payment of the Initial Note shall continue in full force and effect as security for payment of the indebtedness evidenced by said note, subject, however, to the prior and superior security interest of Hildalgo Trading Company, L.C. in the Borrowers' assets as described in those certain Security Agreements dated June 27, 2000, between Borrowers and Hildalgo Trading Company, L.C., which assets secure the payment of all liabilities of the Borrowers to Hildalgo.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed effective as of the date first above written.
"Borrowers" PALWEB CORPORATION
By: /s/ Paul A. Kruger
---------------------------------
Paul A. Kruger, President
PLASTIC PALLET PRODUCTION, INC.
By: /s/ Paul A. Kruger
---------------------------------
Paul A. Kruger, President
"Lender" YORKTOWN MANAGEMENT AND FINANCIAL
SERVICES, L.L.C.
By: /s/ Warren F. Kruger
---------------------------------
Warren F. Kruger, Manager
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Following is a list of the subsidiaries of PalWeb Corporation:
Plastic Pallet Production, Inc., a Texas corporation;
PP Financial, Inc., a Texas corporation;
Paceco Financial Services, Inc., an Oklahoma corporation and a wholly owned subsidiary of PP Financial, Inc.
STOCK OPTION PLAN
OF
PALWEB CORPORATION
(EFFECTIVE MAY 11, 2001)
1. PURPOSE OF THE PLAN
THIS STOCK OPTION PLAN (THE "PLAN") IS INTENDED AS AN INCENTIVE TO MANAGERIAL AND OTHER KEY EMPLOYEES OF PALWEB CORPORATION (THE "COMPANY"), AND ITS SUBSIDIARIES. ITS PURPOSES ARE TO RETAIN EMPLOYEES WITH A HIGH DEGREE OF TRAINING, EXPERIENCE, AND ABILITY, TO ATTRACT NEW EMPLOYEES WHOSE SERVICES ARE CONSIDERED UNUSUALLY VALUABLE, TO ENCOURAGE THE SENSE OF PROPRIETORSHIP OF SUCH PERSONS, AND TO STIMULATE THE ACTIVE INTEREST OF SUCH PERSONS IN THE DEVELOPMENT AND FINANCIAL SUCCESS OF THE COMPANY. OPTIONS GRANTED UNDER THE PLAN MAY BE EITHER "INCENTIVE STOCK OPTIONS" AS PROVIDED BY SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, AND AS MAY BE FURTHER AMENDED FROM TIME TO TIME ( THE "INTERNAL REVENUE CODE" OR "CODE") OR OPTIONS WHICH DO NOT QUALIFY AS INCENTIVE STOCK OPTIONS.
2. ADMINISTRATION OF THE PLAN
(a) Administration. The Plan shall be administered by the Board of Directors of the Company, or if the Board so authorizes, by a committee (the "Committee") of the Board of Directors consisting of not less than two (2) members of the Board of Directors. Unless the context otherwise requires, references herein to the Committee shall be references to the Board of Directors or the Committee. Members of the Committee shall serve at the pleasure of the Board, and the Board may from time to time remove members from, or add members to, the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business. Action approved in writing by a majority of the members of the Committee then serving shall be fully effective as if the action had been taken by unanimous vote at a meeting duly called and held.
(b) Authority. The Committee is authorized to construe and interpret the Plan, to promulgate, amend and rescind rules and regulations relating to the implementation of the Plan and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may designate persons other than members of the Committee to carry out its responsibilities under such conditions and limitations as it may prescribe, except that the Committee may not delegate its authority with regard to selection for participation of, and the granting of options to, persons subject to Sections 16(a) and 16(b) of the Exchange Act. Any determination, decision or action of the Committee in connection with the construction, interpretation, administration, or application of the Plan shall be final, conclusive and binding upon all persons participating in the Plan and any person validly claiming under or through persons participating in the Plan. The Company shall effect the granting of options under the Plan in accordance with the determinations made by the Committee, by execution of instruments in writing in such form as approved by the Committee.
3. DESIGNATION OF PARTICIPANTS
Persons eligible for options under the Plan shall consist of managerial and other key employees of the Company and/or its subsidiaries who hold positions of significant responsibilities or whose performance or potential contribution, in the sole judgment of the Committee, will benefit the future success of the Company. In addition, all Non-employee Directors of the Company shall be eligible for options under the plan in accordance solely with the provisions of Section 7 hereof.
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Paragraph 9 hereof, there shall be subject to the Plan twenty five million (25,000,000) shares of common stock of the Company, par value $0.10 per share. The shares subject to the Plan shall consist of authorized but unissued shares or treasury shares held by the Company. Any of such shares that may remain unsold and that are not subject to outstanding options at the termination of the Plan shall cease to be subject to the Plan. Should any option expire or be canceled prior to its exercise in full, or a portion of an option is surrendered in payment for the exercise of an option or satisfaction of any tax withholding obligations, the shares theretofore subject to such options may again be subjected to an option under the Plan. Any shares not subject to outstanding options at the expiration of the Plan or at any time during the life of the Plan may be dedicated to other plans that the Company may adopt and to the extent so dedicated, such shares shall not be subject to this Plan.
5. OPTION PRICE
(a) Price. The purchase price for each share placed under option pursuant to the Plan shall be determined by the Committee, but shall in no event be less than 100% of the Fair Market Value (as defined below) of such share on the date the option is granted.
(b) Fair Market Value. "Fair Market Value" means the average of the high and low sales prices of the shares of Common Stock on any national securities exchange on which the shares are listed on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by such exchange, by National Quotation Bureau, Inc. or other national quotation service. If the Common Stock is not listed on a national securities exchange, Fair Market Value means the average of the reported high and low sales prices of the shares of Common Stock in the over-the-counter market on the date on which such value is to be determined as reported by a widely followed quotation service such as Yahoo Finance, MSN Investor, Raging Bull or similar sites, or, if such prices are not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. If at any time shares of Common Stock are not traded on an exchange or in the over-the-counter market, Fair Market Value shall be the value determined by the Committee, taking into consideration those factors affecting or reflecting value that
they deem appropriate. For purposes of determining the purchase price of an incentive stock option, Fair Market Value shall in any event be determined in accordance with Section 422 of the Code.
