-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PJheMysiGyewM0Kgu7w6uOss2sVWoCQk3Gl91t611gOZ3ROgQ5yGFoY4ljFvrur2 IhGZvI2GnkrJ57dAhF5jgQ== 0001072613-05-000093.txt : 20050119 0001072613-05-000093.hdr.sgml : 20050119 20050119162919 ACCESSION NUMBER: 0001072613-05-000093 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20041130 FILED AS OF DATE: 20050119 DATE AS OF CHANGE: 20050119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALWEB CORP CENTRAL INDEX KEY: 0001088413 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 752954680 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-26331 FILM NUMBER: 05536647 BUSINESS ADDRESS: STREET 1: 1613 E. 15TH CITY: TULSA STATE: OK ZIP: 74120 BUSINESS PHONE: 918-583-7441 MAIL ADDRESS: STREET 1: 1613 E. 15TH CITY: TULSA STATE: OK ZIP: 74120 10QSB 1 form10-qsb_13198.txt PALWEB CORPORATION FORM 10-QSB ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2004 ----------------- [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM _________ TO _________ Commission file number 000-26331 --------------------- PALWEB CORPORATION - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) OKLAHOMA 75-2954680 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1613 EAST 15TH STREET, TULSA, OKLAHOMA 74120 - -------------------------------------------------------------------------------- (Address of principal executive offices) (918) 583-7441 - -------------------------------------------------------------------------------- (Issuer's telephone number) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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. Yes [X] No [_] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: January 13, 2005 - 21,711,038 TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [_] No [X] ================================================================================ PALWEB CORPORATION FORM 10-QSB FOR THE PERIOD ENDED NOVEMBER 30, 2004 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PAGE Condensed Consolidated Balance Sheets as of November 30, ........ 1 2004 and May 31, 2004 Condensed Consolidated Statement of Operations .................. 2 For the Six Month Periods Ended November 30, 2004 and 2003 Condensed Consolidated Statement of Operations .................. 3 For the Three Month Periods Ended November 30, 2004 and 2003 Condensed Consolidated Statements of Cash Flows for the ......... 4 Six Month Periods Ended November 30, 2004 and 2003 Notes to Financial Statements ................................... 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ....... 6 ITEM 3. CONTROLS AND PROCEDURES ......................................... 11 PART II. OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ..... 13 ITEM 3. DEFAULTS UPON SENIOR SECURITIES ................................. 13 ITEM 5. OTHER INFORMATION ............................................... 13 ITEM 6. EXHIBITS ........................................................ 15 SIGNATURES ................................................................ 17 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PALWEB CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, May 31, 2004 2004 ------------ ------------ ASSETS ------ CURRENT ASSETS: Cash $ 135,211 $ 274,085 Accounts receivable 1,109,558 951,596 Inventory 791,008 521,376 Prepaid expenses 29,384 -- ------------ ------------ TOTAL CURRENT ASSETS 2,065,161 1,747,057 PROPERTY, PLANT AND EQUIPMENT, at cost 7,242,108 7,330,179 Less: Accumulated depreciation (945,695) (741,151) ------------ ------------ TOTAL PROPERTY, PLANT AND EQUIPMENT 6,296,413 6,589,028 OTHER ASSETS: Goodwill 6,164,435 6,164,435 Patents and deposit 484,723 490,441 ------------ ------------ TOTAL OTHER ASSETS 6,649,158 6,654,876 ------------ ------------ TOTAL ASSETS $ 15,010,732 $ 14,990,961 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt $ 4,536,444 $ 2,352,667 Notes payable 1,091,551 1,503,612 Accounts payable and accrued liabilities 1,979,317 1,578,917 Preferred dividends payable 65,103 60,582 ------------ ------------ TOTAL CURRENT LIABILITIES 7,672,415 5,495,778 LONG-TERM DEBT, NET OF CURRENT PORTION 2,579,377 6,390,499 STOCKHOLDERS' EQUITY: Preferred stock, $.0001 par value, 20,750,000 shares authorized; 50,000 shares of Series 2003 outstanding 5 5 Common stock, $.0001 par value, 5,000,000,000 authorized; outstanding - 21,711,038 and 12,790,451 2,171 1,279 Additional paid-in capital 51,386,810 48,265,496 Deficit (46,630,046) (45,162,096) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 4,758,940 3,104,684 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,010,732 $ 14,990,961 ============ ============
The accompanying notes are an integral part of this consolidated financial statement. 1 PALWEB CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended November 30, ---------------------------- 2004 2003 ------------ ------------ SALES $ 4,108,817 $ 2,290,934 COST OF SALES, including depreciation of $226,293 and $147,728, respectively 4,224,633 2,258,690 ------------ ------------ GROSS PROFIT (LOSS) (115,816) 32,244 EXPENSES: General and administrative expenses 812,775 613,042 ------------ ------------ OPERATING LOSS (928,591) (580,798) OTHER INCOME (EXPENSE): Other income 17,421 18,633 Interest expense (368,492) (334,458) ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (351,071) (315,825) ------------ ------------ NET LOSS (1,279,662) (896,623) PREFERRED DIVIDENDS 188,288 475,616 ------------ ------------ NET LOSS TO COMMON STOCKHOLDERS $ (1,467,950) $ (1,372,239) ============ ============ NET LOSS PER COMMON SHARE $ (0.11) $ (0.15) ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 12,790,000 9,261,000 ============ ============
The accompanying notes are an integral part of this consolidated financial statement. 2 PALWEB CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended November 30, ---------------------------- 2004 2003 ------------ ------------ SALES $ 1,938,587 $ 2,097,715 COST OF SALES, including depreciation of $116,382 and $106,377, respectively 2,314,115 1,872,775 ------------ ------------ GROSS PROFIT (LOSS) (375,528) 224,940 EXPENSES: General and administrative expenses 474,855 377,130 ------------ ------------ OPERATING LOSS (850,383) (152,190) OTHER INCOME (EXPENSE): Other income 9,415 14,977 Interest expense (181,092) (158,524) ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (171,677) (143,547) ------------ ------------ NET LOSS (1,022,060) (295,737) PREFERRED DIVIDENDS 96,199 251,232 ------------ ------------ NET LOSS TO COMMON STOCKHOLDERS $ (1,118,259) $ (546,969) ============ ============ NET LOSS PER COMMON SHARE $ (0.09) $ (0.04) ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 12,790,000 12,237,000 ============ ============
The accompanying notes are an integral part of this consolidated financial statement. 3 PALWEB CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended November 30, ---------------------------- 2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net cash used in operations $ (1,001,594) (1,656,897) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (191,929) (34,335) Acquisition of assets of Greystone Plastics, Inc. -- (12,000,130) Other -- (1,299) ------------ ------------ Net cash used in investing activities (191,929) (12,035,764) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 318,763 9,146,007 Payments on notes (525,826) (136,322) Preferred dividends (188,288) -- Proceeds from sale of stock 1,450,000 5,000,000 ------------ ------------ Net cash provided by financing activities 1,054,649 14,009,685 ------------ ------------ NET DECREASE IN CASH (138,874) 317,024 CASH, beginning of period 274,085 6,209 ------------ ------------ CASH, end of period $ 135,211 $ 323,233 ============ ============ NONCASH ACTIVITIES: Issuance of common stock for accounts payable, advances and debt $ 1,672,206 $ -- Issuance of common stock in lieu of cash payment of preferred dividends -- 224,384 Sale of equipment in exchange for debt 259,000 -- SUPPLEMENTAL INFORMATION: Interest paid $ 314,237 $ 222,435
The accompanying notes are an integral part of this consolidated financial statement. 4 PALWEB CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications, which are of a normal recurring nature, necessary to present fairly its financial position as of November 30, 2004, and the results of its operations for the six month periods and three month periods ended November 30, 2004 and 2003 and its cash flows for the six month periods ended November 30, 2004 and 2003. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended May 31, 2004 and the notes thereto included in the Company's Form 10-KSB. The financial statements have been prepared assuming that PalWeb will continue as a going concern. The working capital deficit of approximately $5,607,000 at November 30, 2004, reflects the uncertain financial condition of PalWeb and its inability to obtain long term financing until it is able to attain profitable operations. 2. The results of operations for the six month periods and three month period ended November 30, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year. 3. The computation of loss per share is computed by dividing the loss available to common shareholders by the weighted average shares outstanding for the periods. Loss available to common shareholders is determined by adding preferred dividends for the periods to the net loss. For the six month periods ended November 30, 2004 and 2003, the weighted average common shares outstanding are 12,790,000 and 6,317,000. For the three month periods ended November 30, 2004 and 2003, the weighted average common shares outstanding are 12,790,000 and 6,317,000. Convertible preferred stock is not considered as its effect is antidilutive. 4. On January 3, 2005, Greystone Manufacturing, LLC ("GSM"), entered into a letter agreement with Greystone Plastics, Inc. ("Greystone Plastics"), pursuant to which GSM agreed to pay, on or before March 8, 2005, all amounts owed by it under and pursuant to that certain Senior Secured Promissory Note dated September 3, 2003, issued by GSM to Greystone Plastics in the principal amount of $5,000,000 (the "Secured Note") and that certain Wraparound Promissory Note dated September 3, 2003, issued by GSM to Bill Hamilton in the principal amount of $799,454.06 (the "Wraparound Note"). The total amount of principal and interest owed by GSM under the Secured Note and the Wraparound Note is approximately $4,576,000 as of November 30, 2004. 5. Effective October 31, 2004, NYOK, a general partnership owned by Marshall Cogan, Non-Executive Chairman, and Warren Kruger, President and CEO, purchased certain grinding equipment from Greystone Manufacturing, LLC, at its net book value of $278,000 which approximates market in exchange for the cancellation of a like amount of indebtedness of PalWeb to Warren Kruger. NYOK will lease the equipment back to Greystone Manufacturing, LLC, at the rate of $0.04 per processed pound of plastic material. 5 6. As of November 30, 2004, PalWeb sold 8,920,587 shares of common stock at the rate of $0.35 per share for a total of $3,122,206 plus warrants to purchase an additional 1,200,638 shares of common stock (471,279 shares at $0.6625 per share; 392,732 at $0.795 per share; and 336,627 at $0.927 per share). The sale included 4,142,856 shares of common stock for cash of $1,450,000, 2,642,857 shares of common stock in exchange for advances of $925,000, 68,805 shares in exchange for accounts payable of $24,082, 1,428,571 shares of common stock to Warren Kruger, CEO, in exchange for debt and accrued interest of $500,000, and 637,498 shares of common stock to Robert Rosene, a director of PalWeb, in exchange for debt and accrued interest of $223,124. ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS - --------------------- GENERAL TO ALL PERIODS The consolidated statements include PalWeb and its wholly-owned subsidiaries, Greystone Manufacturing, LLC, or GSM, and Plastic Pallet Production, Inc., or PPP. PalWeb has incurred significant losses from operations, and there is no assurance that it will achieve profitability or obtain funds necessary to finance its operations. References to fiscal year 2005 refer to the six and three month periods ended November 30, 2004. References to fiscal year 2004 refer to the six and three month periods ended November 30, 2003. SALES PalWeb's primary business is the manufacturing and selling of plastic pallets through its wholly owned subsidiaries, GSM and PPP. GSM was formed as a subsidiary of PalWeb for the purpose of acquiring substantially all the assets and operations of Greystone Plastics, Inc., or Greystone Plastics, effective as of September 8, 2003. GSM manufactures pallets for the beverage industry, operates at full capacity and sells its product to one customer. PalWeb distributes its pallets through the combination of a network of independent contractor distributors and sales by PalWeb's officers and employees. PPP also markets its own designed injection molding machine, the PIPER 600, through a licensing agreement with ForcePro, LLC, which gives ForcePro the exclusive right to market and sell the PIPER 600. Pursuant to the terms of the licensing agreement, PalWeb will receive a royalty of 5% of the gross proceeds from sales of the PIPER 600. PERSONNEL 6 PalWeb has approximately 62 full-time employees as of November 30, 2004 compared to 58 full-time employees as of November 30, 2003. TAXES 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. SIX MONTH PERIOD ENDED NOVEMBER 30, 2004, COMPARED TO SIX MONTH PERIOD ENDED NOVEMBER 30, 2003 Sales for fiscal year 2005 were $4,108,817 compared to $2,290,934 in fiscal year 2004. The increase of $1,817,883 is primarily attributable to the acquisition of the assets of Greystone Plastics effective as of September 8, 2003. PalWeb currently utilizes a total of six production lines to produce its plastic pallets, of which one of two production lines is being partially utilized by PPP and four are fully utilized by GSM of which the fourth began production in November 2004. An additional production line will commence operation in January 2005 that will be utilized by GSM. The GSM production lines operate at approximately full capacity, and it is expected that the new line will also operate at approximately full capacity. GSM has received an extension with its major customer through February 28, 2005 and anticipates completing a long term contract beyond such date. Cost of sales in fiscal year 2005 was $4,224,633, or 103% of sales, compared to $2,258,690, or 99% of sales, in fiscal year 2004. Increased material costs are the primary cause of the increase in cost of sales. PalWeb has revised its pricing and is reviewing contracts with customers to compensate for the higher cost of materials. General and administrative expenses increased $199,733 from $613,042 in fiscal year 2004 to $812,775 in fiscal year 2005. The increase is primarily attributable to an increase in payroll costs. During the first quarter of fiscal year 2004, PalWeb's administrative payroll costs were abnormally low, approximately $62,000. The acquisition of the assets of Greystone Plastics, Inc., effective September 8, 2003, had a major effect on PalWeb's need for additional time from PalWeb's President and Chief Executive Officer and additional management personnel. As such, PalWeb began paying a salary to Warren Kruger, the Company's President and Chief Executive Officer, effective August 23, 2003, and added Marshall Cogan as Non-Executive Chairman of the Board of Directors effective July 19, 2004, and Robert Nelson as Chief Financial Officer effective October 1, 2004. Interest expense increased $34,034 from $334,458 in fiscal year 2004 to $368,492 in fiscal year 2005. 7 The net loss increased $383,039 from $(896,623) in fiscal year 2004 to $(1,279,662) in fiscal year 2005 for the reasons discussed above. Preferred dividends decreased $287,328 from $475,616 in fiscal year 2004 to $188,288 in fiscal year 2005. This is primarily attributable to a decrease in dividends payable by the Company related to the conversion of all $7,500,000 of the Company's Series 2001 Preferred Stock, which paid dividends at the rate of 12% per annum, into common stock effective September 8, 2003, offset by interest payable on $5,000,000 of the Company's of Series 2003 Preferred Stock, which was issued as of September 8, 2003 and has a dividend rate equal to the prime rate of interest plus 3.25%. After deducting preferred dividends, the net loss available to common shareholders is $(1,467,950), or $(0.11) per share, in fiscal year 2005 compared to $(1,372,239), or $(0.15) per share, in fiscal year 2004 for a increase of $95,711. THREE MONTH PERIOD ENDED NOVEMBER 30, 2004, COMPARED TO THREE MONTH PERIOD ENDED NOVEMBER 30, 2003 Sales for fiscal year 2005 were $1,938,587 compared to $2,097,715 in fiscal year 2004, for a decrease of $159,128. Cost of sales in fiscal year 2005 was $2,314,115, or 119% of sales, compared to $1,872,775 or 89% of sales, in fiscal year 2004. Increased material costs are the primary cause of the increase in cost of sales. PalWeb has revised its pricing and is reviewing contracts with customers to compensate for the higher cost of materials. General and administrative expenses increased $97,725 from $377,130 in fiscal year 2004 to $474,855 in fiscal year 2005. The increase is due to additional payroll as discussed in the above section, "Six Month Period Ended November 30, 2004, Compared to Six Month Period Ended November 30, 2003" plus costs associated with management's effort to raise capital funding. Interest expense increased $22,568 from $158,524 in fiscal year 2004 to $181,092 in fiscal year 2005. The net loss increased $726,323 from $(295,737) in fiscal year 2004 to $(1,022,060) in fiscal year 2005 for the reasons discussed above. Preferred dividends decreased $155,033 from $251,232 in fiscal year 2004 to $96,199 in fiscal year 2005. This is primarily attributable to a decrease in dividends payable by the Company related to the conversion of all $7,500,000 of the Company's Series 2001 Preferred Stock, which paid dividends at the rate of 12% per annum, into common stock effective September 8, 2003, offset by interest payable on $5,000,000 of the Company's of Series 2003 8 Preferred Stock, which was issued as of September 8, 2003 and has a dividend rate equal to the prime rate of interest plus 3.25%. After deducting preferred dividends, the net loss available to common shareholders is $(1,118,259), or $(0.09) per share, in fiscal year 2005 compared to $(546,969), or $(0.04) per share, in fiscal year 2004 for an increase of $553,464. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- GENERAL PalWeb's cash requirements for operating activities consist principally of accounts receivable, inventory, accounts payable, operating leases and scheduled payments of interest on outstanding indebtedness. PalWeb is currently dependent on outside sources of cash to fund its operations. As of November 30, 2004, revenues from sales remain insufficient to meet current liabilities. A summary of cash flows for the six months ended November 30, 2004 is as follows: Cash used in operating activities $(1,001,594) Cash used in investing activities (191,929) Cash provided by financing activities 1,054,649 In addition to the cash provided by financing activities, PalWeb issued 4,777,731 shares of common stock for a total value of $1,672,206 in exchange for a like amount of accounts payable, advances payable and notes payable, The contractual obligations of PalWeb are as follows:
LESS THAN OVER TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS ----- ------ --------- --------- ------- Long-term debt $ 7,115,821 $4,536,444 $ 926,606 $ 500,004 $1,152,767 Operating leases 5,926,890 664,230 1,182,660 1,152,000 2,928,000 ----------- ---------- ---------- ---------- ---------- Total $13,042,711 $5,200,674 $2,109,266 $1,652,004 $4,080,767 =========== ========== ========== ========== ==========
PalWeb anticipates that the cash necessary for funding its operating activities will continue to decline based on projected increases in sales activity for the remainder of fiscal year 2005. To provide for the additional cash to meet PalWeb's operating activities and contractual obligations for fiscal 2005, PalWeb is exploring various options including long-term debt and equity financing. However, there is no guarantee that PalWeb will be able to raise sufficient capital to meet these obligations. 9 PalWeb has accumulated a working capital deficit of approximately $5,607,000 at November 30, 2004, which includes approximately $5,628,000 of notes payable and current portion of long-term debt and $1,979,000 in accounts payable and accrued liabilities. The working capital deficit reflects the uncertain financial condition of PalWeb resulting from its inability to obtain long term financing until such time as it is able to achieve profitability. There is no assurance that PalWeb will secure such financing. PalWeb has had difficulty in obtaining financing from traditional financing sources. Substantially all of the financing that PalWeb has received through November 30, 2004, has been provided by loans from entities controlled by Mr. Paul Kruger, a significant shareholder, entities affiliated with Warren Kruger, President and Chief Executive Officer of PalWeb, through the offering of preferred stock to essentially the same persons and advances from individual investors principally through contacts of Warren Kruger. PalWeb has traditionally been reliant on funds provided by Warren Kruger and its board of directors through loans or the purchase of equity securities. There is no assurance that Warren Kruger will continue to provide loans or loan guarantees or purchase of equity securities of PalWeb in the future. ACCELERATION OF LONG TERM DEBT As further described under "Notice of Default and Acceleration Received from Greystone Plastics" in Part II, Item 5 of this Quarterly Report on Form 10-QSB, on December 23, 2004, GSM received a notice of default from Greystone Plastics relating to a note issued by GSM. In the notice, GSM was informed by Greystone Plastics that, among other things, unless GSM paid all amounts owed by GSM under two notes issued by it, Greystone Plastics would exercise its rights under the security agreement between GSM and Greystone Plastics relating to one of the notes. The total amount of principal and interest owed by GSM under the two notes is approximately $4,576,000 as of November 30, 2004. Although GSM believes that it has a defense to its failure to make timely payments under the secured note, on January 3, 2005, GSM and Greystone Plastics entered into a letter agreement pursuant to which GSM agreed to pay all amounts owed by it under the two notes on or before March 8, 2005 as further described under "Agreement between Subsidiary of PalWeb and Greystone Plastics, Inc." in Part II, Item 5 of this Quarterly Report on Form 10-QSB. PalWeb has received verbal commitments from certain parties to provide the financing needed pay off all amounts due under the notes. However, there is no assurance that PalWeb will receive such financing. SALE OF PALWEB COMMON STOCK As of November 30, 2004, PalWeb sold 8,920,587 shares of common stock at the rate of $0.35 per share for a total of $3,122,206 plus warrants to purchase an additional 1,200,638 shares of common stock (471,279 shares at $0.6625 per share; 392,732 at $0795 per share; and 336,627 at $0.927 per share). The sale included 4,142,856 shares of common stock for cash of $1,450,000, 2,642,857 shares of common stock in exchange for advances of $925,000, 68,805 shares in 10 exchange for accounts payable of $24,082, 1,428,571 shares of common stock to Warren Kruger, CEO, in exchange for debt and accrued interest of $500,000, and 637,498 shares of common stock to Robert Rosene, a director of PalWeb, in exchange for debt and accrued interest of $223,124. WORKING CAPITAL LOAN On November 30, 2004, PalWeb entered into a loan agreement with F&M Bank providing for a $1,500,000 line of credit at the prime rate of interest and a maturity of January 5, 2006. As of November 30, 2004, PalWeb had drawn $948,322 on the line of credit of which $775,000 was used to retire the working capital loan with BancFirst. The loan is personally guaranteed by Robert Rosene, a director of PalWeb, and Warren Kruger, President and CEO. FORWARD LOOKING STATEMENTS AND MATERIAL RISKS - --------------------------------------------- This Quarterly Report on Form 10-QSB includes certain statements that may be deemed "forward-looking statements" within the meaning of federal securities laws. All statements, other than statements of historical facts, that address activities, events or developments that PalWeb expects, believes or anticipates will or may occur in the future, including decreased costs, the profitability of PalWeb, potential sales of pallets or other possible business developments, are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties. The forward-looking statements contained in the Quarterly Report on Form 10-QSB could be affected by any of the following factors: PalWeb's prospects could be affected by changes in availability of raw materials, competition, rapid technological change and new legislation regarding environmental matters; PalWeb may not be able to secure additional financing necessary to sustain and grow its operations; and a material portion of PalWeb's business is and will be dependent upon a few large customers and there is no assurance that PalWeb will be able to retain such customers. These risks and other risks that could affect PalWeb's business are more fully described in PalWeb's Form 10-KSB for the fiscal year ended May 31, 2004, which was filed on August 30, 2004. Actual results may vary materially from the forward-looking statements. PalWeb undertakes no duty to update any of the forward-looking statements contained in this Quarterly Report on Form 10-QSB. ITEM 3. CONTROLS AND PROCEDURES PalWeb maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in PalWeb's Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of 11 possible controls and procedures. PalWeb carried out an evaluation, under the supervision and with the participation of its management, including PalWeb's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2004. Based on the foregoing, PalWeb's Chief Executive Officer and Chief Financial Officer concluded that PalWeb's disclosure controls and procedures were effective at the reasonable assurance level, except as set forth below. During the period of time covered by this report, PalWeb failed to timely file a Current Report on Form 8-K on two occasions and, during the period of time subsequent to the end of the period covered by this report, PalWeb failed to timely file a Current Report on Form 8-K on three occasions and, as such, in the opinion of PalWeb's Chief Executive Officer and Chief Financial Officer, there are deficiencies in PalWeb's disclosure controls and procedures as