AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PALEX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2248 76-0520673
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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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:
JOHN F. WOMBWELL
ANDREWS & KURTH L.L.P.
4200 TEXAS COMMERCE TOWER
HOUSTON, TEXAS 77002
(713) 220-4200
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this 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. [X]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER SHARE(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share..................... 4,000,000 shares $9.75 $39,000,000 $11,818
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based upon the average of the high and low sale
prices of the Common Stock on May 27, 1997, as reported on The Nasdaq
National Market.
------------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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* *
* 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. *
* *
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SUBJECT TO COMPLETION, DATED MAY 29, 1997
4,000,000 SHARES
[PALEX, INC. LOGO]
COMMON STOCK
------------------------
This Prospectus covers 4,000,000 shares of Common Stock of PalEx, Inc.
("PalEx" or the "Company") which may be offered and issued from time to time
by the Company in connection with its acquisition of the securities and assets
of other businesses. It is expected that the terms of acquisitions involving the
issuance and sale by the Company of Common Stock covered by this Prospectus will
be determined by direct negotiations with the owners or controlling persons of
the businesses whose securities or assets are acquired. The Company expects that
the shares of Common Stock issued in exchange for securities or assets in
business combination transactions will be valued at prices reasonably related to
market prices of the Common Stock either at the time the terms of an acquisition
are agreed upon or at or about the time of delivery of such shares of Common
Stock.
The Common Stock trades on The Nasdaq National Market under the symbol
"PALX." Application will be made to list the shares of Common Stock offered
hereby on The Nasdaq National Market. The last reported sale price of the Common
Stock on The Nasdaq National Market on May 27, 1997 was $9.75 per share.
All expenses of this offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of Common
Stock, although finders fees may be paid with respect to specific acquisitions.
Any person receiving a finder's fee may be deemed to be an Underwriter within
the meaning of the Securities Act of 1933, as amended (the "Securities Act").
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
------------------------
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.
THE DATE OF THIS PROSPECTUS IS MAY , 1997.
<PAGE>
PROSPECTUS SUMMARY
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 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 its initial public
offering on March 25, 1997 (the "Offering"), PalEx acquired in separate
transactions (the "Acquisitions") 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 provides 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 operates from 21 facilities in Florida,
Texas, Virginia, California, Arkansas, Georgia, Illinois, Mississippi and South
Carolina. Ridge Pallets, Inc. ("Ridge") and Fraser Industries, Inc.
("Fraser"), two of the businesses acquired by the Company in connection with
the Offering, are currently among the largest pallet businesses in the U.S.,
based on revenues, and Interstate Pallet Co., Inc. ("Interstate" and together
with Ridge and Fraser the "Founding Companies") 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 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
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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 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.
3
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SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PalEx acquired the Founding Companies simultaneously with the consummation
of the 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 Acquisitions,
(ii) the effects of certain pro forma adjustments to the historical financial
statements and (iii) the consummation of the 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
PRO FORMA -------------------
----------------- THREE MONTHS
FISCAL YEAR ENDED ENDED
NOVEMBER 30, 1996 MARCH 21, 1997
----------------- -------------------
INCOME STATEMENT DATA(1):
Revenues........................ $ 102,030 $ 28,117
Gross profit.................... 15,852 4,211
Selling, general and
administrative expenses(2).... 6,628 1,710
Supplemental profit sharing
contribution.................. -- 1,069
Goodwill amortization(3)........ 556 139
Income from operations.......... 8,668 1,293
Interest income (expense),
net(4)........................ (324) (108)
Net income...................... 4,876 717
Net income per share............ $ 0.48 $ 0.07(6)
Shares used in computing pro
forma net income per
share(5)...................... 10,123,889 10,123,889
PRO FORMA AS OF
MARCH 2, 1997(7)
-----------------
BALANCE SHEET DATA:
Working capital................. $12,332
Total assets.................... 49,862
Total debt, including current
portion........................ 6,824
Stockholders' equity............ 35,576
- ------------
(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 for 1996 include operating
results of Ridge for the twelve months ended December 1, 1996 and Interstate
for the fiscal year ended August 31, 1996. The pro forma income statement
data for the three months ended March 2, 1997 include operating results of
Ridge and Interstate for the three months ended March 2, 1997.
(2) The pro forma combined income statement data for the fiscal year ended
November 30, 1996 and the three months ended March 2, 1997 reflect an
aggregate of approximately $666,000 and $226,000, respectively, in pro forma
reductions in salary and benefits of the owners of the Founding Companies to
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
4
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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 for 1996 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 and the increase in interest expense
attributed to incremental borrowings.
(5) Includes (i) 5,910,000 shares 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 sold in the
Offering and (v) 142,500 shares issued to the Founding Companies' profit
sharing plans. Excludes 450,000 shares issued in April 1997 as a result of
the exercise of the over-allotment option by the underwriters and options to
purchase 925,000 shares which are currently outstanding which were granted
upon consummation of the Offering. See "Certain Transactions."
(6) Excluding the effect of the supplemental profit sharing contribution of $1.1
million ($637,000 net of tax), pro forma net income and pro forma earnings
per share would have been $1.4 million and $.13 per share, respectively. See
Notes 10, 11 and 13 to the Financial Statements of Fraser, Ridge and PalEx,
respectively.
(7) The pro forma combined balance sheet data assume that the Acquisitions were
closed on March 2, 1997, and reflects the closing of the 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 "Certain Transactions." 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.
5
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RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES A SIGNIFICANT DEGREE OF RISK.
PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH BELOW, AS
WELL AS THE OTHER INFORMATION PROVIDED ELSEWHERE IN THIS PROSPECTUS, BEFORE
MAKING AN INVESTMENT IN THE COMMON STOCK.
WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE," "ESTIMATE,"
"PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR
SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED. THESE AND OTHER
FACTORS ARE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY. Prior to March 25, 1997, the
Founding Companies operated as separate independent entities. 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 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. 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
6
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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, 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 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 is a party to a credit facility with Bank One, Texas, NA
("Bank One") which allows the Company to borrow up to $35.0 million to be used
for general corporate purposes including the repayment or refinancing of
indebtedness of the Founding Companies, future acquisitions, capital
expenditures and working capital. The facility requires 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. These
conditions adversely affected the Company's results of operations for the first
fiscal quarter ended March 2, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Pro Forma Combined
Financial Statements."
SEASONALITY; FLUCTUATION OF OPERATING RESULTS. The pallet manufacturing
business can be subject to seasonal variations in operations and demand.
Approximately 17% 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
7
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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."
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. For the past
several years, these products have faced increasing competition from plastic
agricultural containers which has reduced the number of agricultural
8
<PAGE>
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 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 has entered 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. The Company's executive
officers, directors and key employees, and entities and persons affiliated with
them (including stockholders of the Founding Companies), beneficially own 67.4%
of the outstanding shares of Common Stock. 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."
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 the Offering, no
public market for the Common Stock existed. The Common Stock is quoted on The
Nasdaq National Market, although no assurance can be given that an active
trading market for the Common Stock will continue. The market price
9
<PAGE>
of the Common Stock 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 April 30, 1997, 10,573,889 shares
of Common Stock were issued and outstanding. Simultaneously with the closing of
the Offering, the stockholders of the Founding Companies received, in the
aggregate, 5,910,000 shares of Common Stock as a portion of the consideration
for their businesses and the Company issued 142,500 shares of Common Stock to
the Founding Companies' profit sharing plans. None of these 6,052,500 shares was
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."
The Company also has 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 -- 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 Offering 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 7,173,889 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
the Offering 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 shares of Common Stock covered by this Prospectus 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.
DIVIDENDS. The Company intends to retain its earnings for continued
development of its business and does not intend to pay cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."
10
<PAGE>
THE COMPANY
PalEx was founded in January 1996 to create a national provider of pallets
and related services. Concurrently with the closing of the Offering, PalEx
acquired 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 and has 14 plant locations. 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 became Chief
Development Officer and a director of the Company 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 and has five plant locations. 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 became the Chief Operating Officer and a
director of the Company 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 Ridges senior management team has in
excess of 13 years of experience in the pallet business, is actively involved in
the NWPCA and continues to serve the Company.
INTERSTATE. Interstate was founded in 1979 in Richmond, Virginia and is
recognized as an innovator in pallet recycling services. Interstate has two
facilities which engage 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 became a director of the Company
upon consummation of the Offering. Mr. Sykes is a former President and board
member of the NWPCA.
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.
