UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDING AUGUST 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM ________ TO _________
Commission File Number: 000-22237
PALEX, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0520673
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3555 TIMMONS LANE, SUITE 610
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-626-9711
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock of the Registrant, par value $.01 per
share, outstanding at October 13, 1997 was 13,029,289.
<PAGE>
PALEX, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997
INDEX
Part I - Financial Information
Item 1 - Financial Statements
General Information...................................................... 3
Condensed Consolidated Balance Sheets - PalEx, Inc. and Subsidiaries as
of November 30, 1996 and August 31, 1997................................. 4
Condensed Consolidated Statements of Income - PalEx, Inc. and Subsidiaries
for the Three Month Periods ended August 31, 1996 and August 31, 1997 and
the Nine Month Period ended August 31, 1996 and August 31, 1997.......... 5
Statements of Pro Forma Combined Income - PalEx, Inc. and Subsidiaries for
the Three Month Periods ended August 31, 1996 and August 31, 1997 and
the Nine Month Periods ended August 31, 1996 and August 31, 1997........ 6
Condensed Consolidated Statement of Changes in Stockholders' Equity -
PalEx, Inc. and Subsidiaries for the Nine Month Period
Ended August 31, 1997................................................... 7
Condensed Consolidated Statements of Cash Flows - PalEx, Inc. and
Subsidiaries for the Nine Month Periods ended August 31, 1996 and
August 31, 1997......................................................... 8
Notes to the Condensed Consolidated Financial Statements................ 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 15
Part II - Other Information
Item 1 - Legal Proceedings............................................. 23
Item 2 - Recent Sales of Unregistered Securities....................... 23
Item 6 - Exhibits and Reports on Form 8-K.............................. 24
Signature.............................................................. 25
2
<PAGE>
PALEX, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
PalEx, Inc. ("PalEx" or the "Company") was founded in January 1996 to create a
national provider of pallet products and related services. On March 25, 1997,
concurrently with the closing of the initial public offering (the "Offering") of
its Common Stock, par value $.01 per share (the "Common Stock"), PalEx acquired
the following three businesses in separate transactions (the "Acquisitions"):
Fraser Industries, Inc. ("Fraser"), Ridge Pallets, Inc. ("Ridge") and Interstate
Pallet Co., Inc. (" Interstate" and, together with Fraser and Ridge,
collectively referred to as the "Founding Companies"). The consideration for the
Acquisitions of the Founding Companies consisted of a combination of cash and
Common Stock. Fraser has been identified as the accounting acquiror for
financial statement presentation purposes because (i) the stockholders of the
Founding Companies owned a majority of the outstanding shares of Common Stock
following the Offering and the Acquisitions, and (ii) the stockholders of Fraser
received the greatest number of shares of Common Stock among the stockholders of
the Founding Companies. The acquisitions of Ridge and Interstate were accounted
for using the purchase method of accounting. March 31, 1997 has been established
as the effective date of the acquisitions for accounting purposes because
management has determined that effective control of the operations of the
Founding Companies transferred to PalEx on that date.
On August 1, 1997, the Company acquired Sheffield Lumber & Pallet Company, Inc.
("Sheffield") and Sonoma Pacific Company ("Sonoma Pacific" and, together with
Sheffield, the "Pooled Companies") in two separate transactions accounted for as
poolings-of-interests. The accompanying condensed consolidated financial
statements reflect the historical financial statements of PalEx with Fraser as
the accounting acquiror retroactively restated for the acquisitions of the
Pooled Companies for all periods presented and with Ridge and Interstate
included from March 31, 1997. Unless the context otherwise requires, all
references herein to the Company include PalEx, the Founding Companies and the
Pooled Companies.
Operating results for interim periods are not necessarily indicative of the
results for full years. The financial statements included herein should be read
in conjunction with the Pro Forma Combined Financial Statements of the Company
and the related notes thereto, the Supplemental Consolidated Financial
Statements of PalEx, Fraser, Ridge and the Pooled Companies and related notes
thereto, and management's discussion and analysis of financial condition and
results of operations related thereto, all of which are included in the
Company's Registration Statement on Form S-1 (No. 333-28027), as amended (the
"Registration Statement").
