UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to________________
OKLAHOMA 75-1984048
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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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. [_]
The issuer's revenue for the year ended May 31, 2002, was $92,958.
As of August 15, 2002, the aggregate market value of the voting common stock held by non- affiliates of the registrant, computed by using the average of the high and low price on such date, was $5,113,971.
As of August 15, 2002, the issuer had outstanding a total of 4,691,625 shares of its $0.0001 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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 .................................... 14
Item 3. Legal Proceedings .......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders. ....... 16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ... 17
Item 6. Management's Discussion and Analysis or Plan of Operation .. 19
Item 7. Financial Statements ....................................... 32
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure ........................ 32
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........... 32
Item 10. Executive Compensation ..................................... 36
Item 11. Security Ownership of Certain Beneficial Owners
and Management ............................................. 38
Item 12. Certain Relationships and Related Transactions ............. 42
Item 13. Exhibits and Reports on Form 8-K ........................... 45
Item 14. Controls and Procedures .................................... 51
Signatures ................................................. 52
Certifications ............................................. 53
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
PalWeb Corporation ("PalWeb") is an Oklahoma corporation. Until May 2, 2002, PalWeb had existed as a Delaware corporation that was first incorporated on February 24, 1969, under the name Permaspray Manufacturing Corporation. It changed its name to Browning Enterprises Inc. in April 1982, to Cabec Energy Corp. in June 1993, and became PalWeb Corporation in April 1999.
On May 2, 2002, PalWeb completed a redomiciliation merger having the effect of changing its state of incorporation from Delaware to Oklahoma. The redomiciliation merger did not result in any change in the number of shares owned or percentage of ownership of any shareholder of the company, nor did it result in any change in the business, management, location of the principal executive offices, assets, liabilities or shareholders' equity of the company. Upon completion of the merger, the holders of PalWeb's previously outstanding shares of common stock, par value $0.10 per share, and Convertible Preferred Stock had their shares automatically converted into an equal number of shares of common stock, par value $0.0001 per share, of PalWeb as an Oklahoma corporation. Each outstanding share of PalWeb's Series 2001 12% Cumulative Convertible Senior Preferred Stock ("2001 Preferred Stock") was automatically converted into one share of 2001 Preferred Stock of PalWeb as an Oklahoma entity under the same terms and conditions. PalWeb's common stock continues to be traded on the National Association of Securities Dealers Automatic Quotation over-the-counter bulletin board system as further discussed below under Item 5, "Market for common Equity and Related Stockholder Matters."
As authorized by PalWeb's certificate of incorporation, PalWeb's Board of Directors determined that a reverse split of PalWeb's common stock would be beneficial to the company by enhancing the efficiency of the market for the stock. Accordingly, the Board approved a reverse split of 1 share for each 50 shares of common stock outstanding. The reverse split was made effective June 25, 2002. Appropriate adjustments were also made to the terms of the outstanding 2001 Preferred Stock, warrants and stock options of the company to reflect the reverse stock split in accordance with the terms of such instruments.
Unless otherwise noted, all references in this Form 10-KSB to the shares of the company's common stock, including historical references to the common stock of the company issued in connection with transactions occurring prior to the effective date of the reverse stock split, shall be made to the number and price of such shares as adjusted for the reverse split discussed above.
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., a Texas corporation ("PPP"), 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 PPP).
Since the acquisition of PPP, PalWeb's primary business is (i) manufacturing and selling plastic pallets, and (ii) custom designing, manufacturing and selling large plastic injection molding machines and systems. PalWeb is currently a development stage company. As of May 31, 2002, PalWeb had not sold any plastic injection molding machines, and sales of plastic pallets had 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, 200,000 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 820,000 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 under Mr. Kruger's supervision.
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, 2002, Mr. Kruger or his affiliated entities have provided over $4 million in funding through common stock purchases, cash advances, consulting services and the contribution of equity in PalWeb's building and land. All cash advances and other contributions of equity in PalWeb's building and land have been converted into 2001 Preferred Stock as discussed under the heading "Liquidity and Capital Resources" in Item 6 of this Form 10-KSB.
Beginning in mid 2001, Paul Kruger's brother, Warren Kruger, and certain of his affiliated entities began providing financial assistance to the company. These entities have provided over $5 million in funding primarily through loans which were converted into 2001 Preferred Stock as discussed under the heading "Liquidity and Capital Resources" in Item 6 of this Form 10-KSB.
Subsequent to becoming more active in management, Paul Kruger discovered various transactions and agreements that had been entered into with various parties by prior management that were detrimental to PalWeb. As a result of these discoveries, PalWeb initiated litigation against these parties and recovered approximately 1,100,000 shares of PalWeb's common stock.
PalWeb's subsidiary PPP is the entity through which PalWeb conducts its business of selling plastic pallets and plastic injection molding machines. As of May 31, 2002, PalWeb had not sold any plastic injection molding machines, and the sales of plastic pallets had 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. The latter patent covers machines which are more compact than traditional style plastic injection molding machines. Additionally, because externally applied clamping forces are not required during the injection process, these machines benefit from lower power demands and operating costs.
PalWeb also recently filed for patent protection for its new PIPER 600 Multi-Station Injection Molding Equipment ("PIPER 600"). Unlike conventional injection molding designs, the patent-pending PIPER 600 equipment does not require the use of energy intensive accumulators and injectors. Under normal operating conditions, the PIPER 600 uses approximately one-third of the electricity and about 10% of the oil (circulated) used by traditional style machines. The PIPER 600 is approximately 20% to 30% of the length of a traditional style injection molding 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 PIPER 600 plastic injection molding machines.
In addition, PalWeb uses a patent-pending CJ2TM fire retardant formula licensed from Westgate Capital Company, L.L.C., in connection with the production of PalWeb's plastic pallets. As discussed below, pallets produced with CJ2TM fire retardant have received UL 2335 classification with respect to fire retardancy. Westgate Capital Company, L.L.C., is owned by Warren Kruger and William Pritchard, two of PalWeb's directors. Mr. Pritchard's father, Dr. James Pritchard, a respected technical advisor in the area of custom polymer formulations, was involved in the development of the CJ2TM technology.
PalWeb's current product line includes seven items all of which are a 48" X 40" pallet as follows: Hawker FR, Tank, Tank 3-Runner, Granada, Granada 3-Runner, Stackable and Nestable. The Hawker FR utilizes a patented inter-locking design featuring CJ2TM fire retardant polymers that are UL 2335 certified, and has a free span racking capacity of 2,500 lbs., dynamic load of 5,000 lbs., static load of 25,000 lbs. and weighs approximately 53 lbs. The Tank also utilizes the patented inter-locking design, and has a dynamic load of 5,000 lbs., rackable load of 3,000 lbs., and weighs approximately 50 lbs. The Tank 3-Runner utilizes a design that allows for easier handling by electric pallet trucks, has a dynamic load of 5,000 lbs., and weighs approximately 45 lbs. The Granada Picture Frame and Granada 3-Runner pallets are totally produced from recycled plastic material. The Granada Picture Frame has a rackable capacity of 2,500 lbs., a dynamic load of 5,000 lbs. and weighs 47.5 lbs. The Granada 3-Runner has a dynamic capacity of 5,000 lbs. and weighs 41 lbs. The Stackable consists of tops of the Tank pallet, has a dynamic load of 5,000 lbs. and weighs approximately 32 lbs. The Nestable is the same as the Stackable except that the legs nestle inside one another for convenient and more efficient storage.
PalWeb has recently tested its pallets with respect to strength, durability and fire retardancy. In January 2002, PalWeb submitted its Hawker FR plastic pallet manufactured from its PIPER 600 production equipment with CJ2TM fire retardant formula to Underwriters Laboratory for UL certification with respect to fire retardancy. The Hawker FR pallet successfully completed the UL tests and has received its UL 2335 classification with respect to fire retardancy. This UL certification is expected to enhance the marketability of this pallet. In August, 2001, PalWeb received test results on its Hawker plastic pallet from the Virginia Polytech Institute & State University's ("Virginia Tech") FasTrack Evaluation, which in the opinion of PalWeb further demonstrates the strength and durability of this pallet. The Virginia Tech FasTrack Evaluation is a private test that was conducted at PalWeb's request. Although the Virginia Tech FasTrack Evaluation is not an industry standard, PalWeb believes that the results of the FasTrack Evaluation will be useful in marketing PalWeb's Tank plastic pallet.
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 conducted preliminary tests at the facilities of SGS US Testing Company, Inc., on the fire retardancy of the plastic formula used in its pallets and experienced favorable results. In January 2002, PalWeb's 48 inch by 40 inch plastic pallet produced on the company's new line of production equipment successfully passed the Underwriters Laboratory (UL) Standard 2335 Classification Flammability test for commodity storage and idle pallet storage. Through the process of preparing its pallet for the UL Standard 2335 test, PalWeb developed new innovations to the company's patented designs for both its plastic pallet and its injection molding system.
On August 5, 2002, PalWeb signed a Non Exclusive Distribution Agreement with Bosh Material Handling, Inc. ("Bosh"), of Grand Rapids, Michigan. The agreement will allow Bosh, a company with 20 years' experience in the material handling industry, to be a distributor of PalWeb's plastic rackable and nestable pallets. Through Bosh, PalWeb will provide a major international pharmaceutical company with up to 100,000 of PalWeb's patented interlocking rackable pallets through December 31, 2002. This contract allowed PalWeb to increase its production schedule to 24 hours per day, three days per week. Such schedule will enable PalWeb to produce approximately 4,000 pallets per week.
PalWeb's Hawker FR line has also been approved by Wal-Mart as a pallet that can be used by its vendors, but as of August 15, 2002, no sales or leases of Hawker FR pallets had been made to Wal-Mart vendors. PalWeb's marketing efforts have resulted in sales of numerous pallets in the form of separate sales of quantities of 1000 or less. PalWeb's marketing efforts have also generated several leads with customers who are considering sizable orders of pallets, but as of August 15, 2002, the contract with Bosh was the only large quantity order for pallets received by PalWeb. There is no assurance that PalWeb will secure any additional sizable orders of pallets or, if it does, that PalWeb will be able to manufacture the pallets necessary to fill such orders.
PalWeb continues to explore 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. In January 2002, PalWeb closed a private placement in which PalWeb issued 750,000 shares of 2001 Preferred Stock and warrants to purchase up to 4,500,000 shares of PalWeb's common stock in exchange for total consideration of $7,500,000. Details of such private placement are further discussed under the section "Liquidity and Capital Resources" in Item 6 of this Form 10-KSB. In addition, on December 11, 2001, PalWeb, through its subsidiary PPP, entered into a loan agreement with The F & M Bank & Trust Company ("F & M") dated December 11, 2001, whereby PPP issued a revolving note due December 31, 2002, in exchange for a $3,000,000 line of credit at prime plus 0.25%, which note and line of credit are further discussed under the heading "Liquidity and Capital Resources" in Item 6 of this Form 10-KSB. Further, as discussed below under the heading "Acquisition and Disposition of Paceco Financial" in this Item 1, in connection with the sale of PP Financial, Inc., to Paul Kruger, the company obtained a loan from Mr. Kruger in the amount of $1,000,000 at an interest rate of 6% per annum with a one-year balloon maturity of principal and interest under the loan, which loan is further discussed under the heading "Liquidity and Capital Resources" in Item 6 of this Form 10-KSB.
Any further loans to PalWeb will likely be required to be secured and guaranteed by Paul Kruger or Warren Kruger. PalWeb continues to be dependent upon Paul Kruger and Warren Kruger to provide and/or secure additional financing. Neither Paul Kruger or Warren Kruger are obligated to provide additional financing to PalWeb or to secure such financing on PalWeb's behalf, and there is no assurance that they will do so.
During the past two years, PalWeb has completed the construction of its patent-pending PIPER 600 at a total cost of $5,500,000, which funds were generated from the private placement of the 2001 Preferred Stock referenced above. The remaining $2,000,000 generated from such financing have been used by PalWeb as working capital, to satisfy debts of the company and to acquire PalWeb's building and land. PalWeb's PIPER 600, which has a production capacity of approximately 40,000 pallets per month, is now in operation.
Following the successful testing of PalWeb's pallets as discussed above, PalWeb has received indications of interest from a number of potential purchasers of pallets. The contract with Bosh demonstrates the potential of PalWeb's pallets as large volume sellers. However, there is no assurance that PalWeb will be successful in marketing the pallets in sufficient amounts to achieve profitability.
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 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. Projected sales of 40,000 pallets per month, or 480,000 pallets per year, is less than 1/10th of 1% of the new pallet market, and it appears that the market is moving toward the use and purchase of plastic pallets.
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 would 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 May 31, 2002, PalWeb leased 12 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. Subsequent to May 31, 2002, PalWeb increased its employees by 20, of which 18 are temporary production personnel. Should PalWeb successfully increase its production levels to 40,000 pallets per month, it will need to employ a total of 20 to 30 production employees and 5 to 7 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 will continue this sales and marketing plan until sales volumes make it cost effective to develop an internal sales staff. 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.
PalWeb plans to generate interest in its pallets by attending trade shows sponsored by industry segments that would benefit from PalWeb's products. PalWeb attributes the recent increase in interest in its products and the Bosh contract discussed above to PalWeb's recent attendance at one such trade show. PalWeb presently has plans to attend additional trade shows in the future.
PATENTS AND TRADEMARKS
PalWeb seeks to protect its technical advances by pursuing national and international patent protection for its products and methods when appropriate. Among those patents currently held by PPP, the following patents are particularly 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 more compact plastic injection molding machines.
PalWeb also recently filed for patent protection for its PIPER 600 Multi-Station Injection Molding Equipment. In addition, PalWeb uses a patent-pending CJ2TM fire retardant formula licensed from Westgate Capital Company, L.L.C., in connection with the production of PalWeb's plastic pallets. Pallets produced with CJ2TM fire retardant have received UL 2335 classification with respect to fire retardancy.
In addition to guarding its technical innovation, PalWeb also seeks to protect its market reputation through the pursuit of federal trademark and service mark registrations. Applications for federal registration are currently pending for the HAWKER, GRANADA and TANK
trademarks used in PalWeb's pallet product line. An application for federal registration is also pending for the "PALWEB" service mark used for PalWeb's product sale and leasing operations.
SUBSIDIARIES
PalWeb has one wholly-owned subsidiary -- Plastic Pallet Production, Inc., a Texas corporation.
ACQUISITION AND DISPOSITION OF PACECO FINANCIAL
On April 3, 2000, PalWeb acquired 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 1,000,000 shares of its common stock in exchange for all the outstanding stock of Pace Holding, Inc., and PFS became an indirect wholly owned subsidiary of PalWeb. All of the outstanding stock of Pace Holding, Inc., was owned by Paul Kruger, the Chairman and Chief Executive Officer of PalWeb. PFS, in addition to its other assets, owned 870,000 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 130,000 shares of PalWeb common stock.
The 1,000,000 shares of PalWeb's common stock that PalWeb exchanged for all of the outstanding stock of Pace Holding, Inc., was authorized and approved by Mark R. Kidd and Lyle W. Miller, who were at the time the directors of PalWeb other than Mr. Kruger. The 130,000 incremental shares of PalWeb's common stock that were issued in the acquisition of Pace Holding, Inc., represented the value attributable to PFS's business, other than the ownership of PalWeb common stock.
PFS has been in business since 1952 and was 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 a result of these difficulties, PFS has not engaged in any pallet financing activities.
PFS entered into a negotiated arrangement with the ODS in late 2000 whereby a plan (the "Plan") was devised for redeeming depositors' passbook savings accounts and time certificates (collectively referred to herein as "Deposits") of PFS. In general, the Plan provided a method for redeeming the outstanding Deposits through the transfer of 870,000 shares of the PalWeb common stock owned by PFS ("PFS Shares") to an independent trustee and the sale of the PFS 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 with the net sales proceeds being used to redeem the Deposits. Pursuant to that certain Put Agreement (the "Put Agreement") by and between Paul Kruger, Bill J. English, as Trustee (the "Trustee"), and PFS dated December 20, 2000, the percentage of PFS Shares to be purchased by Mr. Kruger is the difference between the amount 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 account balances.
In accordance with the Put Agreement and the Plan, on December 20, 2001, PFS made a payment of $357,000 to the Trustee, and Paul A. Kruger purchased 177,000 shares of the PFS Shares from the Trustee for $1,000,000 in order to redeem 33 1/3% of account balances outstanding as of January 1, 2002. This was the first time that any PFS Shares had been put to Mr. Kruger. Accordingly, as of December 20, 2001 (and as of May 31, 2002), there were 693,000 PFS Shares held by the Trustee.
Effective May 30, 2002, PalWeb sold 100% of the stock of PP Financial, Inc., to Paul Kruger in exchange for a $1,000,000 loan to PalWeb to be funded, at the direction of PalWeb's Board of Directors, by Mr. Kruger on or subsequent to May 31, 2002, with the condition that Mr. Kruger assume any and all claims and liabilities of PP Financial, Inc., and its wholly-owned subsidiary PFS. The $1,000,000 loan is considered by PalWeb to be additional consideration for the sale because of PalWeb's need for funding to continue operations, the loan's below market fixed interest rate of 6% per annum, the subordination of the loan to any and all bank and institutional indebtedness of PalWeb and the one-year balloon maturity of principal and interest under the loan. PalWeb also agreed to prepay the loan in the event that PalWeb obtains new bank financing providing sufficient financial capacity for PalWeb to do so. The loan is expected to provide working capital for current and projected pallet orders. The transaction also resulted in the removal of approximately $3,749,951 in PFS investment certificate liabilities reflected on PalWeb's consolidated balance sheet and increased PalWeb's shareholders' equity by approximately $3,796,250. The sale of the stock of PP Financial, Inc., to Paul Kruger was approved by the members of PalWeb's Board of Directors other than Paul Kruger. Paul Kruger did not participate in the discussion or approval process regarding such sale.
ITEM 2. DESCRIPTION OF PROPERTY
In connection with the preferred stock financing completed in January 2002 and described under the heading "Liquidity and Capital Resources" in Item 6 of this Form 10-KSB, PalWeb acquired the land and building in which its manufacturing facilities are located. Consequently, PalWeb currently owns 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.
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 has sufficient office equipment, such as computers, printers, copiers, etc., to operate effectively.
ITEM 3. LEGAL PROCEEDINGS
As of May 31, 2002, there were two material legal proceedings in which PalWeb was involved.
PalWeb Corporation, Inc. and Plastic Pallet Production, Inc., Plaintiffs v. Vimonta AG, Defendant, 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. On May 17, 2001, the court overruled Vimonta's objection, determining that the U.S. District Court for the Northern District of Texas had jurisdiction over Vimonta.
On July 20, 2001, counsel for Vimonta withdrew in this case. The court entered an order requiring Vimonta to obtain new counsel by August 24, 2001, or default judgement would be entered against Vimonta. Vimonta failed to obtain counsel by the required date. On May 20, 2002, the court entered an Order To Show Cause For Failure To Comply With Court Order
directing Vimonta to show cause in writing on or before June 3, 2002, why default judgment should not be entered against it (the "Show Cause Order").
Vimonta failed to respond to the court's Show Cause Order, and on June 11, 2002, this court entered an order granting default judgment against Vimonta and dismissing Vimonta's counterclaim (the "Default and Dismissal Order") and directed plaintiffs to submit a proposed final judgment. Both the Show Cause Order and the Default and Dismissal Order were served by the clerk of the court on Vimonta, but both were returned unclaimed. PalWeb has filed a motion with the court requesting that it be authorized to serve Vimonta with both of such orders and notice of the proposed form of default judgment in Germany pursuant to the provisions of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents to make certain that proper service is obtained for entry of the default judgment. That matter is pending before the court.
Representatives of Vimonta have previously threatened suit against PalWeb in Germany. However, neither the company nor counsel has received any notice that any such suit has been commenced.
Roger Landress v. PalWeb Corporation f/k/a Cabec Energy Corporation, Cause No. 01- 08731, filed in the 192nd Judicial District, District Court of Dallas County, Texas, on October 8, 2001.
Roger Landress has asserted that he is due certain payments and stock options from PalWeb, valued in excess of $1,000,000, in connection with an employment agreement that was allegedly entered into between Mr. Landress and PalWeb on September 1, 1996, at a time when PalWeb's name was Cabec Energy Corporation. PalWeb disputes the allegations contained in Mr. Landress's petition, has asserted affirmative defenses, such as that the lawsuit is barred by the applicable statute of limitations and that Mr. Landress' resign his position as part of a merger. PalWeb plans to vigorously defend the lawsuit. The company believes that Mr. Landress terminated his employment prior to November 1998, when the company's oil and gas activities were spun off to the Union Group. The Union Group indemnified the company for all liabilities associated with the prior oil and gas activities and may be responsible for indemnifying the company from these claims. Little discovery has been done, and the parties have been ordered to mediation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
References in this Item 4 to shares of PalWeb's common stock cast for or against or abstaining from voting in connection with matters presented to the shareholders shall be to the number of shares and votes actually cast at the meeting of shareholders without adjustment for the reverse stock split effective June 25, 2002.
The following matters were submitted to a vote of PalWeb's shareholders during the fourth quarter of the company's fiscal year ending May 31, 2002. These items were all voted on at the annual meeting of the shareholders on April 22, 2002. PalWeb did not solicit proxies, but
sent out an information statement. The shareholders attending the meeting represented 129,561,090 shares or 55% of the shares entitled to vote at the meeting.
DIRECTORS ELECTED. The re-election of the following six existing directors: Paul A. Kruger, Lyle W. Miller, Warren F. Kruger, Bryan R. Kirchmer, Bradley C. Shoup, and William W. Pritchard. Each re-elected director received 100% of the votes in favor of their election from the shareholders attending the meeting.
APPROVAL OF THE STOCK OPTION PLAN. The ratification of the stock option plan ("Stock Plan") approved by the company' s Board of Directors on May 11, 2001. The Stock Plan is intended as an incentive to managerial and other key employees of the company and its subsidiaries.
The Stock Plan was approved by a majority of the outstanding shares with 128,845,090 votes for, 716,000 against, and 0 abstentions.