11
<PAGE>
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that may be offered and
issued by the Company from time to time in connection with the acquisition of
the securities and assets of other businesses. Other than the securities and
assets acquired, there will be no proceeds to the Company from these offerings.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has traded on The Nasdaq National Market since
March 20, 1997, the effective date of the Offering. The high and low last sale
prices for the Common Stock for the period from March 20, 1997 through May 27,
1997 were $10.00 and $7.50, respectively. At April 30, 1997, there were
approximately 34 stockholders of record of the Company's Common Stock. On May
27, 1997, the last reported sale price of the Common Stock on The Nasdaq
National Market was $9.75 per share.
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, the Company's revolving credit
facility includes, and any additional lines of credit established in the future
may include, restrictions on the ability of the Company to pay dividends without
the consent of the lender.
12
<PAGE>
SELECTED FINANCIAL DATA
PalEx acquired the Founding Companies simultaneously with the 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 fiscal years ended
November 30, 1994, 1995 and 1996 have been derived from audited financial
statements of Fraser and 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 March 2,
1997 and for the fiscal years ended November 30, 1992 and 1993 and for the three
months ended February 29, 1996 and March 2, 1997 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 the 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>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER 30, ------------------------
----------------------------------------------------- FEBRUARY 29, MARCH 2,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ------------ ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
FRASER
Revenues......................... $ 13,110 $ 18,254 $ 23,114 $ 30,135 $ 49,282 $ 10,767 $ 12,405
Gross profit..................... 2,193 2,286 2,359 4,576 7,773 2,260 1,862
Selling, general and
administrative expenses........ 1,971 2,080 1,761 2,131 3,171 791 801
Income from operations........... 222 206 598 2,445 4,602 1,469 686
Interest expense, net(1)......... (100) (170) (344) (431) (540) (121) (89)
Net income....................... $ 118 $ 21 $ 248 $ 1,923 $ 3,846 $ 1,348 $ 597
========= ========= ========= ========= ========= ============ =========
PRO FORMA COMBINED(2):
Revenues......................... $ 102,030 $ 28,117
Gross profit..................... 15,852 4,211
Selling, general and
administrative expenses(3)..... 6,628 1,710
Supplemental profit sharing
contribution................... -- 1,069
Goodwill amortization(4)......... 556 139
Income from operations........... 8,668 1,293
Interest income (expense),
net(5)......................... (324) (108)
Net income....................... $ 4,876 $ 717
========= =========
Net income per share............. $ 0.48 $ 0.07(7)
========= =========
Shares used in computing pro
forma net income per
share(6)....................... 10,123,889 10,123,889
========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF PRO FORMA
----------------------------------------------------- MARCH 2, AS OF
1992 1993 1994 1995 1996 1997 MARCH 2, 1997(8)
--------- --------- --------- --------- --------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
FRASER
Working capital.................. $ 562 $ 796 $ (2,280) $ 997 $ 1,449 $ 1,732 $ 12,332
Total assets..................... 4,630 5,018 9,950 12,295 13,040 14,273 49,862
Total debt, including current
portion........................ 1,901 3,550 5,787 5,920 2,454 2,717 6,824
Stockholders' equity............. 1,672 1,639 1,887 3,810 7,236 7,833 35,576
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
13
<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 for 1996 include operating
results of Ridge for the twelve months ended December 1, 1996 and Interstate
for the fiscal year ended August 31, 1996. The pro forma income statement
data for the three months ended March 2, 1997 include operating results of
Ridge and Interstate for the three months ended March 2, 1997.
(3) The pro forma combined income statement data for the fiscal year ended
November 30, 1996 and the three months ended March 2, 1997 reflect an
aggregate of approximately $666,000 and $226,000, respectively, 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 for 1996 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."
(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 and the increase in interest expense
attributed to incremental borrowings.
(6) Includes (i) 5,910,000 shares 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 sold in the
Offering and (v) 142,500 shares issued to the Founding Companies' profit
sharing plans. Excludes 450,000 shares issued in April 1997 as a result of
the exercise of the over-allotment option by the underwriters and options to
purchase 925,000 shares which are currently outstanding which were granted
upon consummation of the Offering. See "Certain Transactions."
(7) Excluding the effect of the supplemental profit sharing contribution of $1.1
million ($637,000 net of tax), pro forma net income and pro forma earnings
per share would have been $1.4 million and $.13 per share respectively. See
Notes to the Financial Statements.
(8) The pro forma combined balance sheet data assume that the Acquisitions were
closed on March 2, 1997, and reflects the closing of the 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 "Certain Transactions." 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.
14
<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 17% 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,
15
<PAGE>
adversely affecting the Company's revenues and results of operations. 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. These conditions adversely affected the Company's results of
operations for the first quarter ended March 2, 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 the
Offering were 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 used 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.
16
<PAGE>
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED(2)
FISCAL PERIODS ENDED(1) --------------------
---------------------------------------------------------------- FEBRUARY 29,
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 74,540 100.0% $ 88,357 100.0% $ 102,030 100.0% $ 24,541 100.0%
Cost of Sales........................ 64,129 86.0 75,118 85.0 86,178 84.5 19,954 81.3
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 10,411 14.0 13,239 15.0 15,852 15.5 4,587 18.7
Selling, general and administrative
expenses........................... 6,039 8.1% 6,120 6.9% 7,419 7.3% 1,844 7.5%
Supplemental profit sharing
contribution....................... -- -- -- -- -- -- -- --
</TABLE>
THREE MONTHS
ENDED(2)
--------------------
MARCH 2,
1997
--------------------
Revenues............................. $ 28,117 100.0%
Cost of Sales........................ 23,930 85.1
--------- ---------
Gross profit..................... 4,187 14.9
Selling, general and administrative
expenses........................... 1,912 6.8
Supplemental profit sharing
contribution....................... 1,069 3.8
- ------------
(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.
(2) The fiscal periods above include the 3 month periods indicated for all
Founding Companies.
THREE MONTHS ENDED MARCH 2, 1997 COMPARED TO THREE MONTHS ENDED FEBRUARY 29,
1996
Combined revenues increased 14.6% from $24.5 million to $28.1 million. This
increase was partially attributable to an increase in the average sales price of
new pallets, an increase which reflects higher raw material costs, a portion of
which were passed on to customers in the form of higher sales prices. Sales to
CHEP, the Company's largest customer, increased from 29.3% of revenues in 1996
to 40.5% of revenues in 1997 as a result of increased orders. The increase in
orders from CHEP assisted the Company in partially offsetting a reduction in the
demand for pallets from the produce industry in south Florida during February
1997 as a result of freezing weather conditions occurring in late January, 1997.
Combined unit sales of new pallets increased from approximately 1.8 million
to 1.9 million and repaired and used pallet units increased from approximately
1.3 million to 1.7 million. Unit sales of agricultural harvesting boxes and
specialty bins decreased from 11,000 to 2,600 as a result of continued
competitive pressures from plastic boxes and bins.
Combined gross profit declined from approximately $4.6 million to $4.2
million and as a percentage of revenues from 18.7% to 14.9%, primarily as a
result of higher raw material costs resulting from the impact of wet weather
conditions on the harvesting of both hardwood and pine timber during the three
month period ended March 2, 1997. Such conditions generally restricted the
supply of lumber and increased its cost. The Company believes that the increases
in the cost of pine lumber were also influenced by the operation of lumber
agreements between Canada and the U.S. and competition from other industries
that use similar grades and types of lumber. The Company has experienced some
delay in passing these higher raw material costs on to customers in the form of
higher sales prices due to competitive pressures.
Combined selling, general and administrative costs exclusive of
supplemental profit sharing contributions increased from approximately $1.8
million in 1996 to $1.9 million in 1997 and were 7.5% and 6.8% of revenues
respectively. In addition to recurring selling, general and administrative
costs, the Founding Companies made supplemental contributions to their
respective profit sharing plans of approximately $1.1 million during the three
month period ended March 2, 1997.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues increased approximately 15.5% to $102.0 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.
17
<PAGE>
Gross profit as a percentage of revenues increased to 15.5% 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 19.7% to $15.9 million from $13.2 million.
Selling, general and administrative expenses increased 21.2% 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
approximately $6.1 million.
LIQUIDITY AND CAPITAL RESOURCES -- COMBINED
During the three month period ended March 2, 1997, net cash provided by
operating activities was $708,000, capital expenditures were $598,000 and net
repayment of debt amounted to $305,000. The Company anticipates capital
expenditures (exclusive of acquisitions and the construction of new market
facilities, if any) of approximately $2.5 million during the remainder of 1997,
primarily for the recurring replacement of machinery and equipment, and for the
improvements and expansion or relocation of existing facilities.
