SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 15, 1997
PALEX, INC.
(Exact name of registrant as specified in its charter)
Delaware 000-22237 76-0520673
(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
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
<PAGE>
As indicated in the Registrant's Form 8-K dated August 1, 1997, the
financial statements and pro forma financial information required to be filed
therewith would be filed not later than October 15, 1997. Accordingly, Item 7 of
the Form 8-K dated August 1, 1997 is hereby amended to read in its entirety as
follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of businesses acquired.
The following Financial Statements of Sheffield Lumber and Pallet Co.,
Inc. and Affiliate as of December 31, 1996 are attached hereto and made a part
hereof:
(i) Report of Independent Public Accountants
(ii) Combined Balance Sheets
(iii) Combined Statements of Income
(iv) Combined Statements of Changes in Stockholders' Equity
(v) Combined Statements of Cash Flows
(v) Notes to Combined Financial Statements
The following Financial Statements of Sonoma Pacific Company and Affiliate
as of December 31, 1996 are attached hereto and made a part hereof:
(i) Report of Independent Public Accountants
(ii) Combined Balance Sheets
(iii) Combined Statements of Income
(iv) Combined Statements of Changes in Stockholders' Equity
(v) Combined Statements of Cash Flows
(vi) Notes to Combined Financial Statements
The following Supplemental Financial Statements of PalEx, Inc. and
Subsidiaries as of November 30, 1995 and 1996 are attached hereto and made a
part hereof:
(i) Report of Independent Public Accountants
(ii) Supplemental Consolidated Balance Sheets
(iii) Supplemental Consolidated Statements of Income
(iv) Supplemental Consolidated Statements of Changes in
Stockholders'Equity
(v) Supplemental Consolidated Statements of Cash Flows
(vi) Notes to Supplemental Consolidated Financial Statements
2
<PAGE>
(b) Pro forma financial information.
The following Unaudited Pro Forma Consolidated Financial Statements are
attached hereto and made a part hereof:
(i) Basis of Presentation
(ii) Pro Forma Consolidated Statement of Income for the Year Ended
November 30, 1996
(iii) Pro Forma Consolidated Statement of Income for the Six Months
Ended June 1, 1997
(iv) Notes to Unaudited Pro Forma Consolidated Statements of Income
(c) Exhibits.
The following exhibits are incorporated by reference from the Registrant's
Form 8-K dated August 1, 1997:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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
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.*
*Copies of omitted schedules and exhibits shall be furnished supplementally
to the Commission upon request.
3
<PAGE>
SIGNATURES
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, hereunto duly authorized.
PALEX, INC.
Date: October 15, 1997 By: /s/ EDWARD RHYNE
Edward Rhyne,
Vice President and General Counsel
4
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Historical Financial Statements
PalEx, Inc. and Subsidiaries
Report of Independent Public Accountants.................... 6
Supplemental Consolidated Balance Sheets.................... 7
Supplemental Consolidated Statements of Income.............. 8
Supplemental Consolidated Statements of Changes in
Stockholders' Equity....................................... 9
Supplemental Consolidated Statements of Cash Flows.......... 10
Notes to Supplemental Consolidated Financial Statements..... 11
Sheffield Lumber and Pallet Co., Inc. and Affiliate
Report of Independent Public Accountants.................... 24
Combined Balance Sheets..................................... 25
Combined Statements of Income..................................... 26
Combined Statements of Changes in Stockholders' Equity...... 27
Combined Statements of Cash Flows........................... 28
Notes to Combined Financial Statements...................... 29
Sonoma Pacific Company and Affiliate
Report of Independent Public Accountants.................... 35
Combined Balance Sheets..................................... 36
Combined Statements of Income............................... 37
Combined Statements of Changes in Stockholders' Equity...... 38
Combined Statements of Cash Flows........................... 39
Notes to Combined Financial Statements...................... 40
Unaudited Pro Forma Consolidated Financial Statements
Basis of Presentation............................................. 46
Pro Forma Consolidated Statement of Income for the Year Ended
November 30, 1996................................................ 47
Pro Forma Consolidated Statement of Income for the Six Months
Ended June 1, 1997............................................... 48
Notes to Unaudited Pro Forma Consolidated Statements of Income.... 49
5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PalEx, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
PalEx, Inc. (a Delaware corporation), and subsidiaries as of November 30, 1995
and 1996, and the related supplemental consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended November 30, 1996. These supplemental financial statements give
retroactive effect to acquisitions made by the Company during the third quarter
of 1997 which have been accounted for as poolings-of-interests. These
supplemental consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplemental consolidated 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 supplemental consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the supplemental
consolidated 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 supplemental consolidated financial statements referred
to above present fairly, in all material respects, the supplemental consolidated
financial position of PalEx, Inc., and subsidiaries as of November 30, 1995 and
1996, and the supplemental results of their operations and their cash flows for
each of the three years in the period ended November 30, 1996, after giving
retroactive effect to certain pooling-of-interests transactions, in conformity
with generally accepted accounting principles.