they relate to Form 8-K filings. The failure to file a Current Report on Form 8-K related to each of the following events which are described under Part II, Item 5 of this Quarterly Report on Form 10-QSB: o an agreement entered into between PalWeb and its Non-Executive Chairman, Marshall S. Cogan, which was executed in October, 2004, and has an effective date of August 1, 2004; o the sale of unregistered securities to certain accredited investors in November of 2004; o an agreement entered into between PalWeb and its Chief Financial Officer, Robert H. Nelson, which was executed January 7, 2005, and has an effective date of November 1, 2004; o a notice of default and acceleration received from Greystone Plastics on December 23, 2004, relating to certain notes issued by a wholly owned subsidiary of PalWeb, GSM; and o an agreement dated January 3, 2005, entered into between GSM and Greystone Plastics relating to the payment of amounts owed under certain notes issued by GSM. In an effort to address the deficiencies in PalWeb's disclosure controls and procedures as they relate to Form 8-K filings, PalWeb's Chief Executive Officer has asked that its outside legal counsel provide PalWeb's officers and directors with a summary of the new Form 8-K requirements and other reporting requirements and responsibilities applicable to public companies. In addition, PalWeb's management is currently evaluating taking certain actions with respect to its disclosure controls and procedures, including designating one employee who will be responsible for coordinating with PalWeb's outside legal counsel in connection with determining 12 if any developments relating to PalWeb require a filing on Form 8-K and implementing a policy related to corporate disclosure control. PART II. OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS For information relating to sales of unregistered securities during the period covered by Quarterly Report on Form 10-QSB, see "Sales of Unregistered Securities to Accredited Investors in November of 2004" under Part II, Item 5 of this Quarterly Report on Form 10-QSB. ITEM 3. DEFAULTS UPON SENIOR SECURITIES For information relating to a notice of default and acceleration received by GSM after the period covered by this Quarterly Report on Form 10-QSB relating to a note issued by GSM, see "Notice of Default and Acceleration Received from Greystone Plastics " under Part II, Item 5 of this Quarterly Report on Form 10-QSB. ITEM 5. OTHER INFORMATION AGREEMENT WITH PALWEB'S NON-EXECUTIVE CHAIRMAN, MARSHALL S. COGAN In October, 2004, PalWeb entered into an employment agreement with PalWeb's Non-Executive Chairman, Marshall S. Cogan, which was effective as of August 1, 2004, and has a term that ends on July 13, 2007. Pursuant to the employment agreement, Mr. Cogan received a base salary of $10,000 per month through September 2004 and is entitled to receive a base salary of $15,000 per month beginning October 1, 2004, and an annual bonus determined by PalWeb's Board of Directors in an amount not less than 50% of the annual bonus to be received by PalWeb's Chief Executive Officer. Also pursuant to the employment agreement, PalWeb granted to Mr. Cogan a warrant to purchase 1,250,000 shares of PalWeb's common stock at an exercise price of $0.50 per share. The warrant became vested with respect to 25% of the shares underlying the warrant on August 1, 2004, and will vest with respect to 25% of the shares underlying the warrant on each September 30th of 2005, 2006 and 2007, respectively, and may be exercised in whole or in part until September 13, 2013. SALES OF UNREGISTERED SECURITIES TO ACCREDITED INVESTORS IN NOVEMBER OF 2004 Effective November 30, 2004, PalWeb privately placed with certain accredited investors 8,920,587 shares of its common stock, par value $0.0001 per share ("Common Stock"), and warrants to purchase an additional 1,200,638 shares of Common Stock (the "Warrants"). The aggregate sales price was $3,122,206, of which $1,450,000 was paid in cash, $925,000 was paid through the cancellation of a like amount of advances made by third parties to PalWeb, $24,802 13 was paid through the cancellation of a like amount of accounts payable of PalWeb to third parties, and $500,000 and $223,124 was paid through the cancellation of a like amount of indebtedness of PalWeb to Warren Kruger, PalWeb's President and Chief Executive Officer, and Robert Rosene, a director of PalWeb, respectively. Pursuant to the terms of the securities purchase agreements entered into with the accredited investors, Palweb agreed to cause a registration statement relating to the common stock and the common stock underlying the Warrants to be filed with the SEC. The Warrants are immediately exercisable at exercise prices of $0.6625, $0.795 and $0.9275 per share for 471,279, 392,732 and 336,627 shares, respectively, and contain anti-dilution protection in certain events. The offer and sale of the shares of the Common Stock and Warrants was not registered under the Securities Act of 1933, as amended, in reliance upon the exemption from the registration requirements of that act provided by Section 4(2) thereof and Regulation D promulgated by the Securities and Exchange Commission thereunder. Each of the investors in the private placement is a sophisticated accredited investor with the experience and expertise to evaluate the merits and risks of an investment in the Common Stock and Warrants and the financial means to bear the risks of such an investment, and was provided access to all of the material information regarding PalWeb that such investor would have received if the offer and sale of the securities had been registered. AGREEMENT WITH PALWEB'S CHIEF FINANCIAL OFFICER, ROBERT H. NELSON On January 7, 2005, PalWeb entered into an employment agreement with PalWeb's Chief Financial Officer, Robert H. Nelson, which was effective as of November 1, 2004, and has an initial term of 30 months. Pursuant to the employment agreement, Mr. Nelson is entitled to receive a base salary of $15,245 per month and an annual bonus determined by PalWeb's Board of Directors in an amount not less than $65,000 per year after PalWeb has met certain financial thresholds. Also pursuant to the employment agreement and upon Mr. Nelson relocating to Tulsa, Oklahoma, PalWeb will grant to Mr. Nelson an option to purchase up to 1,000,000 shares of PalWeb's common stock at an exercise price of $0.50 per share in accordance with the terms of PalWeb's Stock Option Plan. The option will vest with respect to 50% of the shares underlying the warrant on the date that Mr. Nelson relocates to Tulsa and with respect to another 50% on the date 30 months thereafter. NOTICE OF DEFAULT AND ACCELERATION RECEIVED FROM GREYSTONE PLASTICS On December 23, 2004, GSM received a notice of default from Greystone Plastics relating to the Secured Note, which provides that, if any principal due under the Secured Note is not paid within ten days of when the same becomes due, the holder may, without notice, declare all of the unpaid balance of that certain Senior Secured Promissory Note dated September 3, 2003, issued by GSM to Greystone Plastics in the principal amount of $5,000,000 (the "Secured Note") to be immediately due. In the notice, GSM was informed by Greystone Plastics that GSM was in default since it had failed to make timely payments under the Secured Note and, unless GSM paid all amounts owed by it under the Secured Note and that certain Wraparound Promissory Note dated September 3, 2003, issued by GSM to Bill Hamilton in the principal amount of $799,454.06 (the "Wraparound Note") on or before January 8, 2005, Greystone Plastics would exercise its rights under the security agreement between GSM and Greystone Plastics relating to the Secured 14 Note. The total amount of principal and interest owed by GSM under the Secured Note and the Wraparound Note is approximately $4,576,000 as of November 30, 2004. Although GSM believes that it has a defense to its failure to make timely payments under the Secured Note, on January 3, 2005, GSM and Greystone Plastics entered into a letter agreement pursuant to which GSM agreed to pay all amounts owed by it under the Secured Note and Wraparound Note on or before March 8, 2005. AGREEMENT BETWEEN SUBSIDIARY OF PALWEB AND GREYSTONE PLASTICS, INC. On January 3, 2005, one of PalWeb's wholly owned subsidiaries, GSM, entered into a letter agreement with Greystone Plastics, pursuant to which GSM agreed to pay, on or before March 8, 2005, all amounts owed by it under and pursuant to the Secured Note and the Wraparound Note. As stated above, the total amount of principal and interest owed by GSM under the Secured Note and the Wraparound Note is approximately $4,576,000 as of November 30, 2004. ITEM 6. EXHIBITS 10.1 Employment Agreement dated as of August 1, 2004, by and between PalWeb and Agreement with Marshall S. Cogan (submitted herewith). 10.2 Employment Agreement dated as of November 1, 2004, by and between PalWeb and Agreement with Robert H. Nelson (submitted herewith). 10.3 Form of Securities Purchase Agreement entered into between PalWeb and certain accredited investors in connection with November 2004 private placement (submitted herewith). 10.4 Letter Agreement dated January 3, 2005, by and between Greystone Manufacturing, L.L.C., and Greystone Plastics, Inc. (submitted herewith). 11.1 Computation of Loss per Share is in Note 3 in the Notes to the financial statements. 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-B, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith). 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-B, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (submitted herewith). 15 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith). 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (submitted herewith). 16 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be singed on its behalf by the undersigned, thereunto duly authorized. PALWEB CORPORATION -------------------------------- (Registrant) Date: January 19, 2005 /s/ Robert H. Nelson -------------------------------- Chief Financial Officer 17 EX-10.1 2 exh10-1_13198.txt COGAN EMPLOYMENT AGREEMENT EXHIBIT 10.1 ------------ PalWeb Corporation 1613 East 15th Street Tulsa, Oklahoma 74120 August 1, 2004 Marshall S. Cogan 390 Park Avenue, 2nd Floor New York, New York 10022 Dear Mr. Cogan: This letter of agreement (this "Letter of Agreement") sets forth the agreement of Marshall S. Cogan ("Cogan") and PalWeb Corporation (the "Company"), a corporation organized under the laws of the State of Oklahoma, with respect to the contemplated business relationship between the Company and Cogan. The Company and Cogan hereby agree as follows: 1. Cogan shall serve as the Non-Executive Chairman of the Company's board of directors (the "Board") and shall perform such other services as the Company may from time to time request which Cogan agrees to undertake. It is contemplated that such services include but are not limited to assisting the Company in seeking financing opportunities, developing relationships with banking and other commercial/financial institutions developing marketing opportunities for the Company's product and the development of potential acquisition candidates for the Company. Cogan shall perform these services on behalf of the company and shall coordinate his efforts with those of Mr. Kruger ("Kruger"), President and CEO of the Company. The Company has provided an office for Cogan at its headquarters in Tulsa, Oklahoma; however, Cogan shall at his option and expense office primarily in the New York metropolitan area, but will travel as required in connection with the services to be provided by him hereunder. 2. The term of the this Letter of Agreement (the "Term") shall begin on the date hereof (the "Effective Date") and end on July 13, 2007 (the "Expiration Date"), unless sooner terminated as provided herein; provided, however, that this Letter of Agreement shall continue for a minimum of three (3) years and thereafter from year to year following the Expiration Date unless the Board or Cogan elects otherwise, by giving notice of termination of this Letter of Agreement at least six months prior to the Expiration Date (as such date may be extended from time to time). Notwithstanding anything in this Letter of Agreement to the contrary, the term of this Letter of Agreement shall expire immediately and the Letter of Agreement and Warrant Agreement ("Annex B") shall become null and void in the event that either the Private Placement investments by Cogan totaling $500,000 as set forth in paragraph 8 fails to occur regardless of reason or if Cogan is terminated for any of the following reasons: (i) A refusal or material failure (as determined by the Company) of Cogan to perform the duties required of him in his position or gross negligence in the performance of those duties; (ii) Theft, embezzlement, willful misconduct on the part of Cogan or any act by Cogan which could materially injure the reputation or business of the Company (as determined by the Company) or of another employee of the Company; or (iii) Material violation of the provisions of this Agreement. The termination of the Warrant Agreement and the Letter of Agreement shall be the only consequence of Cogan not investing his $500,000 in the Private Placement. 3. The Company shall pay to Cogan a base salary of $10,000 per month through September 2004 and beginning October 1, 2004 such base salary shall be $15,000 per month. 