REINCORPORATION. The approval of the merger of the company with PalWeb Oklahoma Corporation, an Oklahoma corporation, for the purpose of redomiciling the company to the State of Oklahoma (the "Reincorporation"), authorizing additional shares of common and preferred stock, and authorizing the Board of Directors to approve a reverse stock split.
There were 128,841,090 votes for, 720,000 against, and 0 abstentions for the Reincorporation proposal, and the Reincorporation was accomplished on May 2, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION:
PalWeb's common stock is traded on the National Association of Securities Dealers Automatic Quotation (NASDAQ) over-the-counter bulletin board system ("OTCBB") under the symbol "PLWB".
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, with "PAEB" as its trading symbol until June 25, 2002, the effective date of the reverse split of PalWeb's common stock. Since that time, PalWeb's common stock has been traded on the OTCBB with "PLWB" 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 -------------- ---- ----- Aug. 31, 2000 $4.13 $0.55 Nov. 30, 2000 1.15 0.35 Feb. 29, 2001 3.75 0.25 May 31, 2001 4.00 2.00 Aug. 31, 2001 5.75 2.55 Nov. 30, 2001 4.20 1.75 Feb. 29, 2002 9.45 3.00 May 31, 2002 7.25 3.00 |
HOLDERS:
As of May 31, 2002, PalWeb had approximately1288 common stockholders of record.
As of May 31, 2002, there were approximately 6000 beneficial owners (including those holding in street names) of PalWeb's common stock.
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:
Effective May 31, 2002, PalWeb sold all of the stock of PP Financial, Inc., to Paul Kruger, PalWeb's Chairman and CEO, in exchange for a $1,000,000 loan to PalWeb. For more information, refer to "History" under Item 1 and "Discontinued" under Item 6 of this Form 10-KSB.
Holders of PalWeb's 2001 Preferred Stock are entitled to cumulative dividends of 12% per annum, $1.20 per share, or a total of $900,000. In lieu of the quarterly payment of cash dividends due on March 31, 2002, and on June 30, 2002, the holders of such 2001 Preferred Stock have agreed to accept common stock of PalWeb, and PalWeb's Board of Directors has approved the payment of such dividends in the form of 272,775 shares of the authorized but unissued shares of the company's common 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 note and the stock dividend 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 note or stock.
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, the introduction of new products into the market and potential future financings. 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. Although PalWeb has completed the construction of a fully operational plastic injection molding machine and commenced the sales of plastic pallets, PalWeb is still in the development stage. PalWeb 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. PalWeb currently has certain patent applications pending. There can be no assurance that patent applications will result in patents being issued, or that, if issued, the patents will afford protection against competitors with similar technology.
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 SHAREHOLDERS OF ONE OF PALWEB'S 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. 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 or its common stock 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 EFFECT 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 effect on PalWeb's financial condition or other effects on PalWeb. There is no assurance this proceeding will be resolved favorably.
PALWEB'S PRINCIPAL SHAREHOLDERS OWN A SIGNIFICANT AMOUNT OF COMMON STOCK, GIVING THEM CONTROL OVER CORPORATE TRANSACTIONS AND OTHER MATTERS.
Two of PalWeb's directors, Warren Kruger and William Pritchard, and entities with which they are affiliated beneficially own over 50% of PalWeb's common stock, thus enabling them to control the outcome of shareholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in the company's certificate of incorporation or bylaws and the approval of merger and other significant corporate transactions. Paul Kruger, PalWeb's Chairman and Chief Executive Officer, also beneficially owns a substantial percentage of PalWeb's common stock. While these shareholder groups have not agreed to act in concert with respect to all shareholder matters, they may well act together in connection with matters presented to the shareholders in the future. This concentrated ownership makes it unlikely that any other holder or group of holders of common stock will be able to affect the way PalWeb is managed or the direction of its business. These factors may also delay or prevent a change in the management or voting control of PalWeb.
THE CONCENTRATED BENEFICIAL OWNERSHIP OF THE MAJORITY OF PALWEB'S COMMON STOCK BY A FEW OF PALWEB'S DIRECTORS OR ENTITIES WITH WHICH THEY ARE AFFILIATED GIVES RISE TO THE POSSIBILITY THAT RELATED PARTY TRANSACTIONS WITH PALWEB HAVE BEEN AND MAY IN THE FUTURE BE CONDUCTED ON TERMS THAT ARE NOT THE RESULT OF ARM'S LENGTH NEGOTIATION.
PalWeb has in the past and may in the future enter into transactions with parties controlled or affiliated with either Warren Kruger and William Pritchard or Paul Kruger. Warren Kruger and William Pritchard, directors of the company, and entities with which they are affiliated beneficially own over 50% of PalWeb's common stock. Paul Kruger, PalWeb's Chairman and Chief Executive Officer, also beneficially owns a substantial percentage of PalWeb's common stock. These related party transactions which may include loans to the company, contracts for the sale or lease of company property or products, licenses of technology, contracts for the provision of services to the company, etc., may be effected on terms that are not negotiated on an arm's length basis. There is no assurance that the terms of these related party transactions are or will be the same as would be obtained in a transaction with an unrelated party negotiating at arm's length. Accordingly, the terms of such related party transactions may be less
favorable to PalWeb than terms that might be obtained from an independent, unaffiliated party contracting with the company.
GENERAL
The consolidated statements include PalWeb and its wholly-owned subsidiary, PPP. Effective May 31, 2002, PalWeb has disposed of its interest in PFS as discussed in "Discontinued Operations" below.
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 necessary to finance continued operations.
PalWeb's primary business is the manufacturing and selling of plastic pallets, which is referred to herein as continuing operations. During the year ended May 31, 2002, PalWeb also began to explore the possible marketing of its patent-pending PIPER 600 equipment which it may sell to third parties. PalWeb has divested itself of its subsidiary finance company, PFS which is engaged in consumer and small business lending. As described below, the finance activities are classified as discontinued operations.
As of May 31, 2002, production of plastic pallets has been approximately 800 pallets per month, and the current production capacity is approximately 40,000 pallets per month. As of May 31, 2002, PalWeb had 12 full-time employees. During the fiscal year 2002, the construction and installation of PalWeb's new PIPER 600 production line to manufacture plastic pallets was completed at a cost of approximately $5,500,000. This new production line increased the capacity to about 40,000 plastic pallets per month. Production levels have generally been governed by sales, and, in August 2002, PalWeb was producing approximately 3,000 pallets per week and has increased its employees by 20 of which 18 are temporary production personnel. This production level will be maintained as sales dictate. There is no assurance that PalWeb will receive orders for pallets that will maintain, or justify any significant increase to, PalWeb's August 2002 production level.
Inventory levels at May 31, 2002, included approximately 2073 stackable and 2607 rackable pallets and 159 Granada 3-Runner pallets.
For all years presented, PalWeb's effective tax rate is 0%. PalWeb has generated net operating losses since inception, which would normally reflect a tax benefit in the statement of operations and a deferred asset on the balance sheet. However, because of the current uncertainty as to PalWeb's ability to achieve profitability, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the consolidated statement of operations.
YEAR ENDED MAY 31, 2002, COMPARED TO YEAR ENDED MAY 31, 2001
CONTINUING OPERATIONS
Sales for 2002 were $92,958 compared to $89,211 in 2001 and sales revenues remained insufficient to cover material and operating costs. The increase was small but as discussed in "General" above, sales levels begin to increase significantly in fiscal year 2003 as a result of the continuing sales effort, introduction of new product lines and the completion of the new production equipment. During the fiscal year ended May 31, 2002, PalWeb sold 3,303 pallets. Between May 31, 2002, and August 10, 2002, PalWeb sold approximately 5100 pallets.
Salary and benefits expense were $307,085 in 2001 compared to $496,063 in 2002 for an increase of $188,978. This increase is primarily due to the addition of four employees including one in production, one to establish a source of recycled material, and office manager and an executive assistant. Subsequent to May 31, 2002, and through August 15, 2002, PalWeb employed 2 additional full time employees and 18 temporary employees in anticipation of increased sales of pallets. Additional personnel may be required if sales increase further.
The general and administrative expenses increased $491,791 or about 54% from $907,940 in 2001 to $1,399,731 in 2002. The principal reasons for this increase were an increase of approximately $50,000 in property taxes, $85,000 in UL testing and $357,000 in general operational expenses, including in-house costs associated with strength and UL testing, utilities, insurance, rent, advertising, travel, etc. These latter items reflect the general increase in activity toward the anticipated higher level of sales and related production activity and the implementation of the new production equipment.
Depreciation and amortization expense decreased $47,220 from $204,584 in 2001 to $157,364 in 2002. Depreciation expense decreased by approximately $33,000 due to assets becoming fully depreciated in 2001 and approximately $65,000 of depreciation on the company's building. The building was sold in 2000 with an option to purchase. The option to purchase precluded the transaction from being classified as a sale thereby resulting in the building continuing to be carried in accounting records and depreciated. Effective May 1, 2001, the option was cancelled allowing the sale to be recorded resulting in no building depreciation in fiscal year 2002 until January 4, 2002, when the building was acquired in exchange for preferred stock. In 2002, additional amortization expense of approximately $48,000 was recorded to fully amortize obsolete patents.
Interest expense decreased $68,833 from $300,451 in 2001 to $231,618 in 2002. Total interest in 2002 was $403,995 of which $172,377 was capitalized as part of the new production equipment. The additional borrowings during 2002 were primarily for the completion of the new production line.
The loss from continuing operations increased $2,074,752 from $184,066 in 2001 to $2,258,818 in 2002. This increase results from a non-recurring gain of $1,541,783 in 2001 resulting from settlement of certain contracts in addition to the net increases discussed above.
DISCONTINUED OPERATIONS
Effective May 31, 2002, PalWeb transferred its ownership in PFS to Mr. Paul Kruger, Chairman and Chief Executive Officer of PalWeb, in exchange for a loan agreement of $1,000,000. The operations of PFS for 2002 and 2001 are classified as discontinued operations in the accompanying financials. The loss on such discontinued operations for 2002 is $197,012 compared to $1,294,655 in 2001.
COMBINED
The consolidated net loss for 2002 of $2,455,830, or $0.57 per share, compared to a net loss of $1,478,721 or $0.37 per share for 2001.
GENERAL
Currently, PalWeb's management projects that the sales of approximately 15,000 pallets per month are necessary to break even. Sales at this level would provide monthly revenues of approximately $450,000 and should provide sufficient cash flow to sustain its operations including about $225,000 in cash operating expenses for labor, recurring overhead and interest and $225,000 for material costs. Although significant sales orders have been executed, there is no assurance that this sales level will be achieved. Until sales reach this level, PalWeb will remain dependent on 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 traditional financing sources. As described below, substantially all of the financing that PalWeb has received through May 31, 2002, has been provided by loans from entities controlled by Mr. Paul Kruger, PalWeb's Chairman and Chief Executive Officer, and from entities affiliated with Warren Kruger, Paul Kruger's brother and a director of PalWeb, and through the offering of 2001 Preferred Stock described below to the same persons. In addition, the bank line of credit discussed below under "Line of Credit" was obtained with the personal guarantees of Paul Kruger and Warren Kruger plus a lien on all equipment. There is no assurance that Paul Kruger or Warren Kruger will continue to provide loans or loan guarantees in the future.
PREFERRED STOCK FINANCING
On May 8, 2001, PalWeb announced that it had signed a letter of intent (the "Letter of Intent") for a private placement of 500,000 shares of convertible preferred stock and warrants to purchase 3,000,000 shares of common stock of PalWeb for a total of $5,500,000. The Letter of Intent was with Westgate Capital Company, L.L.C. ("WCC"), a private limited liability company of which Warren Kruger is a manager and member, and Hildalgo Trading Company, LC ("Hildalgo"), which is 100% owned by Paul Kruger.
Subsequent to the execution of the Letter of Intent, Yorktown Management & Financial Services, L.L.C. ("Yorktown"), and Westgate Investments, L.P. ("Westgate"), entities with which
Warren Kruger is affiliated, provided loan financing. WCC is the general partner of Westgate. Subsequent to the signing of the Letter of Intent, WCC also required as an additional condition to its equity investment that PalWeb acquire the land and building in which its manufacturing facilities are located (the "Building") from Onward, LLC ("Onward"), an entity that is 100% owned by Paul Kruger, subject to existing debt in exchange for additional shares of convertible preferred stock and additional warrants on the same terms as described in the Letter of Intent.
On January 4, 2002, PalWeb entered into a Securities Purchase Agreement, which was subsequently amended on January 21, 2002 (the "Purchase Agreement"), with Hildalgo, Onward and Westgate (collectively, the "Purchasers"). Pursuant to the Purchase Agreement, PalWeb issued 750,000 shares of 2001 Preferred Stock and warrants to purchase up to 4,500,001 shares of common stock for $5.00 per share to the Purchasers in exchange for total consideration of $7,500,000. Hildalgo acquired 95,020 shares of 2001 Preferred Stock and warrants to purchase 570,120 shares of common stock in exchange for the conversion of $950,200 of existing indebtedness owed to Hildalgo. Onward acquired 81,282 shares of 2001 Preferred Stock and warrants to purchase 487,693 shares of common stock in exchange for the conversion of $276,082 of existing indebtedness owed to Onward and $536,745 of equity in the Building, based on an agreed value of $1,350,000, less indebtedness assumed by PalWeb of $813,255. Westgate acquired 573,698 shares of 2001 Preferred Stock and warrants to purchase 3,442,188 shares of common stock in exchange for $522,680 in cash and the conversion of $5,214,297 of existing indebtedness owed to entities with which Warren Kruger is affiliated. Subsequent to the original issuance of the 2001 Preferred Stock, the shares of 2001 Preferred Stock and warrants originally issued to Onward were transferred to Paul Kruger.
The terms of the 2001 Preferred Stock and warrants are the same as those announced in May of 2001 when the Letter of Intent was signed; however, the total amount of 2001 Preferred Stock and warrants offered was increased to account for additional indebtedness that was incurred and the transfer of the Building from Onward to PalWeb. Each share of the 2001 Preferred Stock has a stated value of $10 per share and is convertible at any time into 7 shares of common stock of PalWeb or a total of 5,250,000 shares, which is an effective conversion price of $1.429 per share. Holders of the 2001 Preferred Stock are also entitled to cumulative dividends of 12% per annum, $1.20 per share, or a total of $900,000. The warrants are exercisable at a price of $5.00 per share for a period of four years, subject to acceleration of the expiration date for three separate 25% tranches of the total warrants, if PalWeb's common stock trades at prices of $7.50, $10.00 and $12.50 per share, respectively.
In connection with the Purchase Agreement, PalWeb and Westgate entered into a Shareholders and Voting Agreement dated January 4, 2002, as amended on January 21, 2002 (the "Shareholders Agreement"), whereby the parties agreed, among other things, that Westgate shall have the right to:
o designate for nomination by management for election to the Board of Directors at least two-thirds of the members of the Board for as long as Westgate holds at least 5% of the 2001 Preferred Stock or common stock of PalWeb;
o designate one of the Westgate designees for appointment on every committee of the Board of Directors of PalWeb for as long as Westgate continues to have one or more designees serving on the Board of Directors of PalWeb; and
o routinely consult with, and advise, the management of PalWeb regarding PalWeb's operations.
In addition, the Shareholders Agreement provides that the following actions may not be taken without the prior approval of 60% of the members of the Board of Directors of PalWeb:
o amend the certificate of incorporation or bylaws of PalWeb;
o consolidate with, or merge with or into, any entity, except for certain mergers of wholly owned subsidiaries of PalWeb with or into PalWeb;
o make certain sales, leases, transfers or dispositions of the properties or assets of PalWeb;
o change the general nature of the business of PalWeb;
o make certain acquisitions or issuances of shares of PalWeb;
o enter into certain commitments or obligations for the grant of options, warrants or rights to acquire or issue shares of PalWeb;
o incur any funded indebtedness, except for indebtedness incurred as contemplated by an annual budget, incurred under PalWeb's primary credit facility, or in an aggregate amount not exceeding $250,000;
o make any investment by PalWeb in any entity other than a wholly-owned subsidiary in an amount exceeding $100,000;
o pay any dividends on shares of common stock of PalWeb;
o file any petition seeking to reorganize PalWeb pursuant to, or to obtain relief under, any federal or state bankruptcy or insolvency law;
o dissolve, liquidate or wind-up of the affairs of PalWeb;
o appoint or dismiss the chief executive officer, the president, the chief operating officer, the chief financial officer or any senior vice president of PalWeb; or
o make any capital expenditures not approved in an annual budget in an aggregate amount exceeding $250,000 in any fiscal year.
Westgate's voting and other rights in connection with the Purchase Agreement and Shareholders Agreement constitute a change in control of PalWeb. Westgate's general partner is WCC, whose managers are Warren F. Kruger, Paul A. Kruger's brother, and William W. Pritchard. By virtue of their authority to control Westgate, WCC, Warren F. Kruger and William W. Pritchard may be deemed to be in control of PalWeb.
In connection with the 2001 Preferred Stock, PalWeb is required to pay dividends to the holders of the 2001 Preferred Stock on a quarterly basis in the cumulative amount of 12% per annum, $1.20 per share, or a total of $900,000. In lieu of the cash dividends due on March 31, 2002, and on June 30, 2002, in the total amount of $436,440, the holders of such 2001 Preferred Stock have agreed to accept common stock of PalWeb, and PalWeb's Board of Directors has approved the payment of such dividends with 272,775 shares of PalWeb's common stock valued at $1.60 per share.
PalWeb does not anticipate that it will make cash dividend payments to any holders of its common stock unless and until the financial position of PalWeb improves through increased revenues, another financing, or otherwise. In addition, as a practical matter, the negative covenants described below under "Line of Credit," which essentially limit PPP from transferring funds to PalWeb, could impair PalWeb's ability to pay dividends to its shareholders.
LINE OF CREDIT
On December 11, 2001, PalWeb, through its subsidiary PPP, entered into a loan agreement with The F&M Bank and Trust Company ("F&M") dated December 11, 2001 (the "Loan Agreement"), whereby PPP issued a revolving note due December 31, 2002 (the "Revolving Note"), in exchange for a $3,000,000 line of credit at prime plus 0.25%. In connection with the Loan Agreement, PPP has agreed not to, among other things:
o create, assume or suffer to exist certain liens, charges or encumbrances on the properties encumbered to F&M ;
o sell, assign, transfer, convey, or encumber its assets;
o create, assume or suffer to exist any indebtedness in excess of $100,000 in any single year without the prior consent of F&M ;
o make certain loans, advances or extensions of credit;
o merge, consolidate, enter into certain business combinations, or acquire substantially all of the assets of any other corporation without the prior consent of F&M ;
o engage in any business activities substantially different from or unrelated to its present or proposed business activities; or
o declare or pay certain cash or asset dividends.
As additional inducements for F&M to establish the line of credit, Paul Kruger executed an unlimited guaranty and a pledge, assignment and security agreement pursuant to which he pledged certain shares of Precis, Inc. common stock owned by him, and Warren Kruger executed a limited guaranty in the amount of $1,000,000. Neither Paul nor Warren Kruger received any consideration from the company for these guaranties. The loan is secured by substantially all of the assets of PPP, excluding the company's building which has been mortgaged to the building lender as described below. Proceeds of this line have been used to pay certain accounts payable, to complete the production line installation, and to provide working capital. As of May 31, 2002, this loan was fully advanced. The company's goal is to develop its business to the point that this loan can be extended or refinanced at its current maturity of December 31, 2002, to be repaid from cash flow from future operations. If this goal is not achieved, repayment of the loan at December 31, 2002, will require additional external financing of some type.
In connection with the issuance of the 2001 Preferred Stock, PalWeb acquired the Building on January 4, 2002, as described above under "Preferred Stock Financing," subject to existing debt assumed by the company as further described below under "Other." Although as of May 31, 2002 F&M has not waived its rights in connection with the negative covenants described above prior to PalWeb's assumption of the debt related to the Building, PalWeb anticipates that F&M will not object to such a waiver.
LOAN FROM PAUL KRUGER
Immediately prior to May 31, 2002, PalWeb transferred all of the stock of PP Financial, Inc., to Paul Kruger in exchange for a $1,000,000 loan to PalWeb to be funded, at the direction of PalWeb's Board of Directors, by Mr. Kruger on or subsequent to May 31, 2002, with the condition that Mr. Kruger assume any and all claims and liabilities associated with PP Financial, Inc., and its subsidiary PFS, regardless of when such claims and liabilities arose or accrued. The loan from Mr. Kruger is considered additional consideration for the transfer because PalWeb is in need of funding to continue its operations, the loan was made at a below market fixed rate of interest of 6% per annum, the loan is unsecured and subordinated to any and all bank and institutional indebtedness of the company, and the loan was made with a one-year balloon maturity of principal and interest. PalWeb also agreed to prepay the loan in the event that it obtains new bank financing that provides the company with the capacity to do so. As of August 15, 2002, $950,000 had been advanced on this loan.
OTHER
Effective January 4, 2002 , PalWeb acquired its facility from Onward, an affiliate of Paul Kruger, for $1,350,000 through the issuance of 53,674 shares of preferred stock and the assumption of about $812,000 of mortgage debt. The note assumed by PalWeb in connection with this acquisition has an interest rate of prime plus 1%, requires a payment of $5,000 per month in principal plus accrued interest, and matures in January 2003. Texas Capital Bank ("TCB") has not consented to PalWeb's assumption of the mortgage debt. Therefore, Onward remains liable on the debt in the event that PalWeb does not pay the obligation. However, TCB has taken no action to accelerate the mortgage debt.
PalWeb had accumulated a working capital deficit of $4,268,000 at May 31, 2002, which includes $2,992,700 due to F&M and $540,867 in accounts payable and accrued liabilities. This deficit reflects the uncertain financial condition of PalWeb resulting from its inability to obtain long term financing to progress beyond the development stage. There is no assurance that PalWeb will secure such financing.