3
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31, 1997,
NOVEMBER 30, 1996 (UNAUDITED)
----------------- ----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................................ $ 530 $ 1,675
Accounts receivable, net of allowance of $70 and $198 .................................... 5,943 12,584
Inventories .............................................................................. 7,014 15,789
Deferred income taxes .................................................................... 395 920
Other current assets ..................................................................... 121 --
------- -------
Total current assets ......................................................... 14,003 30,968
PROPERTY, PLANT AND EQUIPMENT, net ....................................................... 17,983 27,253
GOODWILL ................................................................................. -- 17,623
OTHER ASSETS ............................................................................. 1,596 3,073
------- -------
Total assets ................................................................. $33,582 $78,917
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit ........................................................................... $ 865 $ --
Notes Payable - Related Party ............................................................ 2,689 --
Current Maturities of long-term debt ..................................................... 1,330 78
Deferred Income .......................................................................... 336 1,786
Accounts payable ......................................................................... 2,188 4,625
Accrued expenses ......................................................................... 3,544 3,236
------- -------
Total current liabilities .................................................... 10,952 9,725
LONG-TERM DEBT, net of current maturities ................................................ 4,716 13,952
DEFERRED INCOME TAXES .................................................................... 958 2,286
COMMITMENTS AND CONTINGENCIES
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, 5,349,104 and
13,029,289 outstanding ................................................................... 53 130
Additional paid-in capital ............................................................... 4,372 46,864
Retained earnings ........................................................................ 12,531 5,960
------- -------
16,956 52,954
------- -------
Total liabilities and stockholders' equity.................................... $33,582 $78,917
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
------------------------ -----------------------
AUGUST 31, 1996 AUGUST 31, 1997 AUGUST 31, 1996 AUGUST 31, 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES .......................................... $ 19,364 $ 42,006 $ 58,410 $ 103,275
COST OF GOODS SOLD ................................ 15,490 35,250 46,215 86,098
----------- ------------ ----------- -----------
Gross profit ................................ 3,874 6,756 12,195 17,177
SELLING, GENERAL AND ADMINISTRATIVE ............... 2,244 3,869 6,544
8,928
GOODWILL AMORTIZATION ............................. -- 152 -- 245
----------- ------------ ----------- -----------
Income from operations ...................... 1,630 2,735 5,651 8,004
INTEREST EXPENSE .................................. (228) (266) (857) (746)
OTHER INCOME (EXPENSE), NET ....................... (91) 40 (95) 11
----------- ------------ ----------- -----------
INCOME BEFORE INCOME TAXES ........................ 1,311 2,509 4,699 7,269
PROVISION FOR INCOME TAXES ........................ -- 1,078 -- 2,945
----------- ------------ ----------- -----------
NET INCOME ........................................ $ 1,311 $ 1,431 $ 4,699 $ 4,324
=========== ============ =========== ===========
EARNINGS PER SHARE ................................ $ .25 $ .11 $ .88 $ .44
WEIGHTED AVERAGE SHARES OUTSTANDING ............... 5,349,104 13,350,607 5,349,104 9,848,767
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PALEX, INC. AND SUBSIDIARIES
STATEMENTS OF PRO FORMA COMBINED INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
------------------------ -----------------------
AUGUST 31, 1996 AUGUST 31, 1997 AUGUST 31, 1996 AUGUST 31, 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES ............................................... $ 30,537 $ 42,006 $ 98,284 $ 124,240
COST OF GOODS SOLD ..................................... 24,889 35,250 79,599 103,847
------------ ------------ ------------ ------------
Gross profit ..................................... 5,648 6,756 18,685 20,393
SELLING, GENERAL AND ADMINISTRATIVE .................... 2,889 3,803 8,375 9,739
SUPPLEMENTAL PROFIT SHARING CONTRIBUTION ............... -- -- -- 1,069
GOODWILL AMORTIZATION .................................. 139 196 416 342
------------ ------------ ------------ ------------
Income from operations ........................... 2,620 2,757 9,894 9,243
INTEREST EXPENSE ....................................... (183) (201) (626) (545)
OTHER INCOME (EXPENSE), NET ............................ (39) 110 28 83
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ............................. 2,398 2,666 9,296 8,781
PROVISION FOR INCOME TAXES ............................. 955 1,073 3,655 3,446
------------ ------------ ------------ ------------
NET INCOME ............................................. $ 1,443 $ 1,593 $ 5,641 $ 5,335
============ ============ ============ ============
EARNINGS PER SHARE ..................................... $ .11 $ .12 $ .45 $ .41(1)
WEIGHTED AVERAGE SHARES OUTSTANDING .................... 12,579,289 13,350,607 12,579,289 13,015,299
</TABLE>
The accompanying notes are an integral part of these financial statements.
(1) 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 for the nine month period ending August 31, 1997 would have been $6.0
million and $.46 per share respectively. See Note 8 in Notes to the Financial
Statements.
