AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1997
REGISTRATION NO. 333-18683
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-1/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PALEX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2448
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
DELAWARE 76-0520673
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3555 TIMMONS LANE, SUITE 610
HOUSTON, TEXAS 77027
(713) 626-9711
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
VANCE K. MAULTSBY, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3555 TIMMONS LANE, SUITE 610
HOUSTON, TEXAS 77027
(713) 626-9711
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO: COPY TO:
JOHN F. WOMBWELL THOMAS J. MURPHY
ANDREWS & KURTH L.L.P. MCDERMOTT, WILL & EMERY
4200 TEXAS COMMERCE TOWER 227 WEST MONROE STREET
HOUSTON, TEXAS 77002 CHICAGO, ILLINOIS 60606
(713) 220-4200 (312) 372-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes
effective. __________________
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED MARCH 13, 1997
3,000,000 SHARES
[PALEX LOGO]
COMMON STOCK
------------------
All of the 3,000,000 shares of Common Stock offered hereby are being sold
by PalEx, Inc. (the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $9.00 and $11.00 per
share. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "PALX".
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------
Per Share.................. $ $ $
- --------------------------------------------------------------------------------
Total(2)................... $ $ $
================================================================================
(1) Before deducting expenses of the offering payable by the Company estimated
at $500,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public as shown above. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
----------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland on or about ,
1997.
ALEX. BROWN & SONS MONTGOMERY SECURITIES
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[PICTURE OF PRODUCTS IN USE AND AUTOMATED MANUFACTURING PROCESS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING TRANSACTIONS EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
CONCURRENTLY WITH THE CLOSING OF THE OFFERING MADE HEREBY (THE
"OFFERING"), PALEX, INC. PLANS TO ACQUIRE, IN SEPARATE TRANSACTIONS
(COLLECTIVELY, THE "ACQUISITIONS"), IN EXCHANGE FOR CONSIDERATION INCLUDING
SHARES OF ITS COMMON STOCK, THREE BUSINESSES: FRASER INDUSTRIES, INC.
("FRASER"), RIDGE PALLETS, INC. ("RIDGE") AND INTERSTATE PALLET CO., INC.
("INTERSTATE" AND, TOGETHER WITH FRASER AND RIDGE, THE "FOUNDING
COMPANIES"). UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO "PALEX" MEAN
PALEX, INC., AND REFERENCES TO THE "COMPANY" MEAN PALEX AND THE FOUNDING
COMPANIES COLLECTIVELY.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION AND
SHARE AND PER SHARE DATA IN THIS PROSPECTUS (I) GIVE EFFECT TO THE ACQUISITIONS,
(II) ASSUME THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (III)
GIVE EFFECT TO A 1,021-FOR-1 STOCK SPLIT OF THE COMMON STOCK EFFECTED IN
DECEMBER 1996.
THE COMPANY
PalEx was formed in January 1996 to create a national provider of pallets
and related services. Concurrently with the closing of this Offering, PalEx will
acquire three of the leading U.S. pallet businesses, making it one of the
largest producers of new pallets and one of the largest pallet recyclers in the
U.S. The Company believes that these acquisitions will enable it to capitalize
on the significant trends currently affecting product manufacturing and
distribution practices throughout the U.S., including the increasing reliance by
shippers and logistics agents on a smaller number of better capitalized, more
sophisticated vendors. The Company will provide a broad variety of pallet
products and related services, including the manufacture and distribution of new
pallets; the recycling of pallets (including used pallet retrieval, repair,
remanufacture and secondary marketing); maintenance of depot operations and the
sorting and storage of pallets for selected customers; and the processing and
marketing of various wood-based by-products derived from pallet recycling
operations. The Company will initially operate from 22 facilities in Florida,
Texas, Virginia, California, Arkansas, Georgia, Illinois, Mississippi and South
Carolina. For its fiscal year ended November 30, 1996, the Company generated pro
forma combined revenues, income from operations and net income of $102.0
million, $8.4 million and $4.9 million, respectively. Ridge and Fraser, two of
the Founding Companies, are currently among the largest pallet businesses in the
U.S., based on revenues, and Interstate is regarded in the pallet industry as a
leading developer of pallet recycling services and products. The Company intends
to actively pursue acquisitions of additional leading pallet companies as part
of its growth strategy.
The pallet industry produces a variety of storage and shipping platforms.
Pallets are typically constructed of wood and used in virtually all U.S.
industries where products are physically distributed, including the automotive,
chemical, consumer products, grocery, produce and food production, paper and
forest products, retail, and steel and metals industries. Based on information
supplied by industry sources, the Company estimates that the U.S. pallet
industry generated revenues of approximately $5 billion in 1995 and that it is
served by approximately 3,600 companies, most of which are small, privately
held, operate in only one location and serve customers within a limited
geographic radius.
The pallet industry has experienced significant changes and growth during
the past several years. These changes are due, among other factors, to the focus
by FORTUNE 1000 businesses on improving the logistical efficiency of their
manufacturing and distribution systems. This focus has caused many of these
businesses to attempt to reduce significantly the number of vendors serving them
in order to simplify their procurement and product distribution processes. It
has also prompted large manufacturers and distributors to outsource key elements
of those processes that are not within their core competencies and to develop
just-in-time procurement, manufacturing and distribution systems. With the
adoption of these systems, expedited product movement has become increasingly
important and the demand for a high quality source of pallets has increased.
Palletized freight facilitates movement through the supply chain, reducing
costly loading and
3
<PAGE>
unloading delays at distribution centers and warehouse facilities. However, the
use of low-quality or improperly sized pallets may increase the level of product
damage during shipping or storage. As a result, there has been an increased
demand for high-quality pallets in an attempt to reduce product damage during
shipping and storage.
The broad changes affecting U.S. industry have created significant demand
for higher quality pallets distributed through an efficient, more sophisticated
system. Environmental and cost concerns have also accelerated the trend toward
increased reuse or "recycling" of previously used pallets, further increasing
the importance of the quality of newly manufactured pallets. In recognition of
these trends, Chep USA ("CHEP") has established a national pallet leasing
program that provides high-quality pallets to customers throughout the U.S. for
a daily fee. CHEP is a partnership created by Brambles Industries Limited, an
Australian publicly-held corporation, and GKN, Ltd., a publicly-held U.K.
corporation. Ridge and Fraser, two of the Founding Companies, manufacture and
repair pallets for CHEP and provide a variety of logistical services with
respect to its existing pallet pool, including the repair, storage and
just-in-time delivery of pallets. CHEP currently does not manufacture pallets
and engages in limited repair operations. During the fiscal year ended November
30, 1996, approximately 34% of the Company's pro forma combined revenues and a
significant percentage of the Company's growth were attributable to CHEP. The
Company expects to continue to build its relationship with CHEP both
geographically and by providing additional logistical services.
GROWTH STRATEGY
The Company's goal is to become a leading national provider of pallets and
related services by pursuing an aggressive acquisition strategy and by
continuing to expand its existing operations.
GROWTH THROUGH ACQUISITIONS. The Company intends to actively pursue
acquisitions of leading companies whose management and operating philosophies
are complementary to those of the Founding Companies. The Company also intends
to expand within its existing markets through "tuck-in" acquisitions to
increase its market penetration as well as to provide a broader range of
services to existing customers in those markets. These tuck-in acquisitions will
generally involve smaller pallet companies whose operations can be incorporated
into the Company's existing operations without a significant increase in
infrastructure.
INTERNAL GROWTH. The Company has opened nine new locations in the past
three years and expects to open additional locations in the future. The Company
intends to expand the service offerings at many of its locations to include a
combination of manufacturing, repair, recycling and the sale of by-products. The
Company also expects to be able to accelerate the internal growth of the
Founding Companies and businesses acquired in the future by continuing to
develop the Company's relationship with CHEP and other large customers and by
developing and implementing a "best practices" program.
PalEx believes that a significant market opportunity exists for a company
that can consistently offer high-quality pallets and related value-added
services to large pallet users in the U.S. The Company believes that the
prominence and operating strength of the Founding Companies and the experience
of its executive management will provide the Company with a significant
competitive advantage as it pursues its growth strategy.
4
<PAGE>
THE OFFERING
Common Stock offered by the Company..... 3,000,000 shares
Common Stock to be outstanding after the
Offering(1)........................... 10,123,889 shares
Use of proceeds......................... To pay the cash portion of the
purchase price for the Founding
Companies, to repay certain
indebtedness (including related
party indebtedness), to make S
corporation distributions to the
existing stockholders of the
Founding Companies and for general
corporate purposes, which may
include future acquisitions. See
"Use of Proceeds."
Nasdaq National Market symbol........... PALX
- ------------
(1) Includes (i) 5,910,000 shares to be issued to the owners of the Founding
Companies as a portion of the consideration to be paid in the Acquisitions,
(ii) 50,000 shares issued to Vance K. Maultsby, Jr., President and Chief
Executive Officer of PalEx, (iii) 1,021,389 shares issued to Main Street
Capital Partners, L.P. ("Main Street"), (iv) 3,000,000 shares to be sold
in the Offering and (v) 142,500 shares to be issued to the Founding
Companies' profit sharing plans. Excludes options to purchase 200,000 shares
which are currently outstanding and options to purchase 725,000 shares which
are expected to be granted upon consummation of this Offering. See
"Management" and "Certain Transactions."
5
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PalEx will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, however, Fraser, one of the Founding Companies, has been
identified as the "accounting acquiror." The following summary unaudited pro
forma combined financial data presents certain data for the Company, as adjusted
for (i) the effects of the Acquisitions on an historical basis, (ii) the effects
of certain pro forma adjustments to the historical financial statements and
(iii) the consummation of this Offering. See "Selected Financial Data", the
Unaudited Pro Forma Combined Financial Statements and the notes thereto and the
historical financial statements for each of Fraser and Ridge and the notes
thereto included elsewhere in this Prospectus.
PRO FORMA(1)
-----------------
FISCAL YEAR
ENDED
NOVEMBER 30, 1996
-----------------
INCOME STATEMENT DATA:
Revenues........................ $ 102,030
Gross profit.................... 15,852
Selling, general and
administrative expenses(2)..... 6,628
Goodwill amortization(3)........ 867
Income from operations.......... 8,357
Interest income (expense),
net(4)......................... 15
Net income...................... 4,852
Net income per share............ $ 0.48
Shares used in computing pro
forma net income per
share(5)....................... 10,123,889
AS OF
NOVEMBER 30, 1996
---------------------------
PRO AS
FORMA(6) ADJUSTED(7)
-------- -----------
BALANCE SHEET DATA:
Working capital................. $ (5,551) $12,530
Total assets.................... 56,846 59,791
Total debt, including current
portion........................ 12,727(8) 600
Stockholders' equity............ 24,424 51,824
- ------------
(1) The pro forma combined income statement data assume that the Acquisitions
and the Offering were closed on December 1, 1995 and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results. During the
periods presented above, the Founding Companies were not under common
control or management and, therefore, the data presented may not be
comparable to or indicative of post-combination results to be achieved by
the Company. The pro forma combined income statement data is based on
preliminary estimates, available information and certain assumptions that
management deems appropriate and should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.The pro forma income statement data include operating results of
Ridge for the twelve months ended December 1, 1996 and Interstate for the
fiscal year ended August 31, 1996.
(2) The pro forma combined income statement data reflect an aggregate of
approximately $666,000 in pro forma reductions in salary and benefits of the
owners of the Founding Companies to which they have agreed prospectively,
and the effect of revisions of certain lease agreements between one of the
Founding Companies and its stockholder. In addition, the pro forma combined
income statement includes a $300,000 non-recurring, non-cash charge
representing the difference between the amounts paid for shares issued to
the Company's President and Chief Executive Officer and their estimated fair
value on the date of sale assuming the Acquisitions would be consummated,
reduced by $125,000 to adjust compensation to the amount that he will
receive prospectively. See "Certain Transactions."
(3) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 30-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Includes interest income(expense) and other income(expense), net and
reflects the reduction of interest expense attributed to the repayment of
debt with proceeds from the Offering.
(5) Includes (i) 5,910,000 shares to be issued to the owners of the Founding
Companies, (ii) 50,000 shares issued to the management of PalEx, (iii)
1,021,389 shares issued to Main Street, (iv) 3,000,000 shares to be sold in
the Offering and (v) 142,500 shares to be issued to the Founding Companies'
profit sharing plans. Excludes options to purchase 200,000 shares which are
currently outstanding and options to purchase 725,000 shares which are
expected to be granted upon consummation of this Offering. See "Certain
Transactions."
(6) The pro forma combined balance sheet data assume that the Acquisitions were
closed on November 30, 1996. The pro forma combined balance sheet data is
based upon preliminary estimates, available information and certain
assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus. The pro forma balance sheet data include Ridge
as of December 1, 1996 and Interstate as of August 31, 1996.
(7) Reflects the closing of this Offering and the Company's application of the
net proceeds therefrom to fund the cash portion of the purchase price of the
Acquisitions and to repay indebtedness of the Founding Companies. See "Use
of Proceeds" and "Certain Transactions."
(8) Excludes $12.3 million representing the cash consideration and S Corporation
Accumulated Adjustment Accounts to be paid to the owners of the Founding
Companies with a portion of the net proceeds from the Offering.
6
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
(In thousands)
The following table presents certain summary data for each of Fraser, Ridge
and Interstate.
FISCAL PERIODS ENDED(1)
-------------------------------
1994 1995 1996
--------- --------- ---------
FRASER:
Revenues........................... $ 23,114 $ 30,135 $ 49,282
Gross profit....................... 2,359 4,576 7,773
Selling, general and administrative
expenses(2)...................... 1,761 2,131 3,171
Income from operations............. 598 2,445 4,602
RIDGE:
Revenues........................... $ 47,946 $ 54,450 $ 48,341
Gross profit....................... 7,340 8,062 7,801
Selling, general and administrative
expenses(2)...................... 4,018 3,826 3,825
Income from operations............. 3,322 4,236 3,976
INTERSTATE:
Revenues........................... $ 3,480 $ 3,772 $ 4,284
Gross profit....................... 712 601 943
Selling, general and administrative
expenses(2)...................... 260 163 84
Income from operations............. 452 438 859
- ------------
(1) The fiscal periods presented are as follows: Fraser -- fiscal years ended
November 30 for all years presented; Ridge -- fiscal years ended July 31,
1994, July 30, 1995 and July 28, 1996; and Interstate -- fiscal years ended
August 31 for all years presented.
(2) The Company anticipates reductions in selling, general and administrative
expenses aggregating approximately $666,000 annually from reductions in
salary and benefits to the owners of the Founding Companies to which they
have agreed prospectively and from revisions to certain lease agreements
between one of the Founding Companies and its stockholder. These reductions
are not reflected in the financial data presented.
7
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF
FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY. PalEx was founded in January 1996
but has conducted no operations and generated no revenue to date. PalEx has
entered into agreements to acquire the Founding Companies simultaneously with
the closing of this Offering. The Founding Companies have been operating as
separate independent entities and there can be no assurance that the Company
will be able to integrate these businesses on an economic basis. In addition,
there can be no assurance that the recently assembled management group will be
able to oversee the combined entity and effectively implement the Company's
operating or growth strategies. The pro forma combined financial results of the
Founding Companies cover periods when the Founding Companies and PalEx were not
under common control or management and, therefore, may not be indicative of the
Company's future financial or operating results. The success of the Company will
depend on the extent management is able to centralize and integrate certain
administrative and accounting functions and otherwise integrate the Founding
Companies and other future acquisitions into one organization in a profitable
manner. The inability of the Company to successfully integrate the Founding
Companies would have a material adverse effect on the Company's financial
condition and results of operations and would make it unlikely that the
Company's acquisition program will be successful.
SUPPLY AND DEMAND FOR LUMBER. Pallet prices are closely related to the
changing costs and availability of lumber, the principal raw material used in
the manufacture and repair of wooden pallets. Typically, lumber prices fall in
oversupplied lumber markets, enabling small pallet manufacturers with limited
capital resources to procure lumber and initiate production of low-cost pallets,
depressing pallet prices overall and adversely affecting the Company's revenues
and operating margins. The majority of the lumber used in the pallet industry is
hardwood, which is only grown in certain regions of the country and which is
difficult to harvest in adverse weather, making its pricing volatile. For the
fiscal year ended November 30, 1996, purchases from two lumber vendors accounted
for approximately 13% and 11%, respectively, of the Company's total pro forma
combined lumber purchases. While the Company purchased plywood and lumber from
over 85 vendors during the fiscal year ended November 30, 1996, and believes
that it will benefit from strong relationships with multiple lumber suppliers,
there can be no assurance that the Company will be able to secure adequate
lumber supplies in the future. Lumber supplies and costs are affected by many
factors outside the Company's control, including weather, governmental
regulation of logging on public lands, lumber agreements between Canada and the
U.S. and competition from other industries that use similar grades and types of
lumber. For example, in November and December of 1996, the Company experienced
higher lumber costs resulting from the impact of wet weather on the harvesting
of hardwood timber in the southeast. To the extent the Company encounters
adverse lumber prices or is unable to procure adequate supplies of lumber, its
financial condition and results of operations could be materially adversely
affected. See "Business -- Raw Materials."
FACTORS AFFECTING INTERNAL GROWTH. The Company's ability to generate
internal earnings growth will be affected by, among other factors, its ability
to expand the range of services offered to customers, attract new customers,
increase volumes purchased by existing customers (including CHEP), hire and
retain employees, obtain raw materials at acceptable prices, open additional
manufacturing and repair facilities and reduce operating and overhead expenses.
RELIANCE ON ACQUISITIONS. One of the Company's principal growth strategies
is to increase its revenues and the markets it serves through the acquisition of
additional pallet manufacturing and recycling companies. There can be no
assurance that the Company will be able to identify or acquire additional
businesses or to integrate and manage such additional businesses successfully.
Acquisitions may involve a number of risks, including: adverse short-term
effects on the Company's reported operating results; diversion of management's
attention; dependence on retention, hiring and training of key personnel; risks
associated with unanticipated problems or legal liabilities; and amortization of
acquired intangible assets. Some or all of these risks could have a material
adverse effect on the Company's financial condition or results of operations. In
addition, to the extent that consolidation becomes more prevalent in the
industry,
8
<PAGE>
the prices for attractive acquisition candidates may increase and the number of
attractive acquisition candidates may decrease and, in any event, there can be
no assurance that businesses acquired in the future will achieve sales and
profitability that justify the investment therein. See "Business -- Strategy."
ACQUISITION FINANCING. The Company intends to use its Common Stock for a
portion of the consideration for future acquisitions. If the Common Stock does
not maintain a sufficient valuation or potential acquisition candidates are
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to pursue its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through future debt or equity
financings. Using cash to complete acquisitions and finance internal growth
could substantially limit the Company's financial flexibility, using debt could
result in financial covenants that limit the Company's operations and financial
flexibility, and using equity may result in significant dilution of the
ownership interests of the then existing stockholders of the Company. There can
be no assurance that the Company will be able to obtain financing if and when it
is needed or that, if available, it will be available on terms the Company deems
acceptable. As a result, the Company may be unable to pursue its acquisition
strategy successfully. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Combined" and "Business -- Strategy."
The Company has recently received a commitment letter from Bank One, Texas,
NA ("Bank One") to provide the Company with a credit facility which will allow
the Company to borrow up to $35.0 million to be used for acquisitions, working
capital and other general corporate purposes. It is anticipated that such
facility will require the Company to comply with various affirmative and
negative covenants (including maintenance of certain financial ratios) which
could limit the Company's operational and financial flexibility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Combined."
WEATHER CONDITIONS. The Company sells a significant portion of its
products and services to customers who ship agricultural products. Severe
weather, particularly during the harvesting seasons, may cause a reduction in
demand from agricultural customers, adversely affecting the Company's revenues
and results of operations. A heavy freeze or other weather adversely affecting
the citrus and produce industries in Florida could have a significant negative
impact on the Company's financial condition and results of operations. In
addition, adverse weather conditions may affect the Company's ability to obtain
adequate supplies of lumber at a reasonable cost. In October through December of
1996, the Company experienced higher lumber costs resulting from the impact of
wet weather on the harvesting of hardwood timber in the southeast. Additionally,
freezing weather conditions in south Florida during January 1997 adversely
impacted the produce harvest thereby reducing the demand for pallets. The
Company expects these two conditions to adversely affect its results of
operations for the first fiscal quarter ending February 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SEASONALITY; FLUCTUATION OF OPERATING RESULTS. The pallet manufacturing
business can be subject to seasonal variations in operations and demand.
Approximately 20% of the Company's pro forma combined revenues for the fiscal
year ended November 30, 1996 were attributable to the agricultural industry in
the southeastern U.S., with the citrus and produce industries comprising the
largest components thereof. As a result, the Company's southeastern operations
experience the greatest demand for new pallets during the citrus and produce
harvesting seasons (generally October through May) with significantly lower
demand in the summer months. Moreover, yearly results can also fluctuate
significantly, particularly in the southeast region as a result of the size of
the citrus and produce harvests, which, in turn, largely depend on the
occurrence and severity of freezing weather. (See "-- Weather Conditions".)
Quarterly results may also be materially affected by the timing of acquisitions,
the timing and magnitude of acquisition assimilation costs, costs of opening new
facilities, gain or loss of a material customer, variation in product mix and
weather conditions. In addition, the Company's revenues and gross margins can
fluctuate significantly with variations in lumber prices. Accordingly, the
Company's performance in any particular quarter may not be indicative of the
results which can be expected for any other quarter or for the entire year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
9
<PAGE>
RELIANCE ON CHEP. During the fiscal year ended November 30, 1996,
approximately 34% of the Company's pro forma combined revenues and a significant
percentage of the Company's growth were attributable to CHEP. In addition,
certain of the Company's facilities are substantially dependent on CHEP as their
predominant customer. If CHEP were to materially decrease its purchase of
pallets and services from the Company, either because CHEP's operations
encounter financial reversals or as a result of CHEP's determination to
manufacture pallets internally, to buy pallets and services from competitors of
the Company or to substantially increase the number of pallets it repairs or for
any other reason, the Company's financial condition and results of operations
could be materially adversely affected. The Company and CHEP enter into an
agreement for each Company facility which performs CHEP repair or depot
services. These agreements generally do not contain fixed volume requirements,
may be terminated with or without cause depending on the nature of the service
provided and have both indefinite and fixed terms of between one and three
years. The contracts prohibit the Company's contracting facilities from
competing with CHEP in pallet leasing and from repairing pallets for other
leasing companies during the term of the agreement and for a period of up to
three years thereafter. Although CHEP has not terminated or failed to renew any
of these agreements to date, there can be no assurance that CHEP will not
terminate or fail to renew such agreements in the future. See
"Business -- Customers."
MANAGEMENT OF GROWTH. The Company expects to grow through internal growth
and acquisitions. Management expects to expend significant time and effort in
evaluating, completing and integrating acquisitions and opening new facilities.
There can be no assurance that the Company's systems, procedures and controls
will be adequate to support the Company's operations as they expand. Any future
growth also will impose significant added responsibilities on members of senior
management, including the need to identify, recruit and integrate new senior
level managers and executives. There can be no assurance that such additional
management will be identified and retained by the Company. To the extent that
the Company is unable to manage its growth efficiently and effectively, or is
unable to attract and retain additional qualified management, the Company's
financial condition and results of operations could be materially adversely
affected. See "Business -- Strategy."