PalWeb continues to be dependent upon Paul Kruger and Warren Kruger to provide and/or secure additional financing and there is no assurance that either will do so. As such, there is no assurance that funding will be available for PalWeb to continue operations.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of PalWeb are set forth on pages F-1 through F-16 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 EXPIRES
---- -------- -------
Paul A. Kruger Director, President and 2002
Chairman of the Board
Lyle W. Miller Director and Executive Vice 2002
President (Marketing and Sales)
Warren F. Kruger Director 2002
Bryan R. Kirchmer Director 2002
Bradley C. Shoup Director 2002
William W. Pritchard Director 2002
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PAUL A. KRUGER
CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT
Mr. Paul A. Kruger, age 48, earned a Bachelor of Business Administration degree in accounting from Cameron University, Lawton, Oklahoma, and earned a Juris Doctor degree from Oklahoma City University Law School. He has over twenty-five years of experience in the financial services industry. In 1980, Mr. Kruger co-founded MCM Group, Ltd. ("MCM Group"), which owned and operated United Bank Club Association, Inc. ("UBCA"), in Norman, Oklahoma, and served as its President and CEO until February 1996, when UBCA was sold to a subsidiary of Cendant Corp. (CD-NYSE) ("Cendant"). 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 PFS. 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 acquired 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. Memberships in these programs are offered and sold as a part of point-of-sale transactions and through direct marketing. From December 2000 until July 2002, Mr. Kruger served as the Chairman of the Board of Directors and the Chief Executive Officer of Precis, Inc. His responsibilities and contributions to these companies included assisting in the development, implementation and execution of strategic planning. Mr. Kruger currently holds managing officer positions in privately-held Hildalgo and Onward.
Mr. Kruger became a director and Chairman of the Board of Directors of PalWeb on July 8, 1999, and became President on January 22, 2000. He is the brother of Warren F. Kruger.
LYLE W. MILLER
DIRECTOR AND EXECUTIVE VICE PRESIDENT OF MARKETING AND SALES
Mr. Lyle W. Miller, age 58, earned a Bachelor of Business Administration degree from Michigan State University and attended Central Michigan University's Master's program in Finance. For the past seven years, Mr. Miller has been the President and a Director of Lyle W. Miller 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, and owner of the Landings Restaurant in Charlevoix, Michigan. Mr. Miller is a director and Vice-Chairman of Capital Bancorp Limited, a publicly-held bank holding company. As of May 31, 2002, Mr. Miller was a director of Precis, Inc., a publicly-held corporation; however, Mr. Miller is no longer serving in that position.
Mr. Miller became a director of PalWeb and Executive Vice President of Marketing and Sales on January 22, 2000.
WARREN F. KRUGER
DIRECTOR
Mr. Warren F. Kruger, Manager/CEO of privately-held Yorktown Management & Financial Services, L.L.C., is 45 years old. Yorktown Management is involved in investment banking, real estate, manufacturing, and energy endeavors. Mr. Kruger earned a Bachelor of Business Administration Degree from the University of Oklahoma, and an Executive MBA from Southern Methodist University. Mr. Kruger has over twenty-five years experience in the financial services industry. In 1980, Mr. Kruger co-founded MCM Group, which owned and controlled UBCA until 1996 when the firm was sold to a subsidiary of Cendant. He also owned and operated Century Ice, a manufacturer and distributor of ice products from 1996 to 1997, when Packaged Ice (ICED-NASDAQ) acquired Century Ice in an industry rollup. Mr. Kruger is a partner with William W. Pritchard in privately-held WCC, with investments in oil and gas, real estate, and investment banking. Additionally, he is a director of privately-held The F & M Bank and Trust Company in Tulsa, Oklahoma.
Mr. Kruger became a director of PalWeb on January 4, 2002. He is the brother of Paul A. Kruger.
BRYAN R. KIRCHMER
DIRECTOR
Mr. Bryan R. Kirchmer, age 31, earned a Bachelor of Science in Mechanical Engineering from the University of Tulsa and is a registered Professional Engineer in the State of Oklahoma. Mr. Kirchmer has business and project development experience in a variety of industries including investment casting, control valves, and plastics equipment. Mr. Kirchmer is a co-founder of an independent engineering consulting firm serving the plastics industry, Gravity Management and Engineering Group, Inc. ("GME Group"). As President of GME Group, Mr. Kirchmer has been responsible for developing and implementing marketing strategies for the entire range of project management, engineering and construction (EPC). In recent years, Mr. Kirchmer has spent a substantial amount of time working on the development of next-generation injection molding machines. Mr. Kirchmer and GME Group have been responsible for overseeing the construction of the company's new line of injection molding equipment.
Mr. Kirchmer became a director of PalWeb on January 4, 2002.
BRADLEY C. SHOUP
DIRECTOR
Mr. Bradley C. Shoup, age 44, earned a Bachelor of Science in Civil Engineering, with distinction, from the University of Kansas, and a Master of Science from the Sloan School of Management at the Massachusetts Institute of Technology. From 1988 through 1998, Mr. Shoup was a founding partner in several related investment management and corporate finance advisory entities, including Batchelder & Partners, Inc., DHB Partner LP, Girard Partners LP, and Relational Investors LLC. Relational Investors is an investment management firm with over one billion dollars under management. From 1999 to present, Mr. Shoup has been a private investor focused on private start-up ventures and small public companies in the development or high-growth stages. He has been an advisor or executive at certain companies in which he has invested, including CRT Holdings, Inc., Belzberg Technologies Corporation (BLZ-Toronto Stock Exchange), Ivanhoe Energy Corp. (IVAN-NASDAQ), and CyberCity Holdings Inc. Currently, Mr. Shoup is the Chief Financial Officer of CRT Holdings Inc., a private company engaged in the development of innovative technologies in the power generation industry.
Mr. Shoup became a director of PalWeb on January 4, 2002.
WILLIAM W. PRITCHARD
DIRECTOR
Mr. William W. Pritchard is 51 years old and has been an attorney with the law firm of Hall, Estill, Hardwick, Gable, Golden & Nelson in Tulsa, Oklahoma, since 1996. He earned his Bachelor Degree with honors at the University of Kansas and his Juris Doctorate at the University of Tulsa. Mr. Pritchard served as the Vice-President and General Counsel for Parker Drilling Company (PKD-NYSE) for 20 years preceding his tenure with Hall, Estill and has extensive experience in financial and commercial transactions in both domestic and international markets. He is a partner with Warren F. Kruger in WCC, with investments in oil & gas, real estate and investment banking. He was co-founder of The Seminole Group, a privately-held, crude marketing and gathering company. In addition, Mr. Pritchard was a co-founder and currently serves as a director of privately-held Transcontinental Drilling Services, the largest seismic shot hole company in the United States.
Mr. Pritchard became a director of PalWeb on January 4, 2002. Mr. Pritchard also provides legal services to the company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:
Section 16(a) of the Securities Exchange Act of 1934 requires PalWeb's directors, officers and persons who beneficially own more than 10% of any class of the company's equity securities registered under Section 12 to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of such registered securities of the company. Officers, directors and greater than 10% beneficial owners are required by regulation to furnish to the company copies of all Section 16(a) reports they file.
Based solely on review of the copies of such reports furnished to PalWeb and any written representations that no other reports were required during fiscal 2002, to PalWeb's knowledge, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners during fiscal 2002 were complied with on a timely basis, except as follows:
NUMBER OF TRANSACTIONS
NUMBER OF NOT REPORTED ON A
NAME LATE REPORTS TIMELY BASIS
---------------- ------------ ------------
Warren F. Kruger 1 1
Bryan R. Kirchmer 1 1
William W. Pritchard 1 1
Bradley C. Shoup 1 1
Westgate Capital 1 1
Company, L.L.C.
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Westgate Investments, L.P., owns 140,000 shares of PalWeb's common
stock, 573,698 shares of 2001 Preferred Stock (convertible into 4,015,886 shares
of common stock), warrants to purchase 3,442,188 shares of common stock and
208,653 shares it has the right to receive in lieu of cash dividends due on the
2001 Preferred Stock, thus giving that company beneficial ownership of 64.3% of
PalWeb's common stock. As of August 15, 2002, Westgate Investments, L.P., had
not filed with the SEC a report of its beneficial ownership as required by
Section 16(a) of the Securities Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
During the last three completed fiscal years, other than Mr. Paul Kruger, no other named executive officers received a salary as a part of executive compensation. The following table sets forth the compensation paid to named executive officers during the fiscal years ended May 31, 2000, 2001 and 2002:
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ---------------------
NAME AND FISCAL YEAR SECURITIES UNDERLYING
PRINCIPAL POSITION ENDING MAY 31 SALARY BONUS OPTIONS/SARS (#)
------------------ ------------- ------- ----- ---------------------
Paul A. Kruger, 2002 $12,000 - 0 - 150,000
Chairman of Board 2001 $12,000 - 0 - 50,000
and President 2000 $ 6,000(1) - 0 - - 0 -
------------------------
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(1) Mr. Kruger was first placed on the payroll of PalWeb on December 1, 1999.
The following table sets forth information concerning the grant of stock options during the fiscal year ended May 31, 2002, to named executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE
-------------- ----------- ----------- ---------- -----------------
Paul A. Kruger 150,000 79% $3.125 APRIL 11, 2012(1)
------------------------
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(1) The options granted to Mr. Kruger shall become exercisable at the rate of 25% of the total shares subject to the option on each of the first four anniversary dates of the date of grant, which was April 11, 2002. Once vested, the options are exercisable at any time and from time to time until 10 years after the date of grant or April 11, 2012, while Mr. Kruger continues to serve as an employee or director of PalWeb. In the event Mr. Kruger's employment by PalWeb or service on its Board of Directors is terminated other than for cause, the vested portions of the options shall be exercisable within 3 months of such termination; provided that, if Mr. Kruger's employment is terminated but he continues to serve as a director, his options will not expire within 3 months but will, instead, continue until he ceases to be a director or April 11, 2012, whichever date is earlier. In the event of the death of Mr. Kruger, the options shall become exercisable in full by his heirs within 12 months of such death.
The following table provides information with respect to named executive officers concerning the exercise of options during the fiscal year ended May 31, 2002, and unexercised options held as of May 31, 2002:
AGGREGATE OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
SHARES UNEXERCISED OPTIONS MONEY OPTIONS
ACQUIRED VALUE AT FY-END# AT FY-END
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-------------- ----------- -------- ------------------------- -------------------------
Paul A. Kruger -0- N/A 50,000/150,000 $102,500/$138,750
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In addition to the options granted to Paul Kruger and reported above, during the fiscal year ended May 31, 2002, the following directors received grants of stock options under the company's Stock Option Plan: Bryan R. Kirchmer -- 100,000 options, Warren F. Kruger -- 100,000 options, Lyle W. Miller -- 100,000 options, William W. Pritchard -- 100,000 options, and Bradley C. Shoup -- 100,000 options. Each of such option grants shall become exercisable at the rate of 25% of the total shares subject to the option on each of the first four anniversary dates of the date of grant, which was April 11, 2002. Once vested, the options are exercisable at any time and from time to time until 10 years after the date of grant or April 11, 2012, while such directors continue to serve as members of the Board of Directors of PalWeb. In the event that the service on the Board of Directors of any of such directors is terminated other than for cause, the options shall be exercisable within three months of such termination. In the event of the death of any of such directors, the options shall become exercisable in full by his heirs within twelve (12) months of such death. The foregoing options are exercisable at a price of $3.125 per share, which was the market value of the company's common stock on the date of the grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of August 15, 2002, PalWeb had 4,691,625 shares of Common Stock and 750,000 shares of 2001 Preferred Stock outstanding. Each share of the 2001 Preferred Stock is convertible into 350 shares of common stock. The 2001 Preferred Stock and the warrants were issued in connection with a transaction that involved a change in control of the company, as further described in "Preferred Stock Financing" under Item 6.
The following table sets forth certain information regarding the shares of common stock beneficially owned as of August 15, 2002, by (i) each person known by the company to own beneficially five percent (5%) or more of the outstanding common stock, (ii) each director and officer, and (iii) all directors and officers as a group:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNER(1) OF CLASS(2)
---------------- ------------------- -----------
Paul A. Kruger 3,843,647(3) 54.2%
Director, Chairman of the
Board and President
2500 South McGee, Ste. 147
Norman, OK 73072
Hildalgo Trading Company, LC 1,294,421(4) 21.7%
2500 South McGee
Norman, OK 73072
38
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Westgate Investments, L.P. 7,806,727(5) 63.2% 320 S. Boston, Suite 400 Tulsa, OK 74103-3708 Westgate Capital Company, LLC 7,806,727(6) 63.2% 320 S. Boston, Suite 400 Tulsa, OK 74103-3708 Warren F. Kruger 8,200,319(7) 66.4% Director 1613 East 15th Street Tulsa, OK 74120 William W. Pritchard 7,844,449(8) 63.5% Director 320 S. Boston, Suite 400 Tulsa, OK 74103-3708 Bill J. English, Trustee 693,000(9) 14.8% 114 E Main Norman, OK 73072 Lyle W. Miller 180,000(10) 3.8% Director and Executive Vice President of Marketing and Sales 2810 Hannah Blvd. P.O. Box 4697 East Lansing, MI 48823 Bradley C. Shoup 0(11) 0% Director 4233 Normandy Dallas, TX 75205 Bryan R. Kirchmer 2,000(12) .04% Director 601 S. Boulder Ave., Suite 105 Tulsa, OK 74119 All Current Directors & Officers as a Group (6 persons) 12,536,521(13) 83.1% |
(1) The number of shares beneficially owned by each person is calculated in accordance with the rules of the SEC, which provide that person shall be deemed to be a beneficial owner of a security if that person has the right to acquire beneficial ownership of the security within 60 days through options, warrants, or the conversion of a security; provided, however, if such person acquires any such rights in connection with or as a participant in any transaction with the effect of changing or influencing control of the issuer,
immediately upon such acquisition, the holder will be deemed to be the beneficial owner of the securities. The number the shares of common stock beneficially owned by each person includes common stock, the number of shares of common stock each person has the right to acquire upon the conversion of 2001 Preferred Stock, and the number of shares of common stock each person has the right to acquire upon the exercise of warrants or options.
(2) The percentage ownership for each person is calculated in accordance with the rules of the SEC, which provide that any shares a person is deemed to beneficially own by virtue of having a right to acquire shares upon the conversion of warrants, options or other rights, or upon the conversion of preferred stock or other rights are considered outstanding solely for purposes of calculating such persons percentage ownership.
(3) The total includes: (i)1,261,600 shares of common stock beneficially owned
directly or indirectly; (ii) 50,000 shares of common stock that Paul Kruger
directly has the right to acquire in connection with the options; (iv)
665,140 shares that Hildalgo has the right to acquire upon conversion of
2001 Preferred Stock, 570,120 shares Hildalgo has the right to acquire upon
exercise of warrants and 34,561 shares Hildalgo has the right to receive in
lieu of cash dividends due on the 2001 Preferred Stock; (iv) 568,974 shares
that Paul Kruger has the right to acquire upon conversion of 2001 Preferred
Stock, 29,559 shares he has the right to receive in lieu of cash dividends
due on the 2001 Preferred Stock and 487,693 shares that Paul Kruger has the
right to acquire upon exercise of warrants, previously held of record by
Onward; (v) 50,000 shares he holds on behalf of his minor children; and
(vi) 126,000 shares of which he only holds the power to vote pursuant to a
proxy granted by Michael John. However, Michael John publicly claimed that
he only owns 4,800 shares of common stock.
(4) The total includes 24,600 shares of common stock beneficially owned directly by Hildalgo, 665,140 shares that Hildalgo has the right to acquire upon conversion of 2001 Preferred Stock, 570,120 shares Hildalgo has the right to acquire upon exercise of warrants and 34,561 shares Hildalgo has the right to receive in lieu of cash dividends due on the 2001 Preferred Stock. By virtue of his ownership of and control over Hildalgo, these shares are also included in the number of shares beneficially owned by Paul Kruger.
(5) The total includes: (i) 140,000 shares of common stock beneficially owned directly by Westgate; (ii) 4,015,886 shares that Westgate has the right to acquire upon the conversion of 2001 Preferred Stock; (iii) 208,653 shares Westgate has the right to receive in lieu of cash dividends due on the 2001 Preferred Stock; and (iv) 3,442,188 shares Westgate has the right to acquire upon the exercise of warrants. The sole business of Westgate is the ownership of the PalWeb securities listed above. WCC is the general partner of Westgate, and Warren Kruger and William Pritchard are the sole members of WCC. By virtue of their ability to control Westgate, WCC, Warren Kruger and William Pritchard are also deemed to beneficially own the shares beneficially owned by Westgate. Although WCC is the general partner of Westgate, WCC also engages in other business activities, including but not limited to the development and licensing of WCC's CJ2(TM) fire retardant process technology (as discussed under "Technology License Agreement" in Item 12 of this Form 10-KSB), which activities are conducted wholly separate from the business of Westgate. Westgate has no right to participate in the conduct of such other business activities of WCC and does not share in any profit or loss derived from such activities.
(6) The total includes the shares owned by Westgate as further described in footnote (5).
(7) The total includes: (i) 274,592 shares of common stock beneficially owned
directly by Warren Kruger; (ii) 19,000 shares held of record by Yorktown;
(iii) the shares owned by Westgate as further described in footnote (5);
and (iv) 100,000 shares of common stock that Mr. Kruger holds on behalf of
his minor children, of which he only holds the power to vote. WCC is the
general partner of Westgate, and Warren Kruger is one of the two members of
WCC. By virtue of his ability to control Westgate, Warren Kruger is also
deemed to beneficially own the shares beneficially owned by Westgate.
(8) The total includes 560 shares of common stock beneficially owned directly by William Pritchard, the shares owned by Westgate as further described in footnote (5), and 37,162 shares owned by his family. WCC is the general partner of Westgate, and William Pritchard is one of the two members of WCC. By virtue of his ability to control Westgate, William Pritchard is also deemed to beneficially own the shares beneficially owned by Westgate.
(9) These shares are held by Bill J. English, as trustee, for the benefit of the deposit holders of Paceco Financial Services, Inc. Paceco Financial Services, Inc. is no longer a subsidiary of PalWeb. See "Acquisition and Disposition of Paceco Financial" in Item 1 of this Form 10-KSB.
(10) The total includes 130,000 shares held of record by Lyle Miller and 50,000 shares that Lyle Miller has the right to acquire upon the exercise of options.
(11) Although Bradley Shoup is a limited partner in Westgate, applicable rules regarding the foregoing beneficial ownership table do not require that Mr. Shoup be deemed a beneficial owner of the shares beneficially owned by Westgate. Therefore, no shares beneficially owned by Westgate have been included in the shares beneficially owned by Mr. Shoup for purposes of such table.
(12) The total includes 2,000 shares of common stock beneficially owned directly by Bryan Kirchmer. Although Bryan Kirchmer is a limited partner in Westgate, applicable rules regarding the foregoing beneficial ownership table do not require that Mr. Kirchmer be deemed a beneficial owner of the shares beneficially owned by Westgate. Therefore, no shares beneficially owned by Westgate have been included in the shares beneficially owned by Mr. Kirchmer for purposes of such table.
(13) The total includes: (i) 2,140,974 outstanding shares; (ii) 5,250,000 shares issuable upon conversion of 2001 Preferred Stock; (iii) 4,500,001 shares issuable upon exercise of warrants; (iv) 100,000 shares issuable upon exercise of options; and 272,773 shares issuable as dividends on the 2001 Preferred Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ISSUANCES OF SECURITIES
For information on the issuance of 2001 Preferred Stock and warrants on January 4, 2002, to affiliates of Paul Kruger, Warren Kruger and William Pritchard, see "Preferred Stock Financing" under the heading "Liquidity and Capital Resources" in Item 6 of this Form10-KSB.
SALE OF REAL ESTATE
In December 2000, PFS sold its real estate holdings to Onward, a company 100% owned by Paul Kruger, at appraised value, and the proceeds were distributed to Deposit holders of PFS in accordance with the Plan. The Plan is discussed above under the heading "Acquisition and Disposition of Paceco Financial" in Item 1 of this Form 10-KSB. The sales price was approximately $1,352,000 in cash, which resulted in a gain of approximately $33,000.
SALE OF PP FINANCIAL, INC., TO PAUL KRUGER
For information regarding the sale of PalWeb's former wholly-owned subsidiary, PP Financial, Inc., and the resulting transfer of PalWeb's former indirect subsidiary, PFS, to Paul Kruger effective May 30, 2002, see "Acquisition and Disposition of Paceco Financial" under Item 1 of this Form 10-KSB.
OFFICE SHARING ARRANGEMENT
In April 2001, PalWeb entered into an agreement with Foresight, Inc., a company of which Messrs. Paul Kruger and Lyle W. Miller were on the Board of Directors and that was a wholly-owned subsidiary of a publicly-held company of which Paul Kruger beneficially owned in excess of 10%, whereby Foresight, Inc., agreed to make a portion of its leased premises in Norman, Oklahoma, available to one full-time employee of PalWeb, provide the services of a part-time employee of Foresight, Inc., 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. The amount payable by PalWeb under its agreement with Foresight, Inc., was subsequently increased from the amount reflected in the written agreement. During the year ended May 31, 2001, PalWeb paid rent to Foresight, Inc., of $15,000. During the year ended May 31, 2002, PalWeb paid rent to Foresight, Inc., of $87,622.
ADVANCES AND LOANS
As of January 4, 2002, Paul Kruger's affiliated entities had loaned PalWeb approximately $1,226,282, pursuant to various notes with face amounts aggregating a total of $2,000,000. These loans were made from approximately June 2000 through December of 2001. The maturity dates of all of these notes was January 15, 2002, and the notes accumulated interest at the rate of 12% per year. These loans were secured by substantially all of the assets of PalWeb and PPP, including equipment, furniture, fixtures, inventory, accounts receivables and patents. As described above, on January 4, 2002, the principal amounts of these loans were converted into 2001 Preferred Stock and warrants. Also on January 4, 2002, PalWeb paid the interest accrued on these loans in the amount of $174,608.