6
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Capital in Total
--------------------- Excess of Retained Stockholders'
Shares Amount Par Value Earnings Equity
------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, November 30, 1996 .......................... 5,349 $ 53 $ 4,372 $ 12,531 $ 16,956
Dividends paid by pooled companies .................. -- -- -- (635) (635)
Capital contributions equal to
Current income taxes of
S Corporations ................................... -- -- 716 -- 716
Distributions ....................................... (10,144) (10,144)
Public offering, net of
Offering costs ................................... 3,450 35 23,529 -- 23,564
Acquisition of Founding
Companies ........................................ 4,087 41 17,228 -- 17,269
Shares issues to profit sharing ..................... 143 1 800 -- 801
Net Income .......................................... -- -- -- 4,324 4,324
Adjustment to conform
Fiscal year ends of
Pooled Companies ................................. -- -- -- (116) (116)
Capital contributions ............................... -- -- 219 -- 219
------- -------- -------- -------- --------
BALANCE, August 31, 1997 ........................... 13,029 130 46,864 5,960 52,954
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
-----------------------
AUGUST 31, 1996 AUGUST 31, 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .............................................. $ 4,699 $ 4,324
Adjustment to conform fiscal year-end of Pooled Companies -- (116)
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization ..................... 1,204 2,778
Deferred income taxes ............................. (36) 461
Loss on sale of assets ............................ 193 26
Changes in operating assets and liabilities -
Accounts receivable ............................ 314 (1,430)
Inventories .................................... 617 (3,723)
Other current assets ........................... (1,016) (220)
Accounts payable and accrued expenses .......... (888) (363)
Other assets ................................... 291 25
Deferred income ................................ (31) 1,382
------- --------
Net cash provided by operating activities ............ 5,347 3,144
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ............... (2,408) (4,679)
Proceeds from sale of equipment ......................... 96 60
Cash paid for business acquisitions, net of cash acquired -- (1,098)
------- --------
Net cash used in investing activities ................ (2,312) (5,717)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short term borrowings, net ................... (8,458) (4,856)
Proceeds from long-term debt ............................. 5,549 15,150
Payments on long-term debt ............................... -- (19,754)
Net proceeds from issuance of common stock ............... -- 23,241
Distributions and dividends, net of contributions ........ (565) (10,063)
------- --------
Net cash provided by (used in) financing activities .. (3,474) 3,718
------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........... (439) 1,145
CASH AND CASH EQUIVALENTS --
beginning of period ..................................... 655 530
------- --------
CASH AND CASH EQUIVALENTS -
end of period ........................................... $ 216 $ 1,675
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for -
Interest ............................................. $ 759 $ 468
Income taxes ......................................... 34 1,339
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
PALEX, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
PalEx was formed in January 1996 to create a national provider of pallets and
related services. On March 25, 1997, PalEx acquired the Founding Companies for
consideration consisting of cash and Common Stock. The closing of the Offering
also occurred on that date. On August 1, 1997, PalEx acquired the Pooled
Companies in exchange for 2,455,400 shares Common Stock.
For financial statement purposes, Fraser, one of the Founding Companies, has
been identified as the accounting acquiror. The acquisitions of the Pooled
Companies were accounted for using the pooling-of-interests method of
accounting. The acquisitions of Ridge and Interstate were accounted for using
the purchase method of accounting. The accompanying condensed consolidated
financial statements reflect the historical financial statements of PalEx
retroactively restated for the acquisitions of the Pooled Companies with Fraser
as the accounting acquiror for all periods presented and with Ridge and
Interstate included from March 31, 1997, the effective date of the Acquisitions
for accounting purposes. The allocations of the purchase price to the assets
acquired from, and assumed liabilities of, the Founding Companies has been
initially assigned and recorded based on preliminary estimates of fair value and
may be revised as additional information concerning the valuation of such assets
and liabilities becomes available.
The accompanying unaudited interim financial statements are prepared pursuant to
the rules and regulations for reporting on Form 10-Q. Accordingly, certain
information and footnotes required by generally accepted accounting principles
for complete financial statements are not included herein. The Company believes
all adjustments necessary for a fair presentation of these interim statements
have been included and are of a normal and recurring nature. The interim
statements should be read in conjunction with the financial statements and notes
thereto included in the Registration Statement.