On March 25, 1997, PalEx completed the Offering, which involved the sale by
PalEx of 3,000,000 shares of Common Stock at a price to the public of $7.50 per
share. The net proceeds to PalEx from the Offering (after deducting underwriting
discounts, commissions and offering expenses) were approximately $20.2 million.
Of this amount, $3.4 million was used to pay the cash portion of the purchase
prices relating to the acquisitions of the Founding Companies with the remainder
being used to repay certain indebtedness of the Founding Companies.
On April 22, 1997, the Company sold an additional 450,000 shares of Common
Stock at a price to the public of $7.50 per share (generating net proceeds to
the Company of $3,138,750 after underwriting discounts and commissions) pursuant
to an over-allotment option granted by the Company to the underwriters in
connection with the Offering. The net proceeds were used to repay debt borrowed
under the Credit Facility in the amounts of $2.0 million and $1.0 million on
April 22, 1997 and May 2, 1997 respectively.
On March 25, 1997, the Company entered into a credit agreement with Bank
One, Texas, N.A. (the "Credit Facility"). The Credit Facility provides the
Company with an unsecured revolving line of credit of up to $35 million, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies, future acquisitions,
capital expenditures and working capital. Advances under the Credit Facility
bear interest at such bank's designated variable rate plus margins ranging from
0 to 25 basis points, depending on the ratio of the Company's interest bearing
debt to its pro forma trailing earnings before interest, taxes, depreciation and
amortization for the previous
18
<PAGE>
four quarters. At the Company's option, the loans may bear interest based on a
designated London interbank offering rate plus a margin ranging from 75 to 175
basis points, depending on the same ratio. Commitment fees of 25 basis points
per annum are payable on the unused portion of the line of credit. The Credit
Facility contains a limit for standby letters of credit up to $10.0 million. The
Credit Facility prohibits the payment of dividends by the Company, restricts the
Company's incurring or assuming other indebtedness and requires the Company to
comply with certain financial covenants. The Credit Facility will terminate and
all amounts outstanding thereunder, if any, will be due and payable March 25,
2004. The Company's subsidiaries have guaranteed the repayment of all amounts
due under the Credit Facility. On the date of the Offering, the Company borrowed
$6.2 million under the Credit Facility, at an interest rate of 8.25%. Subsequent
to March 2, 1997, the Company repaid $1.2 million of such indebtedness with cash
generated from operations and converted the remaining $5.0 million of the
borrowings to loans based on the London interbank offering rate bearing various
interest rates averaging approximately 6.5%. The approximate level of available
borrowings available under the Credit Facility at May 1, 1997 was $30.0 million.
The Company intends to pursue acquisitions. The timing, size or success of
any acquisitions and the resulting additional capital commitments are
unpredictable. The Company expects to fund future acquisitions primarily through
a combination of issuances of additional equity, working capital, cash flow from
operations and borrowings, including the unused portion of the Credit Facility.
There can be no assurance that the Company can secure such additional financing
or proceeds from issuance of additional equity if and when it is needed or on
terms deemed acceptable to the Company.
SEASONALITY
The pallet manufacturing business can be subject to seasonal variations in
operations and demand. The Company has a significant number of agricultural
customers in the southeastern United States and typically experiences the
greatest demand for new pallets from these customers during the citrus and
produce harvesting seasons (generally October through May) with significantly
lower demand in the summer months. Yearly results can fluctuate significantly in
this region depending on the size of the citrus and produce harvest, 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 customers experience less seasonality. Management
believes that the effects of such seasonality may diminish as the Company grows
and expands its customer base both internally and through acquisition.
Adverse weather conditions may affect the Company's ability to obtain
adequate supplies of lumber at a reasonable cost. For example, the Company
experienced higher lumber costs resulting from the impact of wet weather on the
harvesting of both hardwood and pine timber during the three-month period ended
March 2, 1997. Additionally, freezing weather conditions in South Florida during
January, 1997, adversely impacted the produce harvest thereby reducing the
demand for pallets.
19
<PAGE>
RESULTS OF OPERATIONS -- PALEX
The following table sets forth certain selected financial data for PalEx
(Fraser as the accounting acquiror) as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, THREE MONTH PERIODS ENDED
---------------------------------------------------------------- --------------------
1994 1995 1996 FEBRUARY 29, 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 23,114 100.0% $ 30,135 100.0% $ 49,282 100.0% $ 10,767 100.0%
Cost of Sales........................ 20,755 89.8 25,559 84.8 41,509 84.2 8,507 79.0
--------- --------- --------- --------- --------- --------- --------- ---------
Gross Profit......................... 2,359 10.2 4,576 15.2 7,773 15.8 2,260 21.0
Selling, general and administrative
expenses........................... 1,761 7.6 2,131 7.1 3,171 6.5 791 7.4
Supplemental profit sharing
contribution....................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 598 2.6 2,445 8.1 4,602 9.3 1,469 13.6
Interest expense..................... (335) (1.4) (450) (1.5) (387) (0.8) (119) (1.1)
Other income (expense), net.......... (9) (0.1) 19 0.1 (153) (0.3) (2) --
--------- --------- --------- --------- --------- --------- --------- ---------
Income before tax.................... 254 1.1 2,014 6.7 4,062 8.2 1,348 12.5
Provision for income tax............. 6 -- 91 0.3 216 0.4 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 248 1.1% $ 1,923 6.4% $ 3,846 7.8% $ 1,348 12.5%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
THREE MONTH PERIODS ENDED
--------------------
MARCH 2,
1997
--------------------
Revenues............................. $ 12,405 100.0%
Cost of Sales........................ 10,543 85.0
--------- ---------
Gross Profit......................... 1,862 15.0
Selling, general and administrative
expenses........................... 801 6.5
Supplemental profit sharing
contribution....................... 375 3.0
--------- ---------
Income from operations............... 686 5.5
Interest expense..................... (63) (0.5)
Other income (expense), net.......... (26) (.2)
--------- ---------
Income before tax.................... 597 4.8
Provision for income tax............. -- --
--------- ---------
Net income........................... $ 597 4.8%
========= =========
THREE MONTH PERIOD ENDED FEBRUARY 29, 1996 COMPARED TO MARCH 2, 1997
Revenue increased 15.2% from approximately $10.8 million to $12.4 million.
This increase is attributable to both the increase in overall volume of units
and to an increase in the average sales price. The increase in the average sales
price reflects higher raw material costs, a portion of which were passed on to
customers.
Gross profit as a percentage of revenues declined from approximately 21.0%
to 15.0%, primarily as a result of higher raw material costs resulting from the
impact of wet weather conditions on the harvesting of both hardwood and pine
timber during the three-month period ended March 2, 1997. See "Results of
Operations -- Combined." A portion of the decline in gross profit is also
attributable to lost production time at the Companys New Boston, Texas facility,
resulting from the installation of new equipment during December 1996.
Selling, general and administrative expenses remained stable at
approximately $800,000. In addition to recurring selling, general and
administrative costs, supplemental contributions to the profit sharing plan of
approximately $375,000 were made during the three month period ended March 2,
1997.
Interest expense declined from $119,000 to $63,000 as the result of net
repayments of debt.
Net income declined from $1.3 million to $597,000.
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.
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%.
20
<PAGE>
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 -- PALEX
During the three month period ending March 2, 1997, net cash provided by
operating activities was $81,000, capital expenditures were $375,000 and net
proceeds from debt borrowed under Fraser's credit facilities amounted to
$263,000. Increases in accounts receivable, inventory and accounts payable
occurred as a result of increased sales during the period. See "Liquidity and
Capital Resources -- Combined" for discussion of the liquidity and capital
resources of the Company.
Fraser 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.