Beginning on March 1, 2001, entities with which Warren Kruger is affiliated began to provide financing to PalWeb in the form of loans and cash advances. Through January 4, 2002, such entities had advanced a total of $5,214,297, pursuant to various notes bearing interest at 12% and maturing on January 15, 2002, and undocumented advances made on the same terms. These notes were 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 used the proceeds principally for the acquisition of a new production line of manufacturing equipment. PalWeb also used $300,000 of such proceeds to settle certain litigation involving Ralph Curton, Jr., as reported in PalWeb's Form 10-KSB for the fiscal year ended May 31, 2001. As described above, on January 4, 2002, the principal amounts of these loans were converted into 2001 Preferred Stock and warrants. On December 14, 2001, PalWeb paid the interest accrued on these loans through November 30, 2001, in the amount of $192,205. In June 2002, PalWeb paid the interest accrued from December 1, 2001, through January 4, 2002, in the amount of $56,835.
For additional information involving funds advanced to PalWeb by Paul Kruger and his affiliates, see "History" under Item 1, and "Liquidity and Capital Resources" under Item 6 of this Form 10-KSB.
For additional information involving funds advanced to PalWeb by entities with which Warren Kruger, Paul Kruger's brother, and William Pritchard are affiliated, see "History" under Item 1, and "Liquidity and Capital Resources" under Item 6 of this Form 10-KSB.
LEASE AGREEMENT
From June 2000 through January 2002, PalWeb occupied its Dallas facility under a lease with Onward, an affiliate of Paul Kruger. As of January 4, 2002, this facility was transferred to PalWeb in connection with the private placement described under "Liquidity and Capital Resources" in Item 6 of this Form 10-KSB. During the year ended May 31, 2001, PalWeb paid rent to Onward of $163,380. During the year ended May 31, 2002, PalWeb paid rent to Onward of $150,938.
OBLIGATIONS OF PAUL KRUGER AND HIS AFFILIATED ENTITIES
At May 31, 2002, PalWeb had previously paid expenses on behalf of Paul Kruger or entities with which he is affiliated in the aggregate amount of $126,866, which amount was reflected on PalWeb's financial statements as accounts receivable - related party. Of such total, $13,588 was due from PFS, primarily for life insurance premiums required under the Plan between PFS and the ODS (referenced under Acquisition and Disposition of Paceco Financial in Item 1 of this From 10-KSB), and $113,278 was due from Onward, primarily for ad valorem taxes and utilities expenses related to the facilities in Dallas, Texas, paid by PalWeb in 1999 and 2000 but reimbursable by Onward or its other prior tenants. The receivable does not bear interest. Paul Kruger, on behalf of Onward, is in the process of reviewing the lease arrangements relating to PalWeb's prior lease of the Dallas facilities and the subject expenses to determine whether any of the foregoing expenses are properly borne by PalWeb or by Onward under the terms of such lease arrangements.
TECHNOLOGY LICENSE AGREEMENT
In April 2001, PalWeb entered into a License Agreement with WCC, an entity owned by Warren Kruger and William Pritchard, providing for PalWeb to have the exclusive right and license to use fire retardancy technology then being developed under the direction and expense of WCC. Such License Agreement is submitted with this Form 10-KSB as Exhibit No. 10.21. The License Agreement was negotiated and executed 9 months before Warren Kruger, William Pritchard, or entities with which they are affiliated became directors or beneficial owners of 10% or more of PalWeb's common stock in January 2002. Under the agreement, PalWeb must pay the greater of 2.5% of PalWeb's gross monthly revenues derived from the sale of UL listed pallets using the technology or a minimum monthly royalty of $10,000. However, WCC also agreed in the License Agreement to convey to PalWeb ownership of the licensed Process (as defined in the agreement) in the event that cumulative royalties paid by PalWeb equaled $250,000 during the first two years of the agreement, subject to an override or carried interest in favor of WCC equal to 2.5% of the gross monthly revenues which are the same payments as would have been received under the License Agreement. Subsequent to the execution of the original agreement which provided for a "coating" technology, WCC developed an additive process which PalWeb used to successfully obtain a UL listing. The technology is currently known as CJ2TM.
No minimum or other royalties have been paid or accrued by PalWeb. However, PalWeb has recorded expenses of approximately $126,000 that are associated with the License Agreement. WCC has not asserted that PalWeb is in default under the license agreement, and WCC has indicated that it has no current intentions of asserting any default by PalWeb under such agreement. PalWeb is exploring the possibility of purchasing the technology from WCC.
ENGINEERING SERVICES AGREEMENT
Bryan Kirchmer, a director of PalWeb, is President and principal owner of GME Group, an engineering firm. GME Group has performed and is expected to perform in the future work for PalWeb in connection with the design, construction and implementation of its plastic pallet injection molding equipment. GME Group was originally contracted by Yorktown, a company owned by Warren Kruger, to perform services in connection with the plastic pallet injection molding equipment that eventually became PalWeb's Piper 600. Under its
agreement with Yorktown, GME Group was to perform such engineering services on the basis of its customary rates for similar services performed for other clients with a not-to-exceed limit of $550,000. Yorktown was reimbursed for the payments that it made to GME Group for the benefit of PalWeb's Piper 600 equipment in connection with the preferred stock financing discussed in the section "Preferred Stock Financing" under the heading "Liquidity and Capital Resources" in Item 6 of this From 10-KSB. Subsequently the agreement with GME Group was assigned by Yorktown to PalWeb, and the not-to-exceed limit was waived. The payments made to GME Group have been reflected on PalWeb's books as expenses of the company, and GME is now performing services directly for PalWeb. For the year ended May 31, 2001, PalWeb recorded expenses paid to GME Group of $226,559 for engineering services. For the year ended May 31, 2002, PalWeb recorded expenses paid to GME Group of $643,218 for engineering services.
LEGAL SERVICES PERFORMED BY WILLIAM PRITCHARD
William Pritchard, a director of PalWeb, is of counsel in the law firm Hall, Estill, Hardwick, Gable, Golden & Nelson, a P.C. ("Hall Estill"). Hall Estill has performed and is expected to perform in the future legal services for PalWeb, which services are charged on the basis of the standard hourly rates charged by Hall Estill to other clients for similar services. During the year ended May 31, 2002, PalWeb paid or accrued expenses payable to Hall Estill in the total amount of $79,455 for legal services.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
2.1 Certificate of Ownership and Merger Merging PalWeb
Corporation, a Delaware Corporation, into PalWeb Oklahoma
Corporation, an Oklahoma Corporation filed with the Delaware
Secretary of State on May 2, 2002 (incorporated herein by
reference to Exhibit 2.1 of PalWeb Corporation's Form 8-K12G3
dated May 2, 2002, which was filed with the SEC on May 24,
2002).
2.2 Certificate of Ownership and Merger Merging PalWeb
Corporation, a Delaware Corporation, into PalWeb Oklahoma
Corporation, an Oklahoma Corporation filed with the Oklahoma
Secretary of State on May 2, 2002 (incorporated herein by
reference to Exhibit 2.2 of PalWeb Corporation's Form 8-K12G3
dated May 2, 2002, which was filed with the SEC on May 24,
2002).
3.1 Certificate of Incorporation of PalWeb Oklahoma Corporation
filed with the Oklahoma Secretary of State on May 2, 2002
(incorporated herein by reference to Exhibit 3.1 of PalWeb
Corporation's Form 8-K12G3 dated May 2, 2002, which was filed
with the SEC on May 24, 2002).
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3.2 Bylaws of PalWeb Oklahoma Corporation as adopted on May 2,
2002 (incorporated herein by reference to Exhibit 3.2 of
PalWeb Corporation's Form 8-K12G3 dated May 2, 2002, which was
filed with the SEC on May 24, 2002).
4.1 Certificate of Incorporation of PalWeb Oklahoma Corporation
filed with the Oklahoma Secretary of State on May 2, 2002
(included in Exhibit 3.1).
4.2 Securities Purchase Agreement by and among PalWeb Corporation
and certain purchasers dated January 4, 2002 (incorporated
herein by reference to Exhibit 10.7 of PalWeb Corporation's
Form 10-QSB for the Quarterly Period Ended November 30, 2001,
which was filed with the SEC on January 14, 2002).
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EXHIBIT NO. DESCRIPTION
4.3 Shareholders and Voting Agreement by and among PalWeb
Corporation and certain shareholders dated January 4, 2002
(incorporated herein by reference to Exhibit 10.8 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
November 30, 2001, which was filed with the SEC on January 14,
2002).
4.4 Form of Common Stock Purchase Warrant used in connection with
Securities Purchase Agreement by and among PalWeb Corporation
and certain purchasers dated January 4, 2002 (incorporated
herein by reference to Exhibit 10.9 of PalWeb Corporation's
Form 10-QSB for the Quarterly Period Ended November 30, 2001,
which was filed with the SEC on January 14, 2002).
4.5 Amendment No. 1 to Securities Purchase Agreement and
Shareholders and Voting Agreement by and between PalWeb
Corporation and certain purchasers dated January 21, 2002
(incorporated herein by reference to Exhibit 10.1 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
February 28, 2002, which was filed with the SEC on April 12,
2002).
10.1 Personnel Staffing Agreement by and between Accord Human
Resources, Inc. and Plastic Pallet Production Company, Inc.
dated January 19, 1999 (incorporated herein by reference to
Exhibit 10.2 of Amendment No. 3 to PalWeb Corporation's Form
10-SB, which was filed on May 2, 2000).
10.2 Promissory Note in the amount of $400,000 payable to Hildalgo
Trading Company, L.C. dated July 27, 2000 (incorporated herein
by reference to Exhibit 10.8 of Amendment No. 5 to PalWeb
Corporation's Form 10-SB, which was filed with the SEC on July
20, 2000).
10.3 Security Agreement by and between PalWeb Corporation and
Hildalgo Trading Company, L.C. dated July 27, 2000
(incorporated herein by reference to Exhibit 10.9 of Amendment
No. 5 to PalWeb Corporation's Form 10-SB, which was filed with
the SEC on July 20, 2000).
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EXHIBIT NO. DESCRIPTION
10.4 Security Agreement by and between Plastic Pallet Production,
Inc. and Hildalgo Trading Company, L.C. dated July 27, 2000
(incorporated herein by reference to Exhibit 10.10 of
Amendment No. 5 to PalWeb Corporation's Form 10-SB, which was
filed with the SEC on July 20, 2000).
10.5 Promissory Note in the amount of $350,000 payable to Hildalgo
Trading Company, L.C. dated August 15, 2000 (incorporated
herein by reference to Exhibit 10.1 of PalWeb Corporation's
Form 10-QSB for the Quarterly Period Ended November 30, 2000,
which was filed with the SEC on January 16, 2001).
10.6 Promissory Note in the amount of $400,000 payable to Hildalgo
Trading Company, L.C. dated November 15, 2000 (incorporated
herein by reference to Exhibit 10.2 of PalWeb Corporation's
Form 10-QSB for the Quarterly Period Ended November 30, 2000,
which was filed with the SEC on January 16, 2001).
10.7 Extension and Modification Agreement by and between Hildalgo
Trading Company, L.C., PalWeb Corporation and Plastic Pallet
Production, Inc. dated December 1, 2000 (incorporated herein
by reference to Exhibit 10.3 of PalWeb Corporation's Form
10-QSB for the Quarterly Period Ended November 30, 2000, which
was filed with the SEC on January 16, 2001).
10.8 Promissory Note in the amount of $250,000 payable to Yorktown
Management and Financial Services, L.L.C. dated March 1, 2001
(incorporated herein by reference to Exhibit 10.1 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
February 28, 2001, which was filed with the SEC on April 16,
2001).
10.9 Security Agreement between Yorktown Management and Financial
Services, L.L.C. and PalWeb Corporation dated March 1, 2001
(incorporated herein by reference to Exhibit 10.2 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
February 28, 2001, which was filed with the SEC on April 16,
2001).
10.10 Security Agreement between Yorktown Management and Financial
Services, L.L.C. and Plastic Pallet Production, Inc. dated
March 1, 2001 (incorporated herein by reference to Exhibit
10.3 of PalWeb Corporation's Form 10-QSB for the Quarterly
Period Ended February 28, 2001, which was filed with the SEC
on April 16, 2001).
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EXHIBIT NO. DESCRIPTION
10.11 Promissory Note in the amount of $2,750,000 payable to
Yorktown Management and Financial Services, L.L.C. dated March
5, 2001 (incorporated herein by reference to Exhibit 10.12 of
PalWeb Corporation's Form 10-KSB for the Fiscal Year Ended May
31, 2001, which was filed with the SEC on September 13, 2001).
10.12 Agreement (relating to use of office space and employees)
dated April 27, 2001 by and between Foresight, Inc. and PalWeb
Corporation (incorporated herein by reference to Exhibit 10.13
of PalWeb Corporation's Form 10-KSB for the Fiscal Year Ended
May 31, 2001, which was filed with the SEC on September 13,
2001).
10.13 Lease Agreement dated May 1, 2001, by and between Onward,
L.L.C. and Plastic Pallet Production, Inc. (incorporated
herein by reference to Exhibit 10.14 of PalWeb Corporation's
Form 10-KSB for the Fiscal Year Ended May 31, 2001, which was
filed with the SEC on September 13, 2001).
10.14 Extension Agreement by and between Hildalgo Trading Company,
L.C. and PalWeb Corporation and Plastic Pallet Production,
Inc., dated June 1, 2001 (incorporated herein by reference to
Exhibit 10.15 of PalWeb Corporation's Form 10-KSB for the
Fiscal Year Ended May 31, 2001, which was filed with the SEC
on September 13, 2001).
10.15 Promissory Note in the amount of $850,000 payable to Hildalgo
Trading Company, L.C. dated June 1, 2001 (incorporated herein
by reference to Exhibit 10.16 of PalWeb Corporation's Form
10-KSB for the Fiscal Year Ended May 31, 2001, which was filed
with the SEC on September 13, 2001).
10.16 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 (incorporated
herein by reference to Exhibit 10.17 of PalWeb Corporation's
Form 10-KSB for the Fiscal Year Ended May 31, 2001, which was
filed with the SEC on September 13, 2001).
10.17 Securities Purchase Agreement by and among PalWeb Corporation
and certain purchasers dated January 4, 2002 (incorporated
herein by reference to Exhibit 10.7 of PalWeb Corporation's
Form 10-QSB for the Quarterly Period Ended November 30, 2001,
which was filed with the SEC on January 14, 2002).
10.18 Shareholders and Voting Agreement by and among PalWeb
Corporation and certain shareholders dated January 4, 2002
(incorporated herein by reference to Exhibit 10.8 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
November 30, 2001, which was filed with the SEC on January 14,
2002).
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EXHIBIT NO. DESCRIPTION
10.19 Assumption Agreement between Onward, L.L.C., PalWeb
Corporation and Texas Capital Bank dated January 4, 2002 (not
signed by Texas Capital Bank) (submitted herewith).
10.20 Amendment No. 1 to Securities Purchase Agreement and
Shareholders and Voting Agreement by and between PalWeb
Corporation and certain purchasers dated January 21, 2002
(incorporated herein by reference to Exhibit 10.1 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
February 28, 2002, which was filed with the SEC on April 12,
2002).
10.21 License Agreement by and between Westgate Capital Company,
L.L.C., and PalWeb Corporation dated April 20, 2001 (submitted
herewith).
10.22 Unsecured Subordinated Promissory Note in the amount of
$1,000,000 payable to Paul A. Kruger dated May 31, 2002
(submitted herewith).
10.23 Non Exclusive Distribution Agreement between PalWeb
Corporation and Bosh Material Handling Incorporated dated
August 5, 2002 (submitted herewith).
10.24 Plastic Pallet Production, Inc. Revolving Note payable to The
F & M Bank & Trust Company in the amount of $3,000,000 dated
December 11, 2001 (incorporated herein by reference to Exhibit
10.3 of PalWeb Corporation's Form 10-QSB for the Quarterly
Period Ended November 30, 2001, which was filed with the SEC
on January 14, 2002).
10.25 Plastic Pallet Production, Inc. Loan Agreement by and between
Plastic Pallet Production, Inc. and The F & M Bank & Trust
Company dated December 11, 2001 (incorporated herein by
reference to Exhibit 10.1 of PalWeb Corporation's Form 10-QSB
for the Quarterly Period Ended November 30, 2001, which was
filed with the SEC on January 14, 2002).
10.26 Security Agreement by and between Plastic Pallet Production,
Inc., and The F & M Bank & Trust Company dated December 11,
2001 (incorporated herein by reference to Exhibit 10.2 of
PalWeb Corporation's Form 10-QSB for the Quarterly Period
Ended November 30, 2001, which was filed with the SEC on
January 14, 2002).
10.27 Paul Kruger Guaranty dated December 11, 2001 (incorporated
herein by reference to Exhibit 10.4 of PalWeb Corporation's
Form 10-QSB for the Quarterly Period Ended November 30, 2001,
which was filed with the SEC on January 14, 2002).
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EXHIBIT NO. DESCRIPTION
10.28 Pledge Assignment and Security Agreement by and between Paul
A. Kruger and The F & M Bank & Trust Company dated December
11, 2001 (incorporated herein by reference to Exhibit 10.5 of
PalWeb Corporation's Form 10-QSB for the Quarterly Period
Ended November 30, 2001, which was filed with the SEC on
January 14, 2002).
10.29 Warren Kruger Limited Guaranty dated December 12, 2001
(incorporated herein by reference to Exhibit 10.6 of PalWeb
Corporation's Form 10-QSB for the Quarterly Period Ended
November 30, 2001, which was filed with the SEC on January 14,
2002).
10.30** Form of Indemnity Agreement between Members of the Board of
Directors and PalWeb Corporation (submitted herewith).
10.31 Indemnity Agreement by and between The Union Group, Inc., and
Cabec Energy Corp. dated August 31, 1998 (incorporated herein
by reference to Exhibit 10.6 of Amendment No. 3 to PalWeb
Corporation's Form 10-SB, which was filed on May 2, 2000).
10.32** Stock Option Plan of PalWeb Corporation (effective May 11,
2001), as amended (submitted herewith).
10.33** Form of Non-Qualified Stock Option Agreement (incorporated
herein by reference to Exhibit 99.8 of PalWeb Corporation's
Form 10-KSB for the Fiscal Year Ended May 31, 2001, which was
filed with the SEC on September 13, 2001).
10.34** Form of Incentive Stock Option Agreement (incorporated herein
by reference to Exhibit 99.9 of PalWeb Corporation's Form
10-KSB for the Fiscal Year Ended May 31, 2001, which was filed
with the SEC on September 13, 2001).
10.35** Form of Nonemployee Director Stock Option Agreement
(incorporated herein by reference to Exhibit 99.10 of PalWeb
Corporation's Form 10-KSB for the Fiscal Year Ended May 31,
2001, which was filed with the SEC on September 13, 2001).
10.36** Form of Employee Director Incentive Stock Option Agreement
(submitted herewith).
10.37 Consulting Agreement between Yorktown Management & Financial
Services, L.L.C., and Gravity Management & Engineering Group,
LLC, dated on or about February 19, 2001 (submitted herewith).
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EXHIBIT NO. DESCRIPTION
10.38 Settlement Agreement by and among PalWeb Corporation, Crescent
Road Corporation, Curton Capital Corporation, Consolidated
Capital Group, Inc., Ralph Curton, Jr., and Jeffrey Van Putten
dated April 30, 2001 (submitted herewith).
10.39 Assignment and Indemnity Agreement between PalWeb Corporation
and Paul A. Kruger (regarding transfer of stock of PP
Financial, Inc.) dated May 30, 2002 (submitted herewith).
11.1 Computation of Loss Per Share is in Note 1 in the Notes to the
Financial Statements.
21.1 Subsidiaries of PalWeb Corporation (submitted herewith).
23.1 Consent of Hulme Rahhal and Henderson, Inc. (submitted
herewith).
99.1 Put Agreement by and among Paul A. Kruger, Bill J. English as
Trustee and Paceco Financial Services, Inc. dated December 20,
2000 (incorporated herein by reference to Exhibit 99.2 of
PalWeb Corporation's Form 8-K dated December 20, 2000, which
was filed with the SEC on January 2, 2001).
99.2 Trust Agreement between Paceco Financial Services, Inc. and
Bill J. English dated December 20, 2000 (incorporated herein
by reference to Exhibit 99.3 of PalWeb Corporation's Form 8-K
dated December 20, 2000, which was filed with the SEC on
January 2, 2001).
99.3 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C.ss.1350 (submitted herewith).
** Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report.
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On May 24, 2002, PalWeb filed a Form 8-K12G3 under Item 5, Other Events, reporting the completion of the redomiciliation merger having the effect of changing PalWeb's state of incorporation to Oklahoma. See "Organization" in Item 1 of this Form 10-KSB. No financial statements were filed in connection with such Form 8-K12G3.
ITEM 14. CONTROLS AND PROCEDURES
Not required in this annual report on Form 10-KSB pursuant to the Transitional Provisions of SEC Release No. 34-46427.