As discussed in Note 2, the accompanying financial statements reflect the
Company on a historical basis with Fraser Industries, Inc., as the accounting
acquiror restated for the effect of pooling-of-interests transactions.
ARTHUR ANDERSEN LLP
Houston, Texas
August 1, 1997
6
<PAGE>
PALEX, INC., AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
NOVEMBER 30, JUNE 1,
-------------------------- -------
1995 1996 1997
------- ------- -------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 655 $ 530 $ 1,333
Accounts receivable, net of allowances of $113 and
$140 ................................................................... 6,712 5,943 14,374
Inventories ............................................................. 7,142 7,014 13,569
Deferred income taxes ................................................... 156 395 601
Other current assets .................................................... 229 121 654
------- ------- -------
Total current assets ............................................. 14,894 14,003 30,531
PROPERTY, PLANT AND EQUIPMENT, net ........................................ 15,902 17,983 25,750
GOODWILL, net of amortization of $93 ...................................... -- -- 17,774
OTHER ASSETS .............................................................. 1,552 1,596 3,231
------- ------- -------
Total assets ..................................................... $32,348 $33,582 $77,286
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit .......................................................... $ 3,650 $ 865 $ 2,380
Current maturities of long-term debt .................................... 2,286 1,330 965
Notes payable to related parties ........................................ 3,131 2,689 3,395
Accounts payable ........................................................ 2,013 2,188 4,854
Accrued expenses ........................................................ 1,969 3,272 3,989
Unearned revenue ........................................................ 139 85 1,081
Dividends payable ....................................................... -- 187 --
------- ------- -------
Total current liabilities ........................................ 13,188 10,616 16,664
LONG-TERM DEBT, net of current maturities ................................. 5,702 4,716 5,614
DEFERRED INCOME ........................................................... 360 336 391
DEFERRED INCOME TAXES ..................................................... 763 958 2,357
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
30,000,000 shares; 5,349,104, 5,349,104 and
13,029,289 shares outstanding .......................................... 53 53 130
Capital in excess of par value .......................................... 3,517 4,372 46,658
Retained earnings ....................................................... 8,765 12,531 5,472
------- ------- -------
12,335 16,956 52,260
------- ------- -------
Total liabilities and stockholders' equity ......................... $32,348 $33,582 $77,286
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
7
<PAGE>
PALEX, INC., AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
YEAR ENDED NOVEMBER 30, MAY 31, JUNE 1,
------------------------------- -------- --------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES ....................... $61,927 $69,855 $87,158 $39,046 $61,269
COST OF GOODS SOLD.............. 53,467 60,034 73,411 30,725 50,527
-------- -------- -------- -------- --------
Gross profit................ 8,460 9,821 13,747 8,321 10,742
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES. 5,359 5,035 6,731 4,300 5,379
GOODWILL AMORTIZATION...... - - - - 93
-------- -------- -------- -------- --------
Income from operations...... 3,101 4,786 7,016 4,021 5,270
INTEREST EXPENSE................ (1,015) (1,374) (1,101) (629) (480)
OTHER INCOME (EXPENSE), net..... 192 201 84 (4) (30)
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES...... 2,278 3,613 5,999 3,388 4,760
PROVISION FOR INCOME TAXES...... 819 741 1,015 268 1,868
-------- -------- -------- -------- --------
NET INCOME...................... $ 1,459 $ 2,872 $ 4,984 $ 3,120 $ 2,892
======= ======= ======= ======= =======
Earnings per share.............. $ .27 $ .54 $ .93 $ .58 $ .36
======= ======= ======= ======= =======
Weighted average shares