The Statements of Pro Forma Income for the three and nine month periods ended
August 31, 1996 and August 31, 1997 includes the results of PalEx combined with
the Founding Companies and the Pooled Companies as if the acquisitions had
occurred at the beginning of each respective three and nine month period. The
pro forma combined financial information includes the effects of (i) the
Acquisitions of the Founding and Pooled Companies, (ii) the Offering, (iii)
certain reductions in salaries and benefits to the former owners of the Founding
and Pooled Companies to which they have agreed prospectively, (iv) the
distribution or sale of certain assets prior to the Acquisitions to the former
owners of the Founding Companies and expenses related thereto, (v) amortization
of goodwill resulting from the Acquisitions, (vi) income tax expense as if
income was subject to federal and state income taxes during the period, and
(vii) advances under the Credit Facility (see Note 3 to the Financial
Statements), including decreases in interest
9
<PAGE>
expense resulting from the repayment or refinancing of the Founding and Pooled
Companies' debt. The pro forma financial information may not be comparable to
and may not be indicative of the Company's post-Acquisition results of
operations because, among other matters, (i) the Founding and Pooled Companies
were not under common control or management and (ii) the Company used the
purchase method to establish a new basis of accounting to record the
Acquisitions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective with the three-month period ended March 2, 1997, 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.
The Pooled Companies have previously reported on a December calendar year-end.
As such the accounts of these companies for the year ended December 1996 and for
the three and nine month interim periods ended September, 1996 have been
consolidated with the accounts of PalEx as of November 1996 and the three and
nine month periods ended August 31, 1996, respectively. Unaudited revenues and
net income for the Pooled Companies for the one-month period ended December 31,
1996 were approximately $3.3 million and $116,000, respectively. Effective
December 1, 1996, the results of the Pooled Companies were conformed to the
fiscal year-end of PalEx. Accordingly, an adjustment is included in the
unaudited statements of cash flows for the net income attributed to this
one-month period.
There has been no significant change in the accounting policies of the Company
during the periods presented. For a description of these policies, refer to Note
2 of Notes to Supplemental Consolidated Financial Statements of PalEx included
in the Registration Statement.
3. CREDIT FACILITY
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 and Pooled Companies, future acquisitions, capital
expenditures, letters of credit 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
10
<PAGE>
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. The approximate level of available borrowings
under the Credit Facility at August 31, 1997 was $20.6 million.
4. CAPITAL STOCK
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 $20.1 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 pay 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. Substantially all of the net proceeds were used to
repay indebtedness under the Credit Facility in the amounts of $2.0 million and
$1.0 million on April 22, 1997 and May 2, 1997, respectively.
5. EARNINGS PER SHARE
The computation of net income per share and pro forma net income per share for
the three and nine month periods ended August 31, 1996 and 1997 are based on the
weighted average of Common Stock outstanding as of the respective dates,
consisting of the following shares:
Issued in consideration for acquisition of Founding Companies 5,910,000
Issued in consideration for acquisition of Pooled Companies . 2,455,400
Sold pursuant to the Offering ............................... 3,000,000
Held by Main Street Capital Partners, L. P .................. 1,021,389
Sold pursuant to the over-allotment option .................. 450,000
Issued to profit sharing plans of Founding Companies ........ 142,500
Issued to management ........................................ 50,000
----------
13,029,289
The computation also assumes the exercise of options for 1,187,500 shares
granted to management, directors and key employees with the proceeds being used
to repurchase shares in the open market based on the average closing price
during the three and nine month periods ended August 31, 1997.
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
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<PAGE>
share ("EPS") requiring that the computations required for primary and fully
diluted EPS be replaced with "basic" and "diluted" EPS. The Company will adopt
SFAS No. 128 effective November 30, 1997 and will restate EPS for all periods
presented. The Company anticipates that the amount reported for diluted EPS will
be comparable to the primary EPS presented herein.
6. INCOME TAXES
Prior to the Acquisitions, the stockholders of Fraser elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, Fraser did not pay federal and certain state income taxes because
their stockholders paid income taxes on their proportionate share of the
respective companies' earnings. Commencing with the Acquisitions and the
Offering, the Company began to be taxed at applicable federal and state income
tax rates.
The Pooled Companies were S Corporations for income tax purposes and,
accordingly, any income tax liabilities for the periods prior to the acquisition
date are the responsibility of the respective stockholders. For purposes of
these condensed consolidated financial statements, federal and state income
taxes have been provided as if these companies had filed C Corporation tax
returns for the preacquisition periods. The current income tax expense of these
S Corporations is reflected in the condensed consolidated financial statements
in the provision for income taxes and as an increase to capital in excess of
par.
The Company intends to file a consolidated federal income tax return which
includes the operations of the Founding and Pooled Companies for periods
subsequent to the respective acquisitions. The Founding and Pooled Companies
will each file a "short period" federal income tax return through their
respective acquisition dates.
Fraser recorded a charge to income tax expense of approximately $488,000 on
March 25, 1997 representing deferred income taxes at that date which were not
previously recorded because of Fraser's status under Subchapter S.