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: 09/12/02 /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: 09/12/02 /s/ Paul A. Kruger
---------------------------------------------------------
Paul A. Kruger, Chairman of the Board and President
(Principal Executive Officer, Principal Financial Officer
and Principal Accounting Officer)
Date: 09/ /02
---------------------------------------------------------
Lyle W. Miller, Director and Vice-President, Marketing
Date: 09/12/02 /s/ Warren F. Kruger
---------------------------------------------------------
Warren F. Kruger, Director
Date: 09/12/02 /s/ Bryan R Kirchmer
---------------------------------------------------------
Bryan R. Kirchmer, Director
Date: 09/ /02
---------------------------------------------------------
Bradley C. Shoup, Director
Date: 09/12/02 /s/ William W. Pritchard
---------------------------------------------------------
William W. Pritchard, Director
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CERTIFICATIONS
I, Paul A. Kruger, certify that:
1. I have reviewed this annual report on Form 10-KSB of PalWeb Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
Date: September 12, 2002
/s/ Paul A. Kruger
---------------------------------------------------
Paul A. Kruger, Chairman of the Board and President
(Principal Executive Officer and Principal
Financial Officer)
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FINANCIAL STATEMENTS OF PALWEB CORPORATION
Independent Auditor's Report................................................F-1 Consolidated Balance Sheet..................................................F-2 Consolidated Statements of Operations ......................................F-3 Consolidated Statements of Changes in Stockholders' Deficiency..............F-4 Consolidated Statements of Cash Flows ......................................F-5 Notes to Consolidated Financial Statements..................................F-6 |
INDEPENDENT AUDITOR'S REPORT
Board of Directors
PalWeb Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheet of PalWeb Corporation and its subsidiaries as of May 31, 2002, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for the years ended May 31, 2002 and 2001. 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 its subsidiaries as of May 31, 2002, and the results of their operations and their cash flows for the years ended May 31, 2002 and 2001, in conformity with U.S. 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, 2002, raises substantial doubt about its ability to continue as a going concern. 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, 2002
Ardmore, Oklahoma
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
MAY 31, 2002
CURRENT ASSETS:
Cash $ 13,521
Accounts receivable 43,646
Inventory (Note 3) 204,446
------------
TOTAL CURRENT ASSETS 261,613
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation (Note 4) 6,944,330
OTHER ASSETS (Note 5) 161,396
------------
TOTAL ASSETS $ 7,367,339
============
|
CURRENT LIABILITIES:
Notes payable (Note 6) $ 3,777,700
Accounts payable and accrued expenses 570,868
Preferred dividends payable 211,440
------------
TOTAL CURRENT LIABILITIES 4,560,008
|
COMMITMENT AND CONTINGENCY (Note 15)
STOCKHOLDERS' EQUITY (Notes 9 and 10):
Preferred stock, $.0001 par value, 20,750,000 shares
authorized, 750,000 shares outstanding 75
Common stock, $0.0001 par value, 5,000,000,000
authorized, 4,691,625 shares outstanding 469
Additional paid-in capital 40,732,767
Deficit accumulated during development stage (37,925,980)
------------
TOTAL STOCKHOLDERS' EQUITY 2,807,331
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,367,339
============
|
The accompanying notes are an integral part of this consolidated financial statement.
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
From Inception
Year Ended May 31, (November 20,
----------------------------------- 1995) to
2002 2001 May 31, 2002
------------ ------------ ------------
Sales $ 92,958 $ 89,211 $ 288,876
Expenses:
Research and development 67,000 95,000 568,943
Salaries and benefits 496,063 307,085 2,154,480
General and administrative
expenses 1,399,731 907,940 11,065,379
Depreciation and
amortization expense 157,364 204,584 975,867
Impairment -- -- 3,456,231
Interest expense 231,618 300,451 1,184,082
------------ ------------ ------------
Total expenses 2,351,776 1,815,060 19,404,982
------------ ------------ ------------
Other income:
Gain on settlement of
contract and liabilities -- 1,541,783 1,599,262
Other -- -- 272,308
------------ ------------ ------------
Total other income -- 1,541,783 1,871,570
------------ ------------ ------------
LOSS BEFORE DISCONTINUED
AND EXTRAORDINARY ITEMS (2,258,818) (184,066) (17,244,536)
LOSS FROM DISCONTINUED
OPERATIONS (197,012) (1,294,655) (2,809,945)
EXTRAORDINARY GAIN -- -- 68,616
------------ ------------ ------------
NET LOSS $ (2,455,830) $ (1,478,721) $(19,985,865)
============ ============ ============
LOSS PER COMMON SHARE (Note 1):
LOSS BEFORE DISCONTINUED
OPERATIONS $ (0.53) (0.05) `
LOSS FROM DISCONTINUED
OPERATIONS (0.04) (0.32)
------------ ------------
LOSS PER COMMON SHARE $ (0.57) $ (0.37)
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,662,000 3,966,000
============ ============
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The accompanying notes are an integral part of this consolidated financial statement.
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock Common Stock
--------------------------------- ---------------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
BALANCES, May 31, 2000 2,775,000 $ 278 242,278,244 $ 24,227,825
Common stock issued for debt -- -- 100,000 10,000
Preferred stock conversion (250,000) (25) 250,000 25,000
Cancellation of common stock -- -- (10,700,000) (1,070,000)
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCES, May 31, 2001 2,525,000 253 231,928,244 23,192,825
Preferred stock conversion (2,020,000) (202) 2,020,000 202,000
Amortization of deferred
income - related party -- -- -- --
Issuance of preferred stock 750,000 75 -- --
Sale of treasury stock -- -- -- --
Common stock for services -- -- 100,000 10,000
Reincorporation (505,000) (51) 505,000 (23,381,370)
Disposition of Paceco Financial
Services to related party -- -- -- --
Reverse stock split -- -- (229,861,619) (22,986)
Preferred dividends payable -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCES, May 31, 2002 750,000 $ 75 4,691,625 $ 469
============ ============ ============ ============
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Additional Total
Paid-in Accumulated Treasury Equity
Capital Deficit Stock (Deficiency)
------------ ------------ ------------ ------------
BALANCES, May 31, 2000 $ 9,748,661 $(33,779,989) $ (4,550,266) $ (4,353,491)
Common stock issued for debt 2,000 -- -- 12,000
Preferred stock conversion (24,975) -- -- --
Cancellation of common stock -- -- -- (1,070,000)
Net loss -- (1,478,721) -- (1,478,721)
------------ ------------ ------------ ------------
BALANCES, May 31, 2001 9,725,686 (35,258,710) (4,550,266) (6,890,212)
Preferred stock conversion (201,798) -- -- --
Amortization of deferred
income - related party 82,388 -- -- 82,388
Issuance of preferred stock 7,476,079 -- -- 7,476,154
Sale of treasury stock 74,290 -- 925,731 1,000,021
Common stock for services -- -- -- 10,000
Reincorporation 23,381,421 -- -- --
Disposition of Paceco Financial
Services to related party 171,715 -- 3,624,535 3,796,250
Reverse stock split 22,986 -- -- --
Preferred dividends payable -- (211,440) -- (211,440)
Net loss -- (2,455,830) -- (2,455,830)
------------ ------------ ------------ ------------
BALANCES, May 31, 2002 $ 40,732,767 $(37,925,980) $ -- $ 2,807,331
============ ============ ============ ============
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The accompanying notes are an integral part of this consolidated financial statement.
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From Inception
Year Ended May 31, (November 20,
--------------------------------- 1995) to
2002 2001 May 31, 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,455,830) $ (1,478,721) $(19,985,865)
Add: Loss from discontinued operations 197,012 1,294,655 2,809,945
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation and amortization 157,364 204,584 1,006,667
Extraordinary gain on debt retirement -- -- (68,616)
Consulting services paid by
issuance of common stock 10,000 (1,070,000) 5,656,271
Impairment of investment -- -- 3,145,000
Loss (gain) of disposition of property -- -- 317,358
Changes in accounts receivable 29,142 (71,988) (43,646)
Changes in inventory (61,757) (128,966) (204,446)
Changes in other assets (11,834) 1,737 (174,237)
Changes in payable - related party (1,867) -- 2,929,034
Changes in accounts payable
and accrued expenses (1,282,196) 1,160,298 1,769,561
Increase in customer deposits -- -- 300,000
------------ ------------ ------------
Net cash used in continuing operations (3,419,966) (88,401) (2,542,974)
Net cash used in discontinued operations (122,552) (336,812) (1,335,901)
------------ ------------ ------------
Net cash used in operating activities (3,542,518) (425,213) (3,878,875)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,997,531) (1,804,231) (9,250,384)
Decrease in loans receivable 582,148 1,380,379 2,052,010
Proceeds from sale of equipment -- 1,362,000 1,456,456
Other -- -- 380,241
------------ ------------ ------------
Net cash provided by (used)
investing activities (3,415,383) 938,148 (5,361,677)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and advances payable 6,949,520 1,898,759 11,664,586
Payments on notes payable (200,091) (1,042,875) (1,492,071)
Payments on savings certificates (1,357,306) (1,556,232) (2,909,248)
Sale of treasury stock 1,000,000 -- 1,000,000
Proceeds from issuance of common/preferred stock 498,830 -- 990,806
------------ ------------ ------------
Net cash provided (used) by
financing activities 6,890,953 (700,348) 9,254,073
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (66,948) (187,413) 13,521
CASH, beginning of period 80,469 267,882 --
------------ ------------ ------------
CASH, end of period $ 13,521 $ 80,469 $ 13,521
============ ============ ============
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SUPPLEMENTAL INFORMATION (Note 13)
The accompanying notes are an integral part of this consolidated financial statement.
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective May 2, 2002, management effected a plan of reincorporation whereby the "old" corporation, PalWeb Corporation, a Delaware corporation, was merged with and into an Oklahoma corporation with the Oklahoma corporation surviving as PalWeb Corporation. Pursuant to the merger, each share of the Delaware corporation's par value $0.10 common stock and par value $0.0001 junior convertible preferred stock was converted into one share of the Oklahoma corporation's par value $0.0001 common stock. Each share of the Delaware corporation's Series 2001, 12%, cumulative convertible senior preferred stock was converted into one share of the Oklahoma corporation's Series 2001, 12%, cumulative convertible senior preferred stock.
Effective June 25, 2002, PalWeb effected a reverse stock split of its par value $0.0001, common stock whereby each stockholder received one share for each fifty shares held. Fractional shares were rounded up to one share. All previously reported per share common share data has been restated to reflect the reverse split.
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plant building 20 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 CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
implementation of these standards is not expected to have a material effect on PalWeb's consolidated financial statements.
Raw materials $ 106,223
Finished goods 98,223
----------
Total inventory $ 204,446
==========
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Production machinery and equipment $ 6,561,812
Building and land 725,344
Furniture and fixtures 166,373
-----------
7,453,529
Less: accumulated depreciation (509,199)
-----------
$ 6,944,330
===========
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Depreciation expense for the years ended May 31, 2002 and 2001 is $104,028 and $200,108, respectively.
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of interest costs for the years ended May 31, is:
2002 2001
-------- --------
Interest capitalized as property,
plant and equipment $172,377 $ -
Interest expensed 231,618 300,451
-------- --------
Total interest cost $403,995 $300,451
======== ========
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Accounts receivable-related party $ 126,866
Patents, net of accumulated
amortization of $69,026 18,930
Deposits and other 15,600
-----------
Total Other Assets $ 161,396
===========
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Note payable to bank, prime interest rate plus 0.25%,
(5% at 5/31/02), due December, 2002, secured
by all assets except for building and land $2,992,700
Mortgage payable to bank, 8% interest, due January
2003, secured by building and land 785,000
----------
Total $3,777,700
==========
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The note payable to bank is a line of credit totaling $3,000,000. The loan agreement, among other things, places restrictions on cash or asset dividends, incurring indebtedness of $100,000 in any single year and making loans, advances extensions of credit.
Reference is made to Note 7, "Related Party Transactions," for a commitment to a one year $1,000,000, 6% loan to PalWeb by Paul Kruger.
In connection with the issuance of Series 2001 preferred stock, see Note 9, Paul Kruger and his affiliated companies received 176,302 shares of preferred stock in exchange for indebtedness of $1,226,282 and $536,745 of equity in the building which contains PalWeb's manufacturing facility. The building is based on an agreed upon value of $1,350,000
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
less indebtedness assumed by PalWeb of $813,255. The building is reflected on PalWeb's accounting records at $725,344, which is the agreed upon value of $1,350,000 less unamortized deferred income of $624,656 which originated at the time of the sale and leaseback transaction of the building between Paul Kruger and PalWeb.
Interest paid on indebtedness to Paul Kruger and his affiliated entities was $70,132 and $98,994 for 2002 and 2001, respectively.
At May 31, 2002, PalWeb has advances receivable from companies owned by Paul Kruger in the total amount of $126,866.
During 2002 and 2001, PalWeb incurred expense for rent and support services in the amounts of $87,622 and $15,000, respectively, paid to Foresight, Inc. or its parent company Precis, Inc., a company of which Paul Kruger was a director and the beneficial owner of in excess of 10%.
PalWeb leased commercial space from Onward, LLC, owned by Paul Kruger, chairman and CEO, through January 1, 2002. Total rentals paid were $150,938 and $163,380 in fiscal years 2002 and 2001, respectively. Effective January 1, 2002, PalWeb purchased the property from Mr. Kruger as discussed above.
In December, 2000, the real estate segment was sold to Paul Kruger for appraised value of $1,352,000. A gain of $31,099 was recognized. As discussed in Note 1, Paul Kruger acquired the finance segment of PalWeb by purchasing PP Financial, Inc. and its wholly-owned subsidiary Paceco Financial Services, Inc. in exchange for providing a one year, 6%, $1,000,000 loan.
PalWeb has a contract with a consulting engineering firm for the design and supervision of the construction of the new production equipment. The President of the consulting engineers was elected in 2002 to be a Director of PalWeb. Fees paid to the engineering firm were $643,218 and $226,559 in 2002 and 2001, respectively.
A Director of PalWeb provided legal services through a law firm of which he is of counsel. The fees for 2002 were $79,455.
See Note 15, Commitments and Contingencies, regarding a licensing agreement between PalWeb and Westgate Capital, LLC, an entity owned by directors Warren Kruger and William Pritchard.
NOTE 8. FEDERAL INCOME TAXES
Deferred taxes as of May 31, 2002 are as follows:
Net operating loss $5,298,168
Loss on impairment of investment 1,151,070
Depreciation, tax over financial (148,053)
----------
6,301,185
Less: Valuation allowance (6,301,185)
----------
Total $ -
==========
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PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2002 2001
--------- ---------
Net operating loss $ 876,725 $ 326,925
Depreciation, tax over financial (148,053) --
Accrued liabilities -- (41,800)
Allowance for credit losses (161,640) 93,240
Gain on sale of plant
for tax purposes -- (160,681)
Stock based compensation (34,447) 34,447
Change in Valuation
allowance (532,585) (252,131)
--------- ---------
Tax Benefit $ -- $ --
========= =========
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PalWeb's effective tax rate differs from the federal statutory rate as follows:
Year Ended May 31,
2002 2001
--------- ---------
Tax benefit using statutory tax rate $ 767,998 $ 534,419
Effect of state tax rates 71,086 47,155
Net change in valuation allowance (532,585) (252,131)
Amortization of goodwill -- (244,059)
Other deductions (306,499) (85,384)
--------- ---------
Tax benefit, per financial statements $ -- $ --
========= =========
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PalWeb has a net operating loss (NOL) for Federal income tax purposes as of May 31, 2002 of $14,339,000 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
2,370,000 2022
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PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to Note 7, regarding certain stock transactions with related parties.
In fiscal year 2000, PalWeb entered into consulting agreements with certain consultants in exchange for 220,000 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, 2002, the consultants have returned 214,000 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 2,000 shares of common stock to a creditor in settlement of $12,000 of accounts payable. During 2002, PalWeb issued 2,000 shares of common stock valued at $10,000 for services of a consultant. Values for the common stock were based on market value.
In January 2002, PalWeb issued 750,000 shares of Series 2001, cumulative convertible preferred stock, par value $0.0001, and warrants to purchase 4,500,000 shares of common stock for a total consideration of $7,500,000. Each share of the preferred stock has a stated value of $10.00 and is convertible at any time into 7 shares of common stock of PalWeb or a total of 5,250,000 shares, which is an effective conversion price of $1.429 per share. Holders of the preferred stock are also entitled to cumulative dividends of 12% per annum, $1.20 per share, or a total of $900,000. The warrants are exercisable at a price of $5.00 per share for a period of four years and all but 25% of the warrants will be callable by PalWeb in three separate trances of 25% if its common stock trades at prices of $7.50, $10.00 and $12.50 per share, respectively. Pursuant to a Shareholders and Voting Agreement dated January 4, 2002, as amended, between PalWeb and Westgate Investment, LP, purchaser of 573,698 shares of the Series 2001 preferred for consideration of indebtedness of $5,214,297 and cash of $522,680, the parties agreed, among other things, that Westgate shall have the right to designate for nomination at least two-thirds of the Board and have representation on any committee of the Board. In addition, the agreement provides that 60% approval of the Board is required for, among other things, indebtedness exceeding $250,000, payment of dividends to common stockholders, capital expenditures exceeding $250,000 in any one year and organizational changes or reorganizations of PalWeb.
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
grant. The maximum number of shares of common stock for which options may be granted is 20,000,000 of which 880,000 have been granted as of May 31, 2002. Stock options expire in ten years from date of grant or upon termination of employment and are generally exercisable one year from date of grant in cumulative annual installments of 25%, except that the options granted in fiscal 2001 were 100% vested at the date of grant. Following is a summary of option activity for the two years ended May 31, 2002:
Weighted
Average
Shares Exercise
(000's) Price
Options outstanding at May 31, 2000 - -
Options granted 190 2.00
------ --------
Options outstanding at May 31, 2001 190 $ 2.00
Options granted 690 3.18
------ --------
Options outstanding at May 31, 2002 880 $ 2.92
====== ========
Exercisable as of May 31, 2002 and 2001 190 $ 2.00
====== ========
With respect to options outstanding at May 31, 2002:
Weighted average remaining contractual life 9.8 years
Range of exercise price $2.00 to $4.00
|
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 $(2,455,830)
Net loss, pro forma $(2,862,806)
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 2.06 Risk Free Interest Rate 4% Expected Holding Period 5 years |
PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 2001
--------- ----------
Revenue $ 46,330 $ 199,251
Loss from operations 197,012 (1,294,655)
Gain on disposal 171,715 31,099
|
2002 2001
----------- -----------
Common stock issuances in exchange for
(cancellations):
Consulting services $ 10,000 $(1,070,000)
Retirement of debt through
issuance of common stock -- 12,000
Preferred stock issuances in exchange for:
Retirement of debt 6,440,579 --
Acquisition of property 725,344 --
Debt assumed in acquisition of property 813,255 --
Reduction of debt and accrued interest
through foreclosure, negotiated settle-
ment or issuance of common stock -- 471,783
Interest paid, including capitalized interest
in 2002 of $172,377) 459,019 341,908
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PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PalWeb approved a stock grant of 10,000 shares of restricted common stock to an employee to be vested effective May 30, 2002. At May 31, 2002, the common stock had not been issued; however, an accrual was made at May 31, 2002 to record the related expense.
Effective May 30, 2002, the Board of Directors authorized payment in the form of restricted common stock for the March 31, 2002 quarterly dividend of $211,440 on the Series 2001 preferred stock. Effective June 26, 2002, the Board approved $1.60 per share of common stock to effect the dividend or 132,150 shares.
In April 2001, PalWeb entered into a Licensing Agreement with Westgate Capital, LLC ("WCC"), an entity owned by Warren Kruger and William Pritchard, providing PalWeb the exclusive right and license to use fire retardancy technology then being developed under the direction and expense of WCC. The Licensing Agreement was negotiated and executed prior to Warren Kruger, William Prichard or entities which they are affiliated became directors or beneficial owners of 10% of more of PalWeb's common stock in January 2002. Under the agreement, PalWeb must pay the greater of 2.5% of gross sales of UL listed pallets using fire retardant technology or a minimum monthly royalty of $10,000. The agreement also provided that in the event that cumulative payments to WCC total $250,000 during the first two years, WCC would convey the ownership of the technology process to PalWeb subject to the 2.5% royalty payment. Subsequent to the execution of the original agreement which provided for a "coating" process technology, the fire retardancy process changed to a chemical additive which WCC and PalWeb incorporated in the manufacturing process and used to successfully obtain the UL listing. As of May 31, 2002, no minimum or other royalties have been paid or accrued by PalWeb. However, PalWeb has recorded expenses of approximately $126,000 that are associated with the license agreement. WCC has not asserted that PalWeb is in default under the license agreement, and WCC has indicated that it has no current intentions of asserting any default by PalWeb under such agreement. PalWeb is exploring the possibility of purchasing the technology from WCC.
THIS ASSUMPTION AGREEMENT (the "Agreement") is entered into effective as of the 4th day of January, 2002, by and between ONWARD, L.L.C., an Oklahoma limited liability company (the "Seller"); PALWEB CORPORATION, a Delaware corporation (the "Purchaser"); PAUL A. KRUGER, an individual (the "Guarantor"); and TEXAS CAPITAL BANK, a national banking association (the "Lender").
R E C I T A L S:
A. Seller and Lender entered into a certain Loan Agreement dated December 8, 1999 (the "Loan Agreement").
B. Pursuant to the Loan Agreement, Lender is the holder of a certain Term Note dated December 8, 1999, in the original principal sum of $900,000.00 (the "Note"), executed by the Seller in favor of the Lender.
C. The Note is secured by: (i) a certain Deed of Trust, Assignment, Security Agreement and Financing Statement dated December 8, 1999 (the "Deed of Trust") covering the property described on Exhibit "A" attached hereto and incorporated herein by this reference (the "Property"), executed by the Seller in favor of the Lender and recorded on May 31, 2000, in Volume 2000107, at Page 3034 of the records of Dallas County, Texas; and (ii) a certain Guaranty Agreement dated December 8, 1999 (the "Guaranty Agreement"), executed by the Guarantor in favor of the Lender.
D. The Purchaser has acquired the Property and desires, by this Agreement, to evidence its agreement to assume and pay all sums due under the Loan Agreement, Note and Deed of Trust (hereafter, the "Loan Documents"), and to perform all obligations expressed therein.
E. Lender desires to consent to the Purchaser's assumption of the Loan Documents.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the agreements herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. ASSUMPTION. The Purchaser hereby assumes and agrees to pay all sums payable under the Loan Documents. The Purchaser further covenants, promises and agrees to perform all of the covenants, agreements and obligations contained therein to be performed by the Seller, at the time, in the manner and in all other respects as therein provided, and to be bound thereby. Purchaser acknowledges and agrees that the principal amount of the indebtedness evidenced by the Note, together with accrued interest thereon, as of the date of this Agreement, is $813,255.18.
2. MORTGAGE LIEN. The Purchaser hereby acknowledges and agrees that the Deed of Trust imposes a valid first lien on the Property, that the execution of this Agreement will not impair the lien of the Deed of Trust or any other instrument securing payment of the Note, and that such liens shall continue in full force and effect until the indebtedness evidenced by the Note, and any amendment, renewal, consolidation, modification and/or replacement thereof, is paid in full or otherwise satisfied.
3. CONSENT BY LENDER. The Lender hereby consents to the conveyance of the Property by the Seller to the Purchaser and to the Purchaser's assumption of the Loan Documents.