6. TERMS AND EXERCISE OF OPTIONS
(a) General. The Committee, in granting options hereunder, shall have discretion to determine the times when, and the terms upon which, options shall be exercisable, including such provisions as deemed advisable to permit qualification as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code, as the same may from time to time be amended for options intended to qualify as such, and incentive stock options outstanding under the Plan may be amended, if necessary, to permit such qualification. The Committee shall designate at the time of granting of any option whether such option or any portion thereof shall be an "incentive stock option." Each option shall be evidenced by an agreement between the Company and the optionee containing provisions consistent with this Plan and such other provisions as the Committee may determine as provided herein. Unless otherwise determined by the Committee at the time of grant, all options shall become exercisable at the rate of 25% of the total shares subject to the option on each of the first four (4) anniversary dates of the date of grant. The Committee shall also be entitled to accelerate the date any outstanding option becomes exercisable at any time.
(b) Right to Exercise. If at the time of any exercise of an option
either (i) there are insufficient authorized shares or treasury shares of Common
Stock of the Company available for issuance upon the exercise of the option, or
(ii) the exercise price is less than the par value of the shares (if the only
shares available for exercise are authorized but unissued shares, as opposed to
treasury shares), the right of the optionee to exercise such option shall be
suspended and deferred until such time as either or both of such circumstances
shall have been cured prior to the time that any such option would otherwise
expire.
(C) Term. In the event of the death of an optionee while in the employ of the Company, any unvested portion of the option as of the date of death shall be vested as of the date of death and the option shall be exercisable in full by the heirs or other legal representatives of the optionee within twelve (12) months following the date of death. In the event of termination of employment for any reason other than death or termination for cause (and except as otherwise provided in subsection (e) below) such option shall be exercisable by the employee or his legal representative within three (3) months of the date of termination as to all then vested portions. In addition, the Committee may in its sole discretion, approve acceleration of the vesting of any unvested portions of the option. If an optionee's employment with the Company is terminated for cause, the option shall terminate as of the date of such termination of employment and the optionee shall have no further rights to exercise any portion of the option. "Termination for cause" means any discharge for violation of the policies and procedures of the Company or for other job performance or conduct that is detrimental to the best interests of the Company, as determined by the Committee in its sole discretion. Notwithstanding any of the foregoing, in no event may an option be exercised more than ten (10) years after the date of its grant.
(D) METHOD OF EXERCISE. OPTIONS MAY BE EXERCISED, WHETHER IN WHOLE OR IN PART, BY WRITTEN NOTIFICATION TO THE COMPANY ACCOMPANIED BY CASH OR A CERTIFIED CHECK FOR THE AGGREGATE PURCHASE PRICE OF THE NUMBER OF SHARES BEING PURCHASED, OR UPON EXERCISE OF AN OPTION, THE OPTIONEE SHALL BE ENTITLED (UNLESS OTHERWISE PROVIDED IN THE AGREEMENT EVIDENCING THE OPTION), WITHOUT THE REQUIREMENT OF FURTHER APPROVAL OR OTHER ACTION BY THE COMMITTEE, TO PAY FOR THE SHARES (I) BY TENDERING STOCK OF THE COMPANY THAT HAS BEEN OWNED BY THE OPTIONEE FOR AT LEAST SIX (6) MONTHS WITH SUCH STOCK TO BE VALUED AT THE FAIR MARKET VALUE (AS DETERMINED UNDER SECTION 5) ON THE DATE IMMEDIATELY PRECEDING THE DATE OF EXERCISE OR (II) WITH A COMBINATION OF CASH AND STOCK THAT HAS BEEN OWNED BY THE OPTIONEE FOR AT LEAST SIX (6) MONTHS AS PROVIDED ABOVE.
IN ADDITION, UPON EXERCISE OF AN OPTION, THE OPTIONEE MAY, WITH THE PRIOR APPROVAL OF THE COMMITTEE, PAY FOR THE SHARES (A) BY TENDERING STOCK OF THE COMPANY ALREADY OWNED BY THE OPTIONEE BUT THAT HAS NOT BEEN HELD BY THE OPTIONEE FOR AT LEAST SIX (6) MONTHS WITH SUCH STOCK TO BE VALUED AT THE FAIR MARKET VALUE (AS DETERMINED UNDER SECTION 5) ON THE DATE IMMEDIATELY PRECEDING THE DATE OF EXERCISE, (B) SURRENDERING A PORTION OF THE OPTION WITH SUCH SURRENDERED OPTION TO BE VALUED BASED ON THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE (AS DETERMINED UNDER SECTION 5) OF THE SHARES SURRENDERED ON THE DATE IMMEDIATELY PRECEDING THE DATE OF EXERCISE AND THE AGGREGATE OPTION PURCHASE PRICE OF THE SHARES SURRENDERED ("SURRENDER VALUE"), OR (C) WITH A COMBINATION OF CASH, STOCK OF THE COMPANY THAT HAS NOT BEEN HELD BY THE OPTIONEE FOR AT LEAST SIX (6) MONTHS OR SURRENDER OF OPTIONS.
THE COMMITTEE MAY ALSO PERMIT OPTIONEES, EITHER ON A SELECTIVE OR AGGREGATE BASIS, TO SIMULTANEOUSLY EXERCISE OPTIONS AND SELL THE SHARES OF COMMON STOCK THEREBY ACQUIRED, PURSUANT TO A BROKERAGE OR SIMILAR ARRANGEMENT, APPROVED IN ADVANCED BY THE COMMITTEE, AND USE THE PROCEEDS FROM SUCH SALE AS PAYMENT OF THE PURCHASE PRICE OF THE SHARES BEING ACQUIRED UPON EXERCISE OF ANY OPTION.
(e) Limitations Applicable To Incentive Options. To the extent the aggregate Fair Market Value of stock (determined as of the date of grant) with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under all Company plans) exceeds one hundred thousand dollars ($100,000), such options shall be treated as options that are not incentive stock options. Options intended to be incentive options shall have such additional terms and provisions as required by the Internal Revenue Code.
The grant of any incentive stock options shall be subject to the Plan being approved by the shareholders of the Company within twelve months after the Plan is adopted by the Board. However, the failure of the shareholders of the Company to approve the Plan shall only affect an option's status as an incentive stock option and not the validity of any options granted under the Plan.
(f) Continued Service as a Director. Any provisions of the Plan to the contrary notwithstanding, for purposes of Section 6(b) above, in the event an optionee who is also a director of the Company ceases to be employed by the Company but continues to serve as a director of the Company, the Committee, in its sole discretion, may determine that all or a portion of such optionee's options shall not expire three (3) months following the date of termination of employment with the
Company as is provided in Section 6(b) above, but instead shall continue in full force and effect until the such optionee ceases to be a director of the Company, but in no event beyond the stated expiration date of the options as set forth in the applicable option agreement. Termination of any such option in connection with the optionee's termination of service as a director shall be in accordance with the provisions of Section 6(b) above; provided, however, that (i) the terms "employ" and "employment" as used therein shall be replaced with the terms "service" and "service on the Board of Directors," respectively, and (ii) the phrase "termination for cause" shall mean any removal from the Board of Directors for cause in accordance with applicable law and the Certificate of Incorporation and ByLaws of the Company.