COMPETITION. The markets for pallet manufacturing and recycling services
are highly fragmented and competitive. Competition on pricing is often intense
and the Company may face increasing competition from pallet leasing or other
pallet systems providers, which are marketed as less expensive alternatives to
new pallet purchasers. CHEP's pallet leasing system competes with new pallet
sales to the grocery and wholesale distribution industries, and may expand into
other industries in the future. In addition, pallet manufacturing and recycling
operations are not highly capital intensive, and the barriers to entry in such
businesses are minimal. Certain other smaller competitors may have lower
overhead costs and consequently, may be able to manufacture or recycle pallets
at lower costs than the Company. Other companies with significantly greater
capital and other resources than the Company (including CHEP) may enter or
expand their operations in the pallet manufacturing and recycling businesses in
the future, changing the competitive dynamics of the industry. The Company has
in the past and will continue to compete with lumber mills in the sale of new
pallets. The lumber mills typically view pallet manufacturing as an opportunity
to use the lower grade lumber that would otherwise represent waste that must be
disposed by the mill. While the Company estimates, based on industry sources,
that non-wooden pallets currently account for less than 10% of the pallet
market, there can be no assurance that the Company will not face increasing
competition from pallets fabricated from non-wooden components in the future.
For example, Ridge currently sells agricultural harvesting boxes. These products
have recently faced increasing competition from plastic agricultural containers
which has reduced the number of agricultural harvesting boxes sold by Ridge. The
Company expects competition with plastic agricultural containers to continue in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Competition."
EFFECT OF NON-COMPETE AGREEMENT. Interstate and its stockholder are
parties to non-competition agreements which may restrict until January 14, 1998,
Interstate's, Interstate's affiliates, or such stockholder's ability to engage
in any activity or business enterprise or own an interest in any entity which
engages in any activity or business enterprise which competes with First
Alliance Logistics Management, L.L.C. (the "Alliance"), an organization whose
membership includes pallet recyclers and manufacturers
10
<PAGE>
and was created to pursue the national and global marketing and management of
pallet systems, including the sale or leasing of pallets. The Company has been
notified by the Alliance that it intends to enforce the terms of the non-compete
agreements as it deems appropriate, although the Alliance has not to date
commenced legal proceedings and the Company does not know when, if ever, such
proceedings would commence. The agreements explicitly exclude from their
coverage any product or services offered or sold by Interstate before October
1995, which are the same products or services currently offered by Interstate.
Because of the noncompete provisions' short duration and exclusion of business
currently conducted by Interstate, the Company believes that such agreements
will not have a material adverse effect on its operations. See
"Business -- Competition."
EFFECT OF CERTAIN CHARTER PROVISIONS. The Board of Directors of the
Company is empowered to issue Preferred Stock without stockholder action. The
existence of this "blank-check" Preferred Stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise, even if such a transaction would
provide greater value to the Company's stockholders than if the Company remained
independent. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. See "Description of Capital Stock."
DEPENDENCE ON KEY PERSONNEL. The Company's operations are dependent on the
continued efforts of its executive officers and on senior management of the
Founding Companies. Furthermore, the Company will likely be dependent on the
senior management of companies that may be acquired in the future. Although the
Company will enter into an employment agreement with each of the Company's
executive officers, there can be no assurance that any individual will continue
in such capacity for any particular period of time. The loss of key personnel,
or the inability to hire and retain qualified employees could have an adverse
effect on the Company's business, financial condition and results of operations.
The Company does not intend to carry key-person life insurance on any of its
employees. See "Management."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. Following the completion
of the Acquisitions and this Offering, the Company's executive officers,
directors and key employees, and entities affiliated with them, will
beneficially own 70.4% of the outstanding shares of Common Stock (67.4% if the
Underwriters' over-allotment option is exercised in full). These persons, if
acting in concert, will be able to continue to exercise control over the
Company's affairs, to elect the entire Board of Directors and to control the
disposition of any matter submitted to a vote of stockholders. See "Principal
Stockholders."
PROCEEDS OF OFFERING PAYABLE TO AFFILIATES. Approximately $19.8 million of
the net proceeds of this Offering will be paid in cash to the owners of the
Founding Companies (all of whom will become officers, directors or key employees
of the Company) or will be used to repay indebtedness of the Founding Companies.
Approximately $7.0 million of the $13.3 million of indebtedness to be repaid is
held by certain stockholders and affiliates of the Founding Companies. See "Use
of Proceeds" and "Certain Transactions."
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES. The Company's operations
are subject to various environmental laws and regulations, including those
dealing with handling and disposal of waste products, fuel storage and air
quality. As a result of past and future operations at its facilities, the
Company may be required to incur remediation costs and other expenses related
thereto. In addition, although the Company intends to conduct appropriate due
diligence with respect to environmental matters in connection with future
acquisitions, there can be no assurance that the Company will be able to
identify or be indemnified for all potential environmental liabilities relating
to any acquired business.
NO PRIOR MARKET, POSSIBLE VOLATILITY OF STOCK. Prior to this Offering, no
public market for the Common Stock has existed, and the initial public offering
price, which was determined by negotiation between the Company and
representatives of the Underwriters, may not be indicative of the price at which
the Common Stock will trade after this Offering. See "Underwriting" for the
factors considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market, subject to
notice of final issuance, although no assurance can be given that an
11
<PAGE>
active trading market for the Common Stock will develop or, if developed,
continue after the Offering. The market price of the Common Stock after the
Offering may be subject to significant fluctuations from time to time in
response to numerous factors, including variations in the reported financial
results of the Company and changing conditions in the economy in general or in
the Company's industry in particular. In addition, the stock markets experience
significant price and volume volatility from time to time which may affect the
market price of the Common Stock for reasons unrelated to the Company's
performance.
SHARES ELIGIBLE FOR FUTURE SALE. As of February 20, 1997, 1,071,389 shares
of Common Stock were issued and outstanding. Simultaneously with the closing of
the Offering, the stockholders of the Founding Companies will receive, in the
aggregate, 5,910,000 shares of Common Stock as a portion of the consideration
for their businesses and the Company will issue 142,500 shares of Common Stock
to the Founding Companies' profit sharing plans. None of these 6,052,500 shares
was or will be issued in a transaction registered under the Securities Act of
1933, as amended (the "Securities Act"), and, accordingly, such shares may not
be sold except in transactions registered under the Securities Act or pursuant
to an exemption from registration, including the exemption contained in Rule 144
under the Securities Act. When these shares become saleable, the market price of
the Common Stock could be adversely affected by the sale of substantial amounts
of the shares in the public market. The current stockholders of the Company have
certain registration rights with respect to their shares which may be exercised
after the expiration of the 180-day lock-up period described below. If such
stockholders, by exercising such registration rights, cause a large number of
shares to be registered and sold in the public market, such sales may have an
adverse effect on the market price of the Common Stock. See "Shares Eligible
for Future Sale."
Upon the closing of this Offering, the Company also will have outstanding
options to purchase up to a total of 925,000 shares of Common Stock issued
pursuant to the Company's 1996 Stock Option Plan (the "Plan"). A total of
1,800,000 shares will be issuable pursuant to such plan. The Company intends to
register all the shares subject to these options under the Securities Act for
public resale. See "Management -- 1996 Stock Option Plan."
The Company has agreed that it will not offer, sell or issue any shares of
Common Stock or options, rights or warrants to acquire any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated, except for the grant of employee
stock options and for shares issued (i) in connection with acquisitions and (ii)
pursuant to the exercise of options granted under the Plan. Further, the
Company's directors, officers and certain stockholders who beneficially own
7,123,889 shares in the aggregate have agreed not to directly or indirectly
offer for sale, sell or otherwise dispose of any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated. In addition, the owners of the Founding
Companies have agreed not to sell, contract to sell or otherwise dispose of any
shares of Common Stock received as consideration in the Acquisitions for a
period of two years following receipt thereof.
The Company currently intends to file a registration statement covering up
to an additional 4,000,000 shares of Common Stock under the Securities Act for
its use in connection with future acquisitions. These shares generally will be
freely tradeable after their issuance by persons not affiliated with the Company
unless the Company contractually restricts their resale.
The effect, if any, of the availability for sale, or sale, of the shares of
Common Stock eligible for future sale on the market price of the Common Stock
prevailing from time to time is unpredictable, and no assurance can be given
that the effect will not be adverse.
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchasers of the shares of Common
Stock offered hereby will experience immediate dilution in the net tangible book
value of their shares of $7.45 per share (assuming an initial public offering
price of $10.00 per share). See "Dilution." In the event the Company issues
additional shares of Common Stock in the future, including shares which may be
issued in connection with acquisitions or other public or private financings,
purchasers of Common Stock in the Offering may experience further dilution in
the net tangible book value per share of the Common Stock of the Company.
12
<PAGE>
THE COMPANY
PalEx was founded in January 1996 to create a national provider of pallets
and related services. PalEx has conducted no operations and generated no revenue
to date. Concurrently with and as a condition to the closing of this Offering,
PalEx will acquire the three Founding Companies. A brief description of each of
the Founding Companies is set forth below.
FRASER. Fraser was founded in 1975 and is a leading manufacturer and
recycler of pallets in the southwestern U.S. Fraser is headquartered in Big
Spring, Texas, has 15 plant locations and employs approximately 815 people.
Fraser has experienced significant growth in the past three years, opening nine
facilities and acquiring two additional facilities. Fraser's fiscal 1996
revenues were $49.3 million, with income from operations of $4.6 million. Fraser
has established a leading presence in the supply of new and recycled pallets in
the Southwest and has developed significant relationships with CHEP and Wal-Mart
Stores, Inc. ("Wal-Mart"), among others. The services Fraser provides include
pallet manufacturing, repair, sorting, storage and transportation. Troy L.
Fraser, the President of Fraser, has served in such capacity for 21 years and
will become the Company's Chief Development Officer as well as serve on the
Company's Board of Directors upon consummation of the Offering. Mr. Fraser is a
Vice President and a two-term member of the Board of Directors of the National
Wooden Pallet and Container Association (the "NWPCA").
RIDGE. Ridge was founded in 1967 and is a leading manufacturer of pallets
in the southeastern U.S. Ridge's fiscal 1996 revenues were $48.3 million, with
income from operations of $4.0 million. Ridge is headquartered in Bartow,
Florida, has five plant locations and employs approximately 550 people. Ridge's
traditional strength has been the manufacture of large volumes of new pallets
for customers who have time-sensitive delivery requirements and demand a high
level of customer service. In addition to its traditional focus on the
manufacture of new pallets, Ridge also builds agricultural harvesting boxes and
specialty bins, and has recently entered the pallet repair and recycling market.
A. E. Holland, Jr. has served as President of Ridge for 16 years and has more
than 25 years experience in the pallet industry. Mr. Holland will become the
Company's Chief Operating Officer as well as serve on the Company's Board of
Directors upon consummation of the Offering. Mr. Holland is a past President and
long-standing member of the Board of Directors of the NWPCA. In addition, each
of the nine members of Ridge's senior management team has in excess of 13 years
of experience in the pallet business, is actively involved in the NWPCA and will
continue to serve the Company after the Offering.
INTERSTATE. Interstate was founded in 1979 in Richmond, Virginia and is
recognized as an innovator in pallet recycling services. Interstate has two
facilities and employs approximately 60 people, primarily in the manufacture and
sale of reconstructed wooden pallets. Interstate's fiscal 1996 revenues were
$4.3 million, with income from operations of approximately $900,000. In addition
to the sale of recycled pallets, Interstate has developed pallet management
systems through which Interstate delivers pallets to a customer, retrieves them
for repair after use and redeploys the pallets to the same customer. Interstate
is also an innovator in the sale of wood by-products, including garden mulches
and playground surface materials. Interstate was awarded a special commendation
from the Governor of Virginia recognizing Interstate's commitment to natural
resource conservation for recycling over 50 million pallets since 1980. Stephen
C. Sykes has served as Interstate's President from its inception and will become
a member of the Company's Board of Directors upon consummation of the Offering.
Mr. Sykes is a former President and board member of the NWPCA.
The aggregate consideration to be paid by the Company in the Acquisitions
consists of approximately $1.3 million in cash and 5,910,000 shares of Common
Stock. The consideration to be paid by the Company for the Founding Companies
was determined by negotiations among the Company and representatives of the
Founding Companies. See "Certain Transactions."
PalEx, Inc. was incorporated in Delaware in January 1996. Its executive
offices are located at 3555 Timmons Lane, Suite 610, Houston, Texas 77027, and
its telephone number at that address is (713) 626-9711.
13
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the sale of the shares of Common Stock
offered hereby, after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company, are estimated to be
approximately $27.4 million (approximately $31.6 million if the Underwriters
exercise their over-allotment option in full), assuming an initial public
offering price of $10.00 per share.
Of the net proceeds, the Company estimates that approximately $1.3 million
will be used to pay the cash portion of the purchase price for the Founding
Companies, all of which will be paid to former stockholders of the Founding
Companies. In addition, approximately $13.3 million of the net proceeds will be
used to repay the estimated outstanding indebtedness of the Founding Companies
at the closing of the Offering. Of that $13.3 million, approximately $7.0
million is owed to stockholders and affiliates of Ridge, bears interest at the
prime rate (which at November 30, 1996 was 8.25%) and matures January 3, 2000,
and approximately $70,000 is owed to an affiliate of Fraser, bears interest at
14.0% per annum and matures in January 2005. The remaining estimated
indebtedness at closing consists of amounts drawn under letters of credit by
each of Ridge (approximately $2.2 million) and Fraser (approximately $4.0
million). Both facilities bear interest at the prime rate, with the Ridge
facility maturing in June 1997 and the Fraser facility maturing in April 1997.
Approximately $11.0 million of the net proceeds will be used to make
distributions to the former stockholders of the Founding Companies representing
S Corporation earnings previously taxed to such holders. Approximately $518,000
of the proceeds will be used to pay certain financial advisory fees incurred by
the Founding Companies and $88,000 will be used to purchase equipment owned by
one of the stockholders of the Founding Companies. See "Certain Transactions."
The approximately $1.2 million of remaining net proceeds will be used for
working capital and for general corporate purposes, which are expected to
include future acquisitions. Pending such uses, the Company intends to invest
the net proceeds of the Offering in short-term, investment-grade,
interest-bearing instruments. The Company currently has no binding agreements to
effect any acquisitions. See "Managements's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Combined."
The Company has recently received a commitment from Bank One to provide the
Company with a $35.0 million credit facility which may be used for acquisitions,
working capital and other general corporate purposes. To the extent the net
proceeds of the Offering are insufficient to fund the use of proceeds described
above, the Company may supplement the proceeds for such purposes by utilizing
amounts available under the new credit facility, if available, by drawing on
credit facilities maintained by each of Ridge and Fraser, if available, or by
electing to lower the amount of outstanding debt repaid. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Combined."
DIVIDEND POLICY
It is the Company's current intention to retain earnings to finance the
expansion of its business. Any future dividends will be at the discretion of the
Board of Directors after taking into account various factors, including, among
others, the Company's financial condition, results of operations, cash flows
from operations, current and anticipated cash needs and expansion plans, the
income tax laws then in effect and the requirements of Delaware law. In
addition, the new credit facility may prohibit the payment of dividends by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Combined."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
November 30, 1996 (i) on a pro forma basis to give effect to the Acquisitions
and (ii) as adjusted, to give effect to both the Acquisitions and this Offering
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the Unaudited Pro
Forma Combined Financial Statements of the Company and the related notes thereto
included elsewhere in this Prospectus.
NOVEMBER 30, 1996
---------------------------
PRO FORMA(1) AS ADJUSTED
------------ -----------
(IN THOUSANDS)
Current maturities of long-term
obligations(2)........................ $ 2,858 $ 50
============ ===========
Long-term obligations, less current
maturities............................ 9,869 550
Stockholders' equity:
Preferred stock: $0.01 par value,
5,000,000 shares, authorized; no
shares issued and outstanding..... -- --
Common stock: $0.01 par value,
30,000,000 shares authorized;
7,123,889 shares issued and
outstanding, pro forma; and
10,123,889 shares issued and
outstanding, as adjusted.......... 71 101
Additional paid-in capital.............. 25,410 52,780
Retained earnings....................... (1,057) (1,057)
------------ -----------
Total stockholders' equity......... 24,424 51,824
------------ -----------
Total capitalization.......... $ 34,293 $52,374
============ ===========
- ------------
(1) Combines the respective accounts of PalEx and the Founding Companies as
reflected in the Pro Forma Combined Balance Sheet as of November 30, 1996.
(2) Includes $455,000 drawn under lines of credit as of November 30, 1996.
15
<PAGE>
DILUTION
The deficit in adjusted net tangible book value of the Company at November
30, 1996 was $(1,574,000) or $(0.22) per share after giving effect to the
Acquisitions. "Adjusted net tangible book value per share" is the adjusted
tangible net worth (total tangible assets less total liabilities) of the Company
divided by the number of shares of Common Stock outstanding after giving effect
to the Acquisitions. After giving effect to the sale of the shares of Common
Stock offered hereby (at an assumed price of $10.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses), the pro forma net tangible book value of the Company at
November 30, 1996 would have been $25,826,000 or $2.55 per share, representing
an immediate increase in net tangible book value of $2.77 per share to existing
stockholders and an immediate dilution of $7.45 per share to the investors
purchasing the shares in this Offering ("New Investors"). The following table
illustrates this dilution to New Investors:
Assumed initial public offering price
per share............................. $ 10.00
Adjusted net tangible book value
per share at November 30, 1996.... $ (0.22)
Increase per share attributable to
New Investors..................... 2.77
---------
Pro forma net tangible book value per
share after Offering.................. 2.55
---------
Net tangible book value dilution per
share to New Investors................ $ 7.45
=========
The following table sets forth as of the date of this Prospectus the number
of shares of Common Stock purchased from the Company, the total consideration to
the Company and the average price per share paid by existing stockholders (after
giving effect to the Acquisitions) and by the New Investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 7,123,889 70.4% $ (1,574,000) (5.5%) $ (0.22)
New Investors........................... 3,000,000 29.6 30,000,000 105.5 10.00
------------ ------- -------------- -------
Total.............................. 10,123,889 100.0% $ 28,426,000 100.0%
============ ======= ============== =======
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Founding Companies before this Offering,
adjusted to reflect: (i) the payment of approximately $1.3 million in cash
to the stockholders of the Founding Companies as part of the consideration
for the Acquisitions; (ii) the distribution of $11.0 million to the
stockholders of the Founding Companies representing S Corporation earnings
previously taxed to such stockholders prior to the Acquisitions; (iii)
payment of $518,000 in financial advisory fees incurred by the Founding
Companies in connection with the Acquisitions; (iv) the issuance of 142,500
shares of Common Stock to the Founding Companies' profit sharing plans; (v)
the transfer of certain non-operating assets to the stockholders of the
Founding Companies with an approximate book value of $175,000 in connection
with the Acquisitions; and (vi) the deferred income tax liability of
approximately $1.4 million attributable to the temporary differences between
financial reporting and income tax bases of assets and liabilities currently
held in S Corporations. See "Certain Transactions."
16
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PalEx will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, however, Fraser has been identified as the "accounting
acquiror." The following selected historical financial data for Fraser as of
November 30, 1995 and 1996 and for the years ended November 30, 1994, 1995 and
1996, have been derived from audited financial statements of Fraser, reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such data. The selected historical financial data as of November
30, 1992, 1993 and 1994, and the fiscal years ended November 30, 1992 and 1993,
have been derived from unaudited financial statements of Fraser, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of Fraser, reflect all adjustments consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The following
summary unaudited pro forma combined financial data presents certain data for
the Company, adjusted for (i) the Acquisitions, (ii) the effects of certain pro
forma adjustments to the historical financial statements and (iii) the
consummation of this Offering and the application of the net proceeds therefrom.
See the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
FRASER
Revenues........................ $ 13,110 $ 18,254 $ 23,114 $ 30,135 $ 49,282
Gross profit.................... 2,193 2,286 2,359 4,576 7,773
Selling, general and
administrative expenses....... 1,971 2,080 1,761 2,131 3,171
Income from operations.......... 222 206 598 2,445 4,602
Interest expense, net(1)........ (100) (170) (344) (431) (540)
Net income...................... $ 118 $ 21 $ 248 $ 1,923 $ 3,846
========= ========= ========= ========= =========
</TABLE>
PRO FORMA COMBINED(2):
Revenues........................ $ 102,030
Gross profit.................... 15,852
Selling, general and
administrative expenses(3)..... 6,628
Goodwill amortization(4)........ 867
Income from operations.......... 8,357
Interest income(expense),
net(5)......................... 15
Net income...................... $ 4,852
=============
Net income per share............ $ 0.48
=============
Shares used in computing pro
forma net income per
share(6)....................... 10,123,889
=============
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF NOVEMBER 30, 1996
----------------------------------------------------- ------------------------------
1992 1993 1994 1995 1996 PRO FORMA(7) AS ADJUSTED(8)
--------- --------- --------- --------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Fraser
Working capital................. $ 562 $ 796 $ (2,280) $ 997 $ 1,449 $(5,551) $ 12,530
Total assets.................... 4,630 5,018 9,950 12,295 13,040 56,846 59,791
Total debt, including current
portion....................... 1,901 3,550 5,787 5,920 2,454 12,727(9) 600
Stockholders' equity............ 1,672 1,639 1,887 3,810 7,236 24,424 51,824
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
17
<PAGE>
- ------------
(1) Includes interest expense and other income (expense), net.
(2) The pro forma combined income statement data assume that the Acquisitions
and the Offering were closed on December 1, 1995 and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results. During the
periods presented above, the Founding Companies were not under common
control or management and, therefore, the data presented may not be
comparable to or indicative of post-combination results to be achieved by
the Company. The pro forma combined income statement data is based on
preliminary estimates, available information and certain assumptions that
management deems appropriate and should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus. The pro forma income statement data include operating results of
Ridge for the twelve months ended December 1, 1996 and Interstate for the
fiscal year ended August 31, 1996.
(3) The pro forma combined income statement data include aggregate of
approximately $666,000 in pro forma reductions in salary and benefits to the
owners of the Founding Companies to which they have agreed prospectively,
and the effect of revisions of certain lease agreements between one of the
Founding Companies and its stockholder. In addition, the pro forma combined
income statement data includes a $300,000 non-recurring, non-cash charge
representing the difference between the amounts paid for shares issued to
the Company's President and Chief Executive Officer and their estimated fair
value on the date of the sale assuming the Acquisitions would be
consummated, reduced by $125,000 to adjust compensation to the amount that
he will receive prospectively. See "Certain Transactions."
(4) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 30-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(5) Includes interest income (expense) and other income (expense), net and
reflects the reduction of interest expense attributed to the repayment of
debt with proceeds from the Offering.
(6) Includes (i) 5,910,000 shares to be issued to the owners of the Founding
Companies, (ii) 50,000 shares issued to the management of PalEx, (iii)
1,021,389 shares issued to Main Street, (iv) 3,000,000 shares to be sold in
the Offering and (v) 142,500 shares to be issued to the Founding Companies'
profit sharing plans. Excludes options to purchase 200,000 shares which are
currently outstanding and options to purchase 725,000 shares which are
expected to be granted upon consummation of this Offering. See "Certain
Transactions."
(7) The pro forma combined balance sheet data assume that the Acquisitions were
closed on November 30, 1996. The pro forma combined balance sheet data is
based upon preliminary estimates, available information and certain
assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus. The pro forma balance sheet data include Ridge
as of December 1, 1996 and Interstate as of August 31, 1996.
(8) Reflects the closing of this Offering and the Company's application of the
net proceeds therefrom to fund the cash portion of the purchase price of the
Acquisitions and to repay indebtedness of the Founding Companies. See "Use
of Proceeds" and "Certain Transactions."
(9) Excludes $12.3 million representing the cash consideration and S Corporation
Accumulated Adjustment Accounts to be paid to the owners of the Founding
Companies with a portion of the net proceeds from the Offering.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Founding
Companies' Financial Statements and related notes thereto and "Selected
Financial Data" appearing elsewhere in this Prospectus.
The Company's net revenues are derived from: (i) the manufacture and sale
of new pallets; (ii) the repair, remanufacture and sale of recycled pallets and
the provision of pallet management services; (iii) the manufacture and sale of
ancillary products, including agricultural harvesting boxes and specialty bins,
and lumber sales; and (iv) sales of by-products, including landscape mulch and
playground material.