outstanding..................... 5,349,104 5,349,104 5,349,104 5,349,104 8,095,724
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
8
<PAGE>
PALEX, INC., AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
CAPITAL
IN
COMMON STOCK EXCESS OF TOTAL
-------------------- PAR RETAINED STOCKHOLDERS'
SHARES AMOUNT VALUE EARNINGS EQUITY
------ ------ ----- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, November 30, 1993 .................... 5,349 $ 53 $ 2,223 $ 6,137 $ 8,413
Dividends paid by Pooled Companies .......... -- -- -- (846) (846)
Capital contributions equal to
the current income taxes of S
Corporations ............................... -- -- 781 -- 781
Other equity transactions
of Pooled Companies ........................ -- -- 153 -- 153
Net income .................................. -- -- -- 1,459 1,459
------ ---- ------- -------- --------
BALANCE, November 30, 1994 .................... 5,349 53 3,157 6,750 9,960
Dividends paid by Pooled Companies .......... -- -- -- (857) (857)
Capital contributions equal to
the current income taxes of S
Corporations ............................... -- -- 360 -- 360
Net income .................................. -- -- -- 2,872 2,872
------ ---- ------- -------- --------
BALANCE, November 30, 1995 .................... 5,349 53 3,517 8,765 12,335
Dividends paid by Pooled Companies .......... -- -- -- (798) (798)
Capital contributions equal to
the current income taxes of S
Corporations ............................... -- -- 855 -- 855
Distributions ............................... -- -- -- (420) (420)
Net income .................................. -- -- -- 4,984 4,984
------ ---- ------- -------- --------
BALANCE, November 30, 1996 .................... 5,349 53 4,372 12,531 16,956
Dividends paid by Pooled
Companies (unaudited) ...................... -- -- -- (635) (635)
Capital contributions equal to
the current income taxes of S
Corporations (unaudited) ................... -- -- 729 -- 729
Distributions (unaudited) ................... -- -- -- (9,200) (9,200)
Public offering, net of
Offering costs
(unaudited) ................................ 3,450 35 23,529 -- 23,564
Acquisition of Founding
Companies (unaudited) ...................... 4,087 41 17,228 -- 17,269
Shares issued to profit-sharing
plans (unaudited) .......................... 143 1 800 -- 801
Net income (unaudited) ...................... -- -- -- 2,892 2,892
Adjustment to conform fiscal
year-ends of Pooled Companies
(unaudited) ................................ -- -- -- (116) (116)
------ ---- ------- -------- --------
BALANCE, June 1, 1997 (unaudited) ............. 13,029 $130 $46,658 $ 5,472 $ 52,260
====== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
9
<PAGE>
PALEX, INC., AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
YEAR ENDED NOVEMBER 30, MAY 31, JUNE 1,
----------------------- ------- -------
1994 1995 1996 1996 1997
------- ------- ------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................... $ 1,459 $ 2,872 $ 4,984 $ 3,120 $ 2,892
Adjustment to conform fiscal
year-ends of Pooled Companies ..... -- -- -- -- (116)
Adjustments to reconcile net income
to net cash provided by operating
activities--
Depreciation and amortization ... 1,544 2,332 1,905 1,337 1,577
Changes in operating assets and
liabilities--
Accounts receivable ......... (1,815) (486) 769 (932) (3,220)
Inventories ................. (29) 423 128 (1,343) (1,503)
Deferred income taxes and
other current assets ...... 1,038 646 (131) 249 (33)
Other assets ................ (133) (122) 162 174 (133)
Accounts payable and
accrued expenses .......... 1,929 (541) 1,782 797 1,697
------- ------- ------- ------- --------
Net cash provided by
operating activities ........... 3,993 5,124 9,599 3,402 1,161
------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in cash surrender value
of insurance policies ............. (116) (84) (206) (57) --
Purchase of fixed assets ........... (8,310) (2,816) (3,986) (2,400) (2,258)
Cash paid for business acquisitions,
net of cash acquired .............. -- -- -- -- (1,098)
------- ------- ------- ------- --------
Net cash used in investing
activities ..................... (8,426) (2,900) (4,192) (2,457) (3,356)
------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on
lines of credit ................... (1,250) (750) (1,942) 42 1,515