4. Cogan shall be eligible to receive an annual bonus payment to be determined by the Board (excluding Cogan) with respect to any fiscal year completed during the Term, based on an evaluation by the Board of Cogan's performance of his duties hereunder; provided, however, that in no event shall such bonus payment be less than fifty percent (50%) of the bonus paid to Kruger for the relevant year. 5. The Company shall allow Cogan and his spouse to participate in an employee health and insurance benefit plan on the same terms and conditions as Kruger. 6. The Company shall provide Cogan with (a) a PalWeb American Express or Visa credit card and (b) an allowance thereunder of $3000 per month to cover all entertainment expenses incurred by him on behalf of the Company Travel, hotel and logistics expenses are separate from the entertainment allowance and shall be reimbursed by the Company upon receipt of documentation for all such reasonable expenses. 7. Cogan covenants and agrees that he does not and will not seek control of the Company, whether directly or indirectly, for a period of ten (10) years from the date hereof and acknowledges and agrees that the President and CEO shall manage the Company and nominate members to the Company's Board of Directors. As further consideration for Cogan's covenant and agreement "not to seek control of the Company" the Company shall take all actions necessary to (a) cause the election of Cogan as of the date hereof to the position of Non-Executive Chairman of the Board, (b) cause Cogan's re-election as Non-Executive Chairman of the Board at each subsequent annual meeting of the Company's shareholders (including, without limitation, obtaining any requisite shareholder approvals) and (c) obtain any requisite consents of the Board and the holders of any of the Company's debt or equity securities to the transactions contemplated by this Letter of Agreement. The Company represents that as of the date hereof it has procured such consents verbally from Mr. Paul A. Kruger and that this Letter of Agreement will not (x) violate the Company's Certificate of Incorporation, Certificate of the Designation, Preferences, Rights and Limitations of the Company's Series 2003 Cumulative Convertible Senior Preferred Stock or bylaws or (y) cause a breach or default under (with or without the giving of notice, the lapse of time, or both) any agreement or instrument to which the Company is a party or by which it or any of its assets is bound. 8. Cogan shall invest in the Company's contemplated private placement transaction (the "Private Placement") on the same terms and conditions as the other investors in the Private Placement pursuant to a Subscription Agreement in the form attached hereto as Annex A. Such investment shall be made as follows: a total of $500,000 by October 2004. It is further agreed that Cogan will purchase shares in the private placement at the same price terms and conditions as the other investors. 9. The Company shall grant to Cogan warrants to acquire 5% of the issued and outstanding shares of the Company's common stock (the "Common Stock"), calculated on a fully-diluted basis after giving effect to (a) the exercise, conversion and exchange into Common Stock of all exercisable, -2- convertible and exchangeable securities and (b) the Private Placement, the principal terms and conditions of which shall be as follows: (i) the Warrants for 1,250,000 PalWeb Shares shall vest twenty-five percent (25%) on the date hereof, twenty-five percent (25%) on September 30, 2005, twenty-five percent (25%) on September 30, 2006 and twenty-five percent (25%) on September 30, 2007 and upon vesting shall be immediately exercisable and shall have a term which expires on September 30, 2013; (ii) the exercise price of the Warrants (which may be paid in the form of cash or pursuant to a "cashless" exercise) shall be as follows: $0.50 per Share until expiration on September 30, 2013. (iii) the shares of Common Stock underlying the Warrants shall be entitled to the benefit of customary registration rights and indemnification and contribution in connection therewith. The Company shall execute the Form of Warrant to be attached hereto as Annex B. 10. This Letter of Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, written or oral, with respect thereto. Any term of this Letter of Agreement may be amended and the observance of any term of this Agreement may be waived, only by an instrument in writing and signed by the party against whom such amendment or waiver is sought to be enforced. This Agreement shall bind and inure to the benefit of and be enforceable by the parties hereto and their respective successors, heirs, legal representatives and permitted assigns. If an ambiguity or question of intent or interpretation arises with respect to the terms hereof, this Agreement will be construed as if drafted jointly by the parties and no presumption or burden of proof will arise favoring or disfavoring any party because of the authorship of any provision of this Agreement. 11. This Letter of Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Oklahoma, without regard to the conflicts of laws principles thereof. Any action to enforce the terms of this Letter of Agreement may be brought in Oklahoma or United States Federal District Court of the Northern District of Oklahoma located in the County of Tulsa, and each of the parties to this Letter of Agreement hereby irrevocably consents to the jurisdiction of any such court over its person, and waives any defenses based upon improper venue, inconvenient forum or lack of personal jurisdiction. Each of the parties to this Letter of Agreement hereby irrevocably consents to service of process in any such action by delivery to such party by any of the methods set forth in paragraph 13 hereof. 12. All notices, requests and other communications provided for or permitted to be given under this agreement must be in writing and shall be given by personal delivery, by certified or registered U.S. mail (postage prepaid, return receipt requested), by a nationally recognized overnight delivery service for next day delivery, or by facsimile transmission, as follows (or to such other address as any party may give in a notice given in accordance with the provisions hereof): if to the Company, to PalWeb Corporation, 1613 East 15th Street, Tulsa, Oklahoma 74120, Fax: 214-745-4578, Attn: Warren Kruger; with a copy to William W. Pritchard, 320 South Boston Avenue, Suite 400, Tulsa, Oklahoma 74103 (when copy does not constitute notice) -3- if to Cogan, to Marshall S. Cogan, 390 Park Avenue, 2nd Floor, New York, New York 10022, Fax: (212) 271-3638 (with a copy (which copy does not constitute notice) to Steven H. Scheinman, Esq., Akin Gump Strauss Hauer & Feld LLP, 590 Madison Avenue, New York, New York 10022, Fax: (212) 872-1002. 13. The provisions of this Agreement will be deemed severable and the invalidity or unenforceability of any provision will not affect the validity or enforceability of the other provisions hereof; provided that if any provision of this Agreement, as applied to any party or to any circumstance, is judicially determined not to be enforceable in accordance with its terms, the parties agree that the court judicially making such determination may modify the provision in a manner consistent with its objectives such that it is enforceable, and/or to delete specific words or phrases, and in its modified form, such provision will then be enforceable and will be enforced. 14. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. If you are in agreement with the foregoing, please so indicate by signing a copy of this Letter of Agreement in the space set forth below and returning such signed copy to the Company, whereupon this Letter of Agreement shall constitute a binding agreement as of the date hereof. Very truly yours, PALWEB CORPORATION By: /s/ Warren Kruger ----------------------------------------- Name: Warren Kruger Title: President and Chief Executive Officer ACCEPTED AND AGREED TO: /s/ Marshall S. Cogan - --------------------------------- Marshall S. Cogan -4- EX-10.2 3 exh10-2_13198.txt NELSON EMPLOYMENT AGREEMENT EXHIBIT 10.2 ------------ EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") shall be effective on the 1st day of November 2004 ("Effective Date") between PalWeb Corporation (the "Company") and Robert H. Nelson ("Nelson"). RECITALS WHEREAS, the Company has determined that Nelson's services to the Company will be of value to the Company, and accordingly, the Company desires to enter into this Agreement with Nelson as set forth herein in order to secure such services; WHEREAS, Nelson hereby represents and warrants to the Company that he is free to work for the Company without violation of any other agreements or employment to which Nelson is a party; WHEREAS, Nelson desires to serve as an employee of the Company on the terms set forth herein; NOW THEREFORE, for and in consideration of Nelson's employment by the Company, the promises and the mutual agreements set forth herein, Nelson and the Company agrees as follows: 1. Employment Duties. (a) The Company agrees to employ Nelson as its Director of Finance with the duties and responsibilities generally associated with such position, and such other reasonable additional responsibilities as may be added to Nelson's duties from time-to-time by Warren F. Kruger ("Kruger"), the President and CEO of the Company. Nelson shall report directly to Kruger. (b) Nelson shall (i) diligently follow and implement all policies and decisions communicated by Kruger; (ii) timely prepare business plans, lease/finance plans and will be in charge of and prepare all financial reports and accountings reports as may be requested; and, (iii) devote all of his professional time, attention and efforts to the business and affairs of the Company, subject to vacations and to reasonable periods of illness and/or disability consistent with the Company's policy and applicable law. (See Attachment A) (c) The work product to be produced hereunder by Nelson shall be considered a work made for hire as defined in the Copyright Act of 1976, and is therefore owned exclusively by the Company which vests copyright ownership of works for hire in the Company for whom the work is prepared. If any works hereunder shall be found not to be works made for hire, or ownership does not otherwise automatically vest in the Company, Nelson shall immediately disclose and assign to Company any right, title and interest in any inventions, models, processes, patents, copyrights and improvements thereon relating to services or processes or products of Company that Nelson conceives or acquires during the employment relationship with Company or that Nelson may conceive or acquire, during the period of (1) one year after termination of this Agreement. 2. Term. The initial term of employment shall be thirty months (30) ("Initial Term"). The Initial Term shall begin November 1, 2004 and shall have two (2) automatic thirty (30) month renewal periods; however, the terms shall not renew in the event that either party gives the other party written notice of non-renewal ("Notice") at least ninety (90) days prior to the end of the then-current term. In the event either party provides Notice or terminates this Agreement pursuant to Section 4, Nelson shall diligently assist the Company in transitioning all matters and work for which he was responsible as the Company shall direct. 3. Compensation. (a) Nelson shall be paid a monthly compensation of $15,245/month plus travel and entertainment expenses. Nelson will be obligated to work approximately four (4) days a week either at the Company's headquarters in Tulsa, Oklahoma, or at the Company's plant in Bettendorf, Iowa. (b) Not later than the end of the first One Hundred Twenty (120) days ("Move In Date") of this Agreement Nelson will have moved his residence to Tulsa, Oklahoma. (c) The Company will reimburse Nelson for moving expenses to Tulsa and incurred by Nelson based on the average cost of three (3) written bids. (d) Upon the Move In Date, Nelson will receive an option to purchase up to 500,000 shares of the Company Common Stock immediately and 500,000 shares thirty (30) months thereafter for a total of 1,000,000 shares. The option price shall be $0.50/share and related terms and conditions shall be set in accordance with the Company's stock option plan. (e) At such time that either the gross sales as booked by the Company exceed $1.2 million per month for at least six (6) consecutive months or the Company secures $25,000,000 of additional debt and/or equity financing, Nelson will receive an annual bonus of not less than $65,000 per year. (f) Throughout the term of the Agreement, Nelson will in addition be entitled to related benefits as provided by the Company to other management of the Company such as: (i) The Company will provide health insurance benefits for Nelson and his dependents on the same basis of the other Company employees. (ii) Nelson shall, upon submission of written documentation of business related expenses incurred, be reimbursed for any and all necessary, customary and usual expenses, as approved by Kruger -2- and incurred by Nelson on behalf of Company in the normal course of business. (iii) Nelson shall receive four (4) weeks of paid vacation. Accrued unused vacation time shall expire at the end of each calendar year. (iv) The Base Salary and any bonuses, allowance payments, and all other payments shall be subject to withholding for all applicable taxes as required under applicable federal and state laws. (v) Upon moving to Tulsa, Oklahoma, Nelson shall be reimbursed up to $600/month for lease car expense related to his company car. 4. Termination. This Agreement and Nelson's employment can be terminated by the President of the Company on behalf of the Company as follows: (a) Upon the death of Nelson; or (b) Upon Nelson's permanent disability (which shall mean his inability to perform his duties and responsibilities under this Agreement for a period of at least six (6) consecutive months); or (c) For Cause immediately and without notice. Cause means either the joint or several conduct of Nelson which amounts to (i) fraud, dishonesty or breach of fiduciary duty against the Company; (ii) willful misconduct, insubordination, repeated refusal to follow the reasonable directions of the President or violation of law in the course of performance of duties with the Company; (iii) repeated absences from work without a reasonable excuse; (iv) intoxication with alcohol or drugs while on the Company's premises during regular business hours; (v) a conviction or plea of guilty or nolo contendere to a felony or a crime involving dishonesty: (vi) a material breach or violation of the terms of his Agreement, the Company's general employment policies or any other agreement to which Nelson and the Company are party; or (vii) any malfeasance or misfeasance by Nelson of his duties to the Company that is not corrected within ten (10) calendar days after notice thereof to Nelson; or (a) (d) At anytime during the Pre-Move Period. 