7. NON-EMPLOYEE DIRECTOR OPTIONS
Notwithstanding anything elsewhere in the Plan to the contrary, each person who is a member of the Board of Directors of the Company but who is not an employee of the Company (a "Non- employee Director") shall be eligible for grants of stock options under the Plan solely in accordance with the provisions of this Section 7. The following provisions of this Section 7 shall apply to the granting of stock options to Non-employee Directors:
(a) Exercise Price. The purchase price for each share placed under an option for a Non- employee Director shall be equal to 100% of the Fair Market Value of such share on the date the option is granted.
(b) Vesting and Term. Unless otherwise determined by the Committee at the time of grant, all options shall become exercisable at the rate of 25% of the total shares subject to the option on each of the first four (4) anniversary dates of the date of grant. The Committee shall also be entitled to accelerate the date any outstanding option becomes exercisable at any time. The period during which a Non-employee Director option may be exercised shall be ten (10) years from the date of grant, subject to earlier termination in accordance with the provisions of Section 6(b) hereof; provided, however that (i) the terms "employ" and "employment" as used therein shall be replaced with the terms "service" and "service on the Board of Directors," respectively, and (ii) the phrase "termination for cause" shall mean any removal from the Board of Directors for cause in accordance with applicable law and the Certificate of Incorporation and By-Laws of the Company.
(c) Method of Exercise. Options granted to Non-employee Directors may be exercised in the manner provided in Section 6(d) hereof.
(d) Other Provisions. All options granted to Non-employee Directors
shall be subject to the other provisions of general applicability to options
granted under the Plan, including without limitation, the provisions of Section
8 ("Assignability") , Section 9 ("Changes in Capitalization") and Section 10
("Change in Control") hereof.
8. ASSIGNABILITY
During an optionee's lifetime, an option may be exercisable only by the optionee and options granted under the Plan and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution. Notwithstanding the foregoing or any other provisions of the Plan, to the extent permitted by applicable law, the Committee may, in its sole discretion, permit recipients of options that do not qualify as incentive stock options under Section 422 of the Internal Revenue Code to transfer such non-incentive options by gift or other means pursuant to which no consideration is given for such transfer. The Committee shall impose in connection with any non-incentive options transferred pursuant to the foregoing sentence such limitations and restrictions as it deems appropriate. Any other attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under the Plan or of any right or privilege conferred thereby, contrary to the provisions of the Plan, or the sale or levy or any attachment or similar process upon the rights and privileges conferred thereby, shall be null and void ab initio.
9. CHANGES IN CAPITALIZATION
(a) No Effect on Company Rights. Subject to the other provisions of this Plan, the existence of the Plan and the options granted hereunder shall not affect or restrict in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Company's capital stock or the rights thereof, any issue of shares of Common Stock or shares of any other class of capital stock or warrants or rights to acquire such shares, the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding.
(b) Changes in Capitalization; Reorganizations. In the event of any change in capitalization affecting the common stock of the Company, such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, liquidation, or any other change affecting the common stock (including a merger or reorganization in which the Company is not the surviving entity or survives only as a subsidiary of another entity) ("Change in Capitalization"), such proportionate adjustments, shall be made with respect to the aggregate number and type of securities for which options may be granted under the Plan, the number and type of securities (including securities of a surviving or acquiring entity or cash, property or other consideration) covered by each outstanding option, and the exercise price of outstanding options, in each case to the end that optionees shall be entitled upon exercise of options to receive the same number and kind of stock, securities, cash, property or other consideration that the optionee would have receive in connection with the Change in Capitalization if such option had been exercised immediately preceding such Change in Capitalization.
(c) Other Distributions. The Committee may also make such adjustments in the number of shares covered by, and the price or other value of any outstanding options in the event of a spin-off or other distribution (other than normal cash dividends) of Company assets to shareholders.
10. CHANGE IN CONTROL
(a) Effect on Options. In the event of a Change in Control (as defined below) of the Company, in addition to any adjustments required by Section 9(b):
(i) all options outstanding on the date of such Change in Control shall become immediately and fully exercisable, and
(ii) an optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control, any option or portion of such option to the extent not yet exercised and the optionee will be entitled to receive a cash payment in an amount equal to the excess, if any, of (A) the Fair Market Value on the date preceding the date of surrender, of the shares subject to the option or portion thereof surrendered, over (B) the aggregate exercise price for the shares under the option or portion thereof surrendered.
(b) Change in Control. A "Change in Control" of the Company shall mean the occurrence after the effective date of the Plan of:
(i) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, this subsection (i) shall not apply to acquisitions of Voting Securities by Paul Kruger or his affiliates.
(ii) The individuals who, as of the date of adoption of the Plan by the Board, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by the Company's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened 'election contest' (as described in Rule 14A-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or
(iii) The consummation of:
(A) A merger, consolidation or reorganization involving the Company, unless
(1) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization,
(2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, and
(3) no Person, other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation, or any Subsidiary or any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of fifty percent (50%) or more of the then outstanding Voting Securities, has Beneficial Ownership of fifty percent (50%) or more of the combined voting power of the Surviving Corporation's then outstanding voting securities;
(B) A complete liquidation or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company that, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
11. EFFECTIVE AND EXPIRATION DATES OF PLAN
This Plan became effective as of May 11, 2001, the date of its approval by the Board of Directors of the Company. No options shall be granted pursuant to this Plan after May 11, 2011.
12. AMENDMENTS OR TERMINATION
The Committee may at any time amend, alter or discontinue the Plan in such manner as it may deem advisable. Any such amendment or alteration may be effected without the approval of the shareholders of the Company, except to the extent such approval may be required by applicable laws or by the rules of any securities exchange upon which the Company's outstanding shares are admitted to listed trading.
No amendment, alteration or discontinuation of the Plan shall adversely affect any stock option grants made prior to the time of such amendment, alteration or discontinuation, except with the consent of the holder of the affected options.