The provision for income taxes included in the Statements of Pro Forma Combined
Income for the three and nine month periods ended August 31, 1996 and August 31,
1997 assumes the application of statutory federal and state income taxes rates
and the non-deductibility of goodwill amortization.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. While it is not possible to predict the outcome of
such proceedings with certainty, in the opinion of the Company's management, all
such proceedings are
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<PAGE>
either adequately covered by insurance or, if not so covered, should not
ultimately result in any liability which would have a material adverse effect on
the financial position, liquidity or results of operations of the Company.
Interstate, Sonoma Pacific and their stockholders are parties to non-competition
agreements which may restrict until January 14, 1998 and July 31, 1998,
respectively, Interstate's, Sonoma Pacific's and their affiliates' and their
former stockholders' 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 and Sonoma
Pacific before October 1995, which management believes are the same products or
services currently offered by Interstate and Sonoma Pacific. Because of the
noncompete provisions' short duration and exclusion of business currently
conducted by Interstate and Sonoma Pacific, the Company believes that such
agreements will not have a material adverse effect on its 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 under leases accounted for as operating leases.
Minimum future rental payments under the noncancelable operating leases as of
November 30, 1996 are as follows (in thousands):
Fiscal Years Ending
November 30, 1997.........................$1,012
November 29, 1998......................... 705
November 28, 1999......................... 396
November 26, 2000......................... 56
November 25, 2001......................... 50
Thereafter................................ 101
------
$2,320
======
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<PAGE>
The leases provide for payment of taxes and other expenses by the Company. Rent
expense for operating leases was approximately $562,000 and $865,000 in the nine
months ended August 31, 1996 and August 31, 1997, respectively. The Company
incurred additional lease commitments of approximately $200,000 annually in
connection with the Acquisitions.
8. SUPPLEMENTAL PROFIT SHARING CONTRIBUTION
During the three month period ended March 2, 1997, the Founding Companies made
supplemental contributions totaling $1.1 million to their respective profit
sharing plans. In connection with the Acquisitions, PalEx, as agreed, satisfied
the supplemental profit sharing obligations through the issuance of shares of
Common Stock to the plans.
14
<PAGE>
PALEX, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Pro Forma
Combined Financial Statements of the Company and related notes thereto and the
Supplemental Consolidated Financial Statements of PalEx, Fraser, Ridge and the
Pooled Companies and related notes thereto which are included in the
Registration Statement. Statements contained in this discussion regarding future
financial performance and results and other statements that are not historical
facts are forward-looking statements. The forward-looking statements are subject
to numerous risks and uncertainties to the Company, including but not limited to
the availability of attractive acquisition opportunities, the successful
integration and profitable management of acquired businesses, improvement of
operating efficiencies, the availability of working capital and financing for
future acquisitions, the Company's ability to grow internally through expansion
of services and customer bases and reduction of overhead, conditions in lumber
markets, seasonality, weather conditions and other risk factors discussed in the
Registration Statement.
RESULTS OF OPERATIONS - COMBINED
The combined results of operations for the periods presented do not purport to
present those of the combined Founding and Pooled Companies in accordance with
generally accepted accounting principles, but represent merely the sum of the
revenues, cost of sales, gross profit, selling, general and administrative
expenses and supplementary profit sharing contributions for the individual
Founding Companies, the Pooled Companies and PalEx on a historical basis and
exclude the effects of pro forma adjustments. This data may not be comparable
to, and may not be indicative of, the Company's post-combination results of
operations because, among other matters, (i) the Founding and Pooled Companies
were not under common control or management and had different tax and capital
structures during the periods presented and (ii) the Company used the purchase
method to establish a new basis of accounting to record the Acquisitions.
Quarterly results may also be materially affected by the timing and magnitude of
acquisitions, 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 interim period are not necessarily
indicative of the results that may be achieved for any subsequent interim period
or for a full fiscal year.
15
<PAGE>
THREE MONTH PERIODS ENDED AUGUST 31, 1996 AND AUGUST 31, 1997 - COMBINED
The following table sets forth certain selected financial data as a percentage
of revenues for the periods indicated (dollars in thousands):
THREE MONTH PERIOD ENDED
------------------------
AUGUST 31, 1996 AUGUST 31, 1997
--------------- ---------------
Revenues............................ $30,537 100.0% $42,006 100.0%
Cost of Sales........................ 25,296 82.8 35,250 83.9
------ ---- ------ ----
Gross Profit................. 5,241 17.2 6,756 16.1
Selling, general and administrative.. 3,339 10.9 3,869 9.2
Combined revenues increased 37.6% from approximately $30.5 million to $42.0
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 was passed on to customers in the form of higher sales
prices. Sales to CHEP, the Company's largest customer, increased from 31.8% of
revenues in 1996 to 36.8% of revenues in 1997 primarily as a result of increased
orders.