RESULTS OF OPERATIONS -- RIDGE
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
---------------------------------------------------------------- --------------------
JULY 31, 1994 JULY 30, 1995 JULY 28, 1996 JANUARY 28, 1996
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <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%
Cost of Sales........................ 40,606 84.7 46,388 85.2 40,540 83.9 19,008 84.0
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 7,340 15.3 8,062 14.8 7,801 16.1 3,632 16.0
Selling, general and administrative
expenses........................... 4,018 8.4 3,826 7.0 3,825 7.9 1,929 8.5
Supplemental profit sharing
contribution....................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 3,322 6.9 4,236 7.8 3,976 8.2 1,703 7.5
Interest expense..................... (80) (0.1) (962) (1.8) (1,032) (2.1) (535) (2.4)
Other income (expense), net.......... 922 1.9 101 0.2 199 0.4 89 0.4
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before tax............. 4,164 8.7 3,375 6.2 3,143 6.5 1,257 5.5
Income taxes (benefit)............... 99 0.2 83 0.2 76 0.2 30 0.1
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... $ 4,065 8.5% $ 3,292 6.0% $ 3,067 6.3% $ 1,227 5.4%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
SIX MONTHS ENDED
--------------------
JANUARY 26, 1997
--------------------
Revenues............................. $ 24,090 100.0%
Cost of Sales........................ 21,126 87.7
--------- ---------
Gross profit......................... 2,964 12.3
Selling, general and administrative
expenses........................... 1,876 7.7
Supplemental profit sharing
contribution....................... 618 2.6
--------- ---------
Income from operations............... 470 2.0
Interest expense..................... (398) (1.7)
Other income (expense), net.......... 83 0.3
--------- ---------
Income (loss) before tax............. 155 0.6
Income taxes (benefit)............... 15 --
--------- ---------
Net income (loss).................... $ 140 0.6%
========= =========
21
<PAGE>
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 Ridge 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, Ridge 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 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 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 $3.9 million increase in
lumber costs and a $695,000 increase in fastener costs.
22
<PAGE>
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
Ridge 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. These two conditions adversely
affected the Company's results of operations for the three months ended February
28, 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.
23
<PAGE>
BUSINESS
PalEx was formed in January 1996 to create a national provider of pallets
and related services. Concurrently with the closing of the Offering, PalEx
acquired 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 provides 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 operates from 21 facilities in Florida, Texas, Virginia, California,
Arkansas, Georgia, Illinois, Mississippi and South Carolina. 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,
24
<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 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 3/4 x 40 3/4 pallet, 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 represented
approximately 60% of the Company's pro forma combined revenues for the fiscal
year ended November 30, 1996. 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
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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 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 April 30, 1997, the Company maintained 21 facilities. Most of the
Company's facilities offer more than one service. The Company's corporate
headquarters are located in Houston, Texas. The paragraphs below summarize the
Company's primary operating facilities. 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.
CLARKSVILLE, ARKANSAS. The Clarksville facility initiated operations in
1995. 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. 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. 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.
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MULBERRY, ARKANSAS. The Company's Mulberry plant was purchased in 1992.
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.
SEARCY, ARKANSAS. The Searcy facility was purchased in 1994. 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
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.
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. 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. 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 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 Company anticipates adding
non-CHEP repair operations to the facility in the future.
WALTERBORO, SOUTH CAROLINA. The Company's Walterboro plant 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. 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. 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 primarily produces 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. 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. 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.
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TEMPLE, TEXAS. The Temple location was established in 1995. 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 has 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 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 centralizes its consolidated financial reporting, cash
management, training, human resources, safety and merger and acquisition
activities. The Company otherwise operates on a regional basis, with the
management of each operating location responsible for its day-to-day operations,
profitability and growth. Local management utilizes 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
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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's consolidated accounting and financial reporting activities
are centralized at its operational headquarters in Bartow, Florida, while basic
accounting activities are 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 enhances its ability to: (i) monitor each regional operation; (ii)
prepare both operations and capital asset budgets and budget 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 85 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 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. 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
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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 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. For the past several years, these products have
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
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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 April 30, 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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors, executive officers and certain key employees.
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..................... 53 Director(1)(2)
Sam W. Humphreys.................. 37 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. became Chief Operating Officer and a director of the
Company in March 1997, upon the closing of the 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 became Chief Development Officer and a director in March
1997, upon the closing of the 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 became Chief Accounting Officer and Secretary in March
1997, upon the closing of the 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 became a director of the Company in March 1997, upon the
closing of the Offering. Mr. Sykes founded Interstate in 1979 and has served as
President and Chief Executive Officer from its inception. From 1974 to 1979, Mr.
Sykes was the Director of Transportation for the Virginia Division of
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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 became a director of the Company in March 1997, upon the
closing of the 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 became a director of the Company in March 1997, upon the
closing of the 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
became non-executive Chairman of the Board in March 1997, upon the closing of
the Offering. Mr. Humphreys is a Managing Director of Main Street, a merchant
banking firm, and has been a partner in that firm since its formation in January
1996. From April 1994 until March 1997, Mr. Humphreys held various executive
positions with U.S. Delivery Systems, Inc. ("U.S. Delivery"), the largest
same-day local delivery company in the U.S., most recently serving as Vice
Chairman. 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.
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.
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 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 receives 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."
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EXECUTIVE COMPENSATION
PalEx was incorporated in January 1996 and, prior to the 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.
In fiscal 1997, the Company will not pay any bonuses in addition to these
salaries.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement 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 Companies
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
have 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
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their 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 all of which have 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 $943,341 and $2,390,613, 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 total 1,021,389 shares of Common Stock. 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 the Offering. Simultaneously with the
closing of the Offering, each of the Founding Companies merged with a separate
special purpose subsidiary of PalEx, at which time each Founding Company became
a wholly owned subsidiary of the Company. The aggregate consideration paid by
PalEx to acquire the Founding Companies consisted of (i) approximately $3.4
million in cash and (ii) 5,910,000 shares of Common Stock. In addition, the
Company repaid substantially all of the indebtedness of the Founding Companies
with proceeds from the Offering and borrowings under its credit facility (see
"-- Transactions Involving Certain Officers, Directors and Stockholders" below
and "Use of Proceeds") and also issued 142,500 shares of Common Stock to the
Founding Companies' profit sharing plans.
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The following table sets forth for each Founding Company the consideration
paid to the stockholders of the Founding Companies (i) in cash and (ii) in
shares of Common Stock.
SHARES OF
CASH COMMON STOCK
------------ -------------
Fraser............................... $ 2,200,000 2,893,704
Ridge................................ -- 2,640,768
Interstate........................... 1,200,000 375,528
------------ -------------
Total................................ $ 3,400,000 5,910,000
============ =============
In addition, immediately prior to consummation of the Acquisitions, the
Founding Companies made distributions of approximately $10.4 million in the
aggregate, representing S Corporation earnings previously taxed to their
respective stockholders. The Founding Companies also distributed certain
non-operating assets prior to consummation of the Acquisitions with an aggregate
net book value of approximately $175,000.
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 officers or directors of the Company received the
following consideration in the Acquisitions for their interests in the Founding
Companies.
SHARES OF
CASH(1) COMMON STOCK
------------ -------------
Ridge
A. E. Holland, Jr............... $ -- 319,583
Casey A. Fletcher............... -- 319,583
Fraser
Troy L. Fraser.................. 1,078,000 1,417,915
Interstate
Stephen C. Sykes................ 1,200,000 375,528
- ------------
(1) Excludes distributions representing previously taxed S Corporation earnings
made to each of the persons listed above. The amount of such distributions
to the former owners of the Founding Companies totaled approximately $10.4
million.
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. Upon repayment of the Ridge Notes,
$2.25 million was paid to Resources and $2.25 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 $105,000. Two notes in the aggregate amount of $60,000 bear
interest at 14.0% per annum and mature in January 2005. A third note in the
amount of $45,000 bears interest at 8% per annum and matures in December 1997.
Interstate has a note outstanding to its stockholder in the amount of
approximately $343,000. The note is non-interest bearing and is due on demand.
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The Company repaid all of the Ridge Notes, the Fraser notes and the
Interstate note with the proceeds of the Offering and borrowings under its
credit facility.
Prior to consummation of the Offering, Troy L. Fraser purchased an airplane
from Fraser for its net book value of $203,000.
Certain stockholders of certain of the Founding Companies, who are
directors, executive officers or key employees of the Company, have guaranteed
indebtedness and other obligations of each of their respective Founding
Companies. These guarantees were terminated after the completion of the
Offering.
Main Street paid $1.25 million of the Company's expenses, including legal
and accounting fees, incurred in connection with the Offering and the
Acquisitions.
In connection with the Acquisitions, the Company issued 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 received 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 also received 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 of $7.50 per
share. See "Principal Stockholders."
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 assuming the Acquisitions would be consummated.
Interstate leases its operating facilities and certain equipment from Mr.