13. GOVERNMENTAL REGULATIONS
Notwithstanding any provision hereof, or any option granted hereunder,
the obligation of the Company to sell and deliver shares under any such option
shall be subject to all applicable laws, rules and regulations and to such
approvals by any governmental agencies or national securities exchange as may be
required, and the optionee shall agree that he will not exercise any option
granted hereunder, and that the Company will not be obligated to issue any
shares under any such option, if the exercise thereof or if the issuance of such
shares shall constitute a violation by the optionee or the Company of any
applicable law or regulation. If the shares of Common Stock have not been
registered, the Company may require that as a condition to exercise any option,
the optionee execute an investment letter. The Company shall be entitled to
require as a condition to the issuance of any shares of Common Stock upon
exercise of an option that the optionee remit an amount sufficient, in the
Company's opinion, to satisfy all FICA, federal, state or other withholding tax
requirements related thereto. Unless otherwise provided in the Agreement
evidencing the option, an optionee shall be entitled, without the requirement of
further approval or other action by the Committee, to satisfy such obligation in
whole or in part (i) by tendering stock of the Company already owned by the
optionee with such stock to be valued at the Fair Market Value (as determined
under Section 5) on the date immediately preceding the date of exercise of the
options, (ii) by surrendering a portion of his or her option with such
surrendered option to be valued at the Surrender Value (as determined under
Section 6(c)), or (iii) by a combination of cash, stock of the Company and
surrender of options.
14. GOVERNING LAW
The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the state of incorporation of the company and applicable federal law.
15. SEVERABILITY
If any provision of this Plan is determined to be invalid or unenforceable for any reason, the remaining provisions of the Plan shall remain in effect and be interpreted to reasonably effect the intent of the Plan.
PALWEB CORPORATION
NON-QUALIFIED STOCK OPTION AGREEMENT
This Agreement made and entered into effective __________, by and between PalWeb Corporation, a Delaware corporation ("Company"), and _______________, an employee of the Company or a subsidiary of the Company ("Employee").
WITNESSETH:
WHEREAS, the Company desires to grant the Employee an option to purchase shares of its Common Stock ("Common Stock") as hereinafter provided in order to carry out the purpose of the PalWeb Corporation Stock Option Plan ("Option Plan").
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the parties agree as follows:
1. GRANT OF OPTION. Subject to the terms contained herein, the Company hereby grants to the Employee as of the date set forth above, the right and option, herein called the "Option," to purchase all or any part of an aggregate of __________ shares of the Common Stock. The Option shall not be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code.
2. PURCHASE PRICE. The purchase price of the shares of Common Stock covered by the Option shall be __________ per share, subject to adjustment as provided in Paragraph 6.
3. TERM OF OPTION. Option shall become vested and exercisable in installments as set forth below:
After the Option becomes exercisable, it may thereafter be exercised, as to the number of shares becoming exercisable, at any time and from time to time until ten (10) years after the effective date hereof, or for such other period set forth in Paragraph 5 hereof. Except as provided in Paragraph 5 hereof, the Option may not be exercised at any time unless the Employee shall have been in continuous employ of the Company or any subsidiary of the Company from the effective date hereof to the date of the exercise of the Option. The Committee, as defined in Paragraph 5 hereof, shall be entitled to accelerate the date the Option or any portion thereof becomes exercisable.
4. TRANSFERABILITY. Except as otherwise provided below, neither the Option nor any other right under this Agreement shall be assignable or transferable by the Employee, other than by will or the laws of descent and distribution, and any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option, and the levy of any execution, attachment or similar process upon the Option, shall be null and void and without effect.
Notwithstanding the restrictions on transfer set forth above, the Employee may, with the prior consent of the Committee, transfer all or portions of the Option to "Permitted Transferees" (as defined below), provided that there may be no consideration paid for any such transfer. Subsequent transfer of any transferred Option shall be prohibited except (i) transfers by a transferee in accordance with the first paragraph of this Section by will or the laws of descent and distribution and (ii) transfers by a transferee, conducted in accordance with the procedures and limitations of this paragraph applicable to transfers by the Employee to another person or entity that is also a Permitted Transferee of the Employee. Following transfer, the events of termination of employment set forth elsewhere herein shall continue to be applied with respect to the original Employee, and, following the occurrence of any such event, the transferred Option shall be exercisable by the transferee only to the extent, and for the periods, specified elsewhere herein. The Employee shall remain responsible for the payment of federal, state and local taxes and other amounts as may be required to be withheld by the Company in connection with the exercise of any transferred portion of the Option. In connection with any transfer of the Option pursuant to this paragraph, the Employee shall surrender this Agreement to the Secretary of the Company, and the Company shall furnish to the transferee, and, if the transfer relates to less than all of the Option, to the Employee, a new option agreement of like tenor as this Agreement representing the right to acquire the appropriate number of shares.
For purposes of the foregoing, the term "Permitted Transferees" means
(i) the spouse, children or grandchildren of the Employee ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of Immediate Family
Members, (iii) a partnership in which Immediate Family Members are the only
permitted partners, or (iv) a limited liability company in which Immediate
Family Members are the only permitted members and managers.
5. TERMINATION OF EMPLOYMENT; DEATH OF EMPLOYEE. In the event of the death of Employee while in the employ of the Company, any unvested installments of the Option shall be accelerated as of the date of death and the Option shall be exercisable in full by the heirs or other legal representatives of the Employee at any time within 12 months following the date of death. In the event of termination of employment for any reason other than death or termination for cause, the Option shall be exercisable by the Employee or his legal representative within three months of the date of termination as to all then vested installments; provided, however, that the Company by action of the Board of Directors or the Compensation Committee of the Board of Directors (either referred to as the "Committee") may in its sole discretion approve acceleration of any then unvested installments of the Option. If the Optionee's employment with the Company is terminated for cause, the Option shall terminate as of the date of such termination of employment and the Optionee shall have no further rights to exercise any portion of the Option. "Termination for Cause" means any
discharge for violation of the policies and procedures of the Company or for other job performance or conduct which is detrimental to the best interests of the Company, as determined by the Committee in its sole discretion. In no event, may the Option be exercised more than 10 years after the effective date hereof.