Combined unit sales of new pallets increased from approximately 2.6 million to
2.7 million, while repaired and used pallet units increased from approximately
1.7 million to 2.5 million. Unit sales of agricultural harvesting boxes and
specialty bins decreased from 4,100 to 2,300 as a result of continued
competitive pressures from plastic boxes and bins.
Combined gross profit increased from approximately $5.2 million to $6.8 million
primarily as result of increased volumes. Gross profit as a percentage of
revenues declined from 17.2% to 16.1% primarily as a result of higher raw
material unit costs during 1997. The Company believes that the increases in the
unit cost of lumber were influenced by weather and general economic conditions,
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's
gross profit as a percentage of revenues also fluctuates as a result of
competitive pricing in different market areas in which it operates and continued
changes in product mix.
Combined selling, general and administrative costs increased from approximately
$3.3 million in 1996 to $3.9 million in 1997 and were 10.9% and 9.2% of
revenues, respectively. This increase is generally attributable to increased
costs associated with being a public company. Selling, general and
administrative costs as a percentage of revenues declined because of the
relatively fixed nature of such costs.
16
<PAGE>
NINE MONTH PERIODS ENDED AUGUST 31, 1996 AND AUGUST 31, 1997 - COMBINED
The following table sets forth certain selected financial data as a percentage
of revenues for the periods indicated (dollars in thousands):
NINE MONTH PERIOD ENDED
-----------------------
AUGUST 31, 1996 AUGUST 31, 1997
--------------- ---------------
Revenues............................. $98,284 100.0% $124,240 100.0%
Cost of Sales........................ 79,599 81.0 103,847 83.6
------ ---- ------- ----
Gross Profit................. 18,685 19.0 20,393 16.4
Selling, general and administrative.. 9,749 9.9 10,029 8.1
Supplemental profit sharing contribution -- -- 1,069 .9
Combined revenues increased 26.4% from approximately $98.3 million to $124.2
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
27.6% of revenues in 1996 to 32.6% of revenues in 1997 as a result of increased
orders.
Combined unit sales of new pallets remained relatively stable at approximately
6.4 million while unit sales of repaired and used pallet units increased from
approximately 4.3 million to 6.1 million. Unit sales of agricultural harvesting
boxes and specialty bins decreased from 31,600 to 10,600 as a result of
continued competitive pressures from plastic boxes and bins.
Combined gross profit increased from approximately $18.7 million to $20.4
million as a result of increased volumes. Gross profit as a percentage of
revenues declined from 19.0% to 16.4% primarily as a result of higher raw
material unit costs during 1997. The Company believes that the increases in the
unit cost of lumber were influenced by weather and general economic conditions,
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's
gross profit as a percentage of revenues also fluctuates as a result of
competitive pricing in different market areas in which it operates and continued
changes in product mix.
Combined selling, general and administrative costs decreased from approximately
$9.7 million in 1996 to $8.9 million in 1997 and were 9.9% and 8.1% of revenues,
respectively. The increase is generally attributable to increased costs
associated with being a public company. Selling, general and administrative
costs as a percentage of revenues declined because of the relatively fixed
nature of such costs. In addition to selling, general and administrative costs,
the Founding Companies made supplemental
17
<PAGE>
contributions to their respective profit sharing plans of approximately $1.1
million during the three month period ended March 2, 1997.
LIQUIDITY AND CAPITAL RESOURCES - COMBINED
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 $20.1 million.
Of this amount, $3.4 million was used to pay the cash portion of the purchase
prices relating to the Acquisitions 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 $3.1 million 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.
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 and Pooled 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. The approximate level of available borrowings available under the
Credit Facility at August 31, 1997 was $20.6 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. To the
extent new sources of financing are necessary to fund future acquisitions, there
can be no assurance
18
<PAGE>
that the Company can secure such additional financing 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 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 and changes in rainfall. The
Company's locations serving predominantly manufacturing and industrial customers
experience less seasonality. Management believes that the effects of such
seasonality will diminish as the Company grows and expands it's 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 and the demand for its products. 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
nine month period ended August 31, 1997. Additionally, freezing weather
conditions in South Florida during January, 1997 adversely impacted the produce
harvest thereby reducing the demand for new pallets for the remainder of the
1997 harvest.