Sykes. The Company purchased the leased equipment for its estimated fair market
value of approximately $88,000 and continues 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 by management 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, purchased 50,000 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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock as of April 30, 1997, 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
SHARES OWNED
--------- -----------
Vance K. Maultsby, Jr.(1)............ 50,000 0.5%
A. E. Holland, Jr.................... 319,583 3.0
Troy L. Fraser....................... 1,417,915 13.4
Stephen C. Sykes..................... 375,528 3.6
Casey A. Fletcher(2)................. 319,583 3.0
Tucker S. Bridwell(3)................ 40,000 0.4
John E. Drury(4)..................... 95,000 0.9
Sam W. Humphreys(5).................. 1,021,389 9.7
Main Street Capital Partners, L.P.... 1,021,389 9.7
R. Stephen Fraser(6)................. 868,111 8.2
Joe D. Elmore(7)..................... 607,677 5.7
All executive officers, directors and
director nominees
as a group (8 persons)(8).......... 3,553,998 33.6%
- ------------
(1) Excludes options to purchase 200,000 shares at the initial public offering
price of $7.50 per share 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 2000.
(2) Excludes 2,200 shares which are owned by Mr. Fletcher's two sons. Mr.
Fletcher disclaims beneficial ownership of such shares.
(3) Includes 40,000 shares which may be acquired upon the exercise of options
granted under the Plan.
(4) Includes 20,000 shares which may be acquired upon the exercise of options
granted under the Plan and 25,000 shares deemed to be beneficially owned by
Mr. Drury as a special limited partner in Main Street.
(5) Includes 1,021,389 shares issued to Main Street. Mr. Humphreys is a partner
in Main Street.
(6) Mr. Fraser's address is 111 East 7th Street, Big Spring, Texas 79720.
(7) Mr. Elmore's address is 1020 Highway 82 West, New Boston, Texas 75570.
(8) Excludes 260,000 shares subject to options which become exercisable during
the four-year period ending November 2000.
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. As of May 27, 1997, 10,573,889 shares of Common Stock
are issued and outstanding. 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.
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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
pursuant to this Prospectus when payment is reveived 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 holers 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 provisons of Section 203 of the Delaware
General Corporation Law ("Section 203"), Section 203 provides, with certain
exceptions, that a Delaware corporation may not 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
deemed 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.
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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 May 27,
1997, 10,573,889 shares of Common Stock were issued and outstanding. Of such
shares,7,123,889 shares were not 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. All of the 3,000,000 shares sold in the Offering, except for
shares acquired by affiliates of the Company, are freely tradeable.
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 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 share
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 925,000
shares of Common Stock were 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 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 the Offering without the prior written
consent of Alex. Brown & Sons Incorporated, except for the grant of employee
stock options and for share sissued (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
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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 the Offering 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.
No predictions can be made s 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 sisue 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 for sale in the Registration Statement of which this Prospectus is a part.
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 certian conditions.
RESALES AND PLAN OF DISTRIBUTION
This Prospectus may be used by the Company to offer and issue shares of
Common Stock from time to time in connection with the acquisition of the
securities or assets of other businesses.
This prospectus may also be used by the persons who receive from the
Company shares of Common Stock covered by the Registration Statement of which
this prospectus is a part in acquisitions under circumstances, requiring the use
of a Prospectus (such persons being referred to herein as "Selling
Stockholders"); provided, however, that no Selling Stockholder will be
authorized to use this Prospectus for any offer of such shares of Common Stock
without first obtaining the written consent of the Company. The Company may
consent to the use of this Prospectus by Selling Stockholders for a limited
period of time and subject to conditions and limitations that may vary as to any
given Selling Stockholder.
Agreements with the Selling Stockholders permitting use of this Prospectus
may provide that any such offering be effected in an orderly manner through
securities dealers, acting as a broker or dealer, selected by the Company; that
Selling Stockholders enter into custody agreements with certain persons with
respect to such shares; and that sales be made only by one or more of the
methods described in this caption, as appropriately supplemented or amended as
required.
The Selling Stockholders may from time to time sell all or a portion of the
shares of Common Stock in transactions on the Nasdaq National Market, in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The shares of
Common Stock may be sold directly or through broker-dealers. If shares of Common
Stock are sold through broker-dealers, the Selling Stockholders may pay
brokerage commissions and charges. The methods by which the shares of Common
Stock may be sold include (a) a block trade (which may involve crosses) in which
the broker or dealer so engaged will attempt to sell the securities as agent but
may position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its own account pursuant to this Prospectus; (c) exchange
distribution and/or secondary distributions in accordance with the rules of The
Nasdaq National Market; (d) ordinary brokerage transactions and transactions in
which the broker solicits purchasers; and (e) privately negotiated transactions.
The Selling Stockholders and any broker-dealer participating in the
distribution of the shares of Common Stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any profit and any commissions
paid or any discounts or concessions allowed to any such broker-dealer may be
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deemed to be underwriting discounts and commissions under the Securities Act.
The Selling Stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of shares of Common Stock against certain
liabilities, including liabilities under the Securities Act.
There can be no assurances that the Selling Stockholders will sell any or
all of the shares of Common Stock offered hereunder.
VALIDITY OF SECURITIES
The validity of the shares of Common Stock will be passed upon by Andrew &
Kurth L.L.P., Houston, Texas.
EXPERTS
The audited financial statements of Fraser, Ridge and PalEx 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 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, as 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.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Unaudited Pro Forma Combined
Financial Statements
Basis of Presentation ............................................. F-2
Pro Forma Combined Balance Sheet as of March 2, 1997 .............. F-3
Pro Forma Combined Statement of Income for the Year Ended
November 30, 1996 ................................................ F-4
Pro Forma Combined Statement of Income for the Three Months
Ended March 2, 1997 .............................................. F-5
Notes to Unaudited Pro Forma Combined Financial Statements ........ F-6
Historical Financial Statements
Fraser Industries, Inc.
Report of Independent Public Accountants ..................... F-9
Balance Sheets ............................................... F-10
Statements of Income ......................................... F-11
Statements of Changes in Stockholders' Equity ................ F-12
Statements of Cash Flows ..................................... F-13
Notes to Financial Statements ................................ F-14
Ridge Pallets, Inc.
Report of Independent Public Accountants ..................... F-20
Balance Sheets ............................................... F-21
Statements of Income (Loss) .................................. F-22
Statements of Changes in Stockholders' Equity ................ F-23
Statements of Cash Flows ..................................... F-24
Notes to Financial Statements ................................ F-25
PalEx, Inc.
Report of Independent Public Accountants ..................... F-32
Balance Sheet ................................................ F-33
Statement of Income .......................................... F-34
Statement of Changes in Stockholders' Equity ................. F-35
Notes to Financial Statements ................................ F-36
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") occurred simultaneously with the closing of PalEx's initial
public offering (the "Offering") and are 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 March 2, 1997. The
unaudited pro forma combined statements of income give 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 -- MARCH 2, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
POST
PRO FORMA MERGER
PALEX FRASER RIDGE INTERSTATE ADJUSTMENTS PRO FORMA ADJUSTMENTS
------ ------- ------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........ $ 1 $ 6 $ (27) $ 57 $ 6,403 $ 6,440 $ (6,095)
Accounts receivable, net of
allowance...................... -- 3,406 4,643 451 -- 8,500 --
Inventories...................... -- 3,431 4,964 108 -- 8,503 --
Other current assets............. -- -- 75 -- -- 75 650
------ ------- ------- ----------- ------------ ---------- ------------
Total current assets........ 1 6,843 9,655 616 6,403 23,518 (5,445)
Property, plant and equipment, net... -- 7,280 6,796 431 (381) 14,126 --
Goodwill............................. -- -- -- -- 16,659 16,659 --
Other assets......................... 1,100 150 862 -- (808) 1,304 (300)
------ ------- ------- ----------- ------------ ---------- ------------
Total assets................ $1,101 $14,273 $17,313 $ 1,047 $ 21,873 $ 55,607 $ (5,745)
====== ======= ======= =========== ============ ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit................... $ -- $ 1,105 $ -- $-- $ -- $ 1,105 $ (1,105)
Current maturities of long-term
debt........................... -- 655 1,050 75 -- 1,780 (1,706)
Accounts payable................. -- 1,912 1,147 25 -- 3,084 --