Net borrowings (payments) on notes
payable to related party .......... 591 (321) (442) 450 706
Proceeds from debt ................. 5,755 740 2,180 -- 6,464
Payments on debt ................... -- (565) (4,965) (1,351) (19,822)
Net proceeds from issuance of common
stock ............................. -- -- -- -- 23,241
Distributions to stockholders, net . (586) (1,155) (363) (620) (9,106)
------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities ........... 4,510 (2,051) (5,532) (1,479) 2,998
------- ------- ------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................... 77 173 (125) (534) 803
CASH AND CASH EQUIVALENTS,
beginning of year .................. 405 482 655 655 530
------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of year $ 482 $ 655 $ 530 $ 121 $ 1,333
======= ======= ======= ======= ========
Supplemental Disclosure of Cash Flow
Information:
Cash paid for--
Interest .................... $ 1,278 $ 1,126 $ 1,274 $ 637 $ 479
Income taxes ................ 6 3 34 -- --
</TABLE>
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
10
<PAGE>
PALEX, INC., AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED 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. On
March 25, 1997, concurrently with the closing of PalEx's initial public
offering (the "Offering") of its common stock, par value $.01 per share (the
"Common Stock"), PalEx and separate wholly owned subsidiaries of PalEx
acquired, in separate transactions (the "Acquisitions"), the following three
businesses: Fraser Industries, Inc. ("Fraser"), Ridge Pallets, Inc.
("Ridge"), and Interstate Pallet Co., Inc. ("Interstate"), 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.
Subsequent to the acquisition of the Founding Companies and the Offering,
PalEx acquired the following two wooden pallet manufacturing businesses on
August 1, 1997: Sonoma Pacific Company and Sheffield Lumber and Pallet Co., Inc.
For accounting purposes, these businesses (the "Pooled Companies") were acquired
under the pooling-of-interests method of accounting. The historical financial
statements have been retroactively restated for the acquisitions acquired under
the pooling-of-interests method.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying supplemental consolidated financial
statements follows.
BASIS OF PRESENTATION
These consolidated financial statements are labeled as "supplemental" as
they have been restated to include the results of the Pooled Companies acquired
subsequent to November 30, 1996, which were accounted for as poolings-of-
interests for which postacquisition operating results have not yet been
published. These supplemental consolidated financial statements will represent
the restated historical consolidated financial statements of the Company once
postacquisition operating results of the Company have been published. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Fraser has been identified as the accounting acquiror for financial
statement presentation purposes. 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. The allocations of the
purchase price to the assets acquired and liabilities assumed 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 supplemental consolidated
financial statements present Fraser combined with the Pooled Companies for all
periods presented and include Ridge and Interstate from March 31, 1997. Unless
the context otherwise requires, all references herein to the Company include
PalEx and the Founding and Pooled Companies.
11
<PAGE>
The Pooled Companies have previously reported on a December calendar
year-end. As such, the accounts of these companies for their 1994, 1995 and 1996
calendar years and the six months ended June 30, 1996, have been consolidated
with the accounts of PalEx as of and for the years ended November 30, 1994, 1995
and 1996, and the six months ended May 31, 1996, respectively. Unaudited
revenues and net income for these two companies for the one-month period ended
December 31, 1996, were approximately $3,294,000 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 consolidated statements of stockholders' equity and cash flows for the
net income attributed to this one-month period.
FISCAL YEAR
Historically, PalEx has reported on a fiscal year ended November 30 basis.