19
<PAGE>
RESULTS OF OPERATIONS - PALEX
The following table sets forth certain selected financial data for PalEx (Fraser
as the accounting acquiror and with retroactive restatement for the Pooled
Companies) as a percentage of revenues for the periods indicated and reflects
the acquisitions of Ridge and Interstate effective March 31, 1997 (dollars in
thousands):
THREE MONTH PERIODS ENDED
-------------------------
AUGUST 31, 1996 AUGUST 31,1997
--------------- --------------
Revenues .......................... $ 19,364 100.0% $ 42,006 100.0%
Cost of Sales ..................... 15,490 80.0 35,250 83.9
-------- ------ --------- -------
Gross Profit ...................... 3,874 20.0 6,756 16.1
Selling, general and administrative 2,244 11.6 3,869
9.2
Amortization of goodwill .......... -- -- 152 .4
-------- ------ --------- -------
Income from operations ............ 1,630 8.4 2,735 6.5
Interest expense .................. (228) (1.2) (266) (.6)
Other income (expense), net ....... (91) (.4) 40 .1
-------- ------ --------- -------
Income before income tax .......... 1,311 6.8 2,509 6.0
Provision for income tax .......... -- -- 1,078 2.6
-------- ------ --------- -------
Net income ........................ $ 1,311 6.8% $ 1,431 3.4%
======== ====== ========= =======
THREE MONTH PERIOD ENDED AUGUST 31, 1996 COMPARED TO AUGUST 31, 1997
Revenue increased from approximately $19.4 million to $42.0 million. This
increase is primarily attributable to the acquisition of Ridge and Interstate
and 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 was passed on to customers in the form of higher sales prices.
Gross profit as a percentage of revenues declined from approximately 20.0% to
16.1%, primarily as a result of higher raw material unit costs. A substantial
portion of the operations of Ridge is the manufacture of new pallets which
typically result in a lower gross margin as a percentage of revenues than repair
operations'. See "Results of Operations - Combined".
Selling, general and administrative expenses increased from approximately $2.2
million to $3.9 million and is attributable primarily to the acquisition of
Ridge and Interstate and additional costs associated with being a public
company. Selling, general and
20
<PAGE>
administrative expenses as a percentage of revenues declined from 11.6% to 9.2%
because of the relatively fixed nature of such costs.
Interest expense increased slightly from approximately $228,000 to $266,000.
Fraser recorded a charge to income tax expense of approximately $488,000 on
March 25, 1997 representing deferred income taxes at that date which were not
previously recorded because of Fraser's status under Subchapter S. Federal and
state income taxes have been provided on earnings subsequent to the
Acquisitions.
As a result of the foregoing, net income increased approximately $120,000 to
$1.4 million.
RESULTS OF OPERATIONS - PALEX
The following table sets forth certain selected financial data for PalEx (Fraser
as the accounting acquiror and with retroactive restatement for the Pooled
Companies) as a percentage of revenues for the periods indicated (dollars in
thousands):
NINE MONTH PERIODS ENDED
------------------------
AUGUST 31, 1996 AUGUST 31, 1997
--------------- ----------------
Revenues......................... $58,410 100.0% $103,275 100.0%
Cost of Sales.................... 46,215 79.1 86,098 83.4
------ ---- -------- ------
Gross Profit..................... 12,195 20.9 17,177 16.6
Selling, general and administrative 6,544 11.2 8,928 8.6
Amortization of goodwill......... -- -- 245 .2
------ ---- ------ ------
Income from operations........... 5,651 9.7 8,004 7.8
Interest expense................. (857) (1.5) (746) (.8)
Other expense.................... (95) (.2) 11 --
------ ---- ------ ------
Income before income tax......... 4,699 8.0 7,269 7.0
Provision for income tax......... -- -- 2,945 2.8
------ ---- ------ ------
Net income....................... $4,699 8.0% $4,324 4.2%
====== ==== ====== ======
NINE MONTH PERIOD ENDED AUGUST 31, 1996 COMPARED TO AUGUST 31, 1997
Revenue increased from approximately $58.4 million to $103.3 million. This
increase is primarily attributable to the acquisition of Ridge and Interstate
and partially attributable to an increase in the average sales price of new
pallets, an increase which reflects higher
21
<PAGE>
raw material costs, a portion of which was passed on to customers in the form of
higher sales prices.
Gross profit as a percentage of revenues declined from approximately 20.9% to
16.6%, primarily as a result of higher raw material unit costs. A substantial
portion of the operations of Ridge is the manufacture of new pallets which
typically result in a lower gross margin as a percentage of revenues than repair
operations'. See "Results of Operations - Combined".