5. Effects of Termination. Upon termination: (a) Pursuant to Section 4 (a)(b), the Company shall pay Nelson the Base Salary through the effective date of termination and thereafter at a rate of 25% of the Base Salary through the conclusion of the then current term of the Agreement. All other benefits, bonuses and obligations of the Company to Nelson shall terminate upon the effective date of termination. -3- (b) Pursuant to Section 4 (c), Nelson shall be entitled to no further payments of the Base Salary or any other amounts or any benefits under his Agreement and all then accrued but unpaid amounts and benefits shall be immediately paid, and no further amounts or benefits shall accrue. (c) Pursuant to Section 4(d) the Company shall pay Nelson within ten (10) days of termination a $30,000 lump sum payment (three (3) months salary at $10,000/month). (d) Notwithstanding the above or the cause of termination Nelson's 1,000,000 option shares shall vest as scheduled. Accordingly, as further consideration for the compensation to be paid Nelson pursuant to the Nelson covenants and agrees that he will not directly or indirectly run, advise or otherwise participate in the plastic pallet business in the U.S. during the term of the Agreement and for a period of one (1) year thereafter. 6. Severability. The parties agree that each of the provisions included in this Agreement is separate, distinct, and severable from the other provisions of these Agreement, and that the invalidity or unenforceability of any Agreement provision shall not affect the validity or enforceability of any other provision of these Agreement. Further, if any provision of this Agreement 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 modified 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 their 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. 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 -4- 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. 11. 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 his respective successors, heirs, executors, administrators and permitted assigns. 12. Entire Agreement. This 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 Employee 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. 13. Confidentiality. The terms, conditions and existence of this Agreement shall be confidential. IN WITNESS WHEREOF, Nelson and the Company have executed and delivered this Agreement as of the date first shown above. THE COMPANY: EMPLOYEE: PALWEB CORPORATION By: /s/ Warren Kruger By: /s/ Robert H. Nelson --------------------------------- ------------------------- Warren F. Kruger, President Robert H. Nelson -5- EX-10.3 4 exh10-3_13198.txt SECURITIES PURCHASE AGREEMENT EXHIBIT 10.3 ------------ SECURITIES PURCHASE AGREEMENT PALWEB CORPORATION 1613 E. 15th Tulsa, Oklahoma 74120 ____________, 2004 TO: _______________________ _______________________ _______________________ The undersigned, PalWeb Corporation, an Oklahoma corporation (the "Company"), hereby agrees with you as follows, effective as of the date above written: 1. Authorization and Sale of the Securities. 1.1 Authorization. The Company represents that it has authorized the issuance to you pursuant to the terms and conditions hereof of: (a) _____________shares of its common stock, par value $0.0001 per share ("Common Stock"); and (b) a warrant (the "Warrant") to purchase ____________ shares of the Company's Common Stock ("Warrant Shares") in accordance with the terms set forth in the form of the Common Share Warrant Certificate attached hereto as Exhibit A. The shares of Common Stock and Warrant to be purchased pursuant to the terms of this Agreement are collectively referred to herein as the "Securities." 1.2 Sale. Subject to the terms and conditions hereof, on the Purchase Date (defined below), the Company shall issue and sell to you and you shall purchase from the Company, the Securities for an aggregate purchase price of $_____________ (the "Purchase Price"). 2. Payment of Purchase Price; Delivery. Upon the execution of this Agreement, you shall deliver to the Company wire funds or a check payable to the Company in the amount of the Purchase Price. Upon receipt of the Purchase Price from you (the "Purchase Date"), the Company shall promptly issue and deliver to you the Securities. 3. Representations and Warranties of the Company. The Company hereby represents and warrants to you as follows: 3.1 Organization and Standing; Articles and Bylaws. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of Oklahoma and is in good standing under such laws. The Company is qualified, licensed or domesticated as a foreign corporation in all jurisdictions where the nature of its business conducted or the character of its properties owned or leased makes such qualification, licensing or domestication necessary at this time except in those jurisdictions where the failure to be so qualified or licensed and in good standing does not and will not have a materially adverse effect on the Company, the conduct of its business or the ownership or operation of its properties. The Company has furnished you with copies of its Certificate of Incorporation and Bylaws. Said copies are true, correct and complete and contain all amendments through the date of this Agreement. 3.2 Corporate Power. The Company has the requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company has now, and will have at the Purchase Date, all requisite legal and corporate power to enter into this Agreement, to sell the Securities hereunder, and to carry out and perform its obligations under the terms of this Agreement. 3.3 Subsidiaries. The Company has two wholly owned subsidiaries: Plastic Pallet Production, Inc., a Texas corporation ("PPP"), and Greystone Manufacturing, LLC, an Oklahoma limited liability company ("Greystone"). Other than the shares of PPP and the membership interests of Greystone, the Company does not own, directly or indirectly, shares of stock or other interests in any other corporation, association, joint venture or business organization. 3.4 Capitalization. The authorized capital stock of the Company consists of 100,000,000 shares of common stock and 20,750,000 shares of preferred stock, par value $0.0001 per share. There are issued and outstanding approximately 12,790,451 shares of common stock and 50,000 shares of Series 2003 Cumulative Convertible Senior Preferred Stock (the "2003 Preferred Stock"). The issued and outstanding shares of common stock and 2003 Preferred Stock are fully paid and nonassessable. Except as disclosed in the Disclosure Materials (as defined in Section 4.1 below), there are no outstanding options, warrants or other rights, including preemptive rights, entitling the holder thereof to purchase or acquire shares of common stock or 2003 Preferred Stock of the Company. 3.5 Authorization. (a) All corporate action on the part of the Company, its officers, directors and shareholders necessary for the sale and issuance of the Securities pursuant hereto and the performance of the Company's obligations hereunder has been taken or will be taken prior to the Purchase Date. This Agreement is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting enforcement of creditors' rights, and except as limited by application of legal principles affecting the availability of equitable remedies. 2 (b) The Securities, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that such Securities and the Warrant Shares will be subject to restrictions on transfer under state and/or federal securities laws, and as may be required by future changes in such laws. (c) No shareholder of the Company has any right of first refusal or any preemptive rights in connection with the issuance of the Securities or of any other capital stock of the Company. 3.6 Compliance with Instruments. The Company is not in violation of any terms of its Certificate of Incorporation or Bylaws, or, to the knowledge of the Company, any judgment, decree or order applicable to it. The execution, delivery and performance by the Company of this Agreement, and the issuance and sale of the Securities pursuant hereto, will not result in any such violation or be in conflict with or constitute a default under any such term, or cause the acceleration of maturity of any loan or material obligation to which the Company is a party or by which it is bound or with respect to which it is an obligor or guarantor, or result in the creation or imposition of any material lien, claim, charge, restriction, equity or encumbrance of any kind whatsoever upon, or, to the knowledge of the Company, give to any other person any interest or right (including any right of termination or cancellation) in or with respect to any of the material properties, assets, business or agreements of the Company. 3.7 Litigation, etc. Except as described in the Disclosure Materials, there are no actions, proceedings or, to the knowledge of the Company, investigations pending which might result in any material adverse change in the business, prospects, conditions, affairs or operations of the Company or in any of its properties or assets, or in any impairment of the right or ability of the Company to carry on its business as proposed to be conducted, or in any material liability on the part of the Company, or which question the validity of this Agreement or any action taken or to be taken in connection herewith. 3.8 Governmental Consent, etc. Except as may be required in connection with any filings required under the federal securities laws and/or the securities laws of any state due to the offer and sale of the Securities pursuant to this Agreement, no consent, approval or authorization of, or designation, declaration or filing with, any governmental unit is required on the part of the Company in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities or the consummation of any other transaction contemplated hereby. 3.9 Securities Registration and Filings. The outstanding shares of the Company's Common Stock are registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has filed all reports required by Section 13 or 15(d) of the Exchange Act since June 10, 1999. All of such reports were, at the time they were filed, complete and accurate in all material respects and did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. 