6. REORGANIZATIONS AND RECAPITALIZATIONS OF THE COMPANY.
a. Subject to the other provisions of this Agreement, the existence of the Option granted hereunder shall not affect or restrict in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Common Stock or the rights thereof, any issue of shares of Common Stock or shares of any other class of capital stock or warrants or rights to acquire such shares, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any corporate act or proceeding, whether of a similar character or otherwise.
b. In the event of any change in capitalization affecting the Common Stock of the Company, such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, liquidation, sale of assets or any other change affecting the Common Stock ("Change in Capitalization") a proportionate adjustment shall be made with respect to the aggregate number of shares of Common Stock covered by this Option and the price per share to the end that the Employee shall be entitled to receive the same number and kind of stock, securities, cash, property or other consideration as if this Option had been exercised immediately preceding such Change in Capitalization.
c. In the event of a Change in Control (as defined below) of the Company, and except as the Committee may expressly determine otherwise in connection with any Change in Control:
i. any unvested portion of the Option outstanding on the date of such Change in Control shall become immediately and fully exercisable, and
ii. the Employee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control, the Option or portion of the Option to the extent not yet exercised and the Employee will be entitled to receive a cash payment in an amount equal to the excess, if any, of (A) the Fair Market Value (as defined below) on the date preceding the date of surrender, of the shares subject to the Option or portion thereof surrendered, over (B) the aggregate exercise price for the shares under the Option or portion thereof surrendered.
d. A "Change in Control" of the Company shall mean the consummation of an occurrence after the effective date of the Plan of:
i. An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of the combined voting power of the Company's then outstanding Voting Securities;
ii. The individuals who, as of the date of adoption of the Plan by the Board, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by the Company's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "election contest" (as described in Rule 14A-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or
iii. The consummation of:
(1) A merger, consolidation or reorganization involving the Company, unless
(a) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization,
(b) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the Surviving Corporation, and
(c) no Person other than (a) the
Company, any Subsidiary, any employee
benefit plan (or any trust forming a part
thereof) maintained by the Company, the
Surviving Corporation, or any Subsidiary or
(b) any Person who, immediately prior to
such merger, consolidation or reorganization
had Beneficial Ownership of fifty percent
(50%) or more of the then outstanding Voting
Securities has Beneficial Ownership of fifty
percent (50%) or more of the combined voting
power of the Surviving Corporation's then
outstanding voting securities;
(2) A complete liquidation or dissolution of the Company; or
(3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
7. METHOD OF EXERCISING OPTION. The Option may be exercised, in whole or in part, by written notification to the Company accompanied by cash or a certified check for the aggregate purchase price of the number of shares being purchased, or upon exercise of the Option, the Employee shall be entitled, without the requirement of further approval or other action by the Committee, to pay for the shares (i) by tendering stock of the Company that has been owned by the Employee for at least six (6) months with such stock to be valued at the Fair Market Value (as defined below) on the date immediately preceding the date of exercise or (ii) with a combination of cash and stock that has been owned by the Employee for at least six (6) months as provided above.
In addition, upon exercise of the Option, the Employee may, with the prior approval of the Committee, pay for the shares (a) by tendering stock of the Company already owned by the
Employee but that has not been held by the Employee for at least six (6) months with such stock to be valued at the Fair Market Value (as defined below) on the date immediately preceding the date of exercise, (b) surrendering a portion of the Option with such surrendered portion to be valued based on the difference between the Fair Market Value (as defined below) of the shares surrendered on the date immediately preceding the date of exercise and the aggregate option purchase price of the shares surrendered ("Surrender Value"), or (c) with a combination of cash, stock of the Company that has not been held by the Employee for at least six (6) months or surrender of options.
The Committee may also permit the Employee simultaneously to exercise the Option and sell the shares of Common Stock thereby acquired, pursuant to a brokerage or similar arrangement, approved in advance by the Committee, and use the proceeds from such sale as payment of the purchase price of the shares being acquired upon exercise of the Option.
Notwithstanding any provision hereof, the obligation of the Company to sell and deliver shares under the Option shall be subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchange as may be required. The Employee shall not exercise any portion of the Option and the Company will not be obligated to issue any shares under the Option if the exercise thereof or if the issuance of the shares shall constitute a violation by the Employee or the Company of any applicable law or regulation. If the shares of Common Stock have not been registered, the Company may require that as a condition to exercise any option, the optionee execute an investment letter. The Company may require as a condition to the issuance of any shares of Common Stock upon exercise of the Option that the Employee remit an amount sufficient, in the Company's opinion, to satisfy all FICA, federal, state or other withholding tax requirements related to the exercise of the Option. The Employee shall be entitled, without the requirement of further approval or other action by the Committee, to satisfy such obligation in whole or in part (i) by tendering stock of the Company already owned by the Employee with such stock to be valued at the Fair Market Value (as defined below) on the date immediately preceding the date of exercise of the Option, (ii) by surrendering a portion of the Option with such surrendered Option covering shares having a Surrender Value equal to the amount of such requirement, or (iii) by a combination of cash, stock of the Company or surrender of a portion of the Option.
8. RIGHTS AS A STOCKHOLDER. The Employee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of issuance of a stock certificate to him for such shares.
9. SUBSIDIARY. As used herein, the term "subsidiary" shall mean any present or future corporation in which the Company has a proprietary interest (but only if the Company owns, directly or indirectly, stock possessing not less than fifty percent of the total combined voting power of all classes of stock in such corporation), as the Board of Directors of the Company shall determine from time to time.
10. FAIR MARKET VALUE. "Fair Market Value" means the average of the high and low sales prices of the shares of Common Stock on any national securities exchange on which the shares are listed on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by such exchange, by National Quotation Bureau, Inc. or other national quotation service. If the Common Stock is not listed on a national securities exchange, Fair Market Value means the average of the reported high and low sales prices of the shares of Common Stock in the over-the-counter market on the date on which such value is to be determined as reported by a widely followed quotation service such as Yahoo Finance, MSN Investor, Raging Bull or similar sites, or, if such prices are not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. If at any time shares of Common Stock are not traded on an exchange or in the over-the-counter market, Fair Market Value shall be the value determined by the Committee, taking into consideration those factors affecting or reflecting value that they deem appropriate. For purposes of determining the purchase price of an incentive stock option, Fair Market Value shall in any event be determined in accordance with Section 422 of the Code.
11. OPTION PLAN. The terms of the Option and the rights and responsibilities of the parties hereto shall be governed by the Option Plan. In the event of any inconsistency between the terms of the Agreement and the Option Plan, the terms of the Option Plan shall control.
IN WITNESS WHEREOF the parties hereto have executed this Stock Option Agreement as of the day and year first above written.
COMPANY: PALWEB CORPORATION
By:
EMPLOYEE:
PALWEB CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
This Agreement made and entered into effective __________, by and between PalWeb Corporation, a Delaware corporation ("Company"), and _______________, an employee of the Company, or a subsidiary of the Company ("Employee").
WITNESSETH:
WHEREAS, the Company desires to grant the Employee an option to purchase shares of its Common Stock ("Common Stock") as hereinafter provided in order to carry out the purpose of the PalWeb Corporation Stock Option Plan ("Option Plan").
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the parties agree as follows:
1. GRANT OF OPTION. Subject to the terms contained herein, the Company hereby grants to the Employee as of the date set forth above, the right and option, herein called the "Option," to purchase all or any part of an aggregate of ________ shares of the Common Stock. The Option shall be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code.