New pallets constitute one of two core product lines and accounted for
approximately 60% of the Company's revenues for the fiscal year ended November
30, 1996 on a pro forma combined basis. A substantial portion of the cost of a
new pallet is lumber, and new pallet sales prices are strongly influenced by the
cost, availability and type of lumber used. As a result, changes in lumber
prices can significantly impact the Company's revenues and margins. New pallet
manufacturing is generally considered to be a mature industry characterized by
moderate growth rates. Ridge has historically focused on new pallet sales.
The repair, remanufacture and sale of recycled pallets and the provision of
pallet management services accounted for approximately 25% of the Company's
revenues for the fiscal year ended November 30, 1996 on a pro forma combined
basis and constitutes the Company's other core product line. These activities
are more labor intensive and require fewer raw materials than new pallets.
Recycling operations generally generate higher gross profits as a percentage of
revenues. Fraser's repair and recycling services have grown rapidly in the past
three years and Ridge has recently begun to offer such products and services.
Ancillary product and lumber sales accounted for approximately 15% of the
Company's revenues for the fiscal year ended November 30, 1996 on a pro forma
combined basis. Ancillary products include harvesting boxes and specialty bins
used by the agricultural industry and other products. These products are
generally characterized by higher unit sales costs and higher gross margins than
the Company's core products. Purchases of agricultural harvesting boxes and
specialty bins represent significant capital expenditures to the Company's
customers and can vary significantly from period to period. In addition, Ridge's
sale of agricultural harvesting boxes to the citrus industry in Florida has
declined from 1994 through 1996 as a result of competition from plastic
agricultural containers. The Company expects this competition to continue.
The sale of pallet by-products (generally, landscape mulch and playground
material produced by grinding unusable lumber and scrap) does not represent a
significant portion of the Company's revenues. However, these products produce
significant gross margins because the raw materials costs have been recovered
from the production of a core or ancillary product. In addition, the sale of
by-product enables the Company to avoid disposal costs for unusable lumber and
scrap. Interstate is regarded as a leading innovator in utilizing and marketing
pallet by-products.
Ridge and Fraser, two of the Founding Companies, manufacture and repair
pallets for CHEP and provide a variety of logistical services with respect to
CHEP's existing pallet pool, including the repair, storage and just-in-time
delivery of pallets. CHEP currently does not manufacture pallets and engages in
limited repair operations. During the fiscal year ended November 30, 1996,
approximately 34% of the Company's pro forma combined revenues and a significant
percentage of the Company's growth were attributable to CHEP, with a majority of
revenue growth generated by the opening of six new Fraser facilities within the
past two years which are primarily dedicated to providing services to CHEP.
Although the Company sells products to a broad range of industries,
approximately 20% of the Company's pro forma combined revenues for the fiscal
year ended November 30, 1996 were attributable to the agricultural industry in
the southeastern U.S., with the citrus and produce industries comprising the
largest component thereof. The pallet purchases associated with these industries
are highly seasonal with most sales revenues concentrated in the period from
October through May. Moreover, severe weather, particularly during the
harvesting seasons, may cause a reduction in demand from agricultural customers,
19
<PAGE>
adversely affecting the Company's revenues and results of operations. In
November and December 1996, the Company experienced higher lumber costs
resulting from the impact of wet weather on the harvesting of hardwood timber in
the southeast. Additionally, freezing weather conditions in south Florida during
January 1997 adversely impacted the produce harvest thereby reducing the demand
for pallets. The Company expects these two conditions to adversely affect its
results of operations for the first fiscal quarter ending February 1997.
In August 1994, Ridge purchased its pallet and box manufacturing business
in a management buyout (the "Ridge Buyout") from Ridge Resources, Inc.
("Resources"), a predecessor company owned by three of the stockholders of
Ridge. As consideration for this purchase, Ridge issued notes totaling
approximately $12.6 million to Resources and assumed approximately $1.8 million
of Resources' liabilities. The notes held by Resources and its stockholders are
referred to herein as the "Ridge Notes." A portion of the net proceeds of this
Offering will be used to repay the Ridge Notes. See "Certain Transactions."
The Founding Companies have been managed throughout the periods presented
as independent private companies, and their results of operations reflect tax
structures as S Corporations, which have influenced, among other things, their
historical levels of owners' compensation. Selling, general and administrative
expenses for the periods presented are therefore impacted by the amount of
compensation and related benefits that the former owners and certain key
employees received from their respective businesses during these periods. These
former owners and key employees have agreed to certain reductions in salaries
and benefits in connection with the founding of the Company or the acquisition
of their businesses by the Company. See the Unaudited Pro Forma Combined
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
The Company recognizes revenue upon the delivery of a product or service to
a customer. The Company does not generally maintain significant finished goods
inventory. Cost of sales are predominately variable costs such as lumber, labor,
fasteners, transportation, equipment maintenance and utilities. Fixed costs in
cost of sales include depreciation of equipment, supervisory labor and direct
overhead. Substantially all production employees are paid on a production or
"piecework" basis, which the Company believes provides incentives for
increased productivity.
Selling, general and administrative expenses are generally fixed costs such
as sales, administrative and management salaries and benefits, travel expenses,
professional services, computer costs and office expenses. Many sales,
administrative and managerial employees have variable compensation plans,
although the sales force is not paid a sales commission based on volume of
sales.
RESULTS OF OPERATIONS -- COMBINED
The combined results of operations for the periods presented do not purport
to present those of the combined Founding Companies in accordance with generally
accepted accounting principles, but represent merely a summation of the
revenues, cost of sales, gross profit and selling, general and administrative
expenses of the individual Founding Companies and PalEx on a historical basis
and exclude the effects of pro forma adjustments. This data will not be
comparable to, and may not be indicative of, the Company's post-combination
results of operations because (i) the Founding Companies were not under common
control or management and had different tax structures (S Corporations) during
the periods presented and (ii) the Company will use the purchase method to
establish a new basis of accounting to record the Acquisitions. References to
operations in the southwestern region refer to the operations previously
conducted by Fraser, and references to operations in the southeastern region
refer to operations previously conducted by Ridge.
20
<PAGE>
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL PERIODS ENDED(1)
-----------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 74,540 100.0% $ 88,357 100.0% $ 101,907 100.0%
Cost of Sales........................... 64,129 86.0 75,118 85.0 85,390 83.8
--------- --------- --------- --------- ---------- ---------
Gross profit....................... 10,411 14.0 13,239 15.0 16,517 16.2
Selling, general and administrative
expenses.............................. 6,039 8.1% 6,120 6.9% 7,380 7.2%
</TABLE>
- ------------
(1) The fiscal periods above include the following 12 month periods of the
individual Founding Companies: Fraser -- November 30 for all periods,
Ridge -- July 31, 1994, July 30, 1995 and July 28, 1996, and
Interstate -- August 31 for all periods.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues increased approximately 15.3% to $101.9 million from $88.4
million. Revenues in the southwestern region increased approximately $19.1
million as a result of the full year effect of revenues generated by five new
facilities opened during 1995, as well as an additional facility opened in 1996.
This increase was partially offset by a $6.1 million decline in revenues in the
southeastern region generally attributable both to lower average sales prices
resulting from lower raw material costs, a portion of which were passed on to
customers in the form of lower sales prices, and to a reduction in sales of
agricultural harvesting boxes and specialty bins.
Gross profit as a percentage of revenues increased to 16.2% from 15.0%.
This improvement was generally attributable to continued growth in the
southwestern region in repair and recycling operations which are characterized
by lower raw material costs as a percentage of revenues and generally have
higher gross margins than new pallet operations. As a result of additional
revenues, gross profit increased 24.8% to $16.5 million from $13.2 million.
Selling, general and administrative expenses increased 20.6% to $7.4
million from $6.1 million. The increase was attributable to increased selling
and infrastructure costs associated with the opening of facilities in Arkansas,
California, Illinois and Texas, and the nonrecurring, noncash charge of $300,000
recognized by PalEx in November 1996 representing the difference between the
amounts paid for the shares issued to management and their estimated fair value
on the date of the sale as if the Acquisitions had occurred.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues increased 18.5% to $88.4 million from $74.5 million. This increase
was attributable to the opening of five new facilities in the southwestern
region, higher raw material costs which were generally passed on to customers in
the form of higher sales prices and an increase in the quantity of new pallets
and agricultural harvesting boxes and specialty bins sold in the southeastern
region.
Gross profit as a percentage of revenues improved to 15.0% from 14.0%. This
improvement was generally attributable to growth in the southwestern region in
the repair and recycling operations which are characterized by lower raw
material costs as a percentage of revenue and generally have higher gross
margins than new pallet operations. As a result of additional revenues, gross
profit improved 27.2% to $13.2 million from $10.4 million.
Selling, general and administrative expenses remained stable at $6.1
million.
LIQUIDITY AND CAPITAL RESOURCES -- COMBINED
On a combined basis, the Founding Companies generated $12.2 million of cash
from operating activities during 1996. Net cash used in investing activities was
$5.1 million on a combined basis and was primarily used for purchases of
property and equipment. Net cash used in financing activities was $10.2
21
<PAGE>
million on a combined basis and was primarily used for reductions in long term
debt and for distributions to stockholders.
The Company has recently received a commitment letter from Bank One to
provide a credit facility which would be available upon the closing of the
Offering. According to the proposed terms, the Company would have an unsecured
revolving line of credit of up to $35.0 million, which may be used for general
corporate purposes, including post-Offering acquisitions, capital expenditures
and working capital. It is anticipated that such facility will require the
Company to comply with various affirmative and negative covenants including, but
not limited to (i) maintenance of certain financial ratios, (ii) a restriction
on additional indebtedness and (iii) restrictions on liens, guarantees,
advances, dividends and business activities unrelated to its existing
operations. Failure to comply with such covenants and restrictions would
constitute an event of default under the proposed facility.
The ability of the Company to secure the credit facility is subject to
completion of negotiations with Bank One as well as the satisfaction of certain
conditions, including the execution of appropriate loan documentation. In the
event the credit facility is not available after this Offering, the Company
believes that sufficient alternative sources of financing will be available on
reasonable terms to the Company.
The Company anticipates that its cash flow from operations will provide
sufficient cash to enable the Company to meet its working capital needs, debt
service requirements and planned capital expenditures for property and
equipment. On a combined basis, the Founding Companies made capital expenditures
of $5.3 million in fiscal 1996.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of a portion of the
net proceeds of the Offering, working capital, cash flow from operations and
borrowings, including borrowings under the proposed credit facility, as well as
issuances of additional equity.
Due to the relatively low levels of inflation experienced in fiscal 1994,
1995 and 1996, inflation did not have a significant effect on the results of the
combined Founding Companies in those fiscal years.
RESULTS OF OPERATIONS -- FRASER
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
----------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 23,114 100.0% $ 30,135 100.0% $ 49,282 100.0%
Cost of sales........................... 20,755 89.8 25,559 84.8 41,509 84.2
--------- --------- --------- --------- --------- ---------
Gross profit....................... 2,359 10.2 4,576 15.2 7,773 15.8
Selling, general and administrative
expenses.............................. 1,761 7.6 2,131 7.1 3,171 6.5
--------- --------- --------- --------- --------- ---------
Income from operations.................. 598 2.6 2,445 8.1 4,602 9.3
Interest expense........................ (335) (1.4) (450) (1.5) (387) (0.8)
Other income (expense), net............. (9) (0.1) 19 0.1 (153) (0.3)
--------- --------- --------- --------- --------- ---------
Income before tax....................... 254 1.1 2,014 6.7 4,062 8.2
Income taxes............................ 6 -- 91 0.3 216 0.4
--------- --------- --------- --------- --------- ---------
Net income.............................. $ 248 1.1% $ 1,923 6.4% $ 3,846 7.8%
========= ========= ========= ========= ========= =========
</TABLE>
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995
Revenues increased 63.5% to $49.3 million from $30.1 million. The increase
was primarily due to revenues from five facilities opened or acquired during
1995 and a new facility opened during 1996.
22
<PAGE>
Gross profit as a percentage of revenues increased to 15.8% from 15.2%. The
increase in gross profit as a percentage of revenues was generally attributable
to growth in repair and recycling operations which are characterized by lower
raw material costs as a percentage of revenues and generally have higher gross
margins than new pallet operations. Gross profit increased approximately 69.9%
to $7.8 million from $4.6 million, primarily as a result of increased revenues
associated with the new facilities.
Selling, general and administrative expenses increased 48.8% to $3.2
million from $2.1 million and were generally attributable to additional costs
associated with the facilities opened or acquired during both periods. Because
of the fixed nature of certain selling, general and administrative expenses,
such expenses decreased as a percentage of revenues to 6.5% from 7.1%.
Interest expense remained fairly constant between periods.
Other income (expense), net changed to a net expense of $153,000 from
income of $19,000 due primarily to a casualty loss.
Income before taxes increased to $4.1 million from $2.0 million.
YEAR ENDED NOVEMBER 30, 1995 COMPARED TO YEAR ENDED NOVEMBER 30, 1994
Revenues increased by 30.4% to $30.1 million from $23.1 million and
primarily reflected the opening of five new repair facilities in 1995.
Gross profit as a percentage of revenues increased to 15.2% from 10.2%. The
increase in gross profit as a percentage of revenues was generally attributable
to growth in repair and recycling operations which are characterized by lower
raw material costs as a percentage of revenues and generally have higher gross
margins than new pallet operations. Gross profit increased approximately 94.0%
to $4.6 million from $2.4 million, also as a result of lower raw material costs
and additional revenues.
Selling, general and administrative expenses increased 21.0% to $2.1
million from $1.8 million. The increase in operating expenses was primarily
attributable to increased infrastructure costs associated with the additional
facilities opened in 1995.
Interest expense increased to $450,000 from $335,000. The increase was
generally attributable to higher interest expense necessary to fund working
capital needs associated with the new facilities opened in 1995.
Income before taxes increased to $2.0 million from $254,000.
LIQUIDITY AND CAPITAL RESOURCES -- FRASER
The Company generated $7.2 million in net cash from operations for the year
ended November 30, 1996. Net cash used in investing activities was approximately
$3.4 million, principally for the purchase of property and equipment related to
the opening of new facilities. Net cash used in financing activities was $3.9
million in 1996, principally for the repayment of long-term debt.
23
<PAGE>
RESULTS OF OPERATIONS -- RIDGE
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
FISCAL YEAR ENDED JANUARY
---------------------------------------------------------------- JANUARY 28, 26,
JULY 31, 1994 JULY 30, 1995 JULY 28, 1996 1996 1997
-------------------- -------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 47,946 100.0% $ 54,450 100.0% $ 48,341 100.0% 22,640 100.0% 24,090
Cost of sales................. 40,606 84.7 46,388 85.2 40,540 83.9 19,008 84.0 21,126
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.............. 7,340 15.3 8,062 14.8 7,801 16.1 3,632 16.0 2,964
Selling, general and
administrative expenses..... 4,018 8.4 3,826 7.0 3,825 7.9 1,929 8.5 1,876
Supplemental profit sharing
contribution................ -- -- -- -- -- -- -- -- 618
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Income from operations........ 3,322 6.9 4,236 7.8 3,976 8.2 1,703 7.5 470
Interest expense.............. (80) (0.1) (962) (1.8) (1,032) (2.1) (535) (2.4) (398)
Other income (expense), net... 922 1.9 101 0.2 199 0.4 89 0.4 83
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before tax...... 4,164 8.7 3,375 6.2 3,143 6.5 1,257 5.5 155
Income taxes (benefit)........ 99 0.2 83 0.2 76 0.2 30 0.1 15
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)............. $ 4,065 8.5% $ 3,292 6.0% $ 3,067 6.3% $ 1,227 5.4% 140
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Revenues...................... 100.0%
Cost of sales................. 87.7
---------
Gross profit.............. 12.3
Selling, general and
administrative expenses..... 7.7
Supplemental profit sharing
contribution................ 2.6
---------
Income from operations........ 2.0
Interest expense.............. (1.7)
Other income (expense), net... 0.3
---------
Income (loss) before tax...... 0.6
Income taxes (benefit)........ --
---------
Net income (loss)............. 0.6%
=========
SIX MONTHS ENDED JANUARY 26, 1997 COMPARED TO SIX MONTHS ENDED JANUARY 28, 1996
Revenues increased approximately 6.4% to $24.0 million from $22.6 million.
This increase resulted from an increase in the average sales price of new
pallets, as well as an increase in the number of new pallets sold to CHEP. This
increase was offset by a decline in revenues from sales of agricultural
harvesting boxes, largely as a result of competition from plastic agricultural
containers.
Gross profit as a percentage of revenues declined to 12.3% from 16.0%,
primarily as a result of higher raw materials costs, a portion of which were not
passed on to customers due to competitive pressures. Higher raw material costs
were partially offset by reductions in manufacturing costs as a result of
improved operational efficiencies. Gross profit declined approximately 18.0% to
$3.0 million from $3.6 million.
Selling, general and administrative expenses remained relatively stable at
approximately $1.9 million.
In December 1996, the Company declared a supplemental profit sharing
contribution of approximately $618,000. In connection with the acquisition,
PalEx has agreed to satisfy such obligation through the issuance of
approximately 82,500 shares of PalEx common stock.
Interest expense declined approximately 25.6% to $398,000 from $535,000 as
a result of the repayment of a portion of the Ridge Notes.
Income before taxes declined to $155,000 from $1.3 million.
TWELVE MONTHS ENDED JULY 28, 1996 COMPARED TO TWELVE MONTHS ENDED JULY 30, 1995
Revenues declined 11.2% to $48.3 from $54.5 million. This decline was
partly attributable to a decrease in the average sales price of new pallets, a
decrease which reflects lower raw material costs, a portion of which were passed
on to customers in the form of lower sales prices. The balance of the decline
was attributable both to fewer new pallets sold as a result of smaller citrus
and produce harvests and to a decrease in sales of agricultural harvesting boxes
largely as a result of competition from plastic agricultural containers.
Gross profit as a percentage of revenues improved to 16.1% from 14.8%. The
increase in gross profit percentage was generally attributable to declining raw
material costs as a percentage of sales. Labor and maintenance costs declined
$600,000 as a result of improved efficiencies. As a result of lower revenues,
gross profit declined 3.2% to $7.8 million in 1996 from $8.1 million in 1995.
Selling, general and administrative expenses remained constant at $3.8
million in 1996 and 1995. Despite lower production volumes, the Company
maintained its sales force, infrastructure and quality assurance training
programs in anticipation of improving market conditions and future growth.
Interest expense increased 7.3% to $1.0 million from $962,000 as a result
of an increase in interest rates, partially offset by the repayment of a portion
of the Ridge Notes. Other income (expense), net
24
<PAGE>
includes interest income on invested cash and cash equivalents and increased to
$199,000 from $101,000 due to higher levels of cash equivalents available for
investment.
Income before taxes decreased 6.9% to $3.1 million from $3.4 million.
TWELVE MONTHS ENDED JULY 30, 1995 COMPARED TO THE TWELVE MONTHS ENDED JULY 31,
1994
Revenues increased 13.6% to $54.5 million from $47.9 million. The increase
was partly attributable to an increase in the average sales price of new
pallets, an increase which reflects higher raw material costs, which were
generally passed on to customers in the form of higher sales prices, as well as
an increase in the volume of new pallets sold to CHEP. The remainder of the
increase was attributable to a significant increase in revenues from the sale of
specialty agricultural bins which more than offset declining revenues from
agricultural harvesting boxes attributable to competition from plastic
agricultural containers.
Gross profit as a percentage of revenues declined to 14.8% from 15.3%. The
decrease in a gross profit as a percentage of revenues was generally
attributable to higher raw material costs, including a $4.6 million increase in
lumber costs and a $695,000 increase in fastener costs.
Selling, general and administrative expenses decreased to $3.8 million from
$4.0 million as a result of salary reductions in connection with the Ridge
Buyout.
Interest expense increased to $962,000 from $80,000 as a result of the
issuance of the Ridge Notes as consideration in the Ridge Buyout.
Other income (expense), net in 1994 includes a gain of approximately
$631,000 resulting from the cancellation of deferred compensation agreements in
connection with the Ridge Buyout. Interest income also declined to $131,000 from
$276,000 as a result of lower levels of invested cash and cash equivalents
during the period.
Income before taxes decreased 18.9% to $3.4 million from $4.2 million.
LIQUIDITY AND CAPITAL RESOURCES -- RIDGE
The Company generated $4.4 million of net cash from operating activities
during fiscal year 1996. Net cash used in investing activities was approximately
$1.7 million and was expended primarily for purchases of property and equipment.
Net cash used in financing activities was $5.7 million during 1996 and was
primarily used for distributions to stockholders and repayment of the Ridge
Notes and long-term debt.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Seasonality in the Company's results of operations varies by region. The
southeastern region has a significant number of agricultural customers and
typically experiences greater demand during harvesting periods (October through
May) with significantly lower demand in the summer months. Moreover, yearly
results can also fluctuate significantly in the southeast region depending on
the size of the citrus and produce harvests, which, in turn, largely depend on
the occurrence and severity of freezing weather. Facilities in the southwestern
region supplying agricultural customers can experience similar fluctuations. The
Company's locations serving predominantly manufacturing and industrial customer
bases experience significantly less seasonality. In addition, adverse weather
conditions may affect the Company's ability to obtain adequate supplies of
lumber at a reasonable cost. In October through December of 1996, the Company
experienced higher lumber costs resulting from the impact of wet weather on the
harvesting of hardwood timber in the southeast. Additionally, freezing weather
conditions in south Florida during January 1997 adversely impacted the produce
harvest thereby reducing the demand for pallets. The Company expects these two
conditions to adversely affect its results of operations for the first fiscal
quarter ending February 1997. Finally, quarterly results may also be materially
affected by the timing of acquisitions and the timing and magnitude of
acquisition assimilation costs, costs of opening new facilities, gain or loss of
a material customer, variation in product mix and weather conditions.
Accordingly, the operating results for any three-month period are not
necessarily indicative of the results that may be achieved for any subsequent
fiscal quarter or for a full fiscal year. See "Risk Factors -- Weather
Conditions" and "-- Seasonality; Fluctuation of Quarterly Operating Results."
INFLATION
Inflation has not had a material impact on the Company's results of
operations for the last three years.
25
<PAGE>
BUSINESS
PalEx was formed in January 1996 to create a national provider of pallets
and related services. Concurrently with the closing of this Offering, PalEx will
acquire three of the leading U.S. pallet businesses, making it one of the
largest producers of new pallets and one of the largest pallet recyclers in the
U.S. The Company believes that these acquisitions will enable it to capitalize
on the significant trends currently affecting product manufacturing and
distribution practices throughout the U.S., including the increasing reliance by
shippers and logistics agents on a smaller number of better capitalized, more
sophisticated vendors. The Company will provide a broad variety of pallet
products and related services, including the manufacture and distribution of new
pallets; the recycling of pallets (including used pallet retrieval, repair,
remanufacture and secondary marketing); maintenance of depot operations and the
sorting and storage of pallets for selected customers; and the processing and
marketing of various wood-based by-products derived from pallet recycling
operations. The Company will initially operate from 22 facilities in Florida,
Texas, Virginia, California, Arkansas, Georgia, Illinois, Mississippi and South
Carolina. For its fiscal year ended November 30, 1996, the Company generated pro
forma combined revenues, income from operations and net income of $102.0
million, $8.4 million and $4.9 million, respectively. Ridge and Fraser, two of
the Founding Companies, are currently among the largest pallet businesses in the
U.S., based on revenues, and Interstate is regarded in the pallet industry as a
leading developer of pallet recycling services and products. The Company intends
to actively pursue acquisitions of additional leading pallet companies as part
of its growth strategy.
INDUSTRY OVERVIEW
Based on information supplied by industry sources, the Company estimates
that the U.S. pallet industry generated revenues of approximately $5 billion in
1995 and that it is served by approximately 3,600 companies, most of which are
small, privately held entities operating in only one location and serving
customers within a limited geographic radius. The industry is generally composed
of companies that manufacture new pallets and companies that repair and recycle
pallets. The Company estimates, based on industry sources, that during 1995
approximately 450 million new wooden pallets were produced. The Company
estimates there are more than two billion pallets in circulation in the U.S.
today.