3 4. Representations and Warranties of Purchaser and Restrictions on Transfer Imposed by the Securities Act. 4.1 Representations and Warranties by Purchaser. You represent and warrant to the Company as follows: (a) The Company has provided to you: a copy of the Company's Annual Report on Form 10-KSB for year ended May 31, 2003; copies of the Company's Quarterly Reports on Form 10-QSB for the periods ended August 31, 2003, November 30, 2003 and February 29, 2004; copies of the Company's Current Reports on Form 8-K or Form 8-K/A, as the case may be, filed by the Company on September 23, 2003, January 12, 2004, January 20, 2004, January 27, 2004, February 18, 2004, March 24, 2004 and July 19, 2004; and, a supplement describing certain aspects of this offering. The said materials are referred to herein collectively as the "Disclosure Materials." (b) You are experienced in evaluating and investing in companies such as the Company. Further, you understand that the Securities purchased hereby are of a highly speculative nature and could result in the loss of your entire investment. (c) You have been furnished by the Company with all information requested concerning the proposed operations, affairs and current financial condition of the Company. Such information and access have been available to the extent you consider necessary and advisable in making an intelligent investment decision. In addition, you have received and reviewed copies of the Disclosure Materials and have had the opportunity to discuss the Company's business, management and financial affairs with its Chief Executive Officer. You understand that such discussions, as well as the Disclosure Materials and any other written information issued by the Company, were intended to describe certain aspects of the Company's business and prospects which it believes to be material but were not necessarily a thorough or exhaustive description. (d) The Securities to be acquired by you will be acquired, solely for your account, for investment purposes only and not with a view to the resale or distribution thereof, are not being purchased for subdivision or fractionalization thereof, and you have no contract, undertaking, agreement or arrangement with any person to sell or transfer such Securities to any person and do not intend to enter into such contract or arrangement. (e) You understand that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), nor are they registered or qualified under the blue sky or securities laws of any state, by reason of their issuance in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Sections 3(b) or 4(2) of the Securities Act and available exemptions from the registration requirements of any applicable state securities laws. You further understand that the Securities must be held by you indefinitely and you must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from registration. (f) You have the full right, power and authority to enter into and perform this Agreement, and this Agreement constitutes a legal, valid and binding obligation upon you 4 except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting enforcement of creditors' rights, and except as limited by application of legal principles affecting the availability of equitable remedies. (g) You are able to bear the full economic risk of your investment in the Securities, including the risk of a total loss of your investment in connection therewith. You are an accredited investor as that term is defined in Rule 501(a) of Regulation D promulgated by the Securities and Exchange Commission (the "SEC"). (h) You were not offered the Securities by means of general solicitations, publicly disseminated advertisements or sales literature. 4.2 Legends. Each instrument representing the Securities and the Warrant Shares shall be endorsed with the legend set forth below: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS (I) THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES ACT, OR (II) THE COMPANY SHALL HAVE BEEN FURNISHED AN OPINION OF COUNSEL, SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER ANY OF SUCH ACTS. In addition, each instrument representing the Securities and the Warrant Shares shall be endorsed with any other legend required by any state securities laws. The Company need not register a transfer of legended Securities and the Warrant Shares, and may also instruct its transfer agent not to register the transfer of the Securities and the Warrant Shares, unless one of the conditions specified in each of the foregoing legends is satisfied. 5. Indemnification by Purchaser. You acknowledge and understand that the Company has agreed to offer and sell the Securities to you based upon the representations and warranties made by you in this Agreement, and you hereby agree to indemnify the Company and to hold the Company and its incorporators, officers, directors and professional advisors harmless against all liability, costs or expenses (including attorneys' fees) arising by reason of or in connection with any misrepresentation or any breach of such representations and warranties by you, or arising as a result of the sale or distribution of any Securities by you in violation of the Securities Act or other applicable law. 6. Registration Rights. 6.1 Filing of Registration Statement. The Company shall use commercially reasonable 5 efforts to cause a registration statement relating to, among other things, the Common Stock sold to you pursuant to this Agreement and the Warrant Shares to be filed and to be declared effective on or before December 31, 2004 (the "Registration Statement") and, thereafter, the Company shall use commercially reasonable efforts to cause the Registration Statement to remain effective until June 30, 2005. The Registration Statement shall be prepared in accordance with the requirements of Form SB-2 under the Securities Act or any equivalent thereof. The Company shall pay for the cost of the Registration Statement (excluding underwriter discounts and commissions, if any, and the fees and expenses of your counsel). 6.2 Blue Sky Qualification. The Company shall use commercially reasonable efforts to qualify the Common Stock sold to you pursuant to this Agreement and the Warrant Shares under the securities or "Blue Sky" laws of such states of the United States of America as you may reasonably request. 6.3 Obligations of Company Relating to the Registration Statement. (a) Following the filing of the Registration Statement by the Company, the Company agrees to notify you as soon as practicable after it becomes aware that Registration Statement has become effective or any supplement to any prospectus forming part of the Registration Statement has been filed. (b) As soon as practicable after the effective date of the Registration Statement, the Company shall furnish you with such numbers of copies of the Registration Statement and the related prospectus as you may from time to time reasonably request. (c) If, during the period when the Registration Statement is effective, any event occurs as a result of which the prospectus included in the Registration Statement would include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, not misleading, or it shall be necessary to amend or supplement such prospectus to comply with applicable law, the Company will notify you thereof and upon your request: (i) prepare and file under the Securities Act such amendments and supplements as may be necessary to keep available a prospectus covering such registered stock meeting the requirements of the Securities Act; and (ii) furnish to you such numbers of copies of the Registration Statement and prospectus, as amended or supplemented, as may reasonably be requested from time to time. (d) The Company agrees to notify you promptly of any request by the SEC for the amendment or supplementation of the Registration Statement or prospectus, or for additional information. (e) The Company shall use commercially reasonable efforts to prepare and file with the SEC promptly upon your request any amendment of, or supplement to, the Registration Statement or prospectus relating to information respecting you that, in the opinion of your counsel, may be necessary or advisable in connection with the distribution of the Common Stock owned by you and covered by the Registration Statement. (f) In the event that the Company receives notice or obtains knowledge of the issuance of a stop order by the SEC suspending the effectiveness of the Registration 6 Statement or of the initiation or threat of any proceeding for that purpose, the Company shall promptly advise you of such circumstances and shall use commercially reasonable efforts to prevent the issuance of any stop order and to obtain the withdrawal of any stop order in the event that one is issued. 6.5 Obligations of Purchaser Relating to the Registration Statement. (a) You shall furnish to the Company such information as may be reasonably requested by the Company in connection with the preparation and filing of the Registration Statement, any prospectus contained in the Registration Statement and any amendment thereof or supplement thereto. (b) You will cooperate with the Company as reasonably requested by the Company in connection with causing the Registration Statement to become and remain effective as contemplated in this Agreement. (c) You agree that at any time and from time to time the Company may suspend your use of any prospectus contained in the Registration Statement for a period not to exceed 30 calendar days by providing written notice to you provided an event has occurred and is continuing as a result of which the Registration Statement would, in the Company's judgment, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. 6.6 Indemnification Relating to the Registration Statement. (a) The Company agrees that it will: (i) indemnify and hold harmless you in connection with any losses, claims, damages, expenses or liabilities to which you become subject, whether under the Securities Act or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions in respect thereof) are caused by (A) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any prospectus contained therein, any amendment thereof or supplement thereto or any documents incorporated by reference into any of the foregoing; or (B) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and (ii) reimburse you for any legal or other expenses reasonably incurred by you in connection with investigating or defending any such loss, claim, damage, expense, liability or action arising under clause (i) of this Section 6.6(a); provided, however, the Company will not be liable under clauses (i) or (ii) of this Section 6.6(a) to the extent that any such loss, claim, damage, expense or liability arises out of, or is based upon, an untrue statement or alleged untrue statement or omission, or alleged omission, made in reliance upon, and in conformity with, written information furnished by you specifically for use in the preparation of the Registration Statement or prospectus contained therein or amendment thereof or supplement thereto, or is attributable your failure to carry out your obligations under this Agreement. (b) You agree that you will: (i) indemnify and hold harmless the Company, each of its directors and officers who have signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages, expenses or liabilities (or actions in respect thereof) caused by (A) any 7 untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any prospectus contained in the Registration Statement, or any amendment thereof or supplement thereto; or (B) any omission or alleged omission to state a material fact required to be stated therein, or necessary to make the statement contained therein not misleading; in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission, or alleged omission, was so made in reliance upon, and in conformity with, written information furnished by you specifically for use in the preparation of the Registration Statement or prospectus contained therein or amendment thereof or supplement thereto, or is attributable your failure to carry out your obligations under this Agreement; and (ii) reimburse any legal and other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, expense, liability or action. (c) Any party seeking to be indemnified under the provisions of this Section 6.6 shall give the indemnifying party prompt written notice of any loss, claim, damage, expense, liability or action subject to this Section 6.6 and shall, to the extent the indemnified party is not adversely affected, cooperate fully with the indemnifying party in defense and settlement of said loss, claim, damage, expense, liability or action. The indemnifying party shall not have the right to settle any such loss, claim, damage, expense, liability or action without the written consent of the indemnified party, which consent shall not be unreasonably withheld. In the event of the assumption of the defense by an indemnifying party, such indemnifying party shall not be liable for any further legal or other expenses subsequently incurred by the indemnified party in connection with such defense unless otherwise provided herein; provided, however, the indemnified party shall have the right to participate in such defense, at its own cost. If an indemnifying party refuses or fails at any time to defend an indemnified party against any loss, claim, damage, expense, liability or action pursuant to this Section 6.6, the indemnified party shall have the right to undertake the defense and to compromise or settle such loss, claim, damage, expense, liability or action on behalf of, for the account of and at the risk of such indemnifying party. 7. Miscellaneous. 7.1 Successors and Assigns. All the provisions of this Agreement by or for the benefit of the parties shall bind and inure to the benefit of respective successors and permitted assigns of each party. 7.2 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, addressed (a) if to you, at your address set forth on the first page hereof, or at such other address as you shall have furnished to the Company in writing, or (b) if to the Company, at its address set forth on the first page hereof, or at such other address as the Company shall have furnished to you in writing in accordance with this Section 7.2. 7.3 Waivers; Amendments. Any provision of this Agreement may be amended or modified with (but only with) the written consent of the Company and you. Any amendment, modification or waiver effected in compliance with this Section 7.3 shall be binding upon the Company and you. No failure or delay of the Company or you in exercising any power or 8 right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereon or the exercise of any other right or power. The rights and remedies of the Company and you hereunder are cumulative and not exclusive of any rights or remedies which each would otherwise have. 7.4 Separability. In case any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 7.5 Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the state of Oklahoma without regard to principles of conflicts of law, except as otherwise required by mandatory provisions of law. 7.6 Section Headings. The section headings used herein are for convenience of reference only and shall not be construed in any way to affect the interpretation of any provisions of this Agreement. 