Effective with the three-month period ending 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 13 weeks, unless otherwise noted, and
ends on a Sunday.
INTERIM SUPPLEMENTAL FINANCIAL INFORMATION
The interim supplemental consolidated 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 interim
supplemental consolidated 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 AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original 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 tax purposes.
Expenditures for maintenance and repairs are charged to expense as
incurred. Additions and major replacements or betterments that increase capacity
or extend useful lives are added to the cost of the asset. Upon sale or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net.
12
<PAGE>
INCOME TAXES
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. Instead, Fraser's stockholders
paid income taxes on their proportionate shares of the Company's net earnings.
Effective with the Offering, Fraser's S Corporation status was terminated, and
the Company is now subject to federal income taxes.
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 supplemental 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 supplemental consolidated financial
statements in the provision for income taxes and as an increase to capital in
excess of par.
REVENUE RECOGNITION
The Company recognizes revenue upon delivery of the product to the
customer.
USE OF ESTIMATES
The preparation of supplemental consolidated 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 supplemental consolidated 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 adopted this standard December
1, 1996. The adoption of this standard did not have a material effect on the
Company's financial position or results of operations.
EARNINGS PER SHARE
The historical periods ended November 30, 1994, 1995 and 1996, and the six
months ended May 31, 1996, represent the results of operations of PalEx, with
Fraser as accounting acquiror, restated to include the Pooled Companies.
Accordingly, the computation of earnings per share includes 5,349,104 shares of
Common Stock outstanding attributable to Fraser and the Pooled Companies.
13
<PAGE>
The computation of earnings per share for the six-month period ended June
1, 1997, is based upon 8,095,724 weighted average shares, which include the
5,349,104 attributable to Fraser and the Pooled Companies, and the weighted
average effect of the shares discussed below (unaudited).
WEIGHTED
AVERAGE
SHARES
SIX MONTHS
ENDED
JUNE 1, 1997,
TOTAL SUPPLEMENTAL
--------- ---------
Shares of PalEx attributed to Fraser ................. 2,893,704 2,893,704
Issued in Acquisitions accounted for under the
pooling-of-interests method ........................ 2,455,400 2,455,400
Issued in consideration for acquisition of Ridge and
Interstate ........................................... 3,016,296 1,038,397
Sold pursuant to the Offering ........................ 3,000,000 1,032,787
Issued to Main Street Capital Partners, L.P. ......... 1,021,389 351,626
Sold pursuant to the overallotment option ............ 450,000 100,820
Issued to profit-sharing plans of Founding Companies . 142,500 49,040
Issued to PalEx management ........................... 50,000 17,213
Effect of options using the treasury stock method .... 999,000 156,737
---------
8,095,724
=========
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 be replaced with "basic" and "diluted" EPS. The Company
will adopt SFAS No. 128 effective December 15, 1997, and will restate EPS for
all periods presented. The Company anticipates that the amount reported for
basic and diluted EPS will be comparable to the primary EPS presented herein.
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.
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.
14
<PAGE>
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 22 percent, 18 percent
and 32 percent of the Company's revenues in 1994, 1995 and 1996, respectively.
As of November 30, 1996, this customer had an outstanding accounts receivable
balance which represented approximately 11 percent of the Company's total
accounts receivable.
3. BUSINESS COMBINATIONS:
POOLINGS
In the third quarter of 1997, the Company acquired all of the outstanding
stock of the Pooled Companies in exchange for 2,455,400 shares of Common Stock.
These companies produce and repair wooden pallets. These acquisitions have been
accounted for under the pooling-of-interests method of accounting.