A pallet is a platform, usually made of wood, that is used for storing and
shipping goods. Pallets are used in virtually all U.S. industries where products
are physically distributed, including the automotive, chemical, consumer
products, grocery, produce and food production, paper and forest products,
retail, and steel and metals industries. Pallets come in a wide range of shapes
and sizes. Although pallets are primarily made of wood, they may also be made
from steel, plastic, cardboard, molded wood fiber and other materials to satisfy
smaller niche markets. The Company believes that there are over 1,000 different
sizes and specifications of pallets used in North America. The grocery industry,
however, which accounts for approximately one-third of all new pallets produced,
uses a standard size 48 x 40 pallet, although many different styles and
specifications are manufactured for use in that industry. Other industries
utilize specifications which are appropriate for their particular needs. Based
on information supplied by industry sources, the Company believes that in 1995
over 90% of the pallets used were of the traditional wooden type, fabricated
from lumber and metal fasteners. The wooden pallet has traditionally been the
basis for the design of storage racks, warehouse storage areas, forklifts, docks
and containers used in shipping goods.
The pallet industry has experienced significant changes and growth during
the past several years. These changes are due, among other factors, to the focus
by FORTUNE 1000 businesses on improving the logistical efficiency of their
manufacturing and distribution systems. This focus has caused many of these
businesses to attempt to reduce significantly the number of vendors serving them
in order to simplify their procurement and product distribution processes. It
has also prompted large manufacturers and distributors to outsource key elements
of those processes that are not within their core competencies and to develop
just-in-time procurement, manufacturing and distribution systems. With the
adoption of these systems, expedited product movement has become increasingly
important and the demand for a high quality source of pallets has increased.
Palletized freight facilitates movement through the supply chain, reducing
costly loading and unloading delays at distribution centers and warehouse
facilities. However, the use of low-quality or improperly sized pallets may
increase the level of product damage during shipping or storage. As a result,
26
<PAGE>
there has been an increased demand for high-quality pallets in an attempt to
reduce product damage during shipping and storage.
The broad changes affecting U.S. industry have created significant demand
for higher quality pallets distributed through an efficient, more sophisticated
system. Environmental and cost concerns have also accelerated the trend toward
increased reuse or "recycling" of previously used pallets, further increasing
the importance of the quality of newly manufactured pallets. In recognition of
these trends, CHEP has established a national pallet leasing program that
provides high-quality pallets to customers throughout the U.S. for a daily fee.
CHEP is a partnership created by Brambles Industries Limited, an Australian
publicly-held corporation, and GKN, Ltd., a publicly-held U.K. corporation.
Ridge and Fraser, two of the Founding Companies, manufacture and repair pallets
for CHEP and provide a variety of logistical services with respect to its
existing pallet pool, including the repair, storage and just-in-time delivery of
pallets. CHEP currently does not manufacture pallets and engages in limited
repair operations. During the fiscal year ended November 30, 1996, approximately
34% of the Company's pro forma combined revenues and a significant percentage of
the Company's growth were attributable to CHEP. The Company expects to continue
to build its relationship with CHEP both geographically and by providing
additional logistical services.
CHEP's pallet leasing system represents a significant change in the U.S.
pallet market. CHEP leases a high quality, standardized and easily identifiable
(all CHEP pallets are painted blue) 48 40pallet, primarily for use by grocery
and consumer products customers. CHEP pallets are manufactured to strict
specifications by vendors, including the Company, that have been selected based
on their ability to provide large volumes of pallets manufactured to CHEP
specifications in a timely manner. The advantages CHEP offers to its customers
are high-quality, uniform pallets and just-in-time delivery capabilities.
STRATEGY
The Company's goal is to become a leading national provider of pallets and
related services by pursuing an aggressive acquisition strategy and by
continuing to expand its existing operations.
GROWTH THROUGH ACQUISITIONS. The Company intends to actively pursue
acquisitions of leading companies whose management and operating philosophies
are complementary to those of the Founding Companies. The Company also intends
to expand within its existing markets through "tuck-in" acquisitions to
increase its market penetration as well as to provide a broader range of
services to existing customers in those markets. These tuck-in acquisitions will
generally involve smaller pallet companies whose operations can be incorporated
into the Company's existing operations without a significant increase in
infrastructure.
INTERNAL GROWTH. The Company has opened nine new locations in the past
three years and expects to open additional locations in the future. The Company
intends to expand the service offerings at many of its locations to include a
combination of manufacturing, repair, recycling and the sale of by-products. The
Company also expects to be able to accelerate the internal growth of the
Founding Companies and businesses acquired in the future by continuing to
develop the Company's relationship with CHEP and other large customers and by
developing and implementing a "best practices" program.
PalEx believes that a significant market opportunity exists for a company
that can consistently offer high-quality pallets and related value-added
services to large pallet users in the U.S. The Company believes that the
prominence and operating strength of the Founding Companies and the experience
of its executive management will provide the Company with a significant
competitive advantage as it pursues its growth strategy.
DESCRIPTION OF SERVICES
NEW PALLET MANUFACTURING. New pallet manufacturing represents
approximately 60% of the Company's pro forma combined revenues. The
manufacturing process for new pallets at each of the Company's facilities is
generally the most capital intensive part of the business, with the majority of
assembly and construction being automated. New pallets are manufactured from an
assortment of wood products, varying in type and quality, with construction
specifications being determined by the pallet's end use. The Company believes
that approximately 70% of the wood used in new pallets manufactured in North
America consists of hardwood (including, oak, poplar, alder and gum) with the
balance consisting of pine or other softwoods.
The Company utilizes sawing equipment which cuts large wood sections to
specification. The cut wood is then transported to assembly points where
employees load the side boards ("stringers") and deck boards into nailing
machines which nail the pallets together. A typical nailing machine can produce
an
27
<PAGE>
average of 150 pallets per hour with three to five employees. After construction
is completed, pallets are transported to a stacker for shipment or storage. More
customized or smaller orders may be manufactured by hand on assembly tables
utilizing two laborers with pneumatic nailers. The Company typically
manufactures pallets upon receipt of customer orders and does not generally
maintain significant finished goods inventory.
REPAIR, REMANUFACTURE AND RECYCLING. A large portion of new pallets is
currently discarded by pallet users after one trip. However, pallets can be
recovered, repaired, if necessary, and reused. In addition, used pallets which
are beyond repair can be disassembled and the recovered lumber can be reused in
repairing used pallets. Pallet repair and recycling operations are initiated
with the retrieval or purchase of used pallets from a variety of sources. The
condition and size of these pallets vary greatly. Once obtained, the pallets are
sorted by size and condition. A portion of the pallets may require no repair and
can be resold or returned immediately. Pallets that can be repaired have their
damaged boards replaced with salvaged boards or boards from new stock
inventoried at the facility. Pallets that cannot be repaired are dismantled and
the salvageable boards are recovered for use in repairing and building other
pallets. The remaining damaged boards may be ground into wood fiber, which the
Company sells for use as landscaping mulch, fuel, animal bedding, gardening
material and other uses. Despite recent increases in levels of automation,
pallet recycling remains a labor intensive process.
PALLET MANAGEMENT. Pallet management is the process of providing a
combination of services related to a customer's pallet usage, including the
manufacture, repair, retrieval, delivery and storage of pallets as well as the
disposal of unusable pallets and component parts. In a typical arrangement, the
Company will contract with a customer to remove all pallets from a particular
location and transport them back to the Company's repair facility. The pallets
are sorted and repaired as needed and sold to a third party, returned to either
the customer or his supplier, or placed in storage and made available for return
to service ("depot services"). In a typical arrangement, the Company will
contract with a customer to perform any or all of the management services
available. Both Fraser and Interstate have developed such programs and believe
that they may provide a source of additional revenues when applied throughout
the Company.
PROPERTY AND EQUIPMENT
At February 15, 1997, the Company maintained 22 facilities. Most of the
Company's facilities offer more than one service. Of the Company's facilities, 6
are owned and 16 are leased. The Company's corporate headquarters are located in
Houston, Texas. The paragraphs below summarize the Company's primary operating
facilities and provide the number of employees at each location, including
administrative personnel, as of February 15, 1997. All of the Company's
facilities except for those located at Foreman, Arkansas, Bartow, Florida,
Homeland, Florida, Hazlehurst, Georgia, Walterboro, South Carolina and New
Boston, Texas, are leased. There are no major encumbrances on the titles to the
owned properties or to the leasehold interests in any of the leased properties,
except for liens on the Walterboro, South Carolina facilities securing the
payment of indebtedness incurred to finance these facilities. The Ridge Notes,
which are expected to be repaid in connection with the Offering, are secured by
the Bartow, Florida, Homeland, Florida, and Hazlehurst, Georgia facilities. See
"Certain Transactions -- Transactions Including Certain Officers, Directors and
Stockholders."
BENTONVILLE, ARKANSAS. The Bentonville facility was established in 1994,
has a work-force of approximately 3 employees and serves as a depot for CHEP
pallets as well as a repair facility for Wal-Mart pallets. The Bentonville
facility also sells repaired pallets to the grocery, agricultural and poultry
industries.
CLARKSVILLE, ARKANSAS. The Clarksville facility initiated operations in
1995 and has approximately 3 employees. The facility was initially operated as a
repair facility and currently serves only as a CHEP depot.
FOREMAN, ARKANSAS. The Foreman plant was purchased in 1982 and has
approximately 15 employees. The facility produces pine lumber for use in the
construction of pallets at various of the Company's manufacturing and repair
facilities.
MENA, ARKANSAS. The Mena facility was purchased in 1994 and has
approximately 20 employees. The lumber mill located on the facility processes
lumber for use at the Company's manufacturing and repair facilities in New
Boston, Texas as well as for sale to third parties.
MULBERRY, ARKANSAS. The Company's Mulberry plant was purchased in 1992 and
has approximately 82 employees. The Mulberry facility manufactures new pallets
for the grocery and manufacturing industries in Oklahoma and Arkansas and also
produces cut stock for use in the Company's manufacturing and repair facilities.
28
<PAGE>
SEARCY, ARKANSAS. The Searcy facility was purchased in 1994 and employs
approximately 34 workers. The Searcy facility serves as a depot and repair
facility for CHEP pallets as well as a repair facility for Wal-Mart pallets. The
Searcy facility also sells repaired pallets to the grocery, agricultural and
poultry industries.
TRACY, CALIFORNIA. The Company's operations in the San Francisco Bay area
were established in 1995 to serve as a CHEP depot and repair facility. The
facility employs approximately 133 workers and the Company anticipates that it
will begin operations as a non-CHEP repair facility in the future.
BARTOW, FLORIDA. The Company's Bartow facility was established in 1967 and
employs approximately 164 workers. Citrus and produce distributors are the
Bartow facility's largest customers, and the plant produces a broad variety of
new pallets as well as agricultural harvesting boxes and specialty bins, in many
instances custom designed to customer specifications.
HOMELAND, FLORIDA. The Homeland plant was established in 1983 and employs
approximately 94 workers. The Homeland facility produces both new and recycled
pallets, primarily for industrial use, and also processes lumber by-product for
sale as landscaping mulch.
HAZLEHURST, GEORGIA. The Hazlehurst facility was established in 1977 and
employs approximately 136 workers. The Hazlehurst facility produces new pallets
for CHEP, with additional non-CHEP production sold to general industrial
accounts.
SMARR, GEORGIA The Smarr facility was established in 1992 and is on the
site of a lumber mill which provides raw material for its operations as well as
lumber for the Bartow facility. The plant employs approximately 83 workers and
sells production both to local industrial customers as well as to the Company's
Florida customers during peak produce and citrus harvesting seasons.
EAST ST. LOUIS, ILLINOIS. The Company established its East St. Louis
operation in 1995 as a CHEP repair facility. The facility employs approximately
51 workers and the Company anticipates adding non-CHEP repair operations to the
facility in the future.
WALTERBORO, SOUTH CAROLINA. The Company's Walterboro plant employs
approximately 79 workers and provides new pallets to local industrial accounts
and also supplements the Bartow facility's sales to agricultural and industrial
customers during peak seasons. The facility has been recently updated to
manufacture CHEP pallets.
HORN LAKE, MISSISSIPPI. The Company opened the Horn Lake facility (located
in the Memphis, Tennessee metropolitan area) in October 1996 and employs
approximately 16 workers. This facility serves as both a CHEP depot and repair
and recycling facility for non-CHEP pallets. The facility's customers are
primarily manufacturing facilities in and around Memphis.
AMARILLO, TEXAS. The Company produces new and remanufactured pallets in
its Amarillo facility which was established in 1976 and which employs
approximately 23 workers. The Amarillo facility's primary customers are the
manufacturing and beef packing industries of North Texas.
BIG SPRING, TEXAS. The Company's Big Spring facility initiated operations
in 1977 and employs approximately 55 workers, primarily in the production of new
pallets. The facility services several West Texas oil and chemical companies.
FORT WORTH, TEXAS. The Company's facility in Fort Worth opened in February
1996 and employs approximately 85 workers. The Fort Worth facility was
established to provide CHEP depot and repair operations. The Company currently
anticipates expanding into non-CHEP pallet repairs in the future.
NEW BOSTON, TEXAS. The New Boston location opened in 1994 as the Company's
largest facility in Texas and has approximately 215 employees. The New Boston
facility manufactures new and repaired pallets. The plant serves customers in
Texas, Oklahoma, Arkansas and Louisiana.
SAN ANTONIO, TEXAS. The Company supplies its South Texas customers from
its location in San Antonio. This facility, opened in 1995, is a CHEP depot and
repair facility and also repairs pallets for a large regional grocery chain. The
plant employs approximately 57 people.
TEMPLE, TEXAS. The Temple location was established in 1995 and employs
approximately 23 workers. The Temple facility serves as a CHEP depot and repair
facility as well as a repair facility for Wal-Mart pallets. The facility also
repairs pallets for sale to central Texas grocery, manufacturing and medical
industry customers.
RICHMOND, VIRGINIA. The Company employs approximately 60 workers in two
facilities located in Richmond, Virginia. Repair and recycling of used pallets
constitutes a significant portion of the operations of these facilities which
also offer pallet management systems to local industrial customers. The Richmond
29
<PAGE>
facilities are also engaged in the manufacture of landscape mulch, playground
surfaces and other innovative applications of pallet by-products.
The Company believes that its properties are generally adequate for its
present needs. Furthermore, the Company believes that suitable additional or
replacement space will be available when required.
OPERATIONS
The Company will centralize its consolidated financial reporting, cash
management, training, human resources, safety and merger and acquisition
activities. The Company intends to otherwise operate on a regional basis, with
the management of each operating location responsible for its day-to-day
operations, profitability and growth. Local management will utilize the
Company's "best practices" program which seeks to replicate the Founding
Companies' best practices throughout the entire Company with respect to new
pallet manufacturing, pallet repair and recycling techniques, transportation and
other logistical activities, worker training and participation programs,
financial controls and purchasing information in order to improve productivity,
lower operating costs and improve customer satisfaction to stimulate internal
growth.
SALES AND MARKETING
The Company currently sells to customers within its various geographic
locations. The primary sales and marketing activities involve direct selling by
the Company's sales force and by members of senior management to local and
regional customers at the plant level and to large accounts and target
industries more broadly on a geographic basis. Since pricing is a function of
regional lumber and delivery costs, pricing is established at the regional
level.
Because many of the Company's customers have the need for similar services
on a national scale, the Company is developing a national sales and marketing
plan to provide such services at many locations throughout the U.S. The
Company's network of facilities will allow these customers to: (i) centralize
purchases of new and recycled pallets; (ii) obtain convenient and dependable
service and a consistent supply of uniform quality pallets; (iii) achieve
greater efficiencies in their pallet use; and (iv) meet corporate recycling
goals. The Company has developed relationships with several national customers
and intends to attempt to provide service to these and numerous other customers
on a local, regional and national basis. The pallet needs of national companies
are not uniform and the Company intends to tailor its national programs for each
customer. These programs include a combination of sourcing, retrieving,
repairing and recycling pallets according to individual customer requirements.
CUSTOMERS
The Company seeks to efficiently serve large numbers of customers across
diverse markets and industries to provide a stable and diversified base for
ongoing sales of products and services. Customers include the automotive,
chemical, consumer products, grocery, produce and food production, paper and
forest products, retail, and steel and metals industries and are both regional
and national in scale. Because a significant part of the Company's products are
sold to the produce and citrus industries, the Company's sales volumes in
certain regions tend to be seasonal. During fiscal year ended November 30, 1996,
the Company sold pallets to over 1,200 customers, with CHEP accounting for
approximately 34% of the Company's pro forma combined revenues. No other single
customer accounted for 10% or more of the Company's pro forma combined revenues.
The Company enters into contracts with CHEP on a facility by facility basis and
the terms of such contracts vary in accordance with the service to be provided.
Depot agreements may be terminated with or without cause, while repair and
depot/repair agreements may only be terminated by CHEP for cause and have both
indefinite and fixed terms of between one and three years. All of the CHEP
contracts prohibit the Company's contracting facilities from competing with CHEP
during the term of the agreement and for a period of up to three years
thereafter in the pallet leasing business and from repairing pallets for other
pallet leasing companies. The CHEP contracts typically do not provide for fixed
volumes of repaired or new pallets.
MANAGEMENT INFORMATION AND CONTROLS
The Company will centralize its consolidated accounting and financial
reporting activities at its operational headquarters in Bartow, Florida, while
basic accounting activities will be conducted at the regional level. The Company
believes that its current information systems hardware and software are adequate
to meet current and perceived needs for financial reporting and internal
management control information and other necessary information. The Company
believes this system will enhance its ability to: (i) monitor each regional
operation; (ii) prepare both operations and capital asset budgets and budget
30
<PAGE>
variances; (iii) assimilate newly acquired operations into its network through
standard reporting mechanisms; (iv) implement operational and productivity
measurements and benchmarking; and (v) conduct individual customer profitability
analyses.
RAW MATERIALS
The primary raw materials used in new pallet manufacturing are lumber and
plywood. Fraser and Ridge have both developed long-term relationships with their
lumber and plywood vendors and the Company believes that these relationships, as
well as the Company's ability to pursue larger volume purchases, will help to
ensure adequate lumber supplies at competitive prices in the future. During the
fiscal year ended November 30, 1996, the Company purchased lumber and plywood
from over 200 vendors. Two of these vendors accounted for 13% and 11%,
respectively, of the Company's total pro forma combined lumber purchases during
the fiscal year ended November 30, 1996. The Company does not believe that the
loss of either of these vendors would materially adversely affect its financial
condition or results of operations. The Company intends to continue to pursue a
strategy of purchasing and upgrading low grade and alternative sources of lumber
as well as exploiting pricing aberrations and market trends to take advantage of
lower prices in the marketplace as they occur.
Pallet prices are closely related to the changing costs and availability of
lumber, the principal raw material used in the manufacture and repair of wooden
pallets. Typically, lumber prices fall in oversupplied lumber markets, enabling
small pallet manufacturers with limited capital resources to procure lumber and
initiate production of low-cost pallets, depressing pallet prices overall and
adversely affecting the Company's revenues and operating margins. While the
Company believes that it will benefit from strong relationships with multiple
lumber suppliers, there can be no assurance that the Company will be able to
secure adequate lumber supplies in the future. Lumber supplies and costs are
affected by many factors outside the Company's control, including governmental
regulation of logging on public lands, lumber agreements between Canada and the
U.S. and competition from other industries that use similar grades and types of
lumber. In addition, adverse weather conditions may affect the Company's ability
to obtain adequate supplies of lumber at a reasonable cost. In November and
December 1996, the Company experienced higher lumber costs resulting from the
impact of wet weather on the harvesting of hardwood timber in the southeast. The
Company tries to take advantage of the price volatility of lumber by buying
additional quantities of lumber when prices are favorable and storing the
inventory for later use. The Company also is able to buy low quality lumber and
upgrade such lumber at its own plants. Though the Company has studied the broad
use of alternative materials for the manufacture of pallets, such as plastic, it
believes that there is not currently an available alternative raw material that
possesses the tensile strength, recyclability and low cost of wood. The Company
continues to evaluate alternatives to wood and is receptive to their future use
in pallet production.
The Company sources the majority of its pallets for reconstruction from
businesses that use pallets and from trucking companies. Businesses that receive
and ship a significant amount of goods are generally good sources for used
pallets. Often the pallets they receive are damaged or do not meet their size or
other specifications for internal systems or shipping. As a result, these
businesses accumulate pallets that can be recycled. The Company identifies these
sources through establishing relationships with pallet users, and by direct
solicitation, telemarketing and advertising. The Company generally achieves
timely pallet removal by placing a trailer at a source which loads unwanted
pallets onto the trailer. The Company then removes the load of pallets at the
same time it delivers recycled pallets to the pallet user. In some cases, the
Company is paid a tipping fee for hauling away the used pallets or is allowed to
take the pallets away at no charge, and, in other cases, the Company buys the
pallets.
COMPETITION
The Company believes that the principal competitive factors in the pallet
industry are price, quality of services and reliability. With over 3,600
industry participants, the pallet manufacturing industry has been and is
expected to remain extremely fragmented and highly competitive. While there are
several companies which have attempted to establish national pallet operations,
most of the Company's competitors are small, privately held companies that
operate in only one location and serve customers within a limited geographic
radius. Competition on pricing is often intense and the Company may face
increasing competition from pallet leasing or other pallet systems providers,
which are marketed as less expensive alternatives to new pallet purchasers.
CHEP's pallet leasing system competes with new pallet sales to the grocery and
wholesale distribution industries, and may expand into other industries in the
future. In addition, pallet manufacturing and recycling operations are not
highly capital intensive and the barriers to entry in such
31
<PAGE>
businesses are minimal. Certain other smaller competitors may have lower
overhead costs and consequently, may be able to manufacture or recycle pallets
at lower costs than the Company. Other companies with significantly greater
capital and other resources than the Company (including CHEP) may enter or
expand their operations in the pallet manufacturing and recycling businesses in
the future, changing the competitive dynamics of the industry. The Company has
in the past and will continue to compete with lumber mills in the sale of new
pallets. The lumber mills typically view pallet manufacturing as an opportunity
to use the lower grade lumber that would otherwise be waste for the mill. While
the Company estimates, based on industry sources, that non-wooden pallets
currently account for less than 10% of the pallet market, there can be no
assurance that the Company will not face increasing competition from pallets
fabricated from non-wooden components in the future. For example, Ridge
currently sells agricultural harvesting boxes. These products have recently
faced increasing competition from plastic agricultural containers which has
reduced the number of agricultural harvesting boxes sold by Ridge. The Company
expects competition with plastic agricultural containers to continue in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Interstate and its stockholder are parties to non-competition agreements
which may restrict until January 14, 1998, Interstate's, Interstate's
affiliates, or such stockholder's ability to engage in any activity or business
enterprise or own an interest in any entity which engages in any activity or
business enterprise which competes with the Alliance, an organization whose
membership includes pallet recyclers and manufacturers that was created to
pursue the national and global marketing and management of pallet systems,
including the sale or leasing of pallets. Interstate and its sole stockholder,
Stephen C. Sykes, joined the Alliance in October of 1995 and in connection
therewith executed agreements pursuant to which each agreed not to compete with
the business of the Alliance for a period of one year from withdrawal. Mr. Sykes
and Interstate notified the Alliance of such withdrawal on January 14, 1997, in
connection with Interstate's agreement to merge with PalEx. In response, the
Alliance notified Interstate that it intends to enforce the terms of the
non-compete agreements as it deems appropriate, although the Alliance has not to
date commenced legal proceedings and the Company does not know when, if ever,
such proceedings would commence. The non-compete agreements explicitly exclude
from their coverage any product or services sold or offered by Interstate at the
time it became a member of the Alliance. Because Interstate was engaged in the
manufacture and recycling of pallets in October 1995 and continues in these
business lines currently, the Company believes that the non-compete agreements
do not apply to Interstate's current business. The Alliance could seek either
injunctive relief or monetary damages from Interstate. However, given the non-
compete agreements' short duration and exclusion of the business currently
conducted by Interstate, the Company believes that such agreements, even if
enforced, would not have a material adverse effect on its operations.