2. PURCHASE PRICE. The purchase price of the shares of Common Stock covered by the Option shall be $ _____ per share, subject to adjustment as provided in Paragraph 6.
3. TERM OF OPTION. Option shall become vested and exercisable in installments as set forth below:
After the Option becomes exercisable, it may thereafter be exercised, as to the number of shares becoming exercisable, at any time and from time to time until ten (10) years after the effective date hereof, or for such other period set forth in Paragraph 5 hereof. Except as provided in Paragraph 5 hereof, the Option may not be exercised at any time unless the Employee shall have been in the continuous employ of the Company or any subsidiary of the Company from the effective date hereof to the date of the exercise of the Option. The Committee, as defined in Paragraph 5 hereof, shall be entitled to accelerate the date the Option or any portion thereof becomes exercisable.
4. NON-TRANSFERABILITY. The Option shall not be assignable or transferable by the Employee, except by will or by the laws of descent and distribution. During the life of the Employee, the Option shall be exercisable only by him.
5. TERMINATION OF EMPLOYMENT; DEATH OF EMPLOYEE. In the event of the death of Employee while in the employ of the Company, any unvested installments of the Option shall be accelerated as of the date of death and the Option shall be exercisable in full by the heirs or other legal representatives of the Employee at any time within 12 months following the date of death. In the event of termination of employment for any reason other than death or termination for cause, the Option shall be exercisable by the Employee or his legal representative within three months of the date of termination as to all then vested installments; provided, however, that the Company by action of the Compensation Committee of the Board of Directors ("Committee") may in its sole discretion approve acceleration of any then unvested installments of the Option. If the Optionee's employment with the Company is terminated for cause, the Option shall terminate as of the date of such termination of employment and the Optionee shall have no further rights to exercise any portion of the Option. "Termination for Cause" means any discharge for violation of the policies and procedures of the Company or for other job performance or conduct which is detrimental to the best interests of the Company, as determined by the Committee in its sole discretion. In no event, may the Option be exercised more than 10 years after the effective date hereof.
6. REORGANIZATIONS AND RECAPITALIZATIONS OF THE COMPANY.
a. Subject to the other provisions of this Agreement, the existence of the Option granted hereunder shall not affect or restrict in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Common Stock or the rights thereof, any issue of shares of Common Stock or shares of any other class of capital stock or warrants or rights to acquire such shares, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any corporate act or proceeding, whether of a similar character or otherwise.
b. In the event of any change in capitalization affecting the Common Stock of the Company, such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, liquidation, sale of assets or any other change affecting the Common Stock ("Change in Capitalization") a proportionate adjustment shall be made with respect to the aggregate number of shares of Common Stock covered by this Option and the price per share to the end that the Employee shall be entitled to receive the same number and kind of stock, securities, cash, property or other consideration as if this Option had been exercised immediately preceding such Change in Capitalization.
c. In the event of a Change in Control (as defined below) of the Company, and except as the Committee may expressly determine otherwise in connection with any Change in Control:
i. any unvested portion of the Option outstanding on the date of such Change in Control shall become immediately and fully exercisable, and
ii. the Employee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control, the Option or portion of the Option to the extent not yet exercised and the Employee will be entitled to receive a cash payment in an amount equal to the excess, if any, of (A) the Fair Market Value (as defined below) on the date preceding the date of surrender, of the shares subject to the Option or portion thereof surrendered, over (B) the aggregate exercise price for the shares under the Option or portion thereof surrendered.
d. A "Change in Control" of the Company shall mean the consummation of an occurrence after the effective date of the Plan of:
i. An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of the combined voting power of the Company's then outstanding Voting Securities;
ii. The individuals who, as of the date of adoption of the Plan by the Board, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by the Company's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "election contest" (as described in Rule 14A-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or
iii. The consummation of:
(1) A merger, consolidation or reorganization involving the Company, unless
(a) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization,
(b) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, and
(c) no Person other than (a) the
Company, any Subsidiary, any employee
benefit plan (or any trust forming a part
thereof) maintained by the Company, the
Surviving Corporation, or any Subsidiary or
(b) any Person who, immediately prior to
such merger, consolidation or reorganization
had Beneficial Ownership of fifty percent
(50%) or more of the then outstanding Voting
Securities has Beneficial Ownership of fifty
percent (50%) or more of the combined voting
power of the Surviving Corporation's then
outstanding voting securities;
(2) A complete liquidation or dissolution of the Company; or
(3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by
the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
7. METHOD OF EXERCISING OPTION. The Option may be exercised, in whole or in part, by written notification to the Company accompanied by cash or a certified check for the aggregate purchase price of the number of shares being purchased, or upon exercise of the Option, the Employee shall be entitled, without the requirement of further approval or other action by the Committee, to pay for the shares (i) by tendering stock of the Company that has been owned by the Employee for at least six (6) months with such stock to be valued at the Fair Market Value (as defined below) on the date immediately preceding the date of exercise or (ii) with a combination of cash and stock that has been owned by the Employee for at least six (6) months as provided above.
In addition, upon exercise of the Option, the Employee may, with the prior approval of the Committee, pay for the shares (a) by tendering stock of the Company already owned by the Employee but that has not been held by the Employee for at least six (6) months with such stock to be valued at the Fair Market Value (as defined below) on the date immediately preceding the date of exercise, (b) surrendering a portion of the Option with such surrendered portion to be valued based on the difference between the Fair Market Value (as defined below) of the shares surrendered on the date immediately preceding the date of exercise and the aggregate option purchase price of the shares surrendered ("Surrender Value"), or (c) with a combination of cash, stock of the Company that has not been held by the Employee for at least six (6) months or surrender of options.
The Committee may also permit the Employee simultaneously to exercise the Option and sell the shares of Common Stock thereby acquired, pursuant to a brokerage or similar arrangement, approved in advance by the Committee, and use the proceeds from such sale as payment of the purchase price of the shares being acquired upon exercise of the Option.
Notwithstanding any provision hereof, the obligation of the Company to sell and deliver shares under the Option shall be subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchange as may be required. The Employee shall not exercise any portion of the Option and the Company will not be obligated to issue any shares under the Option if the exercise thereof or if the issuance of the shares shall constitute a violation by the Employee or the Company of any applicable law or regulation. If the shares of Common Stock have not been registered, the Company may require that as a condition to exercise any option, the optionee execute an investment letter. The Company may require as a condition to the issuance of any shares of Common Stock upon exercise of the Option that the Employee remit an amount sufficient, in the Company's opinion, to satisfy all FICA, federal, state or other withholding tax requirements related to the exercise of the Option. The Employee shall be entitled, without the requirement of further approval or other action by the Committee, to satisfy such obligation in whole or in part (i) by tendering stock of the Company already owned by the Employee with such stock to be valued at the Fair Market Value (as defined below) on the date
immediately preceding the date of exercise of the Option, (ii) by surrendering a portion of the Option with such surrendered Option covering shares having a Surrender Value equal to the amount of such requirement, or (iii) by a combination of cash, stock of the Company or surrender of a portion of the Option.