7.7 Entire Agreement. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties hereto with regard to the subjects hereof and thereof. 7.8 Finder's Fees. Each of the Company and you (i) represent and warrant to the other that no finder or broker has been retained by it or you in connection with the transactions contemplated by this Agreement and (ii) each hereby agrees to indemnify and to hold the other, and its respective officers, directors and controlling persons, harmless of and from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which it, or any of its employees or representatives, are responsible. 7.9 Other Documents. The parties to this Agreement shall in good faith execute such other and further instruments, assignments or documents as may be necessary or advisable to carry out the transactions contemplated by this Agreement. 7.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument, and which shall become effective when there exist copies signed by the Company and by you. [Signatures on Next Page] 9 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their duly authorized representatives effective as of the date set forth on the first page hereof. PALWEB CORPORATION By: -------------------------------------------- Warren F. Kruger, Chief Executive Officer Accepted and agreed to this ______ day of ____________, 2004. -------------------------------------------- 10 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES ACT. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS (I) THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES ACT, OR (II) THE COMPANY SHALL HAVE BEEN FURNISHED AN OPINION OF COUNSEL, SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER ANY OF SUCH ACTS. No. _____ ____________, 2004 PALWEB CORPORATION COMMON SHARE WARRANT CERTIFICATE Warrant to Purchase _________ Common Shares Expiring __________, 2009 THIS CERTIFIES THAT ____________ (the "Warrant Holder"), in consideration for entering into that certain Securities Purchase Agreement dated as of ___________, 2004 ("Purchase Agreement"), by and between the Warrant Holder and PalWeb Corporation, an Oklahoma corporation (the "Company"), at any time following the date hereof, on any Business Day on or prior to 5:00 p.m., Pacific Time, on the Expiration Date, is entitled to subscribe for and purchase from the Company, up to ____________ Common Shares (as defined in Section 1 below) at a price per Common Share equal to the Exercise Price (as defined in Section 1 below); provided, however, that the number of Common Shares issuable upon any exercise of this Warrant (as defined in Section 1 below) shall be adjusted and readjusted from time to time in accordance with Section 4 below. 1. Certain Definitions. The following terms, as used herein, have the following meanings: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with such Person. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Commission" means the Securities and Exchange Commission. "Common Share(s)" means the Company's currently authorized class of Common Stock, par value $0.0001. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Exchange Act shall include a reference to the comparable section, if any, of any such successor Federal statute. "Exercise Price" means $0.6625 with respect to up to __________ Warrant Shares, $0.795 with respect to up to ___________ Warrant Shares and $0.9275 with respect to up to ___________ Warrant Shares. "Early Expiration Date" has the meaning specified in Section 2.3 hereof. "Expiration Date" means the earlier to occur of (i) _____________, 2009, or (ii) an Early Expiration Date. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Securities Act" means the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Act shall include a reference to the comparable section, if any, of any such successor Federal statute. "Warrant" means the rights granted to the Warrant Holder pursuant to this Warrant Certificate. "Warrant Certificate" means this Common Share Warrant Certificate. "Warrant Share(s)" means the ___________ Common Shares issued or issuable upon exercise of this Warrant, as adjusted from time to time pursuant to Section 4. 2. Vesting, Exercise and Early Expiration. 2.1 Vesting. The Warrant and the Warrant Shares shall immediately vest upon the execution of this Warrant Certificate. 2.2 Exercise of Warrant. 2 (a) The Warrant Holder may exercise this Warrant by delivering to the Company a duly executed notice (a "Notice of Exercise") in the form of Annex A attached hereto, at the election of the Warrant Holder, in which the Warrant Holder shall receive from the Company the number of Warrant Shares as to which this Warrant is being exercised and shall pay to the Company the Exercise Price for each such Warrant Share by check payable to the order of the Company in an amount equal to the product of: (a) the Exercise Price times (b) the number of Warrant Shares as to which the Warrant is being exercised. (b) As soon as practicable, but not later than five (5) Business Days after the Company shall have received such Notice of Exercise and payment, the Company shall execute and deliver or cause to be executed and delivered, in accordance with such Notice of Exercise, a certificate or certificates representing the number of Common Shares specified in such Notice of Exercise, issued in the name of the Warrant Holder. This Warrant shall be deemed to have been exercised and such share certificate or certificates shall be deemed to have been issued, and such Warrant Holder shall be deemed for all purposes to have become a holder of record of Common Shares, as of the date that such Notice of Exercise and payment shall have been received by the Company. (c) The Warrant Holder shall surrender this Warrant Certificate to the Company when it delivers the Notice of Exercise, and in the event of a partial exercise of the Warrant, the Company shall execute and deliver to the Warrant Holder, at the time the Company delivers the share certificate or certificates issued pursuant to such Notice of Exercise, a new Warrant Certificate for the unexercised portion of this Warrant Certificate, but in all other respects identical to this Warrant Certificate. (d) The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, issuance and delivery of certificates for the Warrant Shares and a new Warrant Certificate, if any, except that if the certificates for the Warrant Shares or the new Warrant Certificate, if any, are to be registered in a name or names other than the name of the Warrant Holder, funds sufficient to pay all transfer taxes payable as a result of such transfer shall be paid by the Warrant Holder at the time of its delivery of the Notice of Exercise or promptly upon receipt of a written request by the Company for payment. (e) No fractional Common Shares will be issued in connection with any exercise of the Warrant, and any fractional Common Share (resulting from any adjustment pursuant to Section 4 or otherwise) in the aggregate number of Common Shares being purchased upon any exercise of the Warrant shall be eliminated. 2.3 Early Expiration. (a) In the event that the closing bid price of the Company's Common 3 Shares, as reported by the Nasdaq Stock Market, Inc., exceeds the Exercise Price for any Warrant Shares to which the Warrant Holder is entitled to receive upon exercising any portion of this Warrant for any period of 30 consecutive trading days, the Warrant shall expire with respect to such Warrant Shares on the 180th day thereafter (each, an "Early Expiration Date"); provided, however, that the Company must give prior written notice to the Warrant Holder not less than 30 days prior to any Early Expiration Date for such Early Expiration Date to be applicable to the Warrant Holder; and, provided further, that the Warrant Holder shall remain entitled to exercise this Warrant with respect to such Warrant Shares at any time up to and including the Business Day immediately preceding the applicable Early Expiration Date. (b) In the event that the Warrant Holder fails to exercise any portion of the Warrant subject to expiration in accordance with Section 2.3(a) above prior to any Early Expiration Date, all rights of the Warrant Holder under this Warrant Certificate with respect to such Warrant Shares shall cease and this Warrant shall no longer be deemed to be outstanding with respect to such Warrant Shares. 3. Validity of Warrant and Issuance of Common Shares. The Company represents and warrants that this Warrant has been duly authorized and is validly issued. The Company further represents and warrants that on the date hereof it has duly authorized and reserved, and the Company hereby agrees that it will at all times until the Expiration Date have duly authorized and reserved, such number of Common Shares as will be sufficient to permit the exercise in full of the Warrant, and that all such Common Shares are and will be duly authorized and, when issued upon exercise of the Warrant, will be validly issued, fully paid and nonassessable, and free and clear of all security interests, claims, liens, equities and other encumbrances. 4. Adjustment Provisions. The number of Warrant Shares that may be purchased upon any exercise of the Warrant, shall be subject to change or adjustment as follows: 4.1 Common Share Reorganization. If the Company shall subdivide its outstanding Common Shares into a greater number of shares, by way of share split, share dividend or otherwise, or consolidate its outstanding Common Shares into a smaller number of shares (any such event being herein called a "Common Share Reorganization"), then (a) the definition of Exercise Price shall be adjusted, effective immediately after the effective date of such Common Share Reorganization, so that each amount contained in the definition of the Exercise Price is equal to such amount multiplied by a fraction, the numerator of which shall be the number of Common Shares outstanding on such effective date before giving effect to such Common Share Reorganization and the denominator of which shall be the number of Common Shares outstanding after giving effect to such Common Shares Reorganization, and (b) the number of Common Shares subject to purchase upon exercise of this Warrant shall be 4 adjusted, effective at such time, to a number determined by multiplying the number of Common Shares subject to purchase immediately before such Common Share Reorganization by a fraction, the numerator of which shall be the number of shares outstanding after giving effect to such Common Share Reorganization and the denominator of which shall be the number of Common Shares outstanding immediately before giving effect to such Common Share Reorganization. 4.2 Capital Reorganization. If there shall be any consolidation or merger to which the Company is a party, other than a consolidation or a merger of which the Company is the continuing corporation and that does not result in any reclassification of, or change (other than a Common Share Reorganization) in, outstanding Common Shares, or any sale or conveyance of the property of the Company as an entirety or substantially as an entirety, or any recapitalization of the Company (any such event being called a "Capital Reorganization"), then, effective upon the effective date of such Capital Reorganization, the Warrant Holder shall no longer have the right to purchase Common Shares, but shall have instead the right to purchase, upon exercise of this Warrant, the kind and amount of Common Shares and other securities and property (including cash) which the Warrant Holder would have owned or have been entitled to receive pursuant to such Capital Reorganization, if the Warrant had been exercised immediately prior to the effective date of such Capital Reorganization. 4.3 Adjustment Rules. (a) Any adjustments pursuant to this Section 4 shall be made successively whenever any event referred to herein shall occur, except that, notwithstanding any other provision of this Section 4, no adjustment shall be made to the number of Warrant Shares to be delivered to the Warrant Holder (or to the Exercise Price) if such adjustment represents less than one-percent (1%) of the number of Warrant Shares previously required to be so delivered, but any lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to one-percent (1%) or more of the number of Warrant Shares to be so delivered. (b) If the Company shall take a record of the holders of its Common Shares for any purpose referred to in this Section 4, then (i) such record date shall be deemed to be the date of the issuance, sale, distribution or grant in question and (ii) if the Company shall legally abandon such action prior to effecting such action, no adjustment shall be made pursuant to this Section 4 in respect of such action. (c) As a condition precedent to the taking of any action which would require an adjustment pursuant to this Section 4, the Company shall take any action which may be necessary, including obtaining regulatory approvals or exemptions, in order that the Company may thereafter validly and legally issue as 5 fully paid and nonassessable all Common Shares which the Warrant Holder is entitled to receive upon exercise of this Warrant. 5. Transfer of Warrant. 