LITIGATION
Each of the Founding Companies has, from time to time, been a party to
litigation arising in the normal course of its business, most of which involves
claims for personal injury or property damage incurred in connection with its
operations. Management believes that none of these actions will have a material
adverse effect on the financial condition or results of operations of the
Company.
EMPLOYEES
At February 15, 1997, the Company had approximately 1,400 employees. The
Company is not a party to any collective bargaining agreements. The Company
believes that its relationship with its employees is satisfactory.
32
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors, executive officers and certain key employees, and those persons who
will become directors and executive officers in connection with this Offering:
NAME AGE POSITION
- ---------------------------- --- -------------------------------------------
Vance K. Maultsby, Jr....... 44 President and Chief Executive Officer
A. E. Holland, Jr........... 47 Chief Operating Officer, Director
Troy L. Fraser.............. 47 Chief Development Officer, Director
Casey A. Fletcher........... 42 Chief Accounting Officer and Secretary
Stephen C. Sykes............ 52 President -- Interstate Pallets, Director
Tucker S. Bridwell.......... 45 Director(1)(2)
John E. Drury............... 52 Director(1)(2)
Sam W. Humphreys............ 36 Director(1)(2)
- ------------
(1) Member of audit committee.
(2) Member of compensation committee.
Directors are elected at each annual meeting of stockholders. All officers
serve at the discretion of the Board of Directors, subject to terms of their
employment agreement terms. See " -- Employment Agreements."
VANCE K. MAULTSBY, JR. became President and Chief Executive Officer of the
Company in December 1996. From 1993 to 1996, Mr. Maultsby was a partner with
Ernst & Young LLP in the Dallas, Texas office where he managed the Dallas office
of its Corporate Finance Group. From 1989 to 1992, Mr. Maultsby was chief
executive officer of Alemar Financial Company (later Alemar Cost Reduction,
Inc.) which provided financial advisory services to a variety of industries.
From 1985 to 1989, Mr. Maultsby was an officer in the Corporate Finance Group
for Stephens Inc., an investment banking firm. Prior thereto, Mr. Maultsby was a
partner with KPMG Peat Marwick, served as the National Director of its Petroleum
Industry Practice, was co-director of its Southwest Area Mergers and
Acquisitions Advisory Practice and practiced public accounting for more than
five years. Mr. Maultsby is a Certified Public Accountant.
A. E. HOLLAND, JR. will become Chief Operating Officer and a director of
the Company upon the closing of this Offering. Mr. Holland has over 25 years of
experience in the pallet industry. Mr. Holland has been associated with Ridge
since 1969 and has served as President of Ridge since 1980. Mr. Holland has
served on the Board of Directors of the NWPCA and was President of NWPCA from
1990 to 1991. Mr. Holland has served the Florida Chamber of Commerce as
Treasurer, Chairman of the Finance Committee and member of the State Strategic
Planning Committee.
TROY L. FRASER will become Chief Development Officer and a director upon
the closing of this Offering. He became President of Fraser in 1975 when he
purchased the business with his two brothers from his father. In 1988, Mr.
Fraser was elected to the Texas House of Representatives where he served three
terms, and was named the National Republican Legislator of the Year in 1991. In
November 1996, Mr. Fraser was elected to the Texas State Senate. Mr. Fraser is
currently Vice President of the NWPCA and has served for two terms on the
NWPCA's Board of Directors.
CASEY A. FLETCHER will become Chief Accounting Officer and Secretary upon
the closing of this Offering. Mr. Fletcher has been employed by Ridge since 1983
where he has served as Controller and Chief Financial Officer. Prior to his
employment with Ridge, Mr. Fletcher was associated with Arthur Young from 1976
to 1979. From 1980 to 1983, he was in private industry as an accountant. Mr.
Fletcher is a Certified Public Accountant.
STEPHEN C. SYKES will become a director of the Company upon the closing of
this Offering. Mr. Sykes founded Interstate in 1979 and has served as President
and Chief Executive Officer from its inception. From
33
<PAGE>
1974 to 1979, Mr. Sykes was the Director of Transportation for the Virginia
Division of Holly Farms Poultry. Mr. Sykes has been an active member of the
NWPCA since 1981 and served as its President from 1992 to 1993.
TUCKER S. BRIDWELL will become a director of the Company upon the closing
of this Offering. Since 1992, Mr. Bridwell has been President of Fred Hughes
Motors, Inc., the owner of ten new-car franchises in the Abilene, Texas area.
Mr. Bridwell is also the President of Topaz Exploration Company, an oil and gas
exploration company, a position he has held since 1980. From 1985 to 1992, Mr.
Bridwell was President of Ard Drilling Company, an oilfield drilling company,
and served as President of Texzona Corporation, a private investment company,
from 1979 to 1980. From 1976 to 1979, Mr. Bridwell was Tax Manager with Condley
& Company and was an accountant with Price Waterhouse from 1974 to 1976. Mr.
Bridwell is a Certified Public Accountant.
JOHN E. DRURY will become a director of the Company upon the closing of
this Offering. Mr. Drury is the Chairman and Chief Executive Officer of USA
Waste Services, Inc. ("USA Waste"), the third largest solid waste company in
North America. Mr. Drury has held these positions since May 1994, when USA Waste
and Envirofil, Inc. ("Envirofil") completed their merger. Following this
merger, USA Waste acquired publicly-held Chambers Development Company, Western
Waste Industries, Inc. and Sanifill, Inc., increasing its revenues from
approximately $100 million in 1993 to approximately $1.6 billion in 1996. From
February 1991 through April 1994, Mr. Drury was a Managing Director of Sanders
Morris Mundy, Inc., an investment banking firm. From 1982 through January 1991,
Mr. Drury was President and Chief Operating Officer of Browning Ferris
Industries, Inc. ("BFI"), where he was responsible for the worldwide
operations of BFI. Mr. Drury is a special limited partner in Main Street.
SAM W. HUMPHREYS has been a director of the Company since January 1996 and
will become non-executive Chairman of the Board upon the closing of this
Offering. He is the Vice Chairman of U.S. Delivery Systems, Inc. ("U.S.
Delivery"), the largest same-day local delivery company in the U.S. Mr.
Humphreys has held various executive positions with U.S. Delivery since April
1994. Since U.S. Delivery completed its initial public offering in May 1994, it
has completed 80 acquisitions and has grown from approximately $100 million to
approximately $800 million in annual revenues. Prior to joining U.S. Delivery,
Mr. Humphreys served from May 1993 until April 1994 as Senior Vice President and
General Counsel of Envirofil, which merged with USA Waste in April 1994. Prior
thereto, Mr. Humphreys was a partner at Andrews & Kurth L.L.P., where he was
engaged in the private practice of law for more than five years prior to joining
Envirofil. Mr. Humphreys is also a director of Aviation Sales Company, a New
York Stock Exchange listed company and one of the world's largest providers of
aircraft spare parts. Mr. Humphreys is a partner in Main Street.
The Board of Directors has established an Audit Committee and Compensation
Committee. The Audit Committee recommends the appointment of auditors and
oversees the accounting and audit functions of the Company. The Compensation
Committee determines executive officers' and key employees' salaries and bonuses
and administers the Plan. Messrs. Bridwell, Drury and Humphreys will serve as
members of the Company's Compensation Committee and Audit Committee.
DIRECTORS' COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives a fee of $1,000 for attendance at each Board of Directors
meeting and $500 for each committee meeting (unless held on the same day as a
Board of Directors meeting). Directors of the Company are reimbursed for
out-of-pocket expenses incurred in attending meetings of the Board of Directors
or committees thereof, and for other expenses incurred in their capacity as
directors of the Company. Each non-employee director will receive stock options
to purchase 20,000 shares of Common Stock upon election to the Board of
Directors and an annual grant of 5,000 options. See " -- Stock Option Plan."
34
<PAGE>
EXECUTIVE COMPENSATION
The Company was incorporated in January 1996 and, prior to this Offering,
has not conducted any operations other than activities related to the
Acquisitions and this Offering. While the Company did not pay any compensation
to its executive officers prior to December 1996, in November 1996 PalEx
recognized a nonrecurring, non-cash charge of $300,000, representing the
difference between amounts paid for the 50,000 shares of Common Stock issued to
Mr. Maultsby and the estimated fair market value of such shares on the date of
the sale assuming the Acquisitions would be consummated. During 1997 the
annualized salaries of the Company's most highly compensated executive officers
will be: Mr. Maultsby, $175,000; and $125,000 for each of Messrs. Holland,
Fletcher, Fraser and Sykes. The Company will not pay any bonuses in addition to
these salaries.
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements with each executive
officer and certain key employees of the Company which prohibits such individual
from disclosing the Company's confidential information and trade secrets and
generally restricts these individuals from competing with the Company for a
period of five years after the date of the Acquisitions. Each of the agreements
has an initial term of between one and three years and provides for an automatic
annual extension at the end of its initial term and is terminable by the Company
for "cause" upon ten days' written notice and without "cause" by either
party upon thirty days' written notice. All employment agreements provide that
if the officer's employment is terminated by the Company without "cause," such
officer will be entitled to receive a lump-sum severance payment at the
effective time of termination equal to the base salary at the rate then in
effect for the greater of (i) the time period remaining under the initial term
of the agreement or (ii) one year. In addition, all employment agreements
provide that in the event of termination without "cause," the time period
during which such officer is restricted from competing with the Company will be
shortened from five years to one year. The Company anticipates it will incur
lower selling, general and administrative expenses than the Founding Company on
a pro forma combined basis because the compensation to be paid to the executive
officers and employees by the Company is generally less than the compensation
previously paid by the Founding Companies. See "Selected Financial Data" and
"Unaudited Combined Pro Forma Financial Statements."
The employment agreements of Messrs. Maultsby, Holland, Fraser, Fletcher,
Sykes and certain key employees of the Founding Companies contain certain
provisions concerning a change-in-control of the Company, including the
following: (i) in the event five days' advance notice of the transaction giving
rise to the change in control is not received by the Company and such officer,
the change in control will be deemed a termination of the employment agreement
by the Company without "cause," and the provisions of the employment agreement
governing the same will apply, except that the severance amount otherwise
payable (discussed in the preceding paragraph) shall be tripled and the
provisions which restrict competition with the Company shall not apply; (ii) in
any change-of-control situation, such officer may elect to terminate his
employment by giving five days' written notice prior to the anticipated closing
of the transaction giving rise to the change-in-control, which will be deemed a
termination of the employment agreement by the Company without "cause," and
the provisions of the employment agreement governing the same will apply, except
that the severance amount otherwise payable shall be doubled and the time period
during which such officer is restricted from competing with the Company will be
shortened from five years to two years; and (iii) the officer must be given
sufficient time and opportunity to elect whether to exercise all or any of his
options to purchase Common Stock, including any options with accelerated vesting
under the provisions of the Plan, such that the officer may acquire the Common
Stock at or prior to the closing of the transaction giving rise to the
change-in-control, if he so desires.
STOCK OPTION PLAN
The Board of Directors has adopted, and the stockholders of the Company
approved, the Plan. The purpose of the Plan is to provide directors, officers,
key employees and certain other persons who will be instrumental in the success
of the Company or its subsidiaries with additional incentives by increasing
their
35
<PAGE>
proprietary interest in the Company. The aggregate amount of Common Stock with
respect to which options may be granted may not exceed the greater of 1,800,000
shares (subject to adjustment to reflect stock splits) or 15% of the Company's
outstanding Common Stock, as determined on each date an option is granted.
The Plan is administered by the Compensation Committee, which is composed
of non-employee directors (the "Committee"). Subject to the terms of the Plan,
the Committee generally determines to whom options will be granted and the terms
and conditions of option grants. Options granted under the Plan may be either
non-qualified stock options or may qualify as incentive stock options.
The exercise price of any option may not be less than the fair market value
of the underlying Common Stock as of the date of grant and no employee or
consultant may receive an option in any year to purchase more than 51,000 shares
of Common Stock. The Committee determines the period over which options become
exercisable, provided that all options become immediately exercisable upon death
of the grantee or upon a change-in-control (as defined in the Plan) of the
Company.
The Plan also provides for automatic option grants to directors who are not
otherwise employed by the Company or its subsidiaries. Upon commencement of
service, a non-employee director will receive a non-qualified option to purchase
20,000 shares of Common Stock, and continuing non-employee directors annually
will receive options to purchase 5,000 shares of Common Stock. Options granted
to non-employee directors are fully exercisable following the expiration of six
months from the date of grant.
Mr. Maultsby has been granted options to purchase 200,000 shares of Common
Stock under the Plan, of which 100,000 shares may be purchased at an exercise
price of $7.50 per share with the remainder of the options having an exercise
price equal to the initial public offering price. Mr. Maultsby's options vest
annually in 25% increments beginning in November 1997. The potential realizable
value of Mr. Maultsby's options, assuming 5% and 10% annual rates of
appreciation over ten years for the Company's Common Stock, is $1,507,790 and
$3,437,484, respectively. These potential realizable values were determined
based upon assumed rates of appreciation and are not intended to forecast the
possible future appreciation, if any, of the price or value of the Company's
Common Stock.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
PalEx was initially capitalized in January 1996 by Main Street. Sam W.
Humphreys, a director of the Company, is a partner in Main Street and John E.
Drury, a director of the Company, is a special limited partner in Main Street.
As a result of stock splits, the 1,000 shares of common stock initially issued
by PalEx to Main Street will total 1,021,389 shares of Common Stock immediately
prior to the closing of this Offering. Since early 1996, Main Street has
advanced funds to PalEx pursuant to a commitment to enable PalEx to pay various
expenses incurred in connection with its efforts to complete the Acquisitions
and effect this Offering.
Simultaneously with the closing of this Offering, each of the Founding
Companies will merge with a separate special purpose subsidiary of PalEx, at
which time each Founding Company will become a wholly owned subsidiary of the
Company. The aggregate consideration that will be paid by PalEx to acquire the
Founding Companies consists of (i) approximately $1.3 million in cash and (ii)
5,910,000 shares of Common Stock. In addition, the Company intends to repay
approximately $13.3 million of the estimated outstanding indebtedness of the
Founding Companies at the closing of the Offering (see " -- Transactions
Involving Certain Officers, Directors and Stockholders" below) and also will
issue 142,500 shares of Common Stock to the Founding Companies' profit sharing
plans.
36
<PAGE>
The following table sets forth for each Founding Company the approximate
consideration to be paid to the stockholders of the Founding Companies (i) in
cash and (ii) in shares of Common Stock, in each case subject to adjustments
through the date of the consummation of the Acquisition for changes in the
amount of debt outstanding and the amount of S Corporation earnings previously
taxed to stockholders of the Founding Companies and which will be distributed to
such stockholders.
SHARES OF
CASH COMMON STOCK
------------ ------------
Fraser............................... $ 117,000 2,796,894
Ridge................................ -- 2,718,691
Interstate........................... 1,200,000 394,415
------------ ------------
Total........................... $ 1,317,000 5,910,000
============ ============
In addition, immediately prior to consummation of the Acquisitions, the
Founding Companies will make distributions of approximately $11.0 million in the
aggregate, representing S Corporation earnings previously taxed to their
respective stockholders. The Founding Companies will also distribute certain
non-operating assets prior to consummation of the Acquisitions with an aggregate
net book value of approximately $175,000.
The consummation of each Acquisition is subject to customary conditions.
These conditions include, among others, the accuracy on the closing date of the
Acquisitions of the representations and warranties of the Founding Companies,
their stockholders and of the Company and the performance by each of the parties
of their respective covenants.
The agreements relating to the Acquisitions may be terminated under certain
circumstances prior to the consummation of this Offering. Specifically, the
agreements may be terminated (i) by the mutual consent of the board of directors
of the Company and each Founding Company; (ii) if this Offering and the
Acquisitions are not consummated by April 1, 1997; or (iii) if a material breach
or default under the agreements shall exist and is not cured or waived. There
can be no assurance that the conditions to the closing of the Acquisitions will
be satisfied or waived or that the agreements relating to the Acquisitions will
not be terminated prior to the closing.
Pursuant to the agreements relating to the Acquisitions, all stockholders
of each of the Founding Companies have agreed not to compete with the Company
for a period of five years commencing on the date of closing of the
Acquisitions.
Individuals who are or will become officers or directors of the Company
will receive the following consideration in the Acquisitions for their interests
in the Founding Companies, subject to adjustments as described above.
SHARES OF
CASH(1) COMMON STOCK
------------ ------------
Ridge
A. E. Holland, Jr............... $ -- 329,013
Casey A. Fletcher............... -- 329,013
Fraser
Troy L. Fraser.................. 57,330 1,332,158
Interstate
Stephen C. Sykes................ 1,200,000 394,415
- ------------
(1) Excludes distributions representing previously taxed S Corporation earnings
to be made to each of the persons listed above. The anticipated amount of
such distributions to the former owners of the Founding Companies aggregates
approximately $11.0 million.
37
<PAGE>
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
In August 1994, Ridge purchased its pallet and box manufacturing business
in a management buyout from Resources, a predecessor company owned by A. E.
Holland, Jr., Chief Operating Officer and a director of the Company, and two
other employees of Ridge. As consideration for this purchase, Ridge issued the
Ridge Notes for a total of approximately $12.6 million to Resources and assumed
approximately $1.8 million of Resources' liabilities. Resources subsequently
distributed an interest in a portion of its note receivable from Ridge directly
to Mr. Holland and the other two stockholders. The Ridge Notes mature in January
2000 and pay interest at the prime rate (8.25% at November 30, 1996). Ridge paid
approximately $909,000 and $982,000 in interest expense under the Ridge Notes
during fiscal 1995 and 1996, respectively. The Ridge Notes will be repaid with a
portion of the proceeds of the Offering. The amount anticipated to be paid from
the proceeds is $1.75 million to Resources and $1.75 million each to Mr. Holland
and the other two stockholders. Resources maintains a lumber and fastener
brokerage business as well as other businesses.
Fraser has notes outstanding to certain affiliates in the total amount of
approximately $70,000. The notes bear interest at 14.0% per annum, mature in
January 2005 and are expected to be repaid with a portion of the proceeds of the
Offering.
Prior to consummation of the Offering, Troy Fraser will purchase an
airplane from Fraser for its net book value of $210,000.
Certain stockholders of certain of the Founding Companies, who will be
directors, executive officers or key employees of the Company, have guaranteed
indebtedness and other obligations of each of their respective Founding
Companies. These guarantees are expected to be terminated after the completion
of this Offering.
Main Street has agreed to pay up to $1.25 million of the Company's
expenses, including legal and accounting fees, incurred in connection with the
Offering and the Acquisitions. The Company will pay from the proceeds of the
Offering any expenses which exceed such amount.
In connection with the Acquisitions, the Company has agreed to issue
82,500, 50,000 and 10,000 shares of Common Stock to the Ridge Pallets, Inc.
Profit Sharing Plan, the Fraser Industries, Inc. Profit Sharing Plan and the
Interstate Pallet Co., Inc. Profit Sharing Plan, respectively. The plans will
distribute the Common Stock in accordance with the terms of such plans. Certain
officers and directors of the Company are participants in these plans and will
benefit from the contribution of the Common Stock under the terms of such plans.
In fiscal years 1994, 1995 and 1996, Ridge sold approximately $977,000,
$484,000 and $666,000, respectively, of lumber to Sunbelt Forest Products
Corporation ("Sunbelt"), a chemical wood preserving company, which is owned by
Mr. Holland and two other employees of Ridge. During fiscal year 1994 Ridge
recorded $193,000 of interest income from loans made to Sunbelt. Mr. Fletcher is
a director of Sunbelt. Additionally, Ridge purchased from Resources
approximately $199,000 and $421,000 of fasteners during fiscal years 1995 and
1996, respectively. The sales prices charged Sunbelt and the purchase prices
paid by Ridge were competitive with those charged or paid to unaffiliated third
parties. In addition, Ridge provides certain accounting, human resource and
managerial services to Sunbelt and received as payment therefor $135,000,
$75,000 and $55,000 for the fiscal years 1994, 1995 and 1996, respectively. The
Company intends to continue to transact business with Sunbelt in the future on
terms which are comparable to those that would be available from an unaffiliated
third party.
Mr. Bridwell, who will be a member of the Company's Board of Directors upon
the closing of this Offering, will receive a payment from the Company of $50,000
and options to purchase 20,000 shares of Common Stock, exercisable at the
initial public offering price per share pursuant to the Plan, for providing
advice to Fraser in connection with the Acquisitions. Mr. Bridwell will also
receive options to purchase 20,000 shares of Common Stock in connection with his
election to the Company's Board of Directors exercisable at the initial public
offering price. See "Principal Stockholders."
38
<PAGE>
Mr. Maultsby acquired 50,000 shares of Common Stock in connection with the
formation of the Company. In connection with this issuance, PalEx recognized a
nonrecurring, non-cash charge of $300,000 in November 1996, representing the
difference between amounts paid for the 50,000 shares of Common Stock issued to
Mr. Maultsby and the estimated fair market value of such shares on the date of
the sale asasuming the Acquisitions would be consummated.
Interstate leases its operating facilities and certain equipment from Mr.
Sykes. The Company intends to use a portion of the proceeds of the Offering to
purchase the leased equipment for its estimated fair market value of
approximately $88,000 and to continue to lease the property from Mr. Sykes at
market rates. Mr. Sykes has the right to require the Company to purchase the
property at its appraised value, estimated to be between $1.0 million and $1.4
million. This right can be exercised during the period beginning six months and
ending 12 months after the closing of the Offering.
John E. Drury, a director of the Company, is expected to purchase between
50,000 and 100,000 shares of Common Stock in the Offering.
COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved by a majority of the Board of Directors, including a majority of
disinterested members of the Board of Directors.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock, after giving effect to the issuance of
shares of Common Stock in connection with the Acquisitions and after giving
effect to the Offering, by (i) all persons known to the Company to be the
beneficial owner of 5% or more thereof, (ii) each director and nominee for
director, (iii) each executive officer and (iv) all executive officers,
directors and director nominees as a group. Unless otherwise indicated, the
address of each such person is c/o PalEx, Inc., 3555 Timmons Lane, Suite 610,
Houston, Texas 77027. All persons listed have sole voting and investment power
with respect to their shares unless otherwise indicated.
PERCENTAGE OWNED
--------------------
BEFORE AFTER
SHARES OFFERING OFFERING
----------- -------- --------
Vance K. Maultsby, Jr.(1)............... 50,000 0.7% 0.5%
A. E. Holland, Jr....................... 329,013 4.6 3.2
Troy L. Fraser.......................... 1,370,478 19.2 13.5
Stephen C. Sykes........................ 394,415 5.5 3.9
Casey A. Fletcher....................... 329,013 4.6 3.2
Tucker S. Bridwell(2)................... 40,000 0.6 0.4
John E. Drury(3)........................ 45,000 0.6 0.4
Sam W. Humphreys(4)..................... 1,021,389 14.3 10.1
Main Street Capital Partners, L.P....... 1,021,389 14.3 10.1
R. Stephen Fraser(5).................... 839,068 11.8 8.3
Joe D. Elmore(6)........................ 587,348 8.2 5.8
All executive officers, directors and
director nominees
as a group (8 persons)(7)............. 3,579,308 50.2% 35.4%
- ------------
(1) Excludes options to purchase 100,000 shares at an exercise price of $7.50
per share and options to purchase 100,000 shares at the initial public
offering price granted under the Plan. Such options vest at 25% a year over
the four-year period with the first vesting period ending November 1997 and
the final vesting period ending November 2001.
(2) Includes 40,000 shares which may be acquired upon the exercise of options to
be granted under the Plan upon the consummation of the Offering.