Accrued expenses................. -- 1,439 1,890 55 (801) 2,583 --
Pro forma cash consideration due
to Founding Companies.......... -- -- -- -- 3,400 3,400 (3,400)
------ ------- ------- ----------- ------------ ---------- ------------
Total current liabilities... -- 5,111 4,087 155 2,599 11,952 (6,211)
Long-term debt, net of current
maturities......................... -- 957 8,550 55 16,585 26,147 (19,397)
Other long-term liabilities.......... -- 372 -- -- 1,423 1,795 --
Commitments and contingencies
Stockholders' equity:
Common stock..................... 11 11 550 10 (511) 71 30
Additional paid-in capital....... 1,399 67 496 -- 14,652 16,614 19,833
Retained earnings................ (309) 7,846 3,630 827 (12,966) (972) --
Treasury stock................... -- (91) -- -- 91 -- --
------ ------- ------- ----------- ------------ ---------- ------------
Total stockholders'
equity.................... 1,101 7,833 4,676 837 1,266 15,713 19,863
------ ------- ------- ----------- ------------ ---------- ------------
Total liabilities and
stockholders' equity...... $1,101 $14,273 $17,313 $ 1,047 $ 21,873 $ 55,607 $ (5,745)
====== ======= ======= =========== ============ ========== ============
</TABLE>
AS
ADJUSTED
---------
ASSETS
Current Assets:
Cash and cash equivalents........ $ 345
Accounts receivable, net of
allowance...................... 8,500
Inventories...................... 8,503
Other current assets............. 725
---------
Total current assets........ 18,073
Property, plant and equipment, net... 14,126
Goodwill............................. 16,659
Other assets......................... 1,004
---------
Total assets................ $49,862
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit................... $ --
Current maturities of long-term
debt........................... 74
Accounts payable................. 3,084
Accrued expenses................. 2,583
Pro forma cash consideration due
to Founding Companies.......... --
---------
Total current liabilities... 5,741
Long-term debt, net of current
maturities......................... 6,750
Other long-term liabilities.......... 1,795
Commitments and contingencies
Stockholders' equity:
Common stock..................... 101
Additional paid-in capital....... 36,447
Retained earnings................ (972)
Treasury stock................... --
---------
Total stockholders'
equity.................... 35,576
---------
Total liabilities and
stockholders' equity...... $49,862
=========
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, EXCEPT SHARES)
<TABLE>
<CAPTION>
POST
PRO FORMA 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) 6,628 --
Goodwill amortization................... -- -- -- -- 556(b) 556 --
--------- --------- --------- ---------- ----------- --------- -----------
Income (loss) from operations....... (300) 4,602 3,272 859 235 8,668 --
Interest (expense), and other income,
net................................... -- (540) (756) 3 (324)(c) (1,617 ) 1,293(d)
--------- --------- --------- ---------- ----------- --------- -----------
Income (loss) before income taxes....... (300) 4,062 2,516 862 (89) 7,051 1,293
Provision for income taxes.............. -- 216 75 52 2,538(e) 2,881 587(e)
--------- --------- --------- ---------- ----------- --------- -----------
Net income (loss)....................... $ (300) $ 3,846 $ 2,441 $ 810 $(2,627) $ 4,170 $ 706
========= ========= ========= ========== =========== ========= ===========
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.............................. 6,628
Goodwill amortization................... 556
-----------
Income (loss) from operations....... 8,668
Interest (expense), and other income,
net................................... (324)
-----------
Income (loss) before income taxes....... 8,344
Provision for income taxes.............. 3,468
-----------
Net income (loss)....................... $ 4,876
===========
Net income per share.................... $ 0.48(f)
===========
Shares used in computing net income per
share................................. 10,123,889(g)
The accompanying notes are an integral part of these unaudited
pro forma combined financial statements.
F-4
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 2, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
POST
PRO FORMA MERGER
PALEX FRASER RIDGE INTERSTATE ADJUSTMENTS PRO FORMA ADJUSTMENTS
--------- --------- --------- ---------- ----------- --------- -----------
(NOTE 4) (NOTE 4)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ -- $ 12,405 $ 14,560 $1,152 $-- $ 28,117 $--
Cost of goods sold...................... -- 10,543 12,575 812 (24)(a) 23,906 --
--------- --------- --------- ---------- ----------- --------- -----------
Gross profit........................ -- 1,862 1,985 340 24 4,211 --
Selling, general and administrative
expenses.............................. -- 801 997 114 (202)(a) 1,710 --
Supplemental profit sharing............. -- 375 619 75 -- 1,069 --
Goodwill amortization................... -- -- -- -- 139(b) 139 --
--------- --------- --------- ---------- ----------- --------- -----------
Income (loss) from operations....... -- 686 369 151 87 1,293 --
Interest (expense), and other income,
net................................... -- (89) (200) -- (81)(c) (370 ) 262(d)
--------- --------- --------- ---------- ----------- --------- -----------
Income (loss) before income taxes....... -- 597 169 151 6 923 262
Provision for income taxes.............. -- -- -- -- 365(e) 365 103(e)
--------- --------- --------- ---------- ----------- --------- -----------
Net income (loss)....................... $ -- $ 597 $ 169 $ 151 $ (359) $ 558 $ 159
========= ========= ========= ========== =========== ========= ===========
Net income per share....................
Shares used in computing net income per
share.................................
</TABLE>
AS
ADJUSTED
-----------
Revenues................................ $ 28,117
Cost of goods sold...................... 23,906
-----------
Gross profit........................ 4,211
Selling, general and administrative
expenses.............................. 1,710
Supplemental profit sharing............. 1,069
Goodwill amortization................... 139
-----------
Income (loss) from operations....... 1,293
Interest (expense), and other income,
net................................... (108)
-----------
Income (loss) before income taxes....... 1,185
Provision for income taxes.............. 468
-----------
Net income (loss)....................... $ 717
===========
Net income per share.................... $ 0.07(f)
===========
Shares used in computing net income per
share................................. 10,123,889(g)
The accompanying notes are an integral part of these unaudited
pro forma combined financial statements.
F-5
<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 acquired 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 the 1996 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 acquired all of the
outstanding capital stock of the Founding Companies. The Acquisitions have been
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 $10.4
million and (ii) approximately 142,500 shares of Common Stock issued by PalEx to
the Founding Companies' profit sharing plans upon completion of the Acquisitions
and the Offering.
COMMON STOCK
-------------------------
VALUE OF
CASH SHARES SHARES(1)
--------- ----------- ---------
(DOLLARS IN THOUSANDS)
Fraser............................... $ 2,200 2,893,704 $ 16,277
Ridge................................ -- 2,640,768 14,854
Interstate........................... 1,200 375,528 2,112
--------- ----------- ---------
$ 3,400 5,910,000 $ 33,243
========= =========== =========
- ------------
(1) Value is determined using the initial offering price of $7.50 per share,
less a discount of 25 percent based on restrictions on the sale and
transferability of the shares issued.
F-6
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS: IN THOUSANDS
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............ $ $ 203 $ $ 6,200 $ $ 6,403
Property, plant and equipment, net... (381) (381)
Goodwill............................. 16,659 16,659
Other assets......................... (8) (800) (808)
Accrued liabilities.................. 801 801
Pro forma cash consideration due to
Founding Companies' stockholders... (3,400) (3,400)
Long-term debt, net of current
maturities......................... (10,385) (6,200) (16,585)
Other long-term liabilities.......... (1,423) (1,423)
Common stock......................... 513 (2) 511
Additional paid-in capital........... (13,853) (799) (14,652)
Retained earnings.................... 10,385 186 972 1,423 12,966
Treasury stock....................... (91) (91)
--------- --------- --------- --------- --------- --------- ------------
$ -- $ -- $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= ========= ============
</TABLE>
<TABLE>
<CAPTION>
POST
MERGER
(G) (H) (I) ADJUSTMENTS
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents............ $ 20,163 $ (22,858) $ (3,400) $ (6,095)
Other current assets................. 650 650
Other assets......................... (300) (300)
Line of credit....................... 1,105 1,105
Current maturities of long-term
debt............................... 1,706 1,706
Pro Forma cash consideration due to
Founding Companies' stockholders... 3,400 3,400
Long-term debt, net of current
maturities......................... 19,397 19,397
Common stock......................... (30) (30)
Additional paid-in capital........... (19,833) (19,833)
--------- --------- --------- ------------
$ -- $ -- $ -- $ --
========= ========= ========= ============
</TABLE>
a. Reflects borrowings to fund 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 and the
sale of a non-operating asset to a stockholder at its net book value of
$203,000.
c. Reflects the acquisition of the Founding Companies including the
liability for the cash consideration 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 borrowings under the Company's line of credit.
e. Reflects the issuance of 142,500 shares of common stock to the Founding
Companies profit sharing plans.
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.
F-7
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
g. Reflects the proceeds from the issuance of 3,000,000 shares of Common
Stock, net of estimated offering costs (based on an initial public offering
price of $7.50 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 payment of the cash portion of the purchase price of the
Founding Companies.
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 for the year ended November 30, 1996,
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 increase in interest expense attributed to incremental
borrowings.
d. Reflects the reduction in interest expense attributed to obligations
retired with proceeds from the Offering.
e. 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.
f. In February, 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings Per Share," revising the methodology to be used in computing
earnings per share ("EPS") requiring that the computations required for
primary and fully diluted EPS are replaced with "basic" and "diluted" EPS.