8. RIGHTS AS A STOCKHOLDER. The Employee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of issuance of a stock certificate to him for such shares.
9. SUBSIDIARY. As used herein, the term "subsidiary" shall mean any present or future corporation in which the Company has a proprietary interest (but only if the Company owns, directly or indirectly, stock possessing not less than fifty percent of the total combined voting power of all classes of stock in such corporation), as the Board of Directors of the Company shall determine from time to time.
10. FAIR MARKET VALUE. "Fair Market Value" means the average of the high and low sales prices of the shares of Common Stock on any national securities exchange on which the shares are listed on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by such exchange, by National Quotation Bureau, Inc. or other national quotation service. If the Common Stock is not listed on a national securities exchange, Fair Market Value means the average of the reported high and low sales prices of the shares of Common Stock in the over-the-counter market on the date on which such value is to be determined as reported by a widely followed quotation service such as Yahoo Finance, MSN Investor, Raging Bull or similar sites, or, if such prices are not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. If at any time shares of Common Stock are not traded on an exchange or in the over-the-counter market, Fair Market Value shall be the value determined by the Committee, taking into consideration those factors affecting or reflecting value that they deem appropriate. For purposes of determining the purchase price of an incentive stock option, Fair Market Value shall in any event be determined in accordance with Section 422 of the Code.
11. OPTION PLAN. The terms of the Option and the rights and responsibilities of the parties hereto shall be governed by the Option Plan. In the event of any inconsistency between the terms of the Agreement and the Option Plan, the terms of the Option Plan shall control.
IN WITNESS WHEREOF the parties hereto have executed this Stock Option Agreement as of the day and year first above written.
COMPANY: PALWEB CORPORATION
By:____________________________________
EMPLOYEE:
PALWEB CORPORATION
STOCK OPTION AGREEMENT FOR NONEMPLOYEE DIRECTORS
This Agreement made and entered into effective ____________, by and between PalWeb Corporation, a Delaware corporation ("Company"), and ______ ("Optionee"), a nonemployee member of the Board of Directors of the Company (the "Board").
WITNESSETH:
WHEREAS, the PalWeb Corporation Stock Option Plan ("Option Plan"), provides for the automatic grant to the Optionee of an option to purchase shares of its common stock, par value $.10 per share ("Common Stock"), as hereinafter provided.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the parties agree as follows:
1. GRANT OF OPTION. Subject to the terms contained herein, the Company hereby grants to the Optionee as of the date set forth above, the right and option, herein called the "Option," to purchase all or any part of an aggregate number of ______ shares of the Common Stock covered by the Option. The Option shall not be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code.
2. PURCHASE PRICE. The purchase price of the shares of Common Stock covered by the Option shall be $ ______ per share, subject to adjustment as provided in Paragraph 6 hereof, which price shall be equal to 100% of the Fair Market Value (as defined below) of such shares on the date hereof.
3. TERM OF OPTION. The Option granted hereunder shall be immediately vested and fully exercisable on the effective date hereof. The Option may thereafter be exercised at any time and from time to time until ten (10) years after the effective date hereof, or for such other period set forth in Paragraph 5 hereof. Except as provided in Paragraph 5 hereof, the Option may not be exercised at any time unless the Optionee shall have been in continuous service on the Board from the effective date hereof to the date of the exercise of the Option.
4. TRANSFERABILITY. Except as otherwise provided below, neither the Option nor any other right under this Agreement shall be assignable or transferable by the Optionee, other than by will or the laws of descent and distribution, and any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option, and the levy of any execution, attachment or similar process upon the Option, shall be null and void and without effect.
Notwithstanding the restrictions on transfer set forth above, the Optionee may, with the prior consent of the Board of Directors or the Compensation Committee of the Board of Directors (either
referred to as the "Committee"), transfer all or any portion of the Option to "Permitted Transferees" (as defined below), provided that there may be no consideration paid for any such transfer. Subsequent transfer of any transferred Option shall be prohibited except (i) transfers by a transferee in accordance with the first paragraph of this Section by will or the laws of descent and distribution and (ii) transfers by a transferee, conducted in accordance with the procedures and limitations of this paragraph applicable to transfers by the Optionee to another person or entity that is also a Permitted Transferee of the Optionee. Following transfer, the events of termination of service set forth elsewhere herein shall continue to be applied with respect to the original Optionee, and, following the occurrence of any such event, the transferred Option shall be exercisable by the transferee only to the extent, and for the periods, specified elsewhere herein. The Optionee shall remain responsible for the payment of federal, state and local taxes and other amounts as may be required to be withheld by the Company in connection with the exercise of any transferred portion of the Option. In connection with any transfer of the Option pursuant to this paragraph, the Optionee shall surrender this Agreement to the Secretary of the Company, and the Company shall furnish to the transferee, and, if the transfer relates to less than all of the Option, to the Optionee, a new option agreement of like tenor as this Agreement representing the right to acquire the appropriate number of shares.
For purposes of the foregoing, the term "Permitted Transferees" means
(i) the spouse, children or grandchildren of the Optionee ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of Immediate Family
Members, (iii) a partnership in which Immediate Family Members are the only
permitted partners, or (iv) a limited liability company in which Immediate
Family Members are the only permitted members and managers.
5. TERMINATION OF SERVICE; DEATH OF OPTIONEE. In the event of the death of Optionee while in service on the Board, the Option shall be exercisable in full by the heirs or other legal representatives of the Optionee at any time within twelve (12) months following the date of death. In the event of termination of service on the Board, for any reason other than death or termination for cause, the Option shall be exercisable by the Optionee or his legal representative within three months of the date of termination. If the Optionee's service on the Board is terminated for cause, the Option shall terminate as of the date of such termination of service on the Board, and the Optionee shall have no further rights to exercise any portion of the Option. "Termination for Cause" means any removal from the Board for cause in accordance with applicable law and the Certificate of Incorporation and By-Laws of the Company. In no event may the Option be exercised more than ten (10) years after the effective date hereof.