4. NO RELEASE. Nothing contained in this Agreement shall constitute a release or discharge of the Seller from its obligations under the Loan Documents, or of the Guarantor from his obligations under the Guaranty Agreement.
5. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the matters set forth herein and, except for this Agreement, there are no other agreements or instruments affecting or relating to any of the Loan Documents and/or Guaranty Agreement which will be binding on the parties.
6. FURTHER ASSURANCES. The Purchaser shall provide such other documents and execute such other instruments as Lender may reasonably require to further evidence the Purchaser's assumption of the Loan Documents.
7. BINDING EFFECT. This Agreement shall be binding upon the parties hereto and their respective heirs, administrators, representatives, trustees, successors and assigns.
IN WITNESS WHEREOF, this instrument is executed effective as of the date first above written.
"SELLER" ONWARD, L.L.C., an Oklahoma limited liability
company
By: /s/ Paul A. Kruger
------------------------------
Paul A. Kruger, Manager
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"PURCHASER" PALWEB CORPORATION, a Delaware corporation
By: /s/ Paul A. Kruger
------------------------------
Paul A. Kruger, President
"GUARANTOR" /s/ Paul A. Kruger
------------------------------
Paul A. Kruger, an individual
"LENDER" TEXAS CAPITAL BANK, a national banking
association
By:
-------------------------------------
W. Reed Allton, Senior Vice President
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ACKNOWLEDGMENTS
STATE OF OKLAHOMA )
) SS:
COUNTY OF CLEVELAND )
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The foregoing instrument was acknowledged before me on January __, 2002, by Paul A. Kruger, as Manager, on behalf of Onward, L.L.C., an Oklahoma limited liability company.
Notary Public
My Commission Expires:
STATE OF OKLAHOMA )
) SS:
COUNTY OF CLEVELAND )
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The foregoing instrument was acknowledged before me on January __, 2002, by Paul A. Kruger, as President, on behalf of PalWeb Corporation, a Delaware corporation.
Notary Public
My Commission Expires:
STATE OF OKLAHOMA )
) SS:
COUNTY OF CLEVELAND )
|
The foregoing instrument was acknowledged before me on January __, 2002, by Paul A. Kruger, an individual.
Notary Public
My Commission Expires:
STATE OF TEXAS )
) SS:
COUNTY OF DALLAS )
|
The foregoing instrument was acknowledged before me on January __, 2002, by W. Reed Allton, as Senior Vice President, on behalf of Texas Capital Bank, a national banking association.
My Commission Expires:
Legal Description of Property
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 inch 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 inch 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 inch iron rod set for corner;
South 80 degrees 55 minutes 26 seconds East, a distance of 750.50 feet to a 3/8 inch 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 inch iron rod found for corner;
THENCE South 0 degrees 03 minutes 32 seconds East, 174.17 feet to a 1/2 inch 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.
LICENSE AGREEMENT
This LICENSE AGREEMENT ("Agreement") is made and entered into effective as of April 20, 2002, by and between WESTGATE CAPITAL COMPANY, L.L.C., an Oklahoma limited liability company (hereinafter referred to as "Licensor"), and PALWEB CORPORATION, a Delaware corporation (hereinafter referred to as "Licensee").
WHEREAS, Licensor has developed a fire retardant coating process (the "Process") which shall be licensed by Licensor in accordance with this Agreement; and
WHEREAS, Licensee desires to obtain a license to use the Process for the manufacture and sale of plastic pallets; and
WHEREAS, Licensor is willing to grant such a license to Licensee under the terms of this Agreement.
NOW THEREFORE, in consideration of the mutual promises contained herein, and subject to the terms and conditions of this Agreement, Licensor and Licensee agree as follows:
ARTICLE I
(a) Licensor grants to Licensee the exclusive right and license to use the Process worldwide in connection with the manufacture and sale of U.L. listed plastic pallets (the "Pallets").
(b) Neither Licensee nor its affiliates shall during the term of this Agreement sell or market any U.L. listed Pallet except those which use the Process. The term "Pallets" as used herein shall include all U.L. listed Pallets or any other Pallet or plastic products using the Process sold by Licensee or its affiliates, including without limitation products sold under a private label, as a house brand or otherwise and products for which the Process has been modified. Licensor shall be paid a royalty under Article IV hereof for all sales of Pallets by Licensee or its affiliates.
(c) Licensee agrees that Licensor retains full ownership of the Process, and that Licensee shall not acquire any rights in the Process other than those rights expressly granted by Licensor pursuant to and during the term of this Agreement.
ARTICLE II
Subject to the conveyance and termination provisions set forth in Article III below, the term of this Agreement shall commence on the effective date of this Agreement and shall continue for a period of ten (10) years (Initial Term) thereafter or until such time the Process is conveyed by the Licensor to Licensee in accordance herewith.
ARTICLE III
(a) Licensor shall convey to Licensee all right, title and interest to the Process and be paid an override interest thereafter in the event that cumulative royalties paid by Licensor to Licensee under Article IV equal $250,000.00 during the first two years of the Agreement. Upon such conveyance, the Process shall be the sole property of Licensee and Licensor shall only be entitled to an override or carried interest payment equal to the sums that would have been otherwise paid to Licensor under Article IV royalty payments. The parties agree that at the time of a conveyance of the Process an Override Interest Agreement will be executed by the parties and such Agreement will set forth these financial terms and conditions of Article IV hereof.
(b) In the event that either Licensor or Licensee breaches this Agreement, the other party may serve on the defaulting part a notice of default ("Notice of Default") specifying the nature of the default. If the default is not cured within fifteen (15) days from service of the Notice of Default, the other party may then serve a notice (the "Termination Notice") that it is terminating this Agreement and the Agreement shall be automatically terminated.
(c) This Agreement shall be terminated immediately without notice in the event of the bankruptcy or judicial or administrative declaration of insolvency of Licensee, or in the event that Licensee makes an assignment for the benefit of creditors.
(d) Licensor shall have the right to terminate, upon giving written notice to Licensee, the exclusive right granted to Licensee by Licensor under this Agreement beginning with calendar year 2003, if the total royalties actually paid to Licensor during the preceding year are less than $120,000.00
(e) Licensor shall have the right to immediately terminate, upon giving written notice to Licensee, the Agreement in its entirety if for any six-month period, beginning with calendar year 2003, the total royalties actually paid to Licensee during such six month period are less than $30,000.00.
(f) Upon expiration or termination of this Agreement for any reason, all rights granted to Licensee hereunder shall cease, and Licensee will immediately refrain from further use of the Process and shall destroy or return to Licensor all materials containing the Process.
ARTICLE IV
In consideration of the license granted hereunder, Licensee shall pay to Licensor a monthly royalty equal to two and one-half percent (2.5%) of Licensee's gross monthly revenues derived from the sale of Pallets; provided, that, in no event shall the royalty payment for the exclusive right to the Process ever be less than $120,000.00 for any calendar year, payable in monthly installments of $10,000.00 per month (Guaranteed Minimum Royalty). Each such royalty payment shall be paid no later than the fifteenth (15th) day of the month following each month of operation, and shall include a sales report setting forth in reasonable detail the sales of Pallets for the preceding month. Failure to make any such payment in a timely manner shall be a breach hereunder. As used in this Agreement, the term "gross monthly revenues" shall mean all revenues derived from all sales of Pallets by Licensee, whether such sales be by cash, check, charge account or otherwise, less any sales tax imposed by any federal, state, municipal or other governmental authority and paid by Licensee. Royalty payments due under this Agreement shall bear interest at the maximum lawful rate permitted by the laws of the State of Oklahoma (but in any event not more than eighteen percent (18%) per annum) from the date due until paid.
If Licensee fails to pay the Guaranteed Minimum Royalty then Licensee shall lose its exclusive right granted by Licensee in Article I but may continue to use the Process on a non-exclusive basis in accordance with the terms hereof while allowing License third party's as non-exclusive co-licensee.
ARTICLE V
(a) Licensee agrees to keep accurate books of account and records covering all transactions relating to the manufacture and sale of Pallets. Licensor and its authorized representatives shall have the right to examine and copy said books of account and other records at any time.
(b) Licensor shall also have the right, at any time, to have an independent audit made of the books and records of Licensee at Licensor's expense. If such an audit should reveal that any payments to Licensor have been understated in any report to Licensor, then Licensee shall immediately pay to Licensor the amount understated upon demand, in addition to interest from the date such amount was due until paid, at the maximum rate permitted by Oklahoma law (but not in excess of eighteen percent (18) per annum). If such an audit discloses an understatement in any report of two percent (2%) or more, Licensee shall, in addition, reimburse Licensor for any and all costs and expenses connected with the audit (including, without limitation, reasonable accounting and attorneys' fees).
ARTICLE VI
(a) Licensee agrees to use its best efforts to promote the sale of Pallets.
(b) Licensee will use its best efforts to notify Licensor of, and assist Licensor in terminating, any infringement of the Process by a third party.
ARTICLE VII
(a) Licensee agrees that it is wholly responsible for all Pallets offered, sold or otherwise provided by it, and that Licensor shall have no liability for or in connection with the manufacture or sale of any Pallets. Licensee agrees to indemnify and hold harmless Licensor and the owners, members, officers, directors, employees and agents of Licensor, from and against any and all claims, demands, causes of action, damages, costs and expenses, including court costs and reasonable attorneys' fees, caused by or arising out of or in connection with the Pallets or the offer or sale thereof, including without limitation, claims or actions for negligence, breach of contract, strict liability, products liability, and trademark, patent or copyright infringement.
(b) During the term of this Agreement and for a period of five (5) years after the expiration or termination of this Agreement, the Licensee, at its sole expense, shall cause Licensor to be covered and named as an additional insured under Licensee's commercial general liability insurance policy. Licensee shall deliver to licensor a certificate of insurance which reflects Licensor as an additional insured and shall include a statement by the insurer that the policy will not be canceled or materially altered without at least thirty (30) days prior written notice to Licensor.
ARTICLE VIII
THE PROCESS LICENSED HEREIN IS LICENSED "AS IS." LICENSOR MAKES NO WARRANTY (EXPRESS OR IMPLIED), ARISING BY STATUTE OR OTHERWISE IN LAW OR FROM A COURSE OF DEALING OR USAGE OF TRADE INCLUDING, BUT NOT LIMITED TO, THE WARRANTY OF TITLE AND THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. LICENSOR SHALL HAVE NO LIABILITY FOR ANY LOST PROFITS OR SAVINGS OR FOR CONSEQUENTIAL, EXEMPLARY OR INCIDENTAL DAMAGES EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
ARTICLE IX
Licensee on behalf of itself and its partners, directors, officers, employees and agents (collectively, "Agents") hereby agree that Licensee and its Agents shall keep the Process confidential and shall use it for the sole purposes of manufacturing and selling Pallets in accordance with the terms of this Agreement. Licensee agrees to be jointly and severally responsible for and liable in respect of any breach of the provisions of this Article IX by any of its Agents. The covenant and undertaking set forth in this Article IX shall survive termination of expiration of this Agreement and shall remain in effect for a period of thirty (30) years from the date hereof.
ARTICLE X
All modifications or improvements to the Process, whether developed by Licensee or Licensor, shall belong to and be the property of Licensor; provided, that, Licensee shall have the right to use such modifications or improvements in accordance with the terms of this Agreement so long as this Agreement shall remain in effect. All the provisions of this Agreement shall apply to such modifications or improvements as if they were included as part of the Process, including, without limitation, the confidentiality provisions of Article IX hereof. Each party shall promptly notify the other of any modifications or improvements to the Process.
ARTICLE XI
11.1 APPLICABLE LAW. This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the State of Oklahoma, without regard to the choice of law principles thereof.
11.2 SEVERABILITY. The provisions of this Agreement are severable, and if any provision shall be held illegal, invalid, or unenforceable, the parties affected thereby shall substitute for the affected provision an enforceable provision which approximates the intent and economic benefit of the affected provision as closely as possible, but all other provisions shall continue in full force and effect.
11.3 HEADINGS. All article or section headings in this Agreement are for reference only and shall not be deemed to control or affect in any way the meaning or construction of any of the provisions hereof.
11.4 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
11.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which together shall constitute one agreement binding on the parties hereto.
11.6 NOTICES. Any notice, request, consent or communication (collectively a "Notice") under this Agreement shall be effective only if it is in writing and (a) personally delivered, (b) sent by certified or registered mail, return receipt requested, postage prepaid, (c) sent by a nationally recognized overnight delivery service, with delivery confirmed, or (d) telexed or telecopied, with receipt confirmed, addressed as follows:
If to Licensor: Westgate Capital Company, LLC
Attn: William W. Pritchard, Manager
320 S. Boston Ave., Suite 400
Tulsa, Oklahoma 74103
If to Licensee: PalWeb Corporation
Attn: Paul A. Kruger, President
2500 S. McGee
Norman, Oklahoma 73072
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Unless the sending party has actual knowledge that a Notice was not received by the intended recipient, a Notice shall be deemed to have been given (i) as of the date when personally delivered, (ii) three days after being deposited with the United States mail properly addressed, (iii) the next day after being delivered during business hours to said overnight delivery service, properly addressed and prior to such delivery service's cutoff time for next day delivery, or (iv) when receipt of the telex or telecopy is confirmed, as the case may be. A party may change its notice address hereunder by giving written notice of such change to the other party in accordance with the requirements of this Section 11.6.
11.7 ENTIRE AGREEMENT; MODIFICATION. This Agreement contains the complete expression of the agreement between the parties with respect to the matters addressed herein and there are no promises, representations, or inducements except as herein provided. The terms and provisions of this Agreement may not be modified, supplemented or amended except in writing signed by both parties hereto. All terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and permitted assigns of the parties hereto.
11.8 ASSIGNMENT. Licensee shall have no right to assign its rights, or to delegate its duties, under this Agreement, without the prior written consent of Licensor. Licensor may assign its right, and delegate its duties, under this Agreement in connection with a sale by Licensor of the Process, which sale shall be subject to the terms of this Agreement.
11.9 NO WAIVER. Failure by either party hereto to enforce at any time or for any period of time any provision or right hereunder shall not constitute a waiver of such provision or of the right of such party thereafter to enforce each and every such provision.
11.10 ATTORNEYS' FEES. The prevailing party in any action or suit related to this Agreement shall be entitled to recover from the non-prevailing party, in addition to any other rights or remedies, its reasonable attorneys' fees, court costs and other reasonable costs incurred in the enforcement of the rights and obligations set forth in this Agreement.
IN WITNESS WHEREOF, this License Agreement has been duly executed by the parties hereto effective as of the day and year first set forth above.
LICENSOR:
WESTGATE CAPITAL COMPANY, LLC
By: /s/ William W. Pritchard
----------------------------
Print Name: William W. Pritchard
Title: Manager
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LICENSEE:
PALWEB CORPORATION
By: /s/ Paul A. Kruger
----------------------------
Print Name: Paul A. Kruger
Title: President
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UNSECURED SUBORDINATED PROMISSORY NOTE
$1,000,000.00 May 31, 2002
FOR VALUE RECEIVED, the undersigned, Palweb Corporation ("Debtor"), promises to pay to the order of Paul A. Kruger, individually ("Lender"), the principal sum of up to One Million Dollars ($1,000,000.00) together with interest thereon at the fixed rate of six percent (6 %) per annum. The loan will be funded by Lender in traunches of not less than $250,000 each. The first traunche of $500,000 will be funded on May 31, 2002, or within two business days thereof. This Debtor then will have up to two remaining traunches, totaling $500,000 available to it. This Note shall be unsecured and subordinated to any and all bank debt or other third party institutional debt of PalWeb Corporation past, present or future.
Any sums advanced to Debtor against the Note shall be due and payable with interest as a balloon payment on June 1, 2003.
If this Note is not paid when due and Debtor fails to cure such default within ten (10) days of receiving written notice thereof from Lender, then Lender may, at its option, declare this Note immediately due and payable in full.
If the Debtor is dissolved, makes an assignment for the benefit of creditors, or institutes or has instituted against it any insolvency or bankruptcy proceeding, this Note shall become immediately due and payable at the option of the holder, and notice of the election of this option is expressly waived.
If this Note or any portion of the principal due hereunder is not paid when due, and is given to an attorney for collection, or suit is filed hereon, and as often as any of such events occur, the prevailing party in such litigation shall be entitled to recover reasonable attorneys' fees and court costs.
The Debtor hereof may prepay all or any portion of the principal hereof at any time without prepayment penalty or premium. Any and all principal prepayments made hereby must be accompanied by full payment of all interest accrued on the amount of principal so prepaid.
The Debtor undertakes to prepay Lender in the event Debtor obtains
additional financing, which gives the Debtor the financial capacity to prepay
the Lender.
"Debtor"
PALWEB CORPORATION
By: /s/ Greg Trickel
--------------------
Greg Trickel
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AGREED AND ACCEPTED:
/s/ Paul A. Kruger ------------------------ Lender, Paul A. Kruger |
NON EXCLUSIVE DISTRIBUTION AGREEMENT
THIS AGREEMENT entered into on this August 5, 2002 (the "Effective Date") between PalWeb Corporation, an Oklahoma corporation (the "Company") and Bosh Material Handling Incorporated (hereafter referred to as "Bosh or Non Exclusive Distributor").
RECITALS
WHEREAS, the Company has determined that in view of the Bosh's professional knowledge, expertise and experience, Bosh's services as a Non Exclusive Distributor of the Company will be of great value to the Company, and accordingly, the Company desires to enter into this Agreement with Bosh as set forth herein in order to secure such services;
WHEREAS, Bosh agrees to purchase from the Company, 100,000 pallets cumulative over the five year term.
WHEREAS, contemporaneous with the execution of this Non Exclusive Distribution Agreement (the "Agreement"), Bosh has executed the Confidentiality and Non Disclosure Agreement, attached as Attachment I; and
WHEREAS, Bosh desires to act as a non exclusive distributor for the Company of its pallet products on the terms set forth herein.
NOW THEREFORE, for and in consideration of the Non Exclusive Distributor's agreement with the Company, the above promises and the mutual agreements hereinafter set forth, Bosh and the Company agree as follows:
1. DISTRIBUTOR DUTIES.
(a) The Company agrees to enter into this Agreement with Bosh for the sole purpose of selling the Company's pallets. Bosh shall work with the marketing personnel of the Company or as directed by the Company's Board.
(b) Bosh shall (i) diligently follow and implement all policies and decisions communicated by the Board and/or marketing personnel, (ii) timely prepare and forward to the Board and/or marketing personnel all reports and accountings as may be requested.
(c) The Company shall provide Bosh with such technical support and inventory as appropriate in order for Bosh to perform under this Agreement.
2. TERM. The term of the Agreement shall be five (5) years ("Term").
In the event the Term expires or if either terminates this Agreement pursuant to
Section 3, Bosh shall diligently assist the Company in transitioning all matters
and work for which he was responsible as the Company shall direct.
3. TERMINATION. This Agreement can be terminated as follows:
(a) By the Company for Cause immediately and without notice. Cause means conduct amounting to (i) fraud, dishonesty or breach of fiduciary duty against the Company, (ii) willful misconduct, repeated refusal to follow the reasonable directions of the Company or violation of law in the course of performance under the Agreement, (iii) a material breach or violation of the terms of this Agreement, (iv) non payment of amounts owed the Company to be paid timely in accordance with Section 4.
4. PRE-CONDITIONS. As a pre-condition to the effectiveness of this Agreement, Bosh shall execute the Confidentiality and Non Disclosure Agreement attached as Attachment I and provide financial information to the Company which in the sole discretion of the Company indicates Bosh's ability to purchase the requirement of 100,000 pallets during the term of the Agreement and to pay the Company in a timely manner. Bosh agrees that all pricing is F.O.B. at the Company's plant in Dallas, and payment will be net thirty (30) days after the invoice date. Invoicing will be done in increments equal to actual shipments. Bosh acknowledges and agrees that any breach by it of such agreement shall result in the immediate termination of this Agreement with no further obligation to pay Bosh under this Agreement.
5. NON EXCLUSIVITY. The Agreement grants Bosh the non exclusive right to sell the Company's pallets and related platforms with the understanding that pre-existing relationships (see Attachment III, Bosh's Clients) developed by Bosh will be treated as Bosh's clients during the term hereof and for a period of one year thereafter.
6. SEVERABILITY. The parties agree that each of the provisions included in this Agreement and the Confidentiality and Non Disclosure Agreement is separate, distinct, and severable from the other provisions of these Agreements, and that the invalidity or unenforceability of any Agreement provision shall not affect the validity or enforceability of any other provision of these Agreements. Further, if any provision of these Agreements is ruled invalid or unenforceable by a court of competent jurisdiction because of a conflict between the provision and any applicable law or public policy, the provision shall be redrawn to make the provision consistent with and valid and enforceable under the law or public policy.
7. ASSIGNMENT. This Agreement and the rights and obligations of the hereunder may not be assigned by either party hereto without the prior written consent of the other party hereto. Notwithstanding the foregoing, this Agreement shall be binding on and inure to the benefit of the Company's successors.
8. NOTICES. Except as otherwise specifically provided herein, any notice required or permitted to be given by, or to, either party pursuant to this Agreement shall be given in writing, and shall be personally delivered, or mailed by certified mail, return receipt requested, or provided by electronic transmission with a copy sent contemporaneously by certified mail, return receipt requested, at the address set forth below or at such other address as either party shall designate by written notice to the other given in accordance with this Section. Any notice complying with this Section shall be effective immediately upon personal delivery or electronic transmission, and if mailed only, on the third business day after mailing.
9. WAIVER. The waiver by either party hereto of any breach of this Agreement by the other party hereto shall not be effective unless in writing, and no such waiver shall operate or be construed as the waiver of the same or another breach on a subsequent occasion.
10. INDEPENDENT CONTRACTOR. It is expressly understood that Bosh is an independent contractor and that it is not a principal, partner, or employee of the Company. The actual performance of all day-to-day work by Bosh hereunder shall be under the control and direction of Bosh. The Company, being interested in the result to be obtained, shall at all times have access to the sales information of Bosh for the purposes of observing the performance hereunder by Bosh.
11. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Oklahoma. The parties agree that jurisdiction and venue for any matter arising out of or pertaining to this Agreement shall be proper only in the state courts located in Tulsa county, Oklahoma and the federal courts having jurisdiction over the Northern District of Oklahoma, and the parties hereby consent to such venue and jurisdiction.
12. BENEFICIARY. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, heirs, executors, administrators and permitted assigns.
13. ENTIRE AGREEMENT. This Agreement and the Confidentiality and Non Disclosure Agreement executed contemporaneously herewith embody the entire agreement of the parties on the subject matter stated in the Agreement. No amendment or modification of this Agreement shall be valid or binding upon the Company or Bosh unless made in writing and signed by both parties. All prior understandings and agreements relating to the subject matter of this Agreement are hereby expressly terminated.
14. CONFIDENTIALITY. The terms, conditions and existence of this Agreement shall be confidential.
IN WITNESS WHEREOF, the Non Exclusive Distributor and the Company have executed and delivered this Agreement as of the date first shown above.
THE COMPANY: THE NON EXCLUSIVE DISTRIBUTOR:
PALWEB CORPORATION
By: /s/ Paul A. Kruger /s/ Timothy A. Irwin
------------------------- -----------------------------------
President Bosh Material Handling Incorporated
PALWEB CORPORATION 4380-40th Street SE, Suite A
1607 West Commerce Street Grand Rapids, Michigan 49512-4069
Dallas, Texas 75208
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Picture frame Granada with grommets @ $18.00 per pallet Base Resin Cost of Polymer as of July 23, 2002:
$ .33 per pound of Polyethylene as quoted by Exxon/Mobil. $ .65 per pound of Polypropylene with 15% glass as quoted by Exxon Mobil/Matrix
Through 12-31-02, the $18.00 per pallet shall be adjusted upward in the event that the Base Resin Costs increase more than one-half cent per pound.
Example: Polyethylene and Polypropylene 50 lb (tops 30 lbs. - bottom 20 lbs.) each increase $.02 per pound, then the pallet price would increase by One Dollar from $18.00 per pallet to $19.00 per pallet.
Non Exclusive Distributor Confidentiality and Non Disclosure Agreement
(Customers of Non Exclusive Distributor as of the date of the Agreement)
Customer Terms
-------- -----
1. Pharmacia Corporation o Price of $18.00 per Granada Pallet
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with rubber inserts and $17.00 per
Granada Pallet without rubber inserts.
o Three (3) year full replacement at no
charge, F.O.B. Dallas with return of old
pallet F.O.B. Dallas.
INDEMNITY AGREEMENT
This Agreement made and entered into by and between PalWeb Corporation, a Delaware corporation (hereinafter the "Company") and _______________________, an officer and Director of the Company (hereinafter, together with his heirs, personal representatives, and estate, the "Indemnitee" or "claimant").
WITNESSETH: THAT
WHEREAS, Section 145 ("Section 145") of the General Corporation Law of the
State of Delaware ("Delaware Law") empowers corporations to indemnify a person
serving as a director, officer, employee, or agent of the corporation or a
person who serves at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust or
other enterprise, and further specifies that the indemnification set forth in
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise; and Section 145 further
empowers a corporation to purchase and maintain insurance on behalf of any such
persons against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
Section 145; and
WHEREAS, the Board of Directors has concluded that the Company's directors and officers should be provided with maximum protection in order to insure that the most capable persons otherwise available will remain in, and in the future be attracted to, such directorships and, furthermore, that it is fair, reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify present and future directors and officers of the Company and their respective estates in a reasonable and adequate manner and that the Company assume for itself the responsibility and liability for expenses and damages in connection with claims brought whether on account of any prior, present or future alleged act, omission, injury, damage, or event; and
WHEREAS, the Company desires to have the Indemnitee serve or continue to serve as director and/or officer of the Company or its Affiliates free from undue concern for damages by reason of his decisions or actions on its behalf; and the Indemnitee desires to serve, or to continue to serve, provided that he is furnished the indemnity provided for hereinafter, as a director and/or officer of the Company or its Affiliates.
NOW, THEREFORE, in consideration of the mutually dependent covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows:
1. Agreement to Serve; Definitions.
1.1. Agreement to Serve. The Indemnitee will serve, and/or continue to serve, the Company as a director and/or officer so long as he is duly elected and qualified in accordance with the provisions of the By-laws thereof or until such time as he resigns or is removed.
1.2. Definitions. Unless the context otherwise clearly indicates to the contrary, the following terms as used herein shall have the respective meanings set forth below:
(a) "Affiliate" shall mean any corporation, partnership, or other enterprise which controls, is controlled by, or is under common control with the Company; provided, that any corporation, partnership, or other enterprise which is at least 30% beneficially owned by the Company or any corporation which owns at least 51% of the Company shall be deemed an "Affiliate" of the Company.
(b) "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under any employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly of securities of the Company representing 20% or more of the total voting power represented by the Company's then outstanding Voting Securities (other than any Person or group who own such 20% on the date hereof), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 51% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all the Company's assets.
(c) "Expenses" shall include attorneys' fees and all other costs, travel expenses, fees of experts, transcript costs, filing fees, witness fees, telephone and telefacsimile charges, postage, delivery service fees, expenses and obligations of any nature whatsoever paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any claim relating to any Indemnifiable Event.
(d) "Indemnifiable Event" shall mean any event or occurrence that takes place either prior to or after the execution of this Agreement related to the fact that the Indemnitee is or was a director, officer, employee, trustee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or related to a claim, or by reason of anything done or not done by the Indemnitee in any such capacity.
(e) "Independent Directors" shall mean the Company's directors exclusive of any director who is the Indemnitee.
(f) "Independent Legal Counsel" shall mean an attorney, who shall not have otherwise performed services for the Company or the Indemnitee within the last five years (other than in connection with seeking indemnification under this Agreement). Independent Legal Counsel shall not be any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee's rights under this Agreement, nor shall independent Legal Counsel be any person who has been sanctioned or censured for ethical violations of applicable standards of professional conduct.
(g) "Non-governmental" shall refer to any Person which is not (i) the government of the United States of America or of any state, district, territory, or possession thereof or of any county, parish, city, town, township, or municipality within any such state, district, territory or possession, or (ii) any agency, tribunal, council, instrumentality or public body established by any Person described in (i).
(h) "Person" means any one (or more) individual or natural person or any one (or more) corporation, firm, joint venture, partnership, proprietorship, business venture, government, governmental body, agency or instrumentality, estate, trust, association, or other legal entity whatsoever or a group of same.
(i) "Policy" shall refer to any insurance policy or coverage obtained with respect to potential liabilities of directors and officers of the Company.
(j) "Potential Change in Control" shall be deemed to have occurred if
(i) the Company enters into an agreement or arrangement, the consummation of
which would result in the occurrence of a Change in Control; (ii) any person
(including the Company) publicly announces an intention to take or to consider
taking actions which if consummated would constitute a Change in Control; (iii)
any person, other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
who is or becomes the beneficial owner, directly or indirectly, of securities of
the Company representing 10% or more of the combined voting power of the
Company's then outstanding Voting Securities, increases his beneficial ownership
of such securities by 5% or more over the percentage so owned by such person on
the date hereof; or (iv) the Board adopt a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.
(k) "Voting Securities" shall mean any securities of the Company which vote generally in the election of directors.
2. Indemnification. Subject to the provisions of Section 8 and 9, the Company shall indemnify the Indemnitee as follows:
2.1. Obligation to Indemnify. The Company will pay on behalf of the
Indemnitee, and his executors, administrators and heirs, any amount which he is
or becomes legally obligated to pay because of (i) any claim or claims from time
to time threatened or made against him by any Person because of any act or
omission or neglect or breach of duty, including any actual or alleged error or
misstatement or misleading statement, which he commits or suffers while acting
in his capacity as a director and/or officer of the Company or an Affiliate or
(ii) being a party, or being threatened to be made a party, to any threatened,
pending, or completed action, suit or proceeding, whether civil, criminal,
administrative, or investigative, by reason of the fact that he is or was an
officer, director, employee, or agent of the Company or an Affiliate or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. The payments which the Company will be obligated to make hereunder
shall include without limitation, damages, charges, judgments, fines, penalties,
settlements and costs, cost of investigation and costs of defense of legal or
equitable or criminal actions, claims or proceedings and appeals therefrom, and
costs of attachment, supersedeas, bail, surety or other bonds.
2.2. Failure to Timely Pay. If a claim under this Agreement is not paid by the Company, or on its behalf, within sixty (60) days after a written claim has been received by the Company, the Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if
successful in whole or in part, the Indemnitee shall be entitled to be paid also the expense (including reasonable attorney's fees) of prosecuting such claim.
2.3. Notice of Claim. The Indemnitee shall give to the Company notice in writing as soon as practicable of any claim made against him for which indemnity may be sought and will further notify and cooperate with the Company in the selection of counsel and in the occurrence of costs and expenses in defending or investigating any claim for which indemnity may be sought hereunder. The Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within the Indemnitee's power.
3. Assumption of Liability by Company. If the Indemnitee is deceased and is entitled to indemnification under any provision of this Agreement, the Company shall indemnify the Indemnitee's estate and his spouse, heirs, administrators and executors against, and the Company shall assume any and all costs, charges, and expenses (including attorneys' fees), penalties and fines actually and reasonably incurred by or for the Indemnitee or his estate, in connection with the investigation, defense, settlement or appeal of any such action, suit or proceeding. Further, when requested in writing by the spouse of the Indemnitee, and/or the heirs, executors or administrators of the Indemnitee's estate, the Company shall provide appropriate evidence of the Company's agreement set out herein to indemnify the Indemnitee and to assume itself such costs, charges, liabilities and expenses.
4. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the cost, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in the investigation, defense, appeal or settlement of such suit, action or proceeding but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify the Indemnitee as to the portion thereof to which the Indemnitee is entitled.
5. Determination of Right to Indemnification. Anything contained elsewhere herein to the contrary notwithstanding, any indemnification under the terms of this Agreement shall (unless ordered by a court) be paid by the Company promptly or in any event within 60 days of written request therefor, unless a determination is made, as hereinafter provided, that indemnification is not proper in the circumstances because of the provisions of Sections 8 or 9.
The determination as to whether or not the Indemnitee has met the standard of conduct required to qualify and entitle him, partially or fully, to indemnification under the provisions of any provision of Section 2 hereof may be made (i) either by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties of such action, suit or proceeding; or (ii) by legal counsel (who may be the outside counsel regularly employed by the Company); provided that the manner in which (and, if applicable, the counsel by which) the right to indemnification is to be determined shall be approved in advance in writing by both the highest ranking executive officer of the Company who is not party to such action (sometimes hereinafter referred to as "Senior Officer") and by the Indemnitee. In the event that such parties are unable to agree on the manner in which the determination of the right to indemnity is to be made, such determination may be made by Independent Legal Counsel retained by the Company especially for such purpose; provided that such Independent Legal Counsel shall be approved in advance in writing by both the Senior Officer and the Indemnitee. The fees and expenses of Independent Legal Counsel in connection with making the determination contemplated hereunder shall be paid by the Company, and if requested by such Independent Legal Counsel, the Company shall give such Independent Legal Counsel an appropriate written agreement with respect to the payment of their fees and expenses and such other matters as may reasonably requested by counsel.
Notwithstanding the foregoing, the Indemnitee may, either before or within two (2) years after a determination has been made as provided above, petition the District Court of Delaware or any other court of competent jurisdiction to determine whether the Indemnitee is entitled to indemnification under the provisions hereof under which he claims the right to indemnification, and such court shall thereupon have the exclusive authority to make such determination unless and until such court dismisses or otherwise terminates such action without having made such determination. The court shall, as petitioned, make an independent determination of whether the Indemnitee is entitled to indemnification as provided hereunder, irrespective of any prior determination made by the Board of Directors, the stockholders or counsel. If the court shall determine that the Indemnitee is entitled to indemnification hereunder as to any claim, issue or matter involved in the action, suit or proceeding with respect to which there has been no prior determination pursuant hereto or with respect to which there has been a prior determination pursuant hereto that the Indemnitee was not entitled to indemnification hereunder, the Company shall pay all expenses (including attorneys' fees) actually incurred by the Indemnitee in connection with such judicial determination.
If the Person (including the Board of Directors, Independent Legal Counsel, the stockholders or a court) making the determination hereunder shall determine that the Indemnitee is entitled to indemnification as to some claims, issues or matters involved in the action, suit or proceeding but not as to others, such Person shall reasonably prorate the expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement with respect to which indemnification is sought by the Indemnitee among such claims, issues or matters.
If, and to the extent that, it is finally determined hereunder that the Indemnitee is not entitled to indemnification, then the Indemnitee agrees to reimburse the Company for all expenses advanced or prepaid hereunder, or the proper proportion thereof, other than the expenses of obtaining the judicial determination referred to above.
6. Advances of Cost, Charges, and Expenses. The cost, charges, and expenses incurred by the Indemnitee in investigating, defending, or appealing any threatened, pending or completed civil of criminal action, suit or proceeding (administrative or investigative) covered hereunder, shall be paid by the Company in advance (unless, in the opinion of regular outside counsel to the company, the provisions of Section 8 or 9 preclude such advance payment) all with the understanding and agreement hereby made and entered into by the Indemnitee and the Company, that in the event it shall ultimately be determined as provided hereunder that the Indemnitee was not entitled to be indemnified, or was not entitled to be fully indemnified, that the Indemnitee shall repay to the Company such amount, or the appropriate portion thereof, so paid or advanced.
7. Other Rights and Remedies. The indemnification and advance payment of expenses as provided by any provision of the Agreement shall not be deemed exclusive or any other rights to which the Indemnitee may be entitled under any provision of law, any Policy (as an insured thereunder), the Company's Certificate of Incorporation, any By-law, this or any other agreement, vote of stockholders or disinterested directors, or otherwise, as to action in his official capacity, and shall continue after the Indemnitee has ceased to occupy such position and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee.
8. Construction.
8.1 Contractual Liability. This Agreement shall not be construed so as to give rise to a "contractual liability" which is excluded by any Policy. Each and every term hereof is enforceable by the Indemnitee solely as to amounts (a) in excess of the limits of the Policy with respect to costs, charges and expenses (including attorney's fees), judgments, fines, penalties and amounts
paid in settlement for which coverage is in effect under the Policy and (b) used under the Policy as a "deductible" amount and (c) which none of the Policy and the other liability insurance policies of the Company clearly covers for the Indemnitee as Insured thereunder; however, in any case in which the Company believes the Policy or its other insurance should cover a loss, cost or expense, the Company may make a contingent advance of monies pursuant to the terms hereof without admission, waiver of prejudice to its position that the Policy or the Company's other insurance covers the loss, cost or expense. In amplification and clarification but not in limitation hereof, it is the intent of the Company that this Agreement operate as "excess coverage" above the Policy and other applicable insurance limits and that it operate as "first dollar" coverage in all matters which are outside the scope of the Policy or within the deductibles of the Policy and all other insurance maintained by the Company from time to time, except as to the exclusions set forth in Section 9.
In amplification but not in limitation of the foregoing, there is hereby expressly included "first dollar" coverage with respect to the following matters if considered by the Policy to be exclusions:
(1) any act or omission in connection with the acquisition or assumption by Affiliates or the Company of the stock, assets and/or business of other corporations by merger, purchase of assets or otherwise;
(2) liabilities and expenses based on or arising out of any action, suit or proceeding by a Non-governmental Person involving the Racketeer Influenced and Corrupt Organizations Act. 18 U.S. C. 1961 et seq.; and
(3) any act or omission the sole applicable exclusion for which by the Policy is on account of either (i) lack of appropriate notice, (ii) the existence of prior insurance, (iii) the timing of the occurrence and the claim, or (iv) other procedural defenses to coverage by the Policy.
9. Exclusions and Limitation. Notwithstanding any thing contained herein to the contrary:
9.1. The Company shall not be liable to the Indemnitee for, nor obligated to furnish advances in connection with, any loss, cost or expense of Indemnitee resulting from his willful or negligent violation of the Foreign Corrupt Practices Act of 1977.
9.2. The Company shall not be liable to the Indemnitee for, and shall not be obligated to furnish any advances except for repayable costs, charges and expenses as hereinabove stated, in connection with, any loss, cost or expense of the Indemnitee as the direct result of a final judgment for money damages payable to the Company or any Affiliate for or on account of loss, cost of expense directly of indirectly resulting from the Indemnitee's negligence or misconduct in actions described in Section 145 of Delaware Law.
9.3. Unless otherwise allowed by a court of competent jurisdiction or in a separate action in the District Court of Delaware, the Company shall not be liable to the Indemnitee for, and the Indemnitee undertakes to repay the Company for all advances which may have been made of, expenses of investigation, defense or appeal of any matter the judgment of which is excluded under subsection 9.2 next above.
9.4. Unless otherwise determined by a court of competent jurisdiction or in a separate action in the District Court of Delaware, a settlement of any suit, action or proceeding shall be presumed to be an "expense" in mitigation of the expenses of continued litigation and not the compromise of a judgment on the merits of the action, suit or proceeding.
9.5. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors of the Company pursuant to foregoing provisions, or otherwise, the Board of
Directors has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director and/or officer of the Company in the wholly or partially successful defense of any action, suit or proceeding) is asserted by the Indemnitee in connection with Company securities which have been registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it hereunder is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. In effect, therefore, absent a court decision in the individual case or controlling precedent, the provisions of the Agreement will not apply to liabilities of the Indemnitee arising under the Securities Act unless and only to the extent that the Indemnitee is successful in the defense of the action, suit or proceeding in question.
9.6. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee:
(a) based upon or attributable to the Indemnitee or any member of his immediate family gaining in fact any personal profit or advantage to which he was not legally entitled;
(b) based upon or attributable to the dishonesty of the Indemnitee seeking payment hereunder; provided that the Indemnitee shall be protected under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless a judgment or other final adjudication thereof adverse to the Indemnitee shall establish that he committed acts of active and deliberate dishonesty, with actual dishonest purpose or intent, which acts were material to the cause of action so adjudicated;
(c) for bodily injury, sickness, disease or death of any person, or damage to or destruction of any tangible property; including loss of use thereof; or
(d) for which indemnification under this Agreement is determined by a final adjudication of a court of competent jurisdiction to be unlawful and violative of public policy.
10. Change in Control. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then Independent Legal Counsel shall be selected by the Indemnitee and approved by the Company (which approval shall not be unreasonably withheld) and such Independent Legal Counsel shall determine whether the officer or director is entitled to indemnity payments and expense advances under this Agreement or any other agreement or Certificate of Incorporation or Bylaws of the Company now or hereafter in effect relating to claims for Indemnifiable Events. Such Independent Legal Counsel, among other things, shall render it written opinion to the Company and the Indemnitee as to whether and to what extent the Indemnitee will be permitted to be indemnified. The Company agrees to pay the reasonable fees of the Independent Legal Counsel and to indemnify fully such Independent Legal Counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or the engagement of Independent Legal Counsel pursuant hereto.
11. Establishment of Trust. In the event of a Potential Change in Control, the Company shall, upon written request by the Indemnitee, create a trust for the benefit of the Indemnitee, shall fund such trust in a amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for and defending any claim relating to an Indemnifiable Event, and any and all judgments, fines, penalties and settlement amounts of any and all claims
relation to an Indemnifiable Event from time to time actually paid or claimed, reasonably anticipated or proposed to be paid. The amount or amounts to be deposited in the trust pursuant to the foregoing funding obligation shall be determined by a majority vote of a quorum of the Independent Directors. The terms of the trust shall provide that upon a Change in Control (i) the trust shall not be revoked or the principal thereof invaded, without the written consent of the Indemnitee, (ii) the trustee shall advance, within five business days of a request by the Indemnitee, any and all expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the trust under the circumstances under which the Indemnitee would be required to reimburse the Company under this Agreement, (iii) the trust shall continue to be funded by the Company in accordance with the funding obligation set forth above, (iv) the trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in such trust shall revert to the Company upon a final determination by the Independent Directors or a court of competent jurisdiction, as the case may be, that the Indemnitee has been fully indemnified under the terms of this Agreement. The trustee shall be chosen by the Indemnitee. Nothing in this Section 11 shall relieve the Company of any of its obligations under this Agreement. All income earned on the assets held in the trust shall be reported as income by the Company for federal, state, local and foreign tax purposes.
12. Non-exclusivity, Etc. The rights of the Indemnitee hereunder shall be in addition to any other rights the Indemnitee may have under the Certificate of Incorporation or Bylaws of the Company or the Delaware Law or otherwise. To the extent that a change in the Delaware Law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Certificate of Incorporation and Bylaws of the Company and this Agreement, it is the intent of the parties hereto that the Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change.
13. No Construction as Employment Agreement. Nothing contained herein shall be construed as giving the Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries.
14. Liability Insurance. To the extent the Company maintains a Policy (or Policies), providing directors' and officers' liability insurance, the Indemnitee shall be covered by such Policy (or Policies), in accordance with its (or their) terms, to the maximum extent of the coverage available for any company director of officer.
15. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company or any affiliate of the Company against the Indemnitee, the Indemnitee's spouse, heirs, executors, administrators or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action such shorter period shall govern.
16. Subrogation. In the event of payment under this agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suits to enforce such rights.
17. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee to the extent the Indemnitee has otherwise actually received payment (under any Policy, Certificate of Incorporation or Bylaws of the Company or otherwise) or the amounts otherwise indemnifiable hereunder.
18. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument, but only one of which need be produced.
19. Headings. The headings of the Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
20. Use if Certain Terms. As used in this Agreement, the words "herein," "hereof," "hereunder," and other words of similar import refer to this Agreement as a whole and not to any particular paragraph, subparagraph or other subdivision.
21. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
22. Notice to Company. The Indemnitee agrees to promptly notify Company in writing upon being served with any summons, subpoena, citation, complaint, indictment, or other document relating to a suit, action or proceeding which is or may be covered hereunder, either civil or criminal.