The Company will adopt SFAS No. 128 effective for reporting periods after
December 15, 1997 and will restate EPS for all periods presented. The Company
anticipates that the amount reported for pro forma basic EPS will approximate
that of the net income per share as currently included in the pro forma
financial statements.
g. Includes: (i) 1,071,389 shares issued by PalEx prior to the Offering,
(ii) 5,910,000 shares issued to the stockholders of the Founding Companies in
connection with the Acquisitions, (iii) 142,500 shares issued to satisfy the
obligations of the Founding Companies to their respective profit-sharing plans
and (iv) 3,000,000 shares issued in connection with the Offering. Excludes
450,000 shares issued in April 1997 in connection with the exercise of the
over-allotment option by the underwriters and 925,000 shares of Common Stock
subject to options which were granted at the initial public offering price.
F-8
<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-9
<PAGE>
FRASER INDUSTRIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30,
-------------------- MARCH 2,
1995 1996 1997
--------- --------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents....... $ 115 $ 4 $ 6
Accounts receivable, net of
allowance of $30 and $57...... 3,169 2,852 3,406
Inventories..................... 3,289 2,750 3,431
Other current assets............ 150 -- --
--------- --------- ------------
Total current assets....... 6,723 5,606 6,843
Property, plant and equipment, net... 5,215 7,279 7,280
Other assets......................... 357 155 150
--------- --------- ------------
Total assets............... $ 12,295 $ 13,040 $ 14,273
========= ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit.................. $ 2,950 $ 455 $ 1,105
Current maturities of long-term
debt.......................... 608 737 655
Accounts payable................ 1,314 1,487 1,912
Accrued expenses................ 854 1,478 1,439
--------- --------- ------------
Total current
liabilities............. 5,726 4,157 5,111
Long-term debt, net of current
maturities......................... 2,362 1,262 957
Deferred income...................... 360 336 329
Deferred income taxes................ 37 49 43
Commitments and Contingencies
Stockholders Equity:
Common stock $1 par value;
authorized 200,000 shares;
issued and outstanding 11,000
shares........................ 11 11 11
Capital in excess of par
value......................... 67 67 67
Retained earnings............... 3,823 7,249 7,846
--------- --------- ------------
3,901 7,327 7,924
Less -- 1,000 shares of common
stock in treasury, at cost.... (91) (91) (91)
--------- --------- ------------
3,810 7,236 7,833
--------- --------- ------------
Total liabilities and
stockholders' equity.... $ 12,295 $ 13,040 $ 14,273
========= ========= ============
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
FRASER INDUSTRIES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NOVEMBER 30, ------------------------
------------------------------- FEBRUARY 29, MARCH 2,
1994 1995 1996 1996 1997
--------- --------- --------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 23,114 $ 30,135 $ 49,282 $ 10,767 $ 12,405
Cost of goods sold................... 20,755 25,559 41,509 8,507 10,543
--------- --------- --------- ------------ --------
Gross profit.................... 2,359 4,576 7,773 2,260 1,862
Selling, general and administrative
expenses........................... 1,761 2,131 3,171 791 801
Supplemental profit sharing
contribution....................... -- -- -- -- 375
--------- --------- --------- ------------ --------
Income from operations.......... 598 2,445 4,602 1,469 686
Interest expense..................... (335) (450) (387) (119) (63)
Other income (expense), net.......... (9) 19 (153) (2) (26)
--------- --------- --------- ------------ --------
Income before income taxes........... 254 2,014 4,062 1,348 597
Provision for income taxes........... 6 91 216 -- --
--------- --------- --------- ------------ --------
Net income........................... $ 248 $ 1,923 $ 3,846 $ 1,348 $ 597
========= ========= ========= ============ ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
FRASER INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL IN COMMON
COMMON EXCESS OF RETAINED STOCK IN
SHARES STOCK 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
Net income (unaudited)........... -- -- -- 597 -- 597
------ ------- --- --------- -------- ---------
Balance, March 2, 1997,
(unaudited)...................... $ 11 $ 11 $ 67 $ 7,846 $ (91) $ 7,833
====== ======= === ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
FRASER INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED NOVEMBER 30, ------------------------
------------------------------- FEBRUARY 29, MARCH 2,
1994 1995 1996 1996 1997
--------- --------- --------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income...................... $ 248 $ 1,923 $ 3,846 $ 1,348 $ 597
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and amortization... 736 956 1,192 223 317
(Gain) loss on sale of assets... 1 10 146 (4) 24
Deferred income tax............. 6 21 12 -- --
Changes in operating assets and
liabilities --
Accounts receivable........ (854) (772) 317 419 (554)
Inventories................ (257) (925) 539 (763) (681)
Prepaid expenses........... 123 60 150 (15) --
Other assets............... (86) (104) 190 151 5
Accounts payable and
accrued expenses........ 416 295 797 (252) 380
Deferred income............ 385 (25) (24) 21 (7)
--------- --------- --------- ------------ --------
Net cash provided by (used
in) operating
activities.............. 718 1,439 7,165 1,128 81
--------- --------- --------- ------------ --------
Cash Flows from Investing Activities:
Purchase of property, plant and
equipment..................... (2,974) (1,497) (3,513) (830) (375)
Proceeds from sale of
equipment..................... 15 13 123 19 33
--------- --------- --------- ------------ --------
Net cash used in investing
activities.................... (2,959) (1,484) (3,390) (811) (342)
--------- --------- --------- ------------ --------
Cash Flows from Financing Activities:
Proceeds from short-term debt... -- -- -- -- 650
Payments on short-term debt..... -- -- -- (275) --
Proceeds from long-term debt.... 2,237 740 2,180
Payments on long-term debt...... -- (607) (5,646) (157) (387)
Distribution to stockholders.... -- -- (420) -- --
--------- --------- --------- ------------ --------
Net cash provided by (used in)
financing activities.......... 2,237 133 (3,886) (432) 263
--------- --------- --------- ------------ --------
Net increase (decrease) in cash and
cash equivalents................... (4) 88 (111) (115) 2
Cash and cash equivalents, beginning
of year............................ 31 27 115 115 4
--------- --------- --------- ------------ --------
Cash and cash equivalents, end of
year............................... $ 27 $ 115 $ 4 $ 0 $ 6
========= ========= ========= ============ ========
Supplemental Disclosure of Cash Flow
Information:
Cash paid for --
Interest................... $ 354 $ 446 $ 402 $ 119 $ 63
Income taxes............... 6 3 34 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<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.
FISCAL YEAR
Historically, Fraser has reported on a fiscal year ended November 30 basis.
Effective with the three-month period ending March 2, 1997 and in contemplation
of the merger with PalEx, the Company maintains its accounting records using a
52/53 week year ending on the last Sunday in November. Each quarter contains
thirteen weeks and ends on a Sunday.
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.
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
F-14
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
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 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.
F-15
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
ESTIMATED NOVEMBER 30,
USEFUL 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
property, plant and equipment,
net................................ (4,157) (4,886)
--------- ---------
$ 5,215 $ 7,279
========= =========
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
========= =========
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.
F-16
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
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
===== ==== =====
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.
F-17
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
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-18
<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 entered into a definitive agreement with
PalEx providing for the acquisition of the Company by PalEx. Such transaction
closed on March 25, 1997.
The Company declared a $375,000 contribution to its defined contribution
profit-sharing plan during the first quarter of 1997. In connection with the
acquisition, PalEx satisfied a portion of the Company's obligation (supplemental
profit-sharing obligation) through the issuance to such plan of approximately
50,000 shares of PalEx common stock. In addition, prior to the closing of the
acquisition, the Company made distributions in respect of the Company's
estimated S Corporation Accumulated Adjustment Account at the time of closing in
the amount of approximately $6.7 million. The Company also sold a non-operating
asset at its net book value of approximately $203,000 to a shareholder prior to
the merger with PalEx.
The Company agreed to pay a director of PalEx an amount up to $50,000 for
advisory services contingent upon the successful completion of the acquisition
of the Company by PalEx. In connection with the acquisition, PalEx paid this
amount upon the acquisition's completion.
F-19
<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-20
<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-21
<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 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-22
<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 EARINGS 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-23
<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 operating 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
----------- -------- -------- ----------- -----------
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-24
<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-25
<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 Assets to Be Disposed Of."
This statement establishes the recognition and measurement standards related
F-26
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-27
<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:
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:
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).
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
========== ==========
F-28
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
=== ===
F-29
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 managements 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.