5.1 No Transfer Without the Consent of the Company. This Warrant is personal to the Warrant Holder and this Warrant Certificate and the rights of the Warrant Holder hereunder may not be sold, assigned, transferred or conveyed, in whole or in part, except with the prior written consent of the Company. 5.2 Permitted Transfers. Upon transfer of the Warrant permitted under Section 5.1 above, the Warrant Holder must deliver to the Company a duly executed Warrant Assignment in the form of Annex B, attached hereto, with funds sufficient to pay any transfer tax imposed in connection with such assignment. Upon surrender of this Warrant to the Company, the Company shall execute and deliver a new Warrant in the form of this Warrant, with appropriate changes to reflect such assignment, in the name or names of the assignee or assignees specified in the fully executed Warrant Assignment or other instrument of assignment and, if the Warrant Holder's entire interest is not being transferred or assigned, in the name of the Warrant Holder, and this Warrant shall promptly be canceled. In connection with any transfer or exchange of this Warrant permitted hereunder, the transferring Warrant Holder shall pay all costs and expenses relating thereto, including, without limitation, all transfer taxes, if any, and all reasonable expenses incurred by the Company (including legal fees and expenses). Any new Warrant issued shall be dated the date hereof. The terms "Warrant" and "Warrant Holder" as used herein include all Warrants into which this Warrant (or any successor Warrant) may be exchanged or issued in connection with the permitted transfer or assignment of this Warrant, any successor Warrant and the holders of those Warrants, respectively. 6. Lost Mutilated or Missing Warrant Certificates. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of loss, theft or destruction, upon receipt of indemnification satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver a new Warrant Certificate of like tenor and representing the right to purchase the same aggregate number of Warrant Shares. The recipient of any such Warrant Certificate shall reimburse the Company for all reasonable expenses incidental to the replacement of such lost, mutilated or missing Warrant Certificate. 7. Miscellaneous. 7.1 Successors and Assigns. All the provisions of this Warrant Certificate by or for the benefit of the Company or the Warrant Holder shall bind and inure to the benefit of their respective successors and permitted assigns. 6 7.2 Notices. All notices, requests, demands and other communications hereunder shall be given in accordance with the terms of the Purchase Agreement. 7.3 Waivers; Amendments. Any provision of this Warrant Certificate may be amended or modified with (but only with) the written consent of the Company and the Warrant Holder. Any amendment, modification or waiver effected in compliance with this Section 7.3 shall be binding upon the Company and the Warrant Holder. No failure or delay of the Company or the Warrant Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereon or the exercise of any other right or power. The rights and remedies of the Company and the Warrant Holder hereunder are cumulative and not exclusive of any rights or remedies which each would otherwise have. 7.4 No Rights a Shareholder. The Warrant shall not entitle the Warrant Holder, prior to the exercise of the Warrant, to any rights as a holder of shares of the Company. 7.5 Separability. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 7.6 Governing Law. This Warrant shall be construed and enforced in accordance with the laws of the state of Oklahoma without regard to principles of conflicts of law, except as otherwise required by mandatory provisions of law. 7.7 Section Headings. The section headings used herein are for convenience of reference only and shall not be construed in any way to affect the interpretation of any Provisions of the Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed and attested by its Chief Executive Officer, all as of the day and year first above written. PALWEB CORPORATION By: ----------------------------------------- Warren F. Kruger, Chief Executive Officer 7 ANNEX A ------- Form of Notice of Exercise Date: __________ To: PalWeb Corporation Reference is made to the Common Share Purchase Warrant dated ____________ issued to the undersigned by PalWeb Corporation. Terms defined therein are used herein as therein defined. The undersigned, pursuant to the provisions set forth in the Warrant Certificate, hereby irrevocably elects and agrees to purchase the number of Common Shares at the Exercise Price(s) set forth below, and makes payment herewith by check payable to the order of the Company in an amount equal to $____________ . Number of Warrant Shares Applicable Exercise Price ---------------------- ------------------------- ---------------------- ------------------------- ---------------------- ------------------------- If said number of shares is less than all of the shares purchasable hereunder, the undersigned hereby requests that a new Warrant Certificate representing the remaining balance of the Warrant Shares be issued to me. The undersigned hereby represents that it is exercising the Warrant for its own account for investment purposes and not with the view to any sale or distribution and that the Warrant Holder will not offer, sell or otherwise dispose of the Warrant or any underlying Warrant Shares in violation of applicable securities laws. By: ---------------------------------------- Name: ------------------------------------- Title: ------------------------------------- A-1 ANNEX B ------- Form of Warrant Assignment Reference is made to the Common Share Purchase Warrant dated __________, issued to the undersigned by PalWeb Corporation. Terms defined therein are used herein as therein defined. FOR VALUE RECEIVED __________________ (the "Assignor") hereby sells, assigns and transfers all of the rights of the Assignor as set forth in the Warrant Certificate with respect to the number of Warrant Shares covered thereby as set forth below, to the Assignee(s) as set forth below: Name(s) of Number of Applicable Exercise Assignee(s) Address(es) Warrant Shares Price of Warrant Share - ---------- ---------- ------------------ ------------------- - ---------- ---------- ------------------ ------------------- All notices to be given by the Company to the Assignor as Warrant Holder shall be sent to the Assignee(s) at the above listed address(es), and, if the number of Warrant Shares being hereby assigned is less than all of the Warrant Shares covered by the Warrant Certificate held by the Assignor, then also to the Assignor. In accordance with Section 5 of the Warrant Certificate, the Assignor requests that the Company execute and deliver a new Warrant Certificate or Warrant Certificates in the name or names of the Assignee or Assignees, as is appropriate, or, if the number of Warrant Shares being hereby assigned is less than all of the Warrant Shares covered by the Warrant held by the Assignor, new Warrant Certificates in the name or names of the Assignee or the Assignees, as is appropriate, and in the name of the Assignor. The undersigned represents that the Assignee has represented to the Assignor that the Assignee or each Assignee, as is appropriate, is acquiring the Warrant for its own account or the account of an Affiliate for investment purposes and not with the view to sell or distribute, and that the Assignee or each Assignee, as is appropriate, will not offer, sell or otherwise dispose of the Warrant or the Warrant Shares except under circumstances as will not result in a violation of applicable securities laws. Dated:__________ By: ---------------------------------------- Name: ------------------------------------- Title: ------------------------------------- B-1 EX-10.4 5 exh10-4_13198.txt LETTER AGREEMENT EXHIBIT 10.4 ------------ AITKEN LAW FIRM, P.C. 220 EMERSON PLACE, SUITE 101 DAVENPORT, IOWA 52801 John R. Aitken Jennifer Olsen, Associate Telephone Fax (563) 326-1389 (563) 323-0975 January 3, 2005 Warren F. Kruger Greystone Manufacturing LLC 1513 East 15th Street Tulsa, Oklahoma and Mr. William W. Pritchard Attorney at Law 320 S. Boston Avenue Suite 400 Tulsa, OK 74102-3708 Dear Gentlemen: I am writing you on behalf of Greystone Plastics, Inc. Based upon my letter of December 23, 2004, we have received a letter from Mr. William W. Pritchard and a Memorandum from Warren Kruger. Following my letter, it is my understanding that Bill Hamilton and Joanne Hamilton met with Warren Kruger at the plant in Bettendorf over the weekend. Unfortunately, there was a lot of finger pointing and nothing was accomplished. Before I address the monetary issues, I would like to make one point. I have known Joanne Hamilton for more than twenty five (25) years, and I have known Bill Hamilton for more than ten (10) years. In all of the dealings I have had with Joanne and Bill, I have never had either of them intentionally misled another party. They are two of the most honest people I know and have always lived up to their word. There have been times where Bill has gotten himself in a bind because an agreement was oral and concluded with a hand shake. Bill has had to learn that not all people are as honest as him and that he needs to better protect himself. Therefore, I question the allegations of misrepresentations and misappropriation of company assets. Regarding the monetary situation, Bill intends to exercise his rights under the Security Agreement which defines "default" as any default in the timely payment of performance by Buyer of any of Borrower's Obligations. Under No. 9 of the Security Agreement, it provides that in the event of Default, Greystone Plastics, Inc. "may exercise, in addition to all other right and remedies granted to it in this Agreement, all rights and remedies of a secured party under the Code or any other applicable law". One of those rights is to take possession of the collateral in accordance with the Security Agreement and Article IX of the UCC. Since there is no question that Greystone Manufacturing LLC has defaulted by not making timely payments, we have that Greystone Plastics, Inc. has every right to take possession of the collateral. Therefore, Greystone Manufacturing LL must pay in full both the Senior Secured Promissory Note and the Wraparound Promissory Note on or before March 8, 2005. The principal balance of the Senior Secured Promissory Note is $3,991,461.22. Interest on said amount from September 8, 2004 to December 31, 2004 totals $94,109.58. (9/8/04 - 10/8/04) - $25,171.23; (10/8/04 - 11/8/04) - $25,479.45; (11/8/04 - 12/8/04) - 24,143.83 and (12/8/04 - 12/31/04) - $19,315.07. The principal balance of the Wraparound Promissory Note (U.S. Bancorp) is $584,587.87 with interest of $1,537.55. Therefore, the amount owed on or before March 8, 2005 will be the aforesaid principal balances plus accrued interest to the date of payment. Greystone Plastic, Inc. is willing to work with you on the purchase of the building. The current principal balance is $2,319,443.00 with accrued interest from 9/8/04 - 12/31/04 of $55,068.45. In the event you accept this offer and default on March 8, 2005, Greystone Plastics, Inc. will exercise all rights mentioned above with no litigation from either party. This letter contains Greystone Plastic, Inc.'s final offer, and we are asking for a written decision either accepting or rejecting it by January 4, 2005. If this offer is rejected, then Greystone Plastic, Inc. will proceed as the sole owner of all collateral and production. Very truly yours, AITKEN LAW FIRM, P.C. By: /s/ John R. Aitken ------------------------------------ John R. Aitken ACCEPTED BY: /s/ Warren F. Kruger - ----------------------------------- Warren F. Kruger EX-31.1 6 exh31-1_13198.txt SECTION 302 CERTIFICATION OF C.E.O. Exhibit 31.1 ------------ CERTIFICATION I, Warren F. Kruger, Chief Executive Officer of PalWeb Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of PalWeb Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. January 19, 2005 /s/ Warren F. Kruger --------------------------------- Warren F. Kruger, Chief Executive Officer EX-31.2 7 exh31-2_13198.txt SECTION 302 CERTIFICATION OF C.F.O. Exhibit 31.2 ------------ CERTIFICATION I, Robert H. Nelson, Chief Financial Officer of PalWeb Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of PalWeb Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. January 19, 2005 /s/ Robert H. Nelson --------------------------------- Robert H. Nelson, Chief Financial Officer EX-32.1 8 exh32-1_13198.txt SECTION 906 CERTIFICATION OF C.E.O. Exhibit 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of PalWeb Corporation (the "Company") on Form 10-QSB for the period ending November 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Warren F. Kruger, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. January 19, 2005 /s/ Warren F. Kruger --------------------------------- Warren F. Kruger, Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be considered filed as part of the Report. EX-32.2 9 exh32-2_13198.txt SECTION 906 CERTIFICATION OF C.F.O. Exhibit 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of PalWeb Corporation (the "Company") on Form 10-QSB for the period ending November 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert H. Nelson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. January 19, 2005 /s/ Robert H. Nelson --------------------------------- Robert H. Nelson, Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be considered filed as part of the Report. -----END PRIVACY-ENHANCED MESSAGE-----