Selling, general and administrative expenses increased from approximately $6.5
million to $8.9 million and is attributable primarily to the acquisition of
Ridge and Interstate and additional costs associated with being a public
company. Selling, general and administrative expenses as a percentage of
revenues declined from 11.2% to 8.6% because of the relatively fixed nature of
such costs.
Interest expense declined from approximately $857,000 to $746,000 as the result
of net repayments of debt.
Fraser recorded a charge to income tax expense of approximately $488,000 on
March 25, 1997 representing deferred income taxes at that date which were not
previously recorded because of Fraser's status under Subchapter S. Federal and
state income taxes have been provided on earnings subsequent to the
Acquisitions.
As a result of the foregoing, net income decreased $375,000 to approximately
$4.3 million.
LIQUIDITY AND CAPITAL RESOURCES - PALEX
During the nine month period ending August 31, 1997, net cash provided by
operating activities was $3.1 million, capital expenditures were $4.7 million
and net payments of debt amounted to $9.5 million. Net proceeds from the sale of
Common Stock provided $23.2 million. Net cash paid for the acquisitions amounted
to $1,098,000 and distributions to shareholders amounted to $10.1 million. See
"Liquidity and Capital Resources - Combined" for further discussion of the
liquidity and capital resources of the Company.
22
<PAGE>
PALEX, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsidiaries of PalEx are involved in various legal proceedings that have arisen
in the ordinary course of business. While it is not possible to predict the
outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are either adequately covered by insurance or,
if not so covered should not ultimately result in any liability which would have
a material adverse effect on the financial position, liquidity or results of
operations of the Company.
Interstate, Sonoma Pacific and their stockholders are parties to non-competition
agreements which may restrict until January 14, 1998 and July 31, 1998,
respectively, Interstate's, Sonoma Pacific's and their affiliates' and their
former stockholders' 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 and Sonoma
Pacific before October 1995, which management believes are the same products or
services currently offered by Interstate and Sonoma Pacific. Because of the
noncompete provisions' short duration and exclusion of business currently
conducted by Interstate and Sonoma Pacific, the Company believes that such
agreements will not have a material adverse effect on its operations.
- ------------------------------------------------------------------------------
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities by the
Company during the nine month period ended August 31, 1997 that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
On March 25, 1997, the Company issued 5,910,000 shares of Common Stock as part
of the consideration for the Acquisitions. The Company also issued a total of
142,500 shares of Common Stock to the Founding Companies' profit sharing plans.
On August 1, 1997, the Company issued 2,455,400 shares of Common Stock as part
of the consideration for the acquisitions of the Pooled Companies. These shares
of Common Stock were issued without registration under the Securities Act in
reliance on the exemption provided by Section 4(2) of the Securities Act.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBIT
NO.
---------
2.1* Agreement and Plan of Reorganization, dated as of August 1, 1997, by
and among PalEx, Inc., Sheffield Acquisition, Inc., Sheffield Lumber
and Pallet Company, Inc. and the Stockholders named therein.*
2.2* Agreement and Plan of Reorganization, dated as of August 1, 1997, by
and among PalEx, Inc., Sonoma Pacific Acquisition, Inc., Sonoma
Pacific Company and the Stockholders named 2.2* therein.*
2.3* Agreement and Plan of Reorganization, dated as of August 1, 1997, by
and among PalEx, Inc., Sonoma Pacific Company, Salinas Pacific
Company and the Stockholders named therein.*
2.4* Real Estate Purchase Agreement, dated as of August 1, 1997, by and
among PalEx, Inc., Sonoma Pacific Company, Robert D. Ekedahl and
Diana F. Ekedahl, as Trustees of the Ekedahl 1981
Revocable Trust, and Gregg Gibson, as Tenants in Common.*
3.1** Amended and Restated Certificate of Incorporation
3.2** Bylaws
27.0 Financial Data Schedule
- -------------------
* Incorporated by reference from the exhibits, bearing the same
respective numbers, to the Company's Registration Statement (Commission
File No. 000-22237) as filed with the Commission on August 7, 1997.
** Incorporated by reference from the exhibits, bearing the same
respective numbers, to the Company's Registration Statement on Form S-1
(Registration No. 333-18683)
(b) Reports on Form 8-K
On August 7, 1997, the Company filed a Current Report on Form 8-K to
report the Company's acquisition of Sheffield Lumber and Pallet Company, Inc.
and Sonoma Pacific Company, Inc. in two separate transactions on August 1,
1997, which were accounted for as poolings-of-interests.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALEX, INC.
Date: October 14, 1997 By: /S/ CASEY A. FLETCHER
---------------------
Casey A. Fletcher
Chief Accounting Officer
25
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