F-30
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 employees 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 entered into a definitive agreement with
PalEx providing for the acquisition of the Company by PalEx. Such transaction
closed on March 25, 1997.
In December 1996, the Company declared a contribution to its defined
contribution profit-sharing plan of approximately $968,000. In connection with
the acquisition, PalEx satisfied a portion of the Company's obligation
(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 made distributions in respect of the
Company's estimated S Corporation Accumulated Adjustment Account at the time of
closing in the amount of approximately $3.3 million. The Company also
distributed non-operating assets with a net book value of approximately $175,000
to its shareholders prior to the merger with PalEx.
The Company agreed to pay an investment banking firm an amount up to
$468,000 for advisory services contingent upon the successful completion of the
acquisition of the Company by PalEx. In connection with the acquisition, PalEx
paid this amount upon the acquisition's completion.
F-31
<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-32
<PAGE>
PALEX, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30, MARCH 2,
1996 1997
------------ ------------
(UNAUDITED)
Assets:
Cash and cash equivalents............ $ 1 $ 1
Other assets......................... 300 1,100
------------ ------------
Total assets.................... $ 301 $1,101
============ ============
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
1,071,389 shares issued and
outstanding........................ 11 11
Additional paid-in capital........... 599 1,399
Retained deficit..................... (309) (309)
------------ ------------
Total stockholders' equity...... $ 301 $1,101
============ ============
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
PALEX, INC.
STATEMENT OF INCOME
(IN THOUSANDS)
INCEPTION (JANUARY 8, 1996) THREE MONTHS ENDED
TO NOVEMBER 30, 1996 MARCH 2, 1997
--------------------------- ------------------
(UNAUDITED)
Revenues....................... $ -- $ --
Selling, general and
administrative expenses...... 300 --
------- -------
Loss before income taxes....... (300) --
------- -------
Income tax benefit............. -- --
------- -------
Net loss....................... $ (300) $ --
======= =======
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
PALEX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 8, 1996)
THROUGH MARCH 2, 1997
(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, 1996........... 1,071 $ 11 $ 599 $ (309) $ 301
Offering costs incurred by
stockholder.......................... -- -- 800 -- 800
------ ------- ----------- --------- ---------
Balance, March 2, 1997 (unaudited)... 1,071 $ 11 $ 1,399 $ (309) $ 1,101
====== ======= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<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.
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.
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 $36.5 million (unaudited) (based upon an
offering price of $7.50 per share, net of a 25 percent discount) consisting of a
combination of cash and common stock.
F-36
<PAGE>
PALEX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 profit sharing obligations of the Founding Companies
totaling approximately $802,000 through the issuance of approximately 142,500
shares of PalEx common stock.
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 at the IPO price.
4. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On March 25, 1997, PalEx completed the Offering, which involved the sale by
PalEx of 3,000,000 shares of Common Stock at a price to the public of $7.50 per
share. The net proceeds to PalEx from the Offering (after deducting underwriting
discounts, commissions and offering expenses) were approximately $20.2 million.
Of this amount, $3.4 million was used to pay the cash portion of the purchase
prices relating to the acquisitions of the Founding Companies with the remainder
being used to repay certain indebtedness of the Founding Companies.
On April 22, 1997, the Company sold an additional 450,000 shares of Common
Stock at a price to the public of $7.50 per share (generating net proceeds to
the Company of $3,138,750 after underwriting discounts and commissions) pursuant
to an over-allotment option granted by the Company to the underwriters in
connection with the Offering. The net proceeds were used to repay debt borrowed
under the Credit Facility in the amounts of $2.0 million and $1.0 million on
April 22, 1997 and May 2, 1997 respectively.
F-37
<PAGE>
PALEX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On March 25, 1997, the Company entered into a credit agreement with Bank
One, Texas, N.A. (the "Credit Facility"). The Credit Facility provides the
Company with an unsecured revolving line of credit of up to $35 million, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies, future acquisitions,
capital expenditures and working capital. Advances under the Credit Facility
bear interest at such bank's designated variable rate plus margins ranging from
0 to 25 basis points, depending on the ratio of the Company's interest bearing
debt to its pro forma trailing earnings before interest, taxes, depreciation and
amortization for the previous four quarters. At the Company's option, the loans
may bear interest based on a designated London interbank offering rate plus a
margin ranging from 75 to 175 basis points, depending on the same ratio.
Commitment fees of 25 basis points per annum are payable on the unused portion
of the line of credit. The Credit Facility contains a limit for standby letters
of credit up to $10.0 million. The Credit Facility prohibits the payment of
dividends by the Company, restricts the Company's incurring or assuming other
indebtedness and requires the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable March 25, 2004. The Company's
subsidiaries have guaranteed the repayment of all amounts due under the Credit
Facility. On the date of the Offering, the Company borrowed $6.2 million under
the Credit Facility, at an interest rate of 8.25%. Subsequent to March 2, 1997,
the Company repaid $1.2 million of such indebtedness with cash generated from
operations and converted the remaining $5.0 million of the borrowings to loans
based on the London interbank offering rate bearing various interest rates
averaging approximately 6.5%. The approximate level of available borrowings
available under the Credit Facility at May 1, 1997 was $30.0 million.
In April the Company issued options to purchase 725,000 shares at the IPO
price.
As of March 2, 1997, approximately $1.1 million of costs attributed to the
IPO had been incurred by Main Street and were reflected in the accompanying
financial statements as an increase to deferred offering costs and contributed
capital.
F-38
<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 ...................................................... 2
Risk Factors ............................................................ 6
The Company ............................................................. 11
Use of Proceeds ......................................................... 12
Price Range of Common Stock and Dividend Policy ......................... 12
Selected Financial Data ................................................. 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations ......................................................... 15
Business ................................................................ 24
Management .............................................................. 32
Certain Transactions .................................................... 35
Principal Stockholders .................................................. 38
Description of Capital Stock ............................................ 38
Shares Eligible for Future Sale ......................................... 40
Resales and Plan of Distribution ........................................ 41
Validity of Securities .................................................. 42
Experts ................................................................. 42
Additional Information .................................................. 42
Index to Financial Statements ........................................... F-1
================================================================================
================================================================================
4,000,000 SHARES
[PALEX LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
SEC Registration Fee................. $ 11,818
Nasdaq National Market Listing Fee... *
Accounting Fees and Expenses......... 30,000
Legal Fees and Expenses.............. 40,000
Printing Expenses.................... *
Miscellaneous........................ 10,000
---------
Total................................ $ *
=========
- ------------
* To be filed by amendment.
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 out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
II-1
<PAGE>
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 200,000 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.
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.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------
+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 of 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.
27 -- Financial Data Schedule.
- ------------
+ Incorporated by reference from same exhibit number filed as an exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-18683).
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
II-3
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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 remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
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-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON MAY 28, 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
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------- ------------------------------------- ------------
/s/ VANCE K. MAULTSBY, JR. President and Chief Executive Officer May 28, 1997
- -------------------------- (Principal Executive Officer)
VANCE K. MAULTSBY, JR.
/s/ CASEY A. FLETCHER Chief Accounting Officer (Principal May 28, 1997
- -------------------------- Financial and Accounting Officer)
CASEY A. FLETCHER
/s/ SAM W. HUMPHREYS Director May 28, 1997
- --------------------------
SAM W. HUMPHREYS
/s/ A. E. HOLLAND Director May 28, 1997
- --------------------------
A. E. HOLLAND
Director
- --------------------------
TROY L. FRASER
/s/ TUCKER S. BRIDWELL Director May 28, 1997
- --------------------------
TUCKER S. BRIDWELL
Director
- --------------------------
JOHN E. DRURY
/s/ STEPHEN C. SYKES Director May 28, 1997
- --------------------------
STEPHEN C. SYKES
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
May 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> MAR-02-1997
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 2,909
<ALLOWANCES> 57
<INVENTORY> 2,750
<CURRENT-ASSETS> 5,606
<PP&E> 12,165
<DEPRECIATION> 4,886
<TOTAL-ASSETS> 13,040
<CURRENT-LIABILITIES> 4,157
<BONDS> 1,262
0
0
<COMMON> 11
<OTHER-SE> 7,316
<TOTAL-LIABILITY-AND-EQUITY> 13,040
<SALES> 49,282
<TOTAL-REVENUES> 49,282
<CGS> 41,509
<TOTAL-COSTS> 41,509
<OTHER-EXPENSES> 3,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 387
<INCOME-PRETAX> 4,062
<INCOME-TAX> 216
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,846
<EPS-PRIMARY> 3.85
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</TABLE>