The following table summarizes the restated consolidated revenues, net
income and per share data of the Company after giving effect to these
transactions (in thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------------------
1994 1995 1996
------------------------ ----------------------- ------------------------
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income --
As presently reported ................ $23,114 $ 248 $30,135 $ 1,923 $49,282 $ 3,846
Subsequent acquisitions .............. 38,813 1,211 39,720 949 37,876 1,138
------- --------- ------- --------- ------- ---------
As restated .......................... $61,927 $ 1,459 $69,855 $ 2,872 $87,158 $ 4,984
======= ========= ======= ========= ======= =========
Net income per share--
As presently reported ................ -- $ .09 -- $ .66 -- $ 1.33
Subsequent acquisitions .............. -- .18 -- (.12) -- (.40)
------- --------- ------- --------- ------- ---------
As restated .......................... -- $ .27 -- $ .54 -- $ .93
======= ========= ======= ========= ======= =========
</TABLE>
PURCHASES
The acquisitions of Ridge and Interstate were accounted for as purchases
and have been reflected in the Company's financial statements from March 31,
1997. The aggregate consideration paid in these transactions was $1.2 million in
cash and $17.0 million of Common Stock. The accompanying supplemental
consolidated balance sheet includes allocations of the respective purchase
prices and is subject to final adjustment. The allocations resulted in goodwill
recognized of $17.9 million representing the excess of purchase price over fair
value of the net assets acquired, as follows (in thousands) (unaudited):
Fair value of assets acquired ............................. $ 18,942
Cash paid, net of cash acquired ........................... (1,098)
Liabilities assumed ....................................... (18,744)
Fair value of Common Stock ................................ (16,967)
--------
Goodwill .................................................. $(17,867)
========
15
<PAGE>
The following table sets forth pro forma results of operations of the
Company to reflect adjustments to the supplemental consolidated financial
statements to present the effect of the acquisitions of Ridge and Interstate as
if the acquisitions were effective as of December 1, 1995 (in thousands):
YEAR ENDED SIX MONTHS ENDED
NOVEMBER 30, -----------------------------
1996 MAY 31, 1996 JUNE 1, 1997
--------- -------- -------
(unaudited) (unaudited) (unaudited)
Revenues ................... $ 139,906 $ 67,747 $82,234
========= ======== =======
Net income ................. $ 7,176 $ 4,204 $ 3,682
========= ======== =======
Earnings per share ......... $ .57 $ .33 $ .29
========= ======== =======
Pro forma adjustments included in the amounts above primarily relate to
adjustments to selling, general and administrative expenses for changes in the
compensation level of the owners of the acquired businesses, adjustments to
interest expense attributed to incremental borrowings, retirement of debt
obligations and adjustment to the federal and state income tax provisions based
on pro forma operating results. Net income per share assumes all shares issued
for the acquisitions of Ridge and Interstate and the Offering had been
outstanding for the periods presented.
The pro forma results presented are not necessarily indicative of actual
results that might have occurred had the operations and management teams of the
Company, the Founding Companies and the Pooled Companies been combined at the
beginning of the periods presented.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
ESTIMATED
USEFUL NOVEMBER 30,
LIVES ----------------------------
IN YEARS 1995 1996
----- -------- --------
Land ............................. -- $ 667 $ 773
Machinery and equipment .......... 5-10 19,144 22,565
Buildings ........................ 15-40 5,311 5,514
Furniture and fixtures ........... 5-8 757 763
Tractors and trailers ............ 5-6 1,433 1,683
----- -------- --------
-- 27,312 31,298
Less-- Accumulated depreciation of
property, plant and equipment .. (11,410) (13,315)
-------- --------
$ 15,902 $ 17,983
======== ========
16
<PAGE>
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
NOVEMBER 30,
---------------
1995 1996
----- ----
Balance at beginning of year ............................... $ 69 $113
Additions charged to costs and expenses .................... 71 27
Deductions for uncollectible receivables written off ....... (27) --
----- ----
$ 113 $140
===== ====
The major components of inventories are as follows (in thousands):
NOVEMBER 30,
---------------------
1995 1996
------ ------
Lumber, hardware and fasteners ................... $6,417 $5,551
Finished goods ................................... 725 1,463
------ ------
$7,142 $7,014
====== ======
Other assets consist of the following (in thousands):
NOVEMBER 30,
------------------
1995 1996
------ ------
Cash surrender value of life insurance policies ........ $1,116 $1,322
Other assets ........................................... 436 274
------ ------
$1,552 $1,596
====== ======
Accrued expenses consist of the following (in thousands):
NOVEMBER 30,
---------------------
1995 1996
------ ------
Accrued compensation and benefits ................ $1,234 $2,486
Accrued taxes .................................... 127 203
Other accrued expenses ........................... 608 583
------ ------
$1,969 $3,272
====== ======
17
<PAGE>
6. DEBT:
The Company maintains revolving lines of credit with banks totaling
$7,250,000 which bear interest, payable monthly, ranging from prime (8.25
percent at November 30, 1996) to LIBOR plus 1.75 percent which mature at various
dates during 1998. Certain lines of credit are secured by inventory, machinery
and equipment and personal guarantees of shareholders. At November 30, 1996,
borrowings outstanding under the lines of credit were approximately $865,000.