(3) Includes 20,000 shares which may be acquired upon the exercise of options to
be granted under the Plan upon the consummation of the Offering and 25,000
shares deemed to be beneficially owned by Mr. Drury as a special limited
partner in Main Street.
(4) Includes 1,021,389 shares issued to Main Street. Mr. Humphreys is a partner
in Main Street.
(5) Mr. Fraser's address is 111 East 7th Street, Big Spring, Texas 79720.
(6) Mr. Elmore's address is 1020 Highway 82 West, New Boston, Texas 75570.
(7) Includes 260,000 shares subject to options which become exercisable during
the four-year period ending November 2000.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred
Stock, par value $0.01 per share. After giving effect to the Acquisitions, there
were 7,123,889 shares of Common Stock outstanding which were held of record by
15 stockholders, and no shares of Preferred Stock outstanding. After the closing
of the Offering, 10,123,889 shares of Common Stock will be issued and
outstanding, assuming no exercise of the Underwriters' over-allotment option.
The following summary of the terms and provisions of the Company's capital stock
does not purport to be complete and is qualified in its entirety by reference to
the Company's Amended and Restated Certificate of Incorporation and By-laws,
which have been filed as exhibits to the Company's registration statement, of
which this Prospectus is a part, and applicable law.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Holders of Common Stock are
entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of any Preferred Stock then outstanding. The holders of Common Stock have
no preemptive rights to purchase shares of stock of the Company. Shares of
Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company. All outstanding shares of
Common Stock are, and the shares of Common Stock to be sold by the Company in
the Offering when payment is received therefor will be, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Amended and Restated Certificate of Incorporation and
limitations prescribed by law, the Board of Directors is expressly authorized to
adopt resolutions to issue the shares, to fix the number of shares and to change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares constituting
any class or series of the Preferred Stock, in each case without any further
action or vote by the stockholders. The Company has no current plans to issue
any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for the Common Stock at a premium or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not
41
<PAGE>
engage in any of a broad range of business combinations with a person or an
affiliate, or associate of such person, who is an "interested stockholder" for
a period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person becoming an
interested stockholder, or the business combination, is approved by the Board of
Directors of the corporation before the person becomes an interested
stockholder, (ii) the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
such person an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans), or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is (i) the owner of 15%
or more of the outstanding voting stock of the corporation or (ii) an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage. The Company has not adopted
such an amendment to its Amended and Restated Certificate of Incorporation or
By-laws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Amended and Restated Certificate of Incorporation
and under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of the duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit. The Company has entered into indemnification agreements with
each of its directors and executive officers which indemnify such person to the
fullest extent permitted by its Amended and Restated Certificate of
Incorporation, its By-laws and the Delaware General Corporation Law. The Company
also intends to obtain directors' and officers' liability insurance.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust and
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market. As of February
20, 1997, 1,071,389 shares of Common Stock were issued and outstanding. All of
the 3,000,000 shares sold in the Offering, except for shares acquired by
affiliates of the Company, will be freely tradeable.
Simultaneously with the closing of the Offering, the stockholders of the
Founding Companies will receive, in the aggregate, 5,910,000 shares of Common
Stock as a portion of the consideration for their businesses. In addition,
142,500 shares of Common Stock will be issued to the Founding Companies' profit
sharing plans. As of the date of this Prospectus, certain other stockholders of
the Company held, in the aggregate, an additional 1,071,389 shares of Common
Stock. None of these 7,123,889 shares was issued in a transaction registered
under the Securities Act, and, accordingly, such shares may not be sold except
in transactions registered under the Securities Act or pursuant to an exemption
from registration, including the exemption contained in Rule 144 under the
Securities Act.
In general, under Rule 144 as amended effective April 29, 1997, a person,
or persons whose shares are aggregated, who has beneficially owned his or her
shares for at least one year but not more than two years, or a person who may
be deemed an "affiliate" of the Company who has beneficially owned shares
42
<PAGE>
for at least one year, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of the Common Stock or the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the date on which notice of the
proposed sale is sent to the Securities and Exchange Commission. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. A person who is not deemed to have been an affiliate of the Company at
any time for 90 days preceding a sale and who has beneficially owned his shares
for at least two years would be entitled to sell such shares under Rule 144
without regard to the volume limitations, manner of sale provisions, notice
requirements or the availability of current public information about the
Company.
The Company has authorized the issuance of 1,800,000 shares of its Common
Stock in accordance with the terms of the Plan. Options to purchase 200,000
shares have been granted to Mr. Maultsby under the Plan and it is anticipated
that 725,000 shares of Common Stock will be granted upon closing of the Offering
to certain employees of the Founding Companies. A total of 1,800,000 shares will
be issuable under the Plan. The Company intends to file a registration statement
on Form S-8 under the Securities Act registering the issuance and resale of
shares subject to these options granted under the Plan. As a result, such shares
will be eligible for resale in the public market.
The Company currently intends to file a registration statement covering up
to an additional 4,000,000 shares of Common Stock under the Securities Act for
its use in connection with future acquisitions. These shares generally will be
freely tradeable after their issuance by persons not affiliated with the Company
unless the Company contractually restricts their resale.
The Company has agreed that it will not offer, sell or issue any shares of
Common Stock or options, rights or warrants to acquire any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated, except for the grant of employee
stock options and for shares issued (i) in connection with acquisitions and (ii)
pursuant to the exercise of options granted under the Plan. Further, the
Company's directors, officers and certain stockholders who beneficially own
7,123,889 shares in the aggregate have agreed not to directly or indirectly
offer for sale, sell or otherwise dispose of any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated. In addition, the owners of the Founding
Companies have agreed not to sell, contract to sell or otherwise dispose of any
shares of Common Stock received as consideration in the Acquisitions for a
period of two years following receipt thereof.
Prior to this Offering, there has been no established trading market for
the Common Stock, and no predictions can be made as to the effect that sales of
Common Stock under Rule 144, pursuant to a registration statement, or otherwise,
or the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common Stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Such sales may also make it more difficult
for the Company to issue or sell equity securities or equity-related securities
in the future at a time and price that it deems appropriate. See "Risk
Factors -- Shares Eligible for Future Sale."
The former stockholders of the Founding Companies and certain officers,
directors and stockholders holding in the aggregate 6,981,389 shares of Common
Stock are entitled to certain rights with respect to the registration of their
shares of Common Stock under the Securities Act. None of such persons has
registration rights to include shares of Common Stock for sale in this Offering.
If the Company proposes to register any of its securities under the Securities
Act, such stockholders are entitled to notice of such registration and are
entitled to include, at the Company's expense, all or a portion of their shares
therein, subject to certain conditions.
43
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Montgomery Securities, have severally agreed
to purchase from the Company the following respective number of shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------- -----------
Alex. Brown & Sons Incorporated.........
Montgomery Securities...................
-----------
Total................................... 3,000,000
===========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
price offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After commencement of
the initial public offering, the offering price and other selling terms may be
changed by the Representatives.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 3,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,000,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed that it will not offer, sell or issue any shares of
Common Stock or options, rights or warrants to acquire any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated, except for the grant of employee
stock options and for shares issued (i) in connection with acquisitions and (ii)
pursuant to the exercise of options granted under the Plan. Further, the
Company's directors, officers and certain stockholders who beneficially own
7,123,889 shares in the aggregate have agreed not to directly or indirectly
offer for sale, sell or otherwise dispose of any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated. In addition, the owners of the Founding
Companies have agreed not to directly or indirectly offer to sell, sell,
contract to sell or otherwise dispose of any shares of Common Stock received as
consideration in the Acquisitions for a period of two years following receipt
thereof.
44
<PAGE>
Raymond James & Associates ("Raymond James") provided financial advisory
services to Ridge in connection with the Company's acquisition of Ridge. For
these services, the Company will pay Raymond James a fee of up to $468,000 upon
the closing of the Acquisitions.
At the request of the Company, the Underwriters have reserved 300,000
shares of Common Stock for sale at the initial public offering price to
directors, officers, employees, business associates and other persons with whom
the Company has relationships. John E. Drury, a director of the Company, is
expected to purchase between 50,000 and 100,000 of such reserved shares. The
number of shares of Common Stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives.
Among the factors considered in such negotiations were prevailing market
conditions, the results of operations of the Founding Companies in recent
periods, the market capitalization and stages of development of other companies
which the Company and the Representatives believed to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant.
In connection with the Offering, the Underwriters may engage in
stabilizing, syndicate short covering transactions or other transactions that
may stabilize, maintain or otherwise affect the market price of the Common
Stock.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "PALX".
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Andrews & Kurth L.L.P., Houston,
Texas and for the Underwriters by McDermott, Will & Emery, Chicago, Illinois.
EXPERTS
The audited financial statements of Fraser and Ridge included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is included as part of the Registration Statement, does not
contain all the information contained in the Registration Statement, certain
portions of which have been omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
the exhibits and schedules thereto. Statements made in the Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto may be inspected, without charge, at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Room 1400,
Chicago, IL 60661, and 7 World Trade Center, Suite 1300, New York, NY 10048 or
on the Internet at http://www.sec.gov. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined by an independent public
accounting firm for each fiscal year.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Unaudited Pro Forma Combined
Financial Statements
Basis of Presentation........... F-2
Pro Forma Combined Balance Sheet
as of November 30, 1996......... F-3
Pro Forma Combined Statement of
Income for the Year Ended
November 30, 1996............. F-4
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-5
Historical Financial Statements
Fraser Industries, Inc.
Report of Independent
Public Accountants........... F-8
Balance Sheets............. F-9
Statements of Income....... F-10
Statements of Changes in
Stockholders' Equity......... F-11
Statements of Cash Flows... F-12
Notes to Financial
Statements................... F-13
Ridge Pallets, Inc.
Report of Independent
Public Accountants......... F-19
Balance Sheets............. F-20
Statements of Income
(Loss)....................... F-21
Statements of Changes in
Stockholders' Equity....... F-22
Statements of Cash Flows... F-23
Notes to Financial
Statements................... F-24
PalEx, Inc.
Report of Independent
Public Accountants......... F-31
Balance Sheet.............. F-32
Statement of Income........ F-33
Statement of Changes in
Stockholders' Equity....... F-34
Notes to Financial
Statements................. F-35
F-1
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED)
The following unaudited pro forma combined financial statements give effect
to the acquisitions by PalEx, Inc. ("PalEx" or the "Company") of the
outstanding capital stock of Fraser Industries, Inc. ("Fraser"), Ridge
Pallets, Inc. ("Ridge") and Interstate Pallet Company, Inc. ("Interstate")
(together, the "Founding Companies"). These acquisitions (the
"Acquisitions") will occur simultaneously with the closing of PalEx's initial
public offering (the "Offering") and will be accounted for using the purchase
method of accounting. Fraser, one of the Founding Companies, has been identified
as the accounting acquiror for financial statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on November 30, 1996. The
unaudited pro forma combined statement of income gives effect to these
transactions as if they had occurred on December 1, 1995.
The Company has preliminarily analyzed the savings that it expects to be
realized by consolidating certain operational and general and administrative
functions. The Company has not and cannot quantify these savings until
completion of the combination of the Founding Companies. It is anticipated that
these savings will be partially offset by the costs of being a publicly-held
company and the incremental increase in costs related to the Company's new
management. However, these costs, like the savings that they offset, cannot be
quantified accurately. Neither the anticipated savings nor the anticipated costs
have been included in the pro forma financial information of PalEx.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The pro forma financial data does not purport to represent
what the Company's financial position or results of operations would actually
have been if such transactions in fact had occurred on those dates or to project
the Company's financial position or results of operations for any future period.
Since the Founding Companies were not under common control or management,
historical combined results may not be comparable to, or indicative of, future
performance. The unaudited pro forma combined financial statements should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this Prospectus. See "Risk Factors" included elsewhere
herein.
F-2
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
PRO FORMA COMBINED BALANCE SHEET -- NOVEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA POST MERGER
PALEX FRASER RIDGE INTERSTATE ADJUSTMENTS PRO FORMA ADJUSTMENTS
----- --------- --------- ---------- ----------- --------- -----------
(NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........... $ 1 $ 4 $ 758 $ 122 $ (396) $ 489 $ 2,945
Accounts receivable, net of
allowance......................... -- 2,852 3,742 478 -- 7,072 --
Inventories......................... -- 2,750 4,653 35 -- 7,438 --
Other current assets................ -- -- 137 57 -- 194 --
----- --------- --------- ---------- ----------- --------- -----------
Total current assets............ 1 5,606 9,290 692 (396) 15,193 2,945
PROPERTY, PLANT AND EQUIPMENT, net...... -- 7,279 6,803 415 (297) 14,200 --
GOODWILL................................ -- -- -- -- 25,998 25,998 --
OTHER ASSETS............................ 300 155 1,000 -- -- 1,455 --
----- --------- --------- ---------- ----------- --------- -----------
Total assets.................... $301 $ 13,040 $ 17,093 $1,107 $25,305 $56,846 $ 2,945
===== ========= ========= ========== =========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit...................... $-- $ 455 $ -- $-- $-- $ 455 $ (455)
Current maturities of long-term
debt.............................. -- 737 1,650 16 -- 2,403 (2,353)
Accounts payable.................... -- 1,487 1,263 32 -- 2,782 --
Accrued expenses.................... -- 1,478 1,129 169 -- 2,776 --
Pro forma cash consideration and S
Corporation distributions due to
Founding Companies................ -- -- -- -- 12,328 12,328 (12,328)
----- --------- --------- ---------- ----------- --------- -----------
Total current liabilities....... -- 4,157 4,042 217 12,328 20,744 (15,136)
LONG-TERM DEBT, net of current
maturities............................ -- 1,262 8,550 57 -- 9,869 (9,319)
OTHER LONG-TERM LIABILITIES............. -- 385 -- -- 1,424 1,809 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock........................ 11 11 550 10 (511) 71 30
Additional paid-in capital.......... 599 67 496 -- 24,248 25,410 27,370
Retained earnings................... (309 ) 7,249 3,455 823 (12,275) (1,057) --
Treasury stock...................... -- (91) -- -- 91 -- --
----- --------- --------- ---------- ----------- --------- -----------
Total stockholders' equity...... 301 7,236 4,501 833 11,553 24,424 27,400
----- --------- --------- ---------- ----------- --------- -----------
Total liabilities and
stockholders' equity.......... $301 $ 13,040 $ 17,093 $1,107 $25,305 $56,846 $ 2,945
===== ========= ========= ========== =========== ========= ===========
</TABLE>
AS
ADJUSTED
--------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........... $ 3,434
Accounts receivable, net of
allowance......................... 7,072
Inventories......................... 7,438
Other current assets................ 194
--------
Total current assets............ 18,138
PROPERTY, PLANT AND EQUIPMENT, net...... 14,200
GOODWILL................................ 25,998
OTHER ASSETS............................ 1,455
--------
Total assets.................... $59,791
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit...................... $ --
Current maturities of long-term
debt.............................. 50
Accounts payable.................... 2,782
Accrued expenses.................... 2,776
Pro forma cash consideration and S
Corporation distributions due to
Founding Companies................ --
--------
Total current liabilities....... 5,608
LONG-TERM DEBT, net of current
maturities............................ 550
OTHER LONG-TERM LIABILITIES............. 1,809
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock........................ 101
Additional paid-in capital.......... 52,780
Retained earnings................... (1,057 )
Treasury stock...................... --
--------
Total stockholders' equity...... 51,824
--------
Total liabilities and
stockholders' equity.......... $59,791
========
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-3
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED NOVEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA POST MERGER
PALEX FRASER RIDGE INTERSTATE ADJUSTMENTS PRO FORMA ADJUSTMENTS
------- --------- --------- ---------- ----------- --------- ------------
(NOTE 4) (NOTE 4)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................................ $ -- $ 49,282 $ 48,464 $4,284 $-- $102,030 $ --
COST OF GOODS SOLD...................... -- 41,509 41,328 3,341 -- 86,178 --
------- --------- --------- ---------- ----------- --------- ------------
Gross profit........................ -- 7,773 7,136 943 -- 15,852 --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 300 3,171 3,864 84 (791)(a) 7,495 --
867(b)
------- --------- --------- ---------- ----------- --------- ------------
Income (loss) from operations....... (300) 4,602 3,272 859 (76) 8,357 --
INTEREST (EXPENSE), AND OTHER INCOME,
net................................... -- (540) (756) 3 -- (1,293 ) 1,308(c)
------- --------- --------- ---------- ----------- --------- ------------
INCOME (LOSS) BEFORE INCOME TAXES....... (300) 4,062 2,516 862 (76) 7,064 1,308
PROVISION FOR INCOME TAXES.............. -- 216 75 52 2,670(d) 3,013 507(d)
------- --------- --------- ---------- ----------- --------- ------------
NET INCOME (LOSS)....................... $ (300) $ 3,846 $ 2,441 $ 810 $(2,746) $ 4,051 $ 801
======= ========= ========= ========== =========== ========= ============
NET INCOME PER SHARE....................
SHARES USED IN COMPUTING NET INCOME PER
SHARE.................................
</TABLE>
AS
ADJUSTED
----------
REVENUES................................ $ 102,030
COST OF GOODS SOLD...................... 86,178
----------
Gross profit........................ 15,852
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 7,495
----------
Income (loss) from operations....... 8,357
INTEREST (EXPENSE), AND OTHER INCOME,
net................................... 15
----------
INCOME (LOSS) BEFORE INCOME TAXES....... 8,372
PROVISION FOR INCOME TAXES.............. 3,520
----------
NET INCOME (LOSS)....................... $ 4,852
==========
NET INCOME PER SHARE.................... $ .48
==========
SHARES USED IN COMPUTING NET INCOME PER
SHARE................................. 10,123,889(e)
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-4
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
PalEx, Inc. was formed to create a national provider of pallet products and
services, including the manufacture and distribution of new pallets, the repair
and remarketing of used pallets, and the processing and marketing of various
wood-based by-products derived from pallets. PalEx has conducted no operations
to date and will acquire the Founding Companies concurrently with the
consummation of the Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The periods
included in these financial statements for the individual Founding Companies are
as follows: Fraser -- as of November 30, 1996, and the twelve months ended
November 30, 1996; Ridge -- as of December 1, 1996, and the twelve months ended
December 1, 1996; and Interstate -- as of August 31, 1996, and the twelve months
ended August 31, 1996. The audited historical financial statements included
elsewhere herein have been included in accordance with Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrent with the closing of the Offering, PalEx will acquire all of the
outstanding capital stock of the Founding Companies. The acquisitions will be
accounted for using the purchase method of accounting with Fraser being treated
as the accounting acquiror.
The following table sets forth the consideration to be paid (a) in cash and
(b) in shares of Common Stock to the common stockholders of each of the Founding
Companies. The table does not reflect (i) the distribution of S Corporation
Accumulated Adjustment Accounts prior to the merger estimated to be $11 million
and (ii) approximately 142,500 shares of Common Stock to be issued by PalEx to
the Founding Companies' profit sharing plans upon completion of the Acquisitions
and Offering.
COMMON STOCK
-----------------------
VALUE OF
CASH SHARES SHARES1
--------- --------- --------
(DOLLARS IN THOUSANDS)
Fraser............................... $ 117 2,796,894 $ 20,977
Ridge................................ -- 2,718,691 20,390
Interstate........................... 1,200 394,415 2,958
--------- --------- --------
$ 1,317 5,910,000 $ 44,325
========= ========= ========
- ------------
1 Value is determined using the estimated initial offering price of $10 per
share, less a discount of 25 percent based on restrictions on the sale and
transferability of the shares issued.
The estimated purchase price for the acquisitions is based upon preliminary
estimates and is subject to certain purchase price adjustments at and following
closing.
F-5
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The following tables summarize unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
--------- --------- ---------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............ $ -- $ 122 $ -- $ (518) $ -- -- $ (396)
Property, plant and equipment, net... (297) (297)
Goodwill............................. 24,837 468 693 25,998
Pro forma cash consideration and
Accumulated Adjustment Account due
to Founding Companies'
stockholders....................... (11,011) (1,317) (12,328)
Other long-term liabilities.......... (1,424) (1,424)
Common stock......................... 513 (2) 511
Additional paid-in capital........... (23,182) (1,066) (24,248)
Retained earnings.................... 11,011 175 (760) 50 375 1,424 12,275
Treasury stock....................... (91) (91)
--------- --------- ---------- --------- --------- --------- -----------
$ -- $ -- $ -- $ -- $ -- $ -- $ --
========= ========= ========== ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
POST
MERGER
(G) (H) (I) ADJUSTMENTS
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents............ $ 27,400 $ (12,127) $ (12,328) $ 2,945
Line of credit....................... 455 455
Current maturities of long-term
debt............................... 2,353 2,353
Pro forma cash consideration and
Accumulated Adjustment Account due
to Founding Companies'
stockholders....................... 12,328 12,328
Long-term debt, net of current
maturities......................... 9,319 9,319
Common stock......................... (30) (30)
Additional paid-in capital........... (27,370) (27,370)
---------- ---------- ---------- -----------
$ -- $ -- $ -- $ --
========== ========== ========== ===========
</TABLE>
a. Reflects distribution of S Corporation Accumulated Adjustment Accounts
of the Founding Companies.
b. Reflects the distribution of certain non-operating assets with a net
book value of $175,000 to certain stockholders of the Founding Companies, the
sale of a non-operating asset to a stockholder at its net book value of
$210,000, and the purchase of certain operating equipment from a stockholder at
its estimated fair value of $88,000.
c. Reflects the acquisition of the Founding Companies including the
liability for the cash consideration to be paid and the issuance of 5,910,000
shares of Common Stock to the stockholders of the Founding Companies in
connection with the Acquisitions.
d. Reflects the payment of financial advisory fees incurred by the
Founding Companies in connection with the Acquisitions.
e. Reflects the issuance of 142,500 shares of common stock to the Founding
Companies' profit sharing plans.
F-6
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
f. Reflects the deferred income tax liability attributable to the
temporary differences between financial reporting and income tax bases of assets
and liabilities currently held in S Corporations.
g. Reflects the proceeds from the issuance of 3,000,000 shares of Common
Stock, net of estimated offering costs (based on an assumed initial public
offering price of $10 per share). Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and printing
expenses.
h. Reflects the repayment of certain debt obligations with proceeds from
the Offering.
i. Reflects the cash portion of the purchase price of the Founding
Companies and the distribution of the S Corporation Accumulated Adjustment
Accounts.
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME ADJUSTMENTS:
a. Adjusts compensation to the level the owners of the Founding Companies
have agreed to receive subsequent to the Acquisitions and reflects the
cancellation of certain lease agreements between a shareholder and a Founding
Company as a result of the purchase by the Company of the related assets. The
historical financial statements of PalEx include a nonrecurring, noncash charge
of $300,000 representing the difference between the amounts paid for the shares
issued to the Company's President and Chief Executive Officer and their
estimated fair value on the date of the sale as if the Acquisitions had
occurred. The pro forma adjustment also reduces compensation expense of PalEx by
$125,000 attributable to the difference between the $300,000 nonrecurring,
noncash charge and the compensation that the President and Chief Executive
Officer has agreed to receive prospectively.
b. Reflects the amortization of goodwill using a 30-year estimated life.
c. Reflects the reduction in interest expense attributed to obligations
retired with proceeds from the Offering.
d. Reflects the incremental provision for federal and state income taxes
relating to the other income statement adjustments and for income taxes on S
Corporation income.
e. Includes: (i) 1,071,389 shares issued by PalEx prior to the Offering,
(ii) 5,910,000 shares to be issued to the stockholders of the Founding Companies
in connection with the Acquisitions, (iii) 142,500 shares to be issued to
satisfy the obligations of the Founding Companies to their respective
profit-sharing plans and (iv) 3,000,000 shares to be issued in connection with
the Offering. Excludes 725,000 shares of Common Stock subject to options to be
granted in connection with the Offering at an exercise price equal to the
initial public offering price, and 200,000 shares of Common Stock subject to
options, 100,000 of which were granted at $7.50 per share and 100,000 of which
were granted at the initial public offering price.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fraser Industries, Inc.:
We have audited the accompanying balance sheets of Fraser Industries, Inc.