6. REORGANIZATIONS AND RECAPITALIZATIONS OF THE COMPANY.
a. Subject to the other provisions of this Agreement, the existence of the Option granted hereunder shall not affect or restrict in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Common Stock or the rights thereof, any
issue of shares of Common Stock or shares of any other class of capital stock or warrants or rights to acquire such shares, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any corporate act or proceeding, whether of a similar character or otherwise.
b. In the event of any change in capitalization affecting the Common Stock of the Company, such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, liquidation, sale of assets or any other change affecting the Common Stock ("Change in Capitalization") a proportionate adjustment shall be made with respect to the aggregate number of shares of Common Stock covered by this Option and the price per share to the end that the Optionee shall be entitled to receive the same number and kind of stock, securities, cash, property or other consideration as if this Option had been exercised immediately preceding such Change in Capitalization.
c. In the event of a Change in Control (as defined below) of the Company, the Optionee will be permitted to surrender for cancellation within sixty (60) days after such Change in Control, the Option or portion of the Option to the extent not yet exercised and the Optionee will be entitled to receive a cash payment in an amount equal to the excess, if any, of (A) the Fair Market Value (as defined below) on the date preceding the date of surrender, of the shares subject to the Option or portion thereof surrendered, over (B) the aggregate exercise price for the shares under the Option or portion thereof surrendered.
d. A "Change in Control" of the Company shall mean the consummation of an occurrence after the effective date of the Plan of:
i. An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of the combined voting power of the Company's then outstanding Voting Securities;
ii. The individuals who, as of the date of adoption of the Plan by the Board, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by the Company's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "election contest" (as described in
Rule 14A-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or
iii. The consummation of:
(1) A merger, consolidation or reorganization involving the Company, unless
(a) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization,
(b) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, and
(c) no Person other than (a) the
Company, any Subsidiary, any employee
benefit plan (or any trust forming a part
thereof) maintained by the Company, the
Surviving Corporation, or any Subsidiary or
(b) any Person who, immediately prior to
such merger, consolidation or reorganization
had Beneficial Ownership of fifty percent
(50%) or more of the then outstanding Voting
Securities has Beneficial Ownership of fifty
percent (50%) or more of the combined voting
power of the Surviving Corporation's then
outstanding voting securities;
(2) A complete liquidation or dissolution of the Company; or
(3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
7. METHOD OF EXERCISING OPTION. The Option may be exercised, in whole or in part, by written notification to the Company accompanied by cash or a certified check for the aggregate purchase price of the number of shares being purchased, or upon exercise of the Option, the Optionee shall be entitled, without the requirement of further approval or other action by the Committee, to pay for the shares (i) by tendering stock of the Company that has been owned by the Optionee for at least six (6) months with such stock to be valued at the Fair Market Value (as defined below) on the date immediately preceding the date of exercise or (ii) with a combination of cash and stock that has been owned by the Optionee for at least six (6) months as provided above.
In addition, upon exercise of the Option, the Optionee may, with the prior approval of the Committee, pay for the shares (a) by tendering stock of the Company already owned by the Optionee but that has not been held by the Optionee for at least six (6) months with such stock to be valued at the Fair Market Value (as defined below) on the date immediately preceding the date of exercise, (b) surrendering a portion of the Option with such surrendered portion to be valued based on the difference between the Fair Market Value (as defined below) of the shares surrendered on the date immediately preceding the date of exercise and the aggregate option purchase price of the shares surrendered ("Surrender Value"), or (c) with a combination of cash, stock of the Company that has not been held by the Optionee for at least six (6) months or surrender of options.
The Committee may also permit the Optionee simultaneously to exercise the Option and sell the shares of Common Stock thereby acquired, pursuant to a brokerage or similar arrangement, approved in advanced by the Committee, and use the proceeds from such sale as payment of the purchase price of the shares being acquired upon exercise of the Option.
Notwithstanding any provision hereof, the obligation of the Company to sell and deliver shares under the Option shall be subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchange as may be required. The Optionee shall not exercise any portion of the Option and the Company will not be obligated to issue any shares under the Option if the exercise thereof or if the issuance of the shares shall constitute a violation by the Optionee or the Company of any applicable law or regulation. If the shares of
Common Stock have not been registered, the Company may require that as a condition to exercise any option, the optionee execute an investment letter. The Company may require as a condition to the issuance of any shares of Common Stock upon exercise of the Option that the Optionee remit an amount sufficient, in the Company's opinion, to satisfy all FICA, federal, state or other withholding tax requirements related to the exercise of the Option. The Optionee shall be entitled, without the requirement of further approval or other action by the Committee, to satisfy such obligation in whole or in part (i) by tendering stock of the Company already owned by the Optionee with such stock to be valued at the Fair Market Value (as defined below) on the date immediately preceding the date of exercise of the Option, (ii) by surrendering a portion of the Option with such surrendered Option covering shares having a Surrender Value equal to the amount of such requirement, or (iii) by a combination of cash, stock of the Company or surrender of a portion of the Option.
8. RIGHTS AS A STOCKHOLDER. The Optionee shall have no rights as a stockholder with respect to any shares covered by the Option until the date of issuance of a stock certificate to him for such shares.
9. SUBSIDIARY. As used herein, the term "Subsidiary" shall mean any present or future corporation in which the Company has a proprietary interest (but only if the Company owns, directly or indirectly, stock possessing not less than fifty percent (50%) of the total combined voting power of all classes of stock in such corporation), as the Board shall determine from time to time.
10. FAIR MARKET VALUE. "Fair Market Value" means the average of the high and low sales prices of the shares of Common Stock on any national securities exchange on which the shares are listed on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by such exchange, by National Quotation Bureau, Inc. or other national quotation service. If the Common Stock is not listed on a national securities exchange, Fair Market Value means the average of the reported high and low sales prices of the shares of Common Stock in the over-the-counter market on the date on which such value is to be determined as reported by a widely followed quotation service such as Yahoo Finance, MSN Investor, Raging Bull or similar sites, or, if such prices are not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. If at any time shares of Common Stock are not traded on an exchange or in the over-the-counter market, Fair Market Value shall be the value determined by the Committee, taking into consideration those factors affecting or reflecting value that they deem appropriate. For purposes of determining the purchase price of an incentive stock option, Fair Market Value shall in any event be determined in accordance with Section 422 of the Code.
11. OPTION PLAN. The terms of the Option and the rights and responsibilities of the parties hereto shall be governed by the Option Plan. In the event of any inconsistency between the terms of the Agreement and the Option Plan, the terms of the Option Plan shall control.
IN WITNESS WHEREOF the parties hereto have executed this Stock Option Agreement as of the day and year first above written.
COMPANY: PALWEB CORPORATION
By: __________________________________
OPTIONEE:
______________________________________
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