23. Notices. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand by Federal Express or other commercial courier and receipted for by or on behalf of the party to whom said notice or other communication shall have been directed or if (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:
(a) If to the Indemnitee, to address set forth following the Indemnitee's signature to this Agreement or to such other address as may have been furnished to Company by the Indemnitee by like notice;
(b) If to Company, to: Paul A. Kruger Chief Executive Officer 2500 S. McGee, Ste. 147 Norman, Oklahoma 73072
or to such other address as may have been furnished to the Indemnitee by Company by like notice.
24. Governing Law. The parties agree that this Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of Delaware.
25. Successors and Assigns. This Agreement shall be binding upon Company and its successors and assigns and shall insure to the benefit of the Indemnitee and his spouse, heirs, executors, administrators and estate.
26. Effective Date. Irrespective of the date of execution, this Agreement, and the terms and conditions hereof, shall be deemed to have become and remained effective and binding upon the parties hereto continuously since January 1, 2001.
27. Partial Invalidity. If any provision or provisions of this Agreement shall
be held to be invalid, illegal, or unenforceable for any reason whatsoever, (a)
the validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, all portion of any paragraphs of
Section held to be invalid, illegal or unenforceable, that are not themselves
invalid, illegal or impaired thereby, and (b) to the fullest extent possible,
the provisions of this Agreement (including, without limitation, all portions of
any paragraph of Section of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that are not themselves invalid, illegal
of unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable.
IN WITNESS WHEREOF, the Company has executed this Agreement by its duly authorized officers, and the Indemnitee has set his hand and seal hereto, on this day of , 2002.
PALWEB CORPORATION, an Oklahoma corporation
INDEMNITEE:
AMENDED AND RESTATED
STOCK OPTION PLAN
OF
PALWEB CORPORATION
(EFFECTIVE MAY 11, 2001)
(AS AMENDED BY THE BOARD OF DIRECTORS JANUARY 7, 2002)
(APPROVED BY THE SHAREHOLDERS APRIL 22, 2002)
(AS REVISED TO SHOW CHANGE IN PAR VALUE DUE TO REDOMICILIATION
IN OKLAHOMA ON MAY 2, 2002)
(AS ADJUSTED TO REFLECT REVERSE STOCK SPLIT OF
COMMON STOCK EFFECTIVE JUNE 25, 2002)
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 two million (2,000,000) shares of common stock of the Company, par value $0.0001 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 By-Laws 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
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 ("Optionee").
WITNESSETH:
WHEREAS, the PalWeb Corporation Stock Option Plan ("Option Plan"), provides that the Company may grant to the Optionee options to purchase shares of its common stock, par value $.10 per share ("Common Stock").
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 be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code so long as the Optionee remains an employee.
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 become vested and exercisable as set forth below:
NUMBER OF SHARES DATE EXERCISABLE
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 Optionee shall have been in continuous employment with the Company or a subsidiary or 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 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 termination of employment for any reason other than death or termination for cause, any vested portion of the Option shall be exercisable by Optionee or his legal representative within three (3) months of the date of termination as to all then vested portions; provided, however, the Board of Directors may, in its sole discretion, approve acceleration of the vesting of any unvested portions of the Option.
If the Optionee's employment with the Company or service on the Board is terminated for cause, the Option shall terminate as of the date of such termination of employment or service on the Board, and the Optionee shall have no further rights to exercise any portion of the Option. "Termination for Cause" means any discharge for violation or the policies and the 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, or 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.
In the event of the death of Optionee while employed or 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.
Notwithstanding the foregoing, in the event Optionee ceases to be
employed by the Company but continues to serve as a director of the Company, all
of such Optionee's options shall not expire three (3) months following the date
of termination of employment with the Company, but instead shall continue in
full force and effect until the 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
Section 2 above. Termination of any such option in connection with the
Optionee's termination of service as a director shall be in accordance with the
applicable provisions of the Option Plan; 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.
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:
CONSULTING AGREEMENT
This Agreement is made between Yorktown Management & Financial Services, L.L.C. ("Yorktown") and Gravity Management & Engineering Group, LLC (hereinafter referred to as "Consultant"). Yorktown agrees to contract for the services of the Consultant, and the Consultant agrees to provide services under the terms and conditions in this agreement.
I. STATEMENT OF WORK The Consultant shall provide consulting services on behalf of Yorktown as specified in this Program Book, "Plastic Molding Injection Line Program Book," dated 2/19/01.
II. PAYMENT FOR SERVICES In full consideration of the consulting services hereunder, Yorktown agrees to pay Consultant's invoices within 14 days, as specified on each invoice (i.e. net 14 days).
An invoice describing services rendered and expenses incurred will be submitted to Yorktown at the end of each 2-week period in which the services are rendered.
III. PERIOD OF PERFORMANCE Consultant shall perform the work according to the attached project schedule. This period of performance shall not be extended without written authorization by Yorktown.
IV. NOT TO EXCEED (N-T-E) LIMIT Total payment for engineering services under this contract shall not exceed $550,000 unless authorized in writing by Yorktown.
V. Deleted.
VI. INDEPENDENT CONTRACTOR It is understood and agreed that: Consultant is an independent contractor in the performance of this Agreement, Consultant is not an agent or employee of Yorktown, and Consultant is not authorized to act on behalf of Yorktown.
Consultant shall assume full responsibility for payment of all federal, state, and local taxes and/or special levies required under unemployment insurance, social security, income tax, and/or other laws, with respect to performance of the Consultant's obligations under the Agreement.
VII. RIGHT TO ACT AS CONSULTANT Consultant warrants to Yorktown that Consultant is not subject to any obligations, contracts, or restrictions that would prevent Consultant from entering into or carrying out the provisions of this Agreement.
VIII. AUTHORIZED PARTIES
The following people are authorized to speak on Yorktown's behalf:
Paul Kruger
Warren Kruger
IX. TERMINATION Either party may terminate this agreement at any time by giving written notice of such termination to the other party. Upon receipt of such written notice by either party, no further charges will be made under this Agreement. Termination shall not affect the Consultant's obligations under articles IX and X.
X. HOLD HARMLESS Consultant shall indemnify and hold Yorktown harmless from any and all suits, claims, actions, damages, or losses whatever, resulting from any act or omission of the consultant, its employees, agents, and subcontractors in its performance hereunder.
XI. CONFIDENTIALITY Consultant acknowledges that information about the research, design, development, marketing, and manufacture of Yorktown's products, including findings, reports, and improvements made or conceived by the Consultant under this Agreement, is confidential and of great value to Yorktown. Accordingly, Consultant agrees not to disclose any such confidential information to any person not authorized by Yorktown to receive it. Upon completion of the work, Consultant shall deliver to Yorktown all documents, drawings, specifications, and similar materials that were furnished by Yorktown to Consultant or that were prepared by Consultant in performance of services hereunder.
XII. PATENT LICENSING Yorktown authorizes Consultant to use all issued and pending patents under their name for this Program. The temporary authorization will terminate at the conclusion of this contract.
XIII. DISCOVERIES, INVENTIONS, AND COPYRIGHTS Consultant will promptly disclose to Yorktown all inventions, improvements, designs, and ideas made or conceived by Consultant in the course of Consultant's services under this Agreement. Consultant assigns to Yorktown all right and title to such inventions, copyrights, and developments, and agrees to execute any and all such documents, including patent assignments, as Yorktown deems necessary to secure to it all right, title, and interest.
XIV. AMENDMENTS This Agreement may be amended only by a written document, signed by both Yorktown and Consultant.
XV. ASSIGNMENT Consultant may not assign this Agreement or any right hereunder. Any such attempted assignment shall be void.
XVI. GOVERNING LAW The laws of the Commonwealth of Oklahoma shall govern this Agreement.
CONSULTANT YORKTOWN
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BY /s/ Bryan R. Kirchmer BY /s/ Warren F. Kruger
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NAME Bryan R. Kirchmer NAME Warren F. Kruger
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TITLE TITLE
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DATE DATE
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FINAL VERSION
SETTLEMENT AGREEMENT
This Settlement Agreement ("Agreement") is made and entered into effective as of the 30th day of April, 2001, by and among PalWeb Corporation, a Delaware corporation (the "Company"), Crescent Road Corporation, a Texas corporation ("CRC"), Curton Capital Corporation, a Texas corporation ("CCC"), Consolidated Capital Group, Inc., a Colorado corporation ("CCGI"), Ralph Curton, Jr., an individual and the sole shareholder of CRC ("Curton"); and CCC and Jeffrey Van Putten, an individual and the sole shareholder of CCGI ("Van Putten"), (CRC and CCC are collectively referred to as the "Shareholders" and CRC, CCC, CCGI, Curton and Van Putten are collectively referred to as "Curton Group") with reference to the following circumstances:
The Company and the Curton Group desire to settle all outstanding disputes between them in accordance with the terms of this Agreement. In consideration of the promises and the mutual agreements contained herein the parties agree as follows:
BASIC AGREEMENTS
1.1 Surrender of Stock. Subject to the terms, provisions and conditions hereof, the Curton Group acknowledges that 11,000,000 shares of Common Stock of the Company originally issued in December 1999 and which are the subject of pending litigation between the Company and Curton Group were not validly issued and accordingly, Shareholders shall surrender to the Company for cancellation all of the 10,700,000 remaining shares of Common Stock held by them ("Common Shares") and Curton shall surrender 33,332 shares of Common Stock owned by him ("Curton Stock") all without payment of consideration by the Company. The remaining 300,000 shares originally issued to CRC were transferred to Leann Brenneis on May 3, 2000 ("Brenneis Shares"). The Curton Group will cause the Brenneis Shares to be returned to the Company. The Company will place a stop transfer order on the Brenneis Shares and the Curton Group will indemnify the Company from any claim that the Brenneis Shares have been properly issued or that the holder thereof has any right, title or interest in the shares.
1.2 Existing Loan Agreement and Note. In full satisfaction of all obligations of the Company under that certain loan agreement by and between Curton and the Company dated December 1, 1999 (the "Loan Agreement") and the corresponding note (the "Note") the Company shall pay to Curton the sum of $300,000.
1.3 Relinquishment of Certificate for Series B Preferred Stock of the Company. Curton is the registered owner of 408,889 shares of Series B Preferred Stock of the Company(the "Preferred Shares"). Curton acknowledges that the Preferred Shares have previously been cancelled and he shall return to the Company the certificate for the Preferred Shares and agrees that he has no interest of any kind in the Preferred Shares.
1.4 Closing. The closing (the "Closing") of the transactions contemplated by this Agreement shall occur simultaneously with the execution of this Agreement at such location as the parties may agree (the "Closing Date"). At the Closing:
(a) the Company shall deliver to Curton the sum of $300,000 in full satisfaction of the Note;
(b) the Shareholders shall deliver to the Company certificates evidencing all of the Common Shares, duly endorsed and ready for transfer;
(c) Curton shall deliver to the Company certificates evidencing all of the Preferred Shares, duly endorsed and ready for transfer;
(d) Curton shall deliver to the Company the Note marked paid; and
(e) the Company and the Curton Group shall also deliver such additional documents as the Company or the Curton Group may reasonably request in order to further document the agreements herein, including a joint motion to dismiss with prejudice all claims and counterclaims in the action filed by the Company titled 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 (collectively the "Litigation").
As soon as possible after the Closing, Curton shall deliver a certificates for the Curton Stock and Brenneis Shares, duly endorsed and ready for transfer.
1.5. Consulting Agreements. The Company and the Curton Group hereby agree that the Consulting Agreements dated December 1, 1999 by and between the Company and CRC and CCGI respectively ("Consulting Agreements"), are terminated. The Curton Group agrees that no further compensation or benefit is due or shall ever become due to the Curton Group or anyone else in connection with such Consulting Agreements and that all outstanding invoices from third parties, including Pinnacle Group, LLC, have been or will be paid. The Company agrees that there are no obligations of the Curton Group or any other persons in connection with such Consulting Agreements. Notwithstanding the foregoing, the Company and the Curton Group agree to equally share any fee paid to Pinnacle Group, LLC.
REPRESENTATIONS AND WARRANTIES OF CURTON GROUP
The Curton Group, jointly and severally, hereby represent, warrant and covenant to the Company as follows:
2.1 Common Shares. The Common Shares constitute one hundred percent (100%) of Shareholders' interest, direct or indirect in the capital stock of the Company and the Curton Stock constitutes one hundred percent (100%) of Curton's interest, direct or indirect, in the capital stock of the Company.
2.2 Title. Subject to the acknowledgment of the parties in Section 1.1, Shareholders and Curton own the Common Shares and Curton Stock, respectively, of record and beneficially, free and clear of all liens, pledges, claims, contract restrictions, buy and sell agreements and encumbrances of any kind, other than the claims of the Company.
2.3 Authority. Each member of the Curton Group has all right, power and authority to enter into this Agreement and consummate the transactions described herein, and the execution, delivery and performance of this Agreement by each member of the Curton Group will not violate any statute, rule, judgment, order or restriction of any government, governmental agency, or court to which any member of the Curton Group is subject and does not conflict with, result in a breach of, constitute a default under or require any notice under any agreement, contract or other document to which any member of the Curton Group is a party or are bound. This Agreement constitutes a binding obligation of each member of the Curton Group enforceable in accordance with its terms.
2.4 No Reliance. Each member of the Curton Group has had access to all information they deem necessary to evaluate the merits and risks of entering into this Agreement and surrendering the Common Shares. Each member of the Curton Group agree and understand that the Company makes no representations or warranties regarding the financial or business condition of the Company or the value of the Common Shares. Each member of the Curton Group waives any right they may have to object to any term or condition of this Agreement based upon any alleged omission to disclose any material fact with respect to the Company or the value of the Common Shares.
2.6 Litigation. There are no legal proceedings pending or threatened against any member of the Curton Group, which, if adversely determined, could, in any respect, prevent or impair the ability of the any member of the Curton Group to perform its obligations under this Agreement.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents, warrants and covenants to the Curton Group as follows:
3.1 Authority. The Company has all right, power and authority to enter into this Agreement and to consummate the transactions described herein and the execution, delivery and performance of this Agreement by the Company and will not violate any statute, rule, judgment, order, or restriction of any government, governmental agency, or court to which the
Company is subject and does not conflict with, result in a breach of, constitute a default under or require any notice under any agreement, contract or other document to which the Company is a party or otherwise bound. All proceedings required to be taken by the Company, including approval of the Board of Directors, to authorize the execution, delivery and performance of this Agreement and the agreements relating hereto have been properly taken and this Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms.
3.2 No Reliance. The Company has had access to all information it deems necessary to evaluate the merits and risks of entering into this Agreement and cancelling the Common Shares and paying the Note. The Company agrees and understands that the Curton Group does not make any representations or warranties regarding the financial or business condition of the Company or the value of the Common Shares. The Company waives any right they may have to object to any term or condition of this Agreement based upon any alleged omission to disclose any material fact with respect to the Company of the value of the Common Shares.
3.3 Litigation. There are no legal proceedings pending or threatened against the Company, which, if adversely determined, could, in any respect, prevent or impair the ability of the Company to perform its obligations under this Agreement.
ADDITIONAL AGREEMENTS
4.1 Releases of Curton Group. The Curton Group, on behalf of themselves, their heirs, personal representatives, successors and assigns, hereby fully release, acquit and forever discharge the Company and their respective successors, assigns, officers, directors, agents, employees, attorneys, representatives and family members, past and present (all of such released parties being hereinafter collectively referred to as the "Company Released Parties"), from any and all claims, demands, liabilities, grievances and causes of action of any kind whatsoever, whether known or unknown, contingent or noncontingent, whether relating to personal injury, breach of contract, property damage, economic loss or otherwise, which the Curton Group may have against the Company Released Parties or any of them, including, without limitation, claims, demands, liabilities, grievances and causes of action arising out of or in any way connected with or related to (i) the ownership of capital stock or rights to acquire capital stock of the Company; (ii) any action taken by the Company Released Parties in connection with the operation of the business of the Company, whether as director, officer, employee, stockholder or in any other capacity; (iii) the Consulting Agreements; (iv) the Preferred Shares; (v) any debts or other obligations of the Company Released Parties; and (vi) the Litigation and the negotiation of this Agreement; provided, however, the foregoing release shall not be construed to release any obligations of the Company arising under the terms of this Agreement.
4.2 Releases of Company. The Company, on behalf of itself and its heirs, personal representatives, successors and assigns, hereby fully releases, acquits
and forever discharges the Curton Group and their respective successors, assigns, officers, directors, agents, employees, attorneys, representatives and family members, past and present (all of such released parties being hereinafter collectively referred to as the "Curton Released Parties"), from any and all claims, demands, liabilities, grievances, causes of action of any kind whatsoever, whether known or unknown, contingent or not contingent, whether relating to personal injury, property damage, economic loss or otherwise, which the Company may have had or may now have against the Curton Released Parties or any of them, including, without limitation, claims, demands, liabilities, grievances and causes of action arising out of or in any way connected with or related to (i) the ownership of capital stock, or rights to acquire any capital stock of the Company; (ii) any action taken by the Curton Released Parties in connection with the operation of the business of the Company, whether as director, officer, employee, stockholder or in any other capacity; (iii) any action relating to the performance under the Consulting Agreements; (iv) any debts or obligations of the Curton Released Parties to the Company; and (v) the Litigation and the negotiations relating to this Agreement; provided, however, the foregoing release shall not be construed to release any obligations of the Curton Group arising under the terms of this Agreement.
4.3 Indemnification by Company. The Company shall indemnify and hold harmless the Curton Group from any claim, liability, cost or expense that the transactions contemplated by this Agreement constitute a preferential transfer or fraudulent transfer.
GENERAL
5.1 Integration; Amendment. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified, amended or terminated except by written agreement specifically referring to this Agreement signed by all of the parties hereto.
5.2 Binding Effect. This Agreement shall be binding upon and inure to the benefit of each corporate party hereto, its successors and assigns and each individual party to and his heirs, personal representatives, successors and assigns.
5.3 Further Assurance. Each party hereto shall cooperate and shall take such further action and execute and deliver such further documents as may be reasonably requested by any other party in order to carry out the provisions and purposes of this Agreement.
5.4 Counterparts. This Agreement may be executed in one or more counterparts by different parties on separate counterparts, each of which as so executed shall be deemed to be an original, and all such counterparts, taken together, shall constitute one and the same instrument. This Agreement shall be effective when all parties have executed at least one counterpart.
5.5 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Oklahoma.
5.6 Survival. The representations and warranties and obligations contained herein of all parties shall survive the Closing.
Executed as of the date first above written.
PALWEB CORPORATION
By: /s/ Paul A. Kruger
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Paul A. Kruger, Chairman of
the Board and President
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CRESCENT ROAD CORPORATION
By: /s/ Ralph Curton, Jr.
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Ralph Curton, Jr., President
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CURTON CAPITAL CORPORATION
By: /s/ Ralph Curton, Jr.
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Ralph Curton, Jr., President
/s/ Ralph Curton, Jr.
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Ralph Curton, Jr., Individually
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CONSOLIDATED CAPITAL GROUP, INC.
By: /s/ Jeffrey Van Putten
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Jeffrey Van Putten, President
/s/ Jeffrey Van Putten
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Jeffrey Van Putten, Individually
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ASSIGNMENT AND INDEMNITY AGREEMENT
THIS ASSIGNMENT AND INDEMNITY AGREEMENT (this "Agreement") is made effective as of the 30th day of May, 2002, by and between PalWeb Corporation, an Oklahoma corporation (the "Company"), and Paul A. Kruger, an individual ("Kruger"), with reference to the following circumstances:
RECITALS
A. The Company owns 1,000 shares (the "Shares") of the common stock of PP Financial, Inc., an Oklahoma corporation ("PPF");
B. PPF owns one hundred percent (100%) of the outstanding capital stock of Paceco Financial Services, Inc., an Oklahoma corporation ("Paceco");
C. The Company wishes to transfer the Shares to Kruger, in return for Kruger's promise to indemnify the Company against any claims relating to PPF and Paceco, and in consideration of a loan being made by Kruger to the Company on favorable terms; and
D. Kruger desires to acquire the Shares from the Company and agrees to be bound by the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Assignment. The Company hereby sells, assigns and transfers to Kruger all of its right, title and interest in and to the Shares.
2. Acceptance. Kruger hereby accepts assignment of the Shares from the Company.
3. Indemnity. As a material inducement to the Company to enter into this Agreement and to assign the Shares to him, Kruger hereby agrees to indemnify, defend and hold the Company and its directors, officers, employees, agents, advisors, shareholders and affiliates harmless from any and all claims or liabilities of any kind whatsoever arising, directly or indirectly, from or in connection with the Company's ownership of the Shares or the business and operations of PPF and/or Paceco, whether arising before or after the date of this Agreement, and Kruger shall pay to such indemnified parties promptly upon demand therefor the amount of any loss, liability, obligation, debt, claim, damage or expense (including costs of investigation and defense and reasonable attorneys' fees) incurred by such indemnified persons in connection therewith.
IN WITNESS WHEREOF, the parties have executed this Assignment and Indemnity Agreement as of the date first above written.
"COMPANY" PalWeb Corporation, an Oklahoma corporation
By: /s/ Paul A. Kruger
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Paul A. Kruger, President
"KRUGER" /s/ Paul A. Kruger
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Paul A. Kruger
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SUBSIDIARIES OF PALWEB CORPORATION
PalWeb Corporation has one wholly-owned subsidiary as follows:
Plastic Pallet Production, Inc., a Texas corporation.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the Stock Option Plan, as amended, of PalWeb Corporation and in the related Prospectus, by incorporation by reference of the annual report on Form 10-KSB of PalWeb Corporation for the fiscal year ended May 31, 2002, of our report dated August 15, 2002. We also consent to the reference to our firm under the caption "Experts" in the related Prospectus.
HULME RAHHAL HENDERSON, INC.
Ardmore, Oklahoma
August 15, 2002
CERTIFICATION
Pursuant to 18 U.S.C. ss. 1350, the undersigned officer of PalWeb Corporation (the "Company"), hereby certifies that the Company's Annual Report on Form 10-KSB for the Fiscal Year Ended May 31, 2002 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: September 12, 2002 /s/ Paul A. Kruger
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Name: Paul A. Kruger
Title: Chief Executive Officer and
Chief Financial Officer
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The foregoing certification is being furnished solely pursuant to 18 U.S.C.ss.1350.