(a Texas corporation), as of November 30, 1995 and 1996, and the related
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended November 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fraser Industries, Inc., as
of November 30, 1995 and 1996, the results of its operations and its cash flows
for each of the three years in the period ended November 30, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 3, 1997
F-8
<PAGE>
FRASER INDUSTRIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30,
--------------------
1995 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 115 $ 4
Accounts receivable, net of
allowance of $30 and $57....... 3,169 2,852
Inventories..................... 3,289 2,750
Other current assets............ 150 --
--------- ---------
Total current assets....... 6,723 5,606
PROPERTY, PLANT AND EQUIPMENT, net... 5,215 7,279
OTHER ASSETS......................... 357 155
--------- ---------
Total assets............... $ 12,295 $ 13,040
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................. $ 2,950 $ 455
Current maturities of long-term
debt........................... 608 737
Accounts payable................ 1,314 1,487
Accrued expenses................ 854 1,478
--------- ---------
Total current
liabilities.................. 5,726 4,157
LONG-TERM DEBT, net of current
maturities......................... 2,362 1,262
DEFERRED INCOME...................... 360 336
DEFERRED INCOME TAXES................ 37 49
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value;
authorized 200,000 shares;
issued and outstanding 11,000
shares......................... 11 11
Capital in excess of par
value........................... 67 67
Retained earnings............... 3,823 7,249
--------- ---------
3,901 7,327
Less -- 1,000 shares of common
stock in treasury, at cost..... (91) (91)
--------- ---------
3,810 7,236
--------- ---------
Total liabilities and
stockholders' equity......... $ 12,295 $ 13,040
========= =========
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
FRASER INDUSTRIES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED NOVEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
REVENUES................................ $ 23,114 $ 30,135 $ 49,282
COST OF GOODS SOLD...................... 20,755 25,559 41,509
--------- --------- ---------
Gross profit....................... 2,359 4,576 7,773
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,761 2,131 3,171
--------- --------- ---------
Income from operations............. 598 2,445 4,602
INTEREST EXPENSE........................ (335) (450) (387)
OTHER INCOME (EXPENSE), net............. (9) 19 (153)
--------- --------- ---------
INCOME BEFORE INCOME TAXES.............. 254 2,014 4,062
PROVISION FOR INCOME TAXES.............. 6 91 216
--------- --------- ---------
NET INCOME.............................. $ 248 $ 1,923 $ 3,846
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
FRASER INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
CAPITAL STOCK
COMMON IN EXCESS RETAINED IN
SHARES STOCK OF PAR EARNINGS TREASURY TOTAL
----- ----- ----- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, November 30, 1993 ...... 11 $ 11 $ 67 $ 1,652 $(91) $ 1,639
Net income ................. -- -- -- 248 -- 248
----- ----- ----- ------- ---- -------
BALANCE, November 30, 1994 ...... 11 11 67 1,900 (91) 1,887
Net income ................. -- -- -- 1,923 -- 1,923
----- ----- ----- ------- ---- -------
BALANCE, November 30, 1995 ...... 11 11 67 3,823 (91) 3,810
Net income ................. -- -- -- 3,846 -- 3,846
Distributions .............. -- -- -- (420) -- (420)
----- ----- ----- ------- ---- -------
BALANCE, November 30, 1996 ...... 11 $ 11 $ 67 $ 7,249 $(91) $ 7,236
===== ===== ===== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
FRASER INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED NOVEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 248 $ 1,923 $ 3,846
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and
amortization............... 736 956 1,192
Loss on sale of assets........ 1 10 146
Deferred income tax........... 6 21 12
Changes in operating assets
and liabilities --
Accounts receivable...... (854) (772) 317
Inventories.............. (257) (925) 539
Prepaid expenses......... 123 60 150
Other assets............. (86) (104) 190
Accounts payable and
accrued expenses...... 416 295 797
Deferred income.......... 385 (25) (24)
--------- --------- ---------
Net cash provided by (used in)
operating activities....... 718 1,439 7,165
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment........................ (2,974) (1,497) (3,513)
Proceeds from sale of equipment.... 15 13 123
--------- --------- ---------
Net cash used in investing
activities................. (2,959) (1,484) (3,390)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt......... 2,237 740 2,180
Payments on long-term debt......... -- (607) (5,646)
Distribution to stockholders....... -- -- (420)
--------- --------- ---------
Net cash provided by (used in)
financing activities....... 2,237 133 (3,886)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (4) 88 (111)
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 31 27 115
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 27 $ 115 $ 4
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest...................... $ 354 $ 446 $ 402
Income taxes.................. 6 3 34
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BUSINESS AND ORGANIZATION:
Fraser Industries, Inc. (the "Company"), is a manufacturer and recycler
of wood pallets. Services the Company provides include pallet manufacturing,
repair, sorting, storage and transportation. The Company is headquartered in Big
Spring, Texas and has fifteen plants located primarily in Texas and Arkansas.
Sales are primarily made in the Southwest and California.
The Company and its stockholders intend to enter into a definitive
agreement with PalEx, Inc. ("PalEx"), pursuant to which all outstanding shares
of the Company's common stock will be exchanged for cash and shares of PalEx
common stock concurrent with the consummation of the initial public offering
(the "Offering") of the common stock of PalEx.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis or by specific identification. The cost of
finished goods inventory includes direct materials, direct labor and overhead.
PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. Leased property under capital leases is amortized over the lives of the
respective leases or over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for state tax purposes.
Expenditures for maintenance and repairs are charged to operating expense
as incurred. Additions and major replacements or betterments that increase
capacity or extend useful lives are added to the cost of the asset. Upon sale or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net.
INCOME TAXES
The stockholders of the Company have elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under these provisions,
the Company does not pay federal and certain state income taxes. Instead, the
Company's stockholders pay income taxes on their proportionate shares of the
Company's net earnings. The provision for income taxes is composed entirely of
state income taxes.
REVENUE RECOGNITION
The Company recognizes revenue upon delivery of the product to the
customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets
F-13
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
and liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement establishes the recognition and measurement standards related to
the impairment of long-lived assets. The Company will adopt this standard
December 1, 1996. It is the opinion of management that the adoption of this
standard will not have a material effect on the Company's financial position or
results of operations.
CONCENTRATIONS OF RISK
MATERIALS -- Pallet prices are closely related to the changing costs and
availability of lumber, the principal raw material used in the manufacture and
repair of wooden pallets. Lumber supplies and costs are affected by many factors
including weather, governmental regulation of logging on public lands, lumber
agreements between Canada and the United States and competition from other
industries that use similar grades and types of lumber. The Company received
approximately 14 percent and 17 percent of its lumber purchases from one
supplier in 1995 and 1996, respectively.
MARKETS -- Markets for pallet manufacturing and repair services are highly
fragmented and competitive. Pallet manufacturing and recycling operations are
not capital-intensive; therefore, barriers to entry in such businesses are
minimal.
CUSTOMERS -- The Company sells to customers with local, regional and
national operations in many different industries and geographical locations. Of
such customers, one customer accounted for approximately 24 percent and 47
percent of the Company's revenues in 1995 and 1996, respectively. As of November
30, 1996, this customer had an outstanding accounts receivable balance which
represented approximately 27 percent of the Company's total accounts receivable.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
ESTIMATED
USEFUL NOVEMBER 30,
LIVES --------------------
IN YEARS 1995 1996
--------- --------- ---------
Land.................................... -- $ 41 $ 41
Machinery and equipment................. 5 - 7 8,000 10,666
Buildings............................... 15 938 1,065
Furniture and fixtures.................. 7 393 393
--------- ---------
9,372 12,165
Less -- Accumulated depreciation........ (4,157) (4,886)
--------- ---------
Property, plant and equipment,
net.............................. $ 5,215 $ 7,279
========= =========
F-14
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
NOVEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
Balance at beginning of year............ $ -- $ -- $ 30
Additions charged to costs and
expenses.............................. 22 57 27
Deductions for uncollectible receivables
written off........................... (22) (27) --
--------- --------- ---------
$ -- $ 30 $ 57
========= ========= =========
The major components of inventories are as follows:
NOVEMBER 30,
--------------------
1995 1996
--------- ---------
Lumber, hardware and fasteners.......... $ 3,197 $ 2,359
Finished goods.......................... 92 391
--------- ---------
$ 3,289 $ 2,750
========= =========
Accrued expenses consist of the following:
NOVEMBER 30,
--------------------
1995 1996
--------- ---------
Accrued compensation and benefits....... $ 574 $ 1,014
Accrued taxes........................... 127 203
Other accrued expenses.................. 153 261
--------- ---------
$ 854 $ 1,478
========= =========
F-15
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
5. DEBT:
The Company's borrowings under a $3,000,000 revolving line of credit with a
bank bear interest, payable monthly, at prime (8.25 percent at November 30,
1996) and mature in April 1997. The line of credit is secured by inventory,
machinery and equipment. At November 30, 1995 and 1996, borrowings outstanding
under the line of credit were approximately $2,950,000 and $455,000,
respectively.
Long-term debt consists of the following:
NOVEMBER 30,
--------------------
1995 1996
--------- ---------
Note payable to a bank, bearing interest
at prime (8.25% at November 30, 1996),
payable monthly, principal payments of
$50,000 per month through maturity in
April 1998. Secured by substantially
all assets of the Company and
personally guaranteed by the
stockholders.......................... $ 2,250 $ 1,650
Notes payable to related parties,
bearing interest at 14% per annum,
payable monthly, through maturity in
January 2005.......................... 65 60
Notes payable to stockholders, bearing
interest at 8% to 10% per annum,
payable annually, through maturities
ranging from December 1996 to December
1997.................................. 641 279
Capital leases.......................... 14 10
--------- ---------
2,970 1,999
Less -- Current maturities.............. (608) (737)
--------- ---------
$ 2,362 $ 1,262
========= =========
Future maturities of long-term obligations at November 30, 1996, are as
follows:
Year ending November 30 --
1997............................... $ 737
1998............................... 1,215
1999............................... 8
2000............................... 8
2001............................... 8
Thereafter......................... 23
---------
$ 1,999
=========
6. INCOME TAXES:
State income taxes are as follows:
YEAR ENDED NOVEMBER 30,
-------------------------------
1994 1995 1996
--------- --- ---------
State --
Current............................ $ -- $ 70 $ 204
Deferred........................... 6 21 12
--------- --- ---------
$ 6 $ 91 $ 216
========= === =========
F-16
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
For the years ended November 30, 1994, 1995 and 1996, income tax expense is
primarily computed by applying a blended state tax rate of 5.2 percent to income
before income tax.
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences for the periods ended
November 30, 1995 and 1996, result principally from the following:
NOVEMBER 30,
--------------------
1995 1996
--- ---------
Deferred income tax liabilities --
Depreciation and amortization...... $ 35 $ 67
Accruals and reserves not
deductible until paid............. 14 17
Deferred income tax assets --
Inventory.......................... (4) (7)
Other assets....................... (8) (28)
--- ---------
Total deferred income tax liabilities... $ 37 $ 49
=== =========
7. GRANT RECEIVABLE:
The Company entered into an agreement with New Boston Special Industrial
Development Corporation of New Boston, Texas, in August 1993 in which the
Company is to receive a $200,000 grant (building grant) in exchange for building
a production facility and $200,000 grant (employment grant) for providing 100
full-time jobs for 10 years at the facility. In the event that a monthly average
of 90 full-time jobs are not maintained for the 10 years, the Company is
required to refund a portion of the grant. The refund calculation will be
performed at the end of five years and 10 years. The Company received the entire
$200,000 of the building grant in January 1994 and, through November 30, 1996,
the Company has received $120,000 of the employment grant, with $40,000 to be
received each August 1 through 1998. The building grant is recorded as deferred
income and is recognized in the statements of income as a reduction in
depreciation expense over the life of the facility using the straight-line
method. The employment grant is recorded as deferred income and is recognized in
the statements of income as a reduction in salaries expense over the 10-year
contractual life using the straight-line method.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies during the periods presented in the
accompanying financial statements.
OPERATING LEASE AGREEMENTS
The Company conducts a portion of its operations and warehouses certain of
its products in leased facilities classified as operating leases.
F-17
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
Minimum future rental payments under the noncancelable operating leases as
of November 30, 1996, are as follows:
Year Ending November 30 --
1997............................ $ 746
1998............................ 449
1999............................ 251
2000............................ 6
---------
$ 1,452
=========
The leases provide for payment of taxes and other expenses by the Company.
Rent expense for operating leases was approximately $294,000, $477,000 and
$726,000 in 1994, 1995 and 1996, respectively.
9. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments",
and SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments," require the disclosure of the fair value of
financial instruments, both assets and liabilities recognized and not recognized
on the balance sheet, for which it is practicable to estimate fair value. The
carrying value of the Company's financial instruments approximates fair value.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
The Company and its shareholders have entered into a definitive agreement
with PalEx providing for the acquisition of the Company by PalEx.
The Company intends to declare a contribution to its defined contribution
profit-sharing plan in an amount currently estimated to be approximately
$375,000. In connection with the acquisition, PalEx has agreed to satisfy the
Company's profit-sharing obligation through the issuance of approximately 50,000
shares of PalEx common stock. In addition, prior to the closing of the
acquisition, the Company will make distributions in respect of the Company's
estimated S Corporation Accumulated Adjustment Account at the time of closing in
the amount of approximately $7.1 million. The Company also expects to sell a
non-operating asset at its net book value of approximately $210,000 to a
shareholder prior to the merger with PalEx.
The Company is liable to a director of PalEx for an amount up to $50,000
for advisory services, which amount is payable upon completion of the
acquisition of the Company by PalEx.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ridge Pallets, Inc.:
We have audited the accompanying balance sheets of Ridge Pallets, Inc. (a
Florida corporation) (the "Company"), as of July 30, 1995 and July 28, 1996,
and the related statements of income, changes in stockholders' equity and cash
flows for the years then ended, and the statement of income, changes in
stockholders' equity and cash flows of the Predecessor Company (as defined in
Note 1) for the year ended July 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ridge Pallets, Inc. as of
July 30, 1995 and July 28, 1996, and the results of its operations and cash
flows for the years then ended, and the results of the Predecessor Company's
operations and cash flows for the year ended July 31, 1994, in conformity with
generally accepted accounting principles.
As explained in Note 1 to the financial statements, controlling ownership
of the Predecessor Company was acquired by stockholders of Ridge Pallets, Inc.
in a purchase transaction effective for accounting purposes as of August 1,
1994. The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets and liabilities of the Predecessor
Company based on their estimated fair values at August 1, 1994. Accordingly, the
financial statements of Ridge Pallets, Inc. are not comparable to those of the
Predecessor Company.
ARTHUR ANDERSEN LLP
Houston, Texas
December 8, 1996
F-19
<PAGE>
RIDGE PALLETS, INC.
BALANCE SHEETS -- JULY 30, 1995, JULY 28, 1996, AND JANUARY 26, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
JULY 30, JULY 28, JANUARY 26,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 4,259 $ 1,250 $ 487
Accounts receivable, net of
allowance of $155, $123 and
$88.............................. 2,560 3,376 4,688
Inventories........................ 4,228 3,687 4,616
Other current assets............... 350 144 114
--------- --------- -----------
Total current assets.......... 11,397 8,457 9,905
PROPERTY, PLANT AND EQUIPMENT, net...... 5,211 6,151 6,850
OTHER ASSETS............................ 1,055 1,101 1,005
--------- --------- -----------
Total assets.................. $ 17,663 $ 15,709 $17,760
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt............................. $ 1,050 $ 1,050 $ 1,850
Accounts payable................... 338 796 1,349
Accrued expenses................... 780 1,003 1,611
Dividends payable.................. 1,050 -- --
--------- --------- -----------
Total current liabilities..... 3,218 2,849 4,810
LONG-TERM DEBT, net of current
maturities............................ 12,221 8,600 8,550
--------- --------- -----------
Total liabilities............. 15,439 11,449 13,360
--------- --------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value,
5,000,000 shares authorized;
483,000 shares and 549,500 shares
issued and outstanding for 1995
and 1996, respectively........... 483 550 550
Additional paid-in capital......... 179 496 496
Retained earnings.................. 1,562 3,214 3,354
--------- --------- -----------
Total stockholders' equity.... 2,224 4,260 4,400
--------- --------- -----------
Total liabilities and
stockholders' equity....... $ 17,663 $ 15,709 $17,760
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED JULY 31, 1994, JULY 30, 1995, AND JULY 28, 1996
AND FOR THE SIX MONTHS ENDED JANUARY 28, 1996 AND JANUARY 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
THE --------------------------------------------------
PREDECESSOR SIX MONTHS ENDED
COMPANY --------------------------
JULY 31, JULY 30, JULY 28, JANUARY 28, JANUARY 26,
1994 1995 1996 1996 1997
----------- -------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $47,946 $ 54,450 $ 48,341 $22,640 $24,090
COST OF GOODS SOLD...................... 40,606 46,388 40,540 19,008 21,126
----------- -------- -------- ----------- -----------
Gross profit....................... 7,340 8,062 7,801 3,632 2,964
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 4,018 3,826 3,825 1,929 1,876
SUPPLEMENTAL PROFIT
SHARING CONTRIBUTION............... -- -- -- -- 618
----------- -------- -------- ----------- -----------
Income from operations............. 3,322 4,236 3,976 1,703 470
INTEREST EXPENSE........................ (80) (962) (1,032) (535) (398)
OTHER INCOME (EXPENSE), net............. 922 101 199 89 83
----------- -------- -------- ----------- -----------
INCOME BEFORE INCOME TAXES.............. 4,164 3,375 3,143 1,257 155
PROVISION (BENEFIT) FOR INCOME TAXES.... 99 83 76 30 15
----------- -------- -------- ----------- -----------
NET INCOME.............................. $ 4,065 $ 3,292 $ 3,067 $ 1,227 $ 140
=========== ======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1994, JULY 30, 1995, AND JULY 28, 1996
AND THROUGH JANUARY 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
THE PREDECESSOR COMPANY:
Balance, July 26, 1993.......... 1,875 $ 1,875 $-- $ 13,402 $ 15,277
Stock issued.................... 27 27 64 -- 91
Net income...................... -- -- -- 4,065 4,065
Dividends....................... -- -- -- (1,503) (1,503)
Stock redemption................ (27) (27) (64) (131) (222)
--------- --------- ---------- --------- ---------
Balance, July 31, 1994.......... 1,875 $ 1,875 $-- $ 15,833 $ 17,708
========= ========= ========== ========= =========
THE COMPANY:
Balance -- initial
capitalization, August 1,
1994.......................... 350 $ 350 $-- $ -- $ 350
Stock issued.................... 133 133 179 -- 312
Net income...................... -- -- -- 3,292 3,292
Dividends....................... -- -- -- (1,730) (1,730)
--------- --------- ---------- --------- ---------
Balance, July 30, 1995.......... 483 483 179 1,562 2,224
Stock issued.................... 67 67 317 -- 384
Net income...................... -- -- -- 3,067 3,067
Dividends....................... -- -- -- (1,415) (1,415)
--------- --------- ---------- --------- ---------
Balance, July 28, 1996.......... 550 550 496 3,214 4,260
Net income (unaudited).......... -- -- -- 140 140
--------- --------- ---------- --------- ---------
Balance, January 26, 1997
(unaudited)................... 550 $ 550 $ 496 $ 3,354 $ 4,400
========= ========= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1994, JULY 30, 1995, AND JULY 28, 1996
AND FOR THE SIX MONTHS ENDED JANUARY 28, 1996 AND JANUARY 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
THE -------------------------------------------------
PREDECESSOR SIX MONTHS ENDED
COMPANY -------------------------
JULY 31, JULY 30, JULY 28, JANUARY 28, JANUARY 26,
1994 1995 1996 1996 1997
----------- -------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)................... $ 4,065 $3,292 $ 3,067 $ 1,227 $ 140
----------- -------- -------- ----------- -----------
Additions (deductions) for noncash
activities --
Depreciation and
amortization................. 1,182 605 734 350 465
(Gain) loss on sale of
property, plant and
equipment.................... (6) 13 -- (8) (55)
Deferred income taxes.......... 4 45 (2 ) -- --
Changes in assets and
liabilities --
Accounts receivable........ (646) 1,340 (816 ) (1,606) (1,312)
Inventories................ 103 167 541 (1,700) (929)
Prepaid expenses and other
current assets........... (115) 10 206 100 30
Other assets............... (415) (275) (49 ) 30 96
Accounts payable........... 75 (229) 458 386 553
Accrued expenses........... (899) 35 229 46 608
----------- -------- -------- ----------- -----------
(717) 1,711 1,301 (2,402) (544)
----------- -------- -------- ----------- -----------
Net cash provided by
(used in) operating
activities.......... 3,348 5,003 4,368 (1,175) (404)
----------- -------- -------- ----------- -----------
CASH FROM INVESTING ACTIVITIES:
Proceeds from sale of property,
plant and equipment............... 64 223 90 51 72
Proceeds from redemption of
insurance policies................ 669 -- -- -- --
Purchase of property, plant and
equipment......................... (892) (899) (1,765 ) (571) (1,181)
----------- -------- -------- ----------- -----------
Net cash used in
investing
activities.......... (159) (676) (1,675 ) (520) (1,109)
----------- -------- -------- ----------- -----------
CASH FROM FINANCING ACTIVITIES:
Issuance of common stock............ 91 312 384 390 --
Dividends paid...................... (1,540) (680) (2,465 ) (1,292) --
Payment of long-term debt........... (50) (50) (3,621 ) (1,060) (50)
Redemption of common stock.......... (222) -- -- -- --
Net borrowings on line of credit.... -- -- -- -- 800
Other............................... (59) -- -- -- --
----------- -------- -------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... (1,780) (418) (5,702 ) (1,962) 750
----------- -------- -------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 1,409 3,909 (3,009 ) (3,657) (763)
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 2,263 350 4,259 4,259 1,250
----------- -------- -------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 3,672 $4,259 $ 1,250 $ 602 $ 487
=========== ======== ======== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest....................... $ 37 $ 816 $ 1,018 $ 391 $ 256
Income taxes................... 66 69 90 10 30
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
On August 1, 1994, The FMP Group, Inc., purchased from Ridge Pallets, Inc.
(the "Predecessor Company"), substantially all of its assets used in the
pallet and bin manufacturing business and the name "Ridge Pallets, Inc.," for
notes payable of approximately $12,600,000 and the assumption of approximately
$1,800,000 in liabilities. Simultaneously with the transaction, the seller
changed its name to Ridge Resources, Inc., and The FMP Group, Inc., changed its
name to Ridge Pallets, Inc. (the "Company"). The statements of income,
stockholders' equity and cash flows for the year ended July 31, 1994, represent
those of the Predecessor Company prior to the purchase by the Company. As a
result of the transaction, the cost bases of the Predecessor Company and the
Company are different, as discussed further below. References to the Company
hereinafter may also include periods prior to August 1, 1994.
The Company is a manufacturer of wooden pallets and agricultural harvesting
boxes and bins. Manufacturing facilities are located in Florida, Georgia and
South Carolina, with the Company's headquarters located in Bartow, Florida.
Sales of the Company's products are primarily in Florida and the Southeastern
United States. The Company's customer base is approximately 40 percent
agricultural, with the balance comprised of the cement, roof and tile, auto,
grocery, beverage and seafood industries.
The Company and its stockholders intend to enter into a definitive
agreement with PalEx, Inc. ("PalEx"), pursuant to which all outstanding shares
of the Company's common stock will be exchanged for cash and shares of PalEx
common stock concurrent with the consummation of the initial public offering of
the common stock of PalEx.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR
The fiscal year of the Company is a 52-week or 53-week period that ends on
the last Sunday in July. The years ended July 31, 1994, July 30, 1995, and July
28, 1996, were 53-, 52- and 52-week periods, respectively.
INTERIM FINANCIAL INFORMATION
The interim financial statements are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the consolidated interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis or by specific identification. The cost of
finished goods inventory includes direct material, direct labor and overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation for the
year ended July 31, 1994, was calculated using an accelerated method.
Depreciation for the years ended July 30, 1995, and July 28, 1996, is provided
on the straight-line method based upon the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to operating expense
as incurred. Additions and major replacements or betterments that increase
capacity or extend useful lives are added to the cost of the asset. Upon sale or
retirement of property and equipment, the cost and related accumulated
depreciation are
F-24
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
eliminated from the respective accounts and the resulting gain or loss is
included in other income (expense), net.
INCOME TAXES
The stockholders of the Company have elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under these provisions,
the Company does not pay federal and certain state income taxes. Instead, the
Company's stockholders pay income taxes on their proportionate shares of the
Company's net earnings. The provision for income taxes is composed entirely of
state income taxes.
CASH EQUIVALENTS
For purposes of the statements of cash flows and balance sheets, the
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
NONCASH ACTIVITIES
In fiscal year 1995, the Company issued notes payable of approximately
$12,600,000 and assumed approximately $1,800,000 of liabilities in connection
with the acquisition of the pallet and bin manufacturing business of Ridge
Resources, Inc. The assets acquired were recorded at fair value as follows:
(IN THOUSANDS)
--------------
Property, plant and equipment........ $ 5,372
Inventories.......................... 4,394
Accounts receivable.................. 3,899
Other assets......................... 720
Goodwill............................. 23
--------------
$ 14,408
==============
In addition, dividends of $1,050,000 were included in dividends payable at
July 30, 1995. Accordingly, these noncash investing and financing activities
have been excluded from the accompanying statements of cash flows.
The Predecessor Company maintained deferred compensation agreements with
shareholders and key members of management through July 31, 1994. The agreements
were terminated in connection with the formation of the Company. The Predecessor
Company recognized a gain of approximately $631,000 upon cancellation of the
deferred compensation liability, which has been reflected in other income
(expense), net for the year ended July 31, 1994.
REVENUE RECOGNITION
The Company recognizes revenues upon delivery of the product to the
customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived
F-25
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Assets to Be Disposed Of." This statement establishes the recognition and
measurement standards related to the impairment of long-lived assets. The
Company will be required to adopt this standard during fiscal 1997. It is the
opinion of management that the adoption of this standard will not have a
material effect on the Company's financial position or results of operations.
CONCENTRATIONS OF RISK
MATERIALS -- Pallet prices are closely related to the changing costs and
availability of lumber, the principal raw material used in the manufacture and
repair of wooden pallets. Lumber supplies and costs are affected by many factors
including weather, governmental regulation of logging on public lands, lumber
agreements between Canada and the United States and competition from other
industries that use similar grades and types of lumber. The Company received
approximately 40 percent, 39 percent and 46 percent of its lumber purchases from
two suppliers in 1994, 1995 and 1996, respectively.
MARKETS -- Markets for pallet manufacturing and repair services are highly
fragmented and competitive. Pallet manufacturing and recycling operations are
not capital-intensive; therefore, barriers to entry in such businesses are
minimal.
CUSTOMERS -- The Company's sales are made to customers with local, regional
and national operations in many different industries and geographical locations.
Of such customers, one customer accounted for approximately 17 percent, 22
percent and 21 percent of revenues in 1994, 1995 and 1996. As of July 28, 1996,
the customer had an outstanding accounts receivable balance which represented
approximately 10 percent of total accounts receivable.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
ESTIMATED
USEFUL
LIVES JULY 30, JULY 28,
IN YEARS 1995 1996
----------- -------- --------
(IN THOUSANDS)
Land.................................... - $ 721 $ 721
Machinery and equipment................. 7 - 10 2,033 2,675
Vehicles and rolling stock.............. 5 694 1,141
Buildings and building improvements..... 15 - 40 2,229 2,608
Furniture and fixtures.................. 5 - 10 124 277
Less -- Accumulated depreciation........ (590) (1,271)
-------- --------
Property, plant and equipment, net...... $ 5,211 $ 6,151
======== ========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
The major components of inventories are as follows:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Lumber, hardware and fasteners....... $ 3,701 $ 3,054
Work in process...................... 88 85
Finished goods....................... 439 548
--------- ---------
$ 4,228 $ 3,687
========= =========
F-26
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the Company's allowance for doubtful accounts consists of the
following:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Balance at beginning of the year..... $ 35 $ 155
Additions charged to expense
(recoveries)......................... 120 (5)
Deductions for uncollectible
receivables written off.............. -- (27)
--------- ---------
$ 155 $ 123
========= =========
Other assets are as follows:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Certificate of deposit, restricted... $ 535 $ 554
Cash surrender value of officers'
life insurance....................... 130 146
Notes receivable..................... 131 90
Other assets......................... 259 311
--------- ---------
$ 1,055 $ 1,101
========= =========
Accrued expenses consist of the following:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Accrued workers' compensation........ $ 250 $ 250
Accrued salaries and benefits........ 90 378
Accrued interest payable............. 140 133
Accrued taxes........................ 110 81
Other accrued expenses............... 190 161
--------- ---------
$ 780 $ 1,003
========= =========
5. DEBT:
The Company maintains a $4 million line of credit which expires in June
1997. There were no borrowings on the line as of July 30, 1995, and July 28,
1996. Provisions of the line of credit contain certain restrictive covenants,
the most restrictive of which requires the Company to maintain a net worth of at
least $250,000. The borrowings are collateralized by the personal guarantees of
six of the Company's shareholders. The interest rate is at prime (prime rate was
8.25 percent at July 28, 1996).
F-27
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consisted of the following:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Notes payable to Ridge Resources,
Inc. and its shareholders, at
prime, interest due quarterly,
principal due in annual
installments totaling $1,000,000 to
$1,500,000, maturing January 3,
2000, and collateralized by
property, plant, equipment,
receivables and inventory and
secured by shares of the Company
held by six shareholders........... $ 12,571 $ 9,000
Industrial development bond, interest
variable, approximating 80 percent
of prime, interest due monthly,
$50,000 principal due annually;
collateralized by property, plant
and equipment and a standby letter
of credit from a bank in the amount
of $695,000........................ 700 650
--------- ---------
13,271 9,650
Less -- Current portion.............. (1,050) (1,050)
--------- ---------
Total long-term debt............ $ 12,221 $ 8,600
========= =========
The aggregate principal maturities for each of the next five fiscal years
are as follows (in thousands):
Fiscal year ending --
1997............................ $ 1,050
1998............................ 1,550
1999............................ 1,550
2000............................ 5,050
2001............................ 50
Thereafter...................... 400
---------
$ 9,650
=========
6. INCOME TAXES:
State income taxes are as follows:
JULY 31, JULY 30, JULY 28,
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
State --
Current......................... $ 95 $ 38 $ 78
Deferred........................ 4 45 (2)
--- --- ---
$ 99 $ 83 $ 76
=== === ===
For the years ended 1994, 1995 and 1996, actual income tax expense is
primarily computed by applying the blended state tax rate of 2.4 percent to
income before income taxes.
F-28
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences for the years ended
1995 and 1996 result principally from the following:
JULY 30, JULY 28,
1995 1996
-------- --------
(IN THOUSANDS)
Deferred income tax liabilities --
Depreciation and amortization...... $ 3 $ 9
Fiscal year-end deferral........... 48 44
Deferred income tax assets --
Inventory.......................... (3) (3)
Other assets....................... (4) (7)
--- ---
Net current deferred income
tax liabilities........... $ 44 $ 43
=== ===
7. RELATED-PARTY TRANSACTIONS:
The Company is related to Sunbelt Forest Products Corporation ("Sunbelt")
and Ridge Resources, Inc., through certain common ownership, officers and
directors.
The following amounts are included in the statements of income:
YEARS ENDED
----------------------------------
JULY 31, JULY 30, JULY 28,
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
Sales to Sunbelt........................ $ 977 $ 484 $ 666
Purchases from Sunbelt.................. -- -- 11
Accounting and managerial services
revenue from Sunbelt.................. 135 75 55
Purchases from Ridge Resources, Inc..... -- 199 421
Interest income from Sunbelt............ 193 -- --
Interest expense to Ridge Resources,
Inc................................... -- 909 982
The following amounts are included in the balance sheets:
JULY 30, JULY 28,
1995 1996
-------- --------
(IN THOUSANDS)
Accounts receivable from Sunbelt........ $ 7 $ 6
Due from Ridge Resources, Inc........... 5 1
Note payable to Ridge Resources, Inc.... 12,571 9,000
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company has a workers' compensation and general liability policy,
subject to a $250,000 deductible. As such, any claim within the first $250,000
per incident would be the financial obligation of the Company. In addition, the
policy limits coverage to $850,000 per year. The Company maintains a
F-29
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
certificate of deposit as security in the amount of approximately $554,000,
which is included in other assets at July 28, 1996.
The accrued insurance claims payable represents management's estimate of
the Company's potential claims costs in satisfying the deductible provisions of
the insurance policy for claims occurring through July 28, 1996. The accrual is
based upon known facts and historical trends, and management believes such
accrual to be adequate.
The Company self-insures its employees' health insurance program. A trust
was established in July 1983 to administer this program. Effective August 1,
1994, the Company became the new trust sponsor. By agreement between the Company
and the trust, the Company must contribute sufficient funds to the trust to
ensure that the trust has sufficient monies to pay claims as provided in the
employee health insurance plan document. The Company contributed $205,000,
$185,000 and $145,000 in fiscal years 1994, 1995 and 1996, respectively. Health
insurance expense was $198,000, $192,000 and $145,000 in fiscal years 1994, 1995
and 1996, respectively.
The trust obtained tax-exempt status from the Internal Revenue Service
during 1985. Its trustees are employees of the Company.
9. PROFIT-SHARING PLAN:
The Company maintains a qualified profit-sharing plan. Company
contributions are voluntary and at the discretion of the board of directors.
Annual contributions, in order to be deductible for income tax purposes by the
Company, cannot exceed 15 percent of salaries and wages.
Effective January 1, 1995, the Company amended the Plan to qualify under
Internal Revenue Code Section 401(k). In accordance with the Plan, the Company
will match 50 percent of employee 401(k) contributions, not to exceed 4 percent
of the employee's qualified compensation related to the Plan.
Total profit-sharing and 401(k) expense was $400,000 for fiscal years 1994,
1995 and 1996.
10. DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments",
and SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments," require the disclosure of the fair value of
financial instruments, both assets and liabilities recognized and not recognized
on the balance sheet, for which it is practicable to estimate fair value. The
carrying value of the Company's financial instruments approximates fair value.
11. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
The Company and its shareholders have entered into a definitive agreement
with PalEx providing for the acquisition of the Company by PalEx.
In December 1996, the Company declared a contribution to its defined
contribution profit-sharing plan of approximately $968,000. The Company intends
to satisfy approximately $350,000 of this obligation with a cash payment to the
plan. In connection with the acquisition, PalEx has agreed to satisfy the
Company's supplemental profit-sharing obligation through the issuance to such
plan of approximately 82,500 shares of PalEx common stock. In addition, prior to
the closing of the acquisition, the Company will make distributions in respect
of the Company's estimated S Corporation Accumulated Adjustment Account at the
time of closing in the amount of approximately $2.5 million. The Company will
also distribute non-operating assets with a net book value of approximately
$175,000 to its shareholders prior to the merger with PalEx.
The Company is also liable to an investment banking firm for an amount up
to $468,000 for financial advisory services upon the completion of the
acquisition of the Company by PalEx.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PalEx, Inc.:
We have audited the accompanying balance sheet of PalEx, Inc. (a Delaware
corporation), as of November 30, 1996, and the related statement of income and
statement of changes in stockholders' equity for the period from inception
(January 8, 1996) to November 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PalEx, Inc., as of November
30, 1996, and the results of its operations for the period from inception
(January 8, 1996) to November 30, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 3, 1997
F-31
<PAGE>
PALEX, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30,
1996
------------
ASSETS
CASH AND CASH EQUIVALENTS............... $ 1
OTHER ASSETS............................ 300
------------
Total assets.................. $ 301
============
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value,
5,000,000 shares authorized, no
shares issued..................... $--
Common stock, $.01 par value,
30,000,000 shares authorized and
1,071,389 shares issued........... 11
Additional paid-in capital......... 599
Retained deficit................... (309)
------------
Total stockholders' equity.... $ 301
============
The accompanying notes are an integral part of this financial statement.
F-32
<PAGE>
PALEX, INC.
STATEMENT OF INCOME
FROM INCEPTION (JANUARY 8, 1996) TO NOVEMBER 30, 1996
(IN THOUSANDS)
REVENUES................................ $ --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 300,000
------------
LOSS BEFORE INCOME TAXES................ (300,000)
INCOME TAX BENEFIT...................... --
------------
NET LOSS................................ $ (300,000)
============
The accompanying notes are an integral part of this financial statement.
F-33
<PAGE>
PALEX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 8, 1996)
THROUGH NOVEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Initial Capitalization.................. 1,021 $ 10 $ -- $ (9) $ 1
Offering Costs incurred by
Stockholder........................... -- -- 300 -- 300
Issuance of Management Shares........... 50 1 299 -- 300
Net Loss................................ -- -- -- (300) (300)
------ ------ ---------- -------- ------
BALANCE, NOVEMBER 30, 1997.............. 1,071 $ 11 $ 599 $ (309) $ 301
====== ====== ========== ======== ======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-34
<PAGE>
PALEX, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
PalEx, Inc. ("PalEx" or the "Company"), was founded in January 1996 to
create a nationwide provider of pallet products and related services. PalEx
intends to acquire three U.S. pallet businesses (the "Acquisitions"), complete
an initial public offering (the "Offering") of its common stock and,
subsequent to the Offering, continue to acquire, through merger or purchase,
similar companies to expand its national operations.
PalEx has not conducted any operations, and all activities to date have
related to the acquisitions and the initial public offering ("IPO"). Cash of
$1,000 was generated from the initial capitalization of the Company (see Note
2). All other expenditures to date have been funded by the majority stockholder,
Main Street Capital Partners, L.P. ("Main Street"), on behalf of the Company.
Accordingly, changes in stockholder's equity and cash flows would not provide
meaningful information and have been omitted. There is no assurance that the
pending acquisitions discussed below will be completed and that PalEx will be
able to generate future operating revenues. Main Street has committed to fund
the first $1.25 million of offering costs. PalEx will treat these costs as
deferred costs and contributed capital as incurred by Main Street. As of
November 30, 1996, costs of approximately $300,000 had been incurred by Main
Street in connection with the IPO. PalEx is dependent upon the IPO to execute
the pending acquisitions and future operations.
2. STOCKHOLDER'S EQUITY:
In connection with the organization and initial capitalization of PalEx,
the Company issued 1,000 shares of common stock for $1,000 (see Note 3).
In November 1996, the Company issued 50,000 shares (after reflecting the
stock dividend discussed in Note 3) of its common stock to the Chief Executive
Officer at an aggregate price of $500. The Company recorded a nonrecurring,
noncash charge of approximately $300,000 representing the difference between the
amounts paid for the shares and the estimated fair value of the shares on the
date of the sale as if the Acquisitions were completed.
3. SUBSEQUENT EVENTS:
In December 1996, PalEx declared a stock dividend of approximately 1,021
shares of common stock for each share of common stock then outstanding. In
addition, PalEx increased the number of authorized shares of common stock to
30,000,000 shares and authorized 5,000,000 shares of $.01 par value preferred
stock. The effects of the common stock dividend and the increase in the number
of common shares authorized have been retroactively reflected on the balance
sheet and in the accompanying notes.
PalEx and separate wholly owned subsidiaries have signed definitive
agreements to acquire by merger three companies ("Founding Companies") to be
effective with the IPO. The companies to be acquired are Fraser Industries, Inc.
("Fraser"), Ridge Pallets, Inc. ("Ridge"), and Interstate Pallets, Inc.
("Interstate"). Consideration that will be paid by PalEx to acquire the
Founding Companies is approximately $45.6 million (unaudited) (based upon an
offering price of $10 per share (unaudited), net of a 25 percent discount)
consisting of a combination of cash and common stock.
On December 24, 1996, PalEx filed a registration statement on Form S-1 for
the sale of its common stock. See "Risk Factors" included elsewhere herein.
In connection with the Acquisitions, PalEx will assume certain obligations
of the Founding Companies. Additionally, in connection with the Acquisitions,
PalEx has agreed to satisfy the Founding Companies profit sharing obligations
totalling approximately $1.1 million through the issuance of approximately
142,500 shares of PalEx common stock.
F-35
<PAGE>
PALEX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has recently received a commitment letter from a bank to
provide a credit facility which would be available upon the closing of the
Offering. According to the proposed terms, the Company would have an unsecured
revolving line of credit of up to $35.0 million, which may be used for general
corporate purposes, including post-Offering acquisitions, capital expenditures
and working capital. It is anticipated that such facility will require the
Company to comply with various affirmative and negative covenants including, but
not limited to (i) maintenance of certain financial ratios, (ii) a restriction
on additional indebtedness and (iii) restrictions on liens, guarantees,
advances, dividends and business activities unrelated to its existing
operations. Failure to comply with such covenants and restrictions would
constitute an event of default under the proposed facility. The ability of the
Company to secure the credit facility is subject to completion of negotiations
with the bank as well as the satisfaction of certain conditions, including the
execution of appropriate loan documentation.
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," allows entities to choose between a
new fair value based method of accounting for employee stock options or similar
equity instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
The Company has authorized the issuance of 1,800,000 shares of its common
stock in accordance with its stock option plan. The Company intends to file a
registration statement on Form S-8 under the Securities Act registering the
issuance of shares upon exercise of options granted under the Plan. The Company
expects to grant options to purchase a total of 725,000 shares of common stock
at the initial public offering price upon consummation of the Offering. The
Chief Executive Officer was also granted 200,000 options to purchase PalEx
common stock, 100,000 of which may be purchased at $7.50 per share and the
remaining 100,000 which may be purchased at the IPO price.
F-36
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary...................... 3
Risk Factors............................ 8
The Company............................. 13
Use of Proceeds......................... 14
Dividend Policy......................... 14
Capitalization.......................... 15
Dilution................................ 16
Selected Financial Data................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 19
Business................................ 26
Management.............................. 33
Certain Transactions.................... 36
Principal Stockholders.................. 40
Description of Capital Stock............ 41
Shares Eligible for Future Sale......... 42
Underwriting............................ 44
Legal Matters........................... 45
Experts................................. 45
Additional Information.................. 45
Index to Financial Statements........... F-1
------------------
UNTIL , 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
3,000,000 SHARES
[Palex Logo]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
SEC Registration Fee................. $ 11,500
NASD Filing Fee...................... 4,295
Nasdaq National Market Listing Fee... 46,809
Accounting Fees and Expenses......... 775,000
Legal Fees and Expenses.............. 350,000
Printing Expenses.................... 200,000
Transfer Agent's Fees................ 7,500
Miscellaneous........................ 354,896
------------
Total........................... $ 1,750,000
============
- ------------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated. Main Street has agreed to pay up to $1,250,000 of these
expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of section 145 of the General Corporation Law of the State
of Delaware (the "DGCL") empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising
II-1
<PAGE>
out of his status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
Section 102(b)(7) of the DGCL of the State of Delaware provides that a
certificate of incorporation may contain a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit.
Article Eighth of the Company's Amended and Restated Certificate of
Incorporation states that:
"No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article Eighth
shall not eliminate or limit the liability of a director to the extent provided
by applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of this Article
Eighth shall apply to, or have any effect on, the liability or alleged liability
of any director of the Corporation for or with respect to any acts or omissions
of such director occurring prior to such amendment or repeal. If the DGCL is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended."
In addition, Article VI of the Company's Bylaws further provides that the
Company shall indemnify its officers, directors and employees to the fullest
extent permitted by law.
The Company intends to enter into indemnification agreements with each of
its executive officers and directors which indemnifies such person to the
fullest extent permitted by its Amended and Restated Certificate of
Incorporation, its Bylaws and the DGCL. The Company also intends to obtain
directors and officers liability insurance.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify, under certain
conditions, the Company, its officers and directors, and persons who control the
Company within the meaning of the Securities Act of 1933, as amended, against
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company during the past three years that were not registered under the
Securities Act of 1933. The description presented below gives effect to the
Company's recent reorganization and accompanying 1,021.389 for one stock split
on December 20, 1996.
(a) On January 8, 1996, the Company issued 1,021,389 shares of its
Common Stock for an aggregate price of $1,000 to Main Street Capital
Partners, L.P. in connection with the formation of the Company.
(b) On November 6, 1996, the Company issued 50,000 shares of its
Common Stock to Vance Maultsby, Jr. for an aggregate price of $500 in
connection with his hiring by the Company. In connection with his hiring by
the Company, Mr. Maultsby received options to purchase 100,000 shares of
Common Stock at an exercise price of $7.50 per share and options to
purchase 100,000 shares of Common Stock at an exercise price equal to the
initial public offering price.
(c) See "Certain Transactions" for a discussion of the issuance of
shares of Common Stock and options to purchase shares of Common Stock in
connection with the Acquisitions.
II-2
<PAGE>
These transactions were completed without registration under the Securities
Act of 1933 in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
- ------------------------
1.1 -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Certificate of
Incorporation.
3.2 -- Bylaws.
4.1 -- Specimen Common Stock Certificate.
5.1 -- Opinion of Andrews & Kurth L.L.P. as to
the legality of the securities being
registered.
10.1 -- Agreement and Plan of Reorganization and
Merger dated as of December 20, 1996
between PalEx, Inc. and Ridge Pallets,
Inc.
10.2 -- Agreement and Plan of Reorganization and
Merger dated as of December 20, 1996
between PalEx, Inc. and Fraser
Industries, Inc.
10.3 -- Agreement and Plan or Reorganization and
Merger dated as of December 20, 1996
between PalEx, Inc. and Interstate
Pallet Co., Inc.
10.4 -- Form of Employment and Non-Competition
Agreement (the terms of each agreement
are identical except that each of
Messrs. Holland, Fletcher, Fraser and
Sykes will have an $125,000 annual
salary and Mr. Maultsby will have an
$175,000 annual salary).
10.5 -- Form of Officer and Director
Indemnification Agreement.
10.6 -- PalEx, Inc. 1996 Stock Option Plan.
23.1 -- Consent of Andrews & Kurth L.L.P.
(included in Exhibit 5.1).
23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of A. E. Holland, Jr. pursuant
to Rule 438.
23.4 -- Consent of Troy L. Fraser pursuant to
Rule 438.
23.5 -- Consent of Stephen C. Sykes pursuant to
Rule 438.
23.6 -- Consent of Tucker S. Bridwell pursuant
to Rule 438.
23.7 -- Consent of John E. Drury pursuant to
Rule 438.
24.1 -- Powers of Attorney (included in
signature page).
27 -- Financial Data Schedule
- ------------
All exhibits have been previously filed, except for exhibit 23.2 filed
herewith.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON MARCH 13, 1997.
PALEX, INC.
By: /s/ VANCE K. MAULTSBY, JR.
VANCE K. MAULTSBY, JR.,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------ ---------------
<S> <C> <C>
/s/ VANCE K. MAULTSBY, JR. President and Chief Executive March 13, 1997
VANCE K. MAULTSBY, JR. Officer (Principal Executive
Officer)
CASEY A. FLETCHER* Chief Accounting Officer (Principal March 13, 1997
CASEY A. FLETCHER Financial and Accounting Officer)
SAM W. HUMPHREYS* Director March 13, 1997
SAM W. HUMPHREYS
*By /s/ VANCE K. MAULTSBY, JR.
VANCE K. MAULTSBY, JR.,
ATTORNEY-IN-FACT
</TABLE>
II-5
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
March 12, 1997