The personal guarantees referred to below were during periods when Fraser and
the Pooled Companies were not owned by PalEx. In connection with the acquisition
of these companies by PalEx, the personal guarantees are being replaced with a
guarantee by PalEx as soon as practical.
Long-term debt consists of the following (in thousands):
NOVEMBER 30,
------------------
1995 1996
------- -------
Notes payable to a bank, bearing interest at prime
(8.25% at November 30, 1996) plus .5%, payments of
$36,000 per month through maturity in June 2002
Secured by certain assets of the Company and personal
guarantees by stockholders ............................. $ 3,926 $ 2,997
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 certain assets of
the Company ............................................ 2,250 1,650
Note payable to a bank, bearing interest at prime
(8.25% at November 30, 1996) plus .625%, payments of
$57,000 per month through maturity in January 1998
Secured by certain assets of the Company and personal
guarantees by stockholders ............................. 1,128 811
Note payable to a bank, bearing interest at 9.2%,
payments of $1,771 per month through maturity in
March 2004. Secured by certain assets of the Company
and personal guarantees by stockholders ................ 216 201
Note payable to Small Business Administration,
bearing interest at 6.94% stepped rate, $921 per
month through maturity in March 2014. Secured by
certain assets of the Company and personal guarantees
by stockholders ........................................ 210 204
Note payable to a bank, bearing interest at LIBOR
plus 2%, payments of $3,773 per month through
maturity in January 1998. Secured by certain assets
of the Company and personal guarantees by
stockholders ........................................... 136 92
Notes payable to a bank, bearing interest at LIBOR
plus 2%, payments of $2,250 per month through
maturity in December 1999. Secured by certain assets
of the Company and personal guarantees by
stockholders ........................................... 108 81
Other .................................................... 14 10
------- -------
7,988 6,046
Less--Current maturities ................................. (2,286) (1,330)
------- -------
$ 5,702 $ 4,716
======= =======
18
<PAGE>
Future maturities of long-term debt at November 30, 1996, are as follows
(in thousands):
Year ending November 30-
1997............................................. $1,330
1998............................................. 2,173
1999............................................. 620
2000............................................. 617
2001............................................. 666
Thereafter....................................... 640
------
$6,046
======
Related-party notes consist of the following (in thousands):
NOVEMBER 30,
----------------
1995 1996
------ ------
Notes payable to stockholders, bearing interest at
7%, payable on demand .................................... $ 511 $ 211
Notes payable to stockholders, bearing interest from
7% to prime plus 3% (prime was 8.25% at November
1996), payable on demand ................................. 349 734
Notes payable to stockholders and officers, bearing
interest at LIBOR plus 1.75%, payable on demand .......... 1,565 1,405
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
------ ------
$3,131 $2,689
====== ======
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 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 zero 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
under the Credit Facility at August 1, 1997, was $24.0 million.
19
<PAGE>
7. INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
YEAR ENDED NOVEMBER 30,
-------------------------------------
1994 1995 1996
---- ---- -------
Federal-
Current ..................... $615 $338 $ 666
Deferred .................... 30 223 (36)
---- ---- -------
645 561 630
---- ---- -------
State-
Current ..................... 167 137 392
Deferred .................... 7 43 (7)
---- ---- -------
174 180 385
---- ---- -------
Total .................... $819 $741 $ 1,015
==== ==== =======
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (in thousands):
YEAR ENDED NOVEMBER 30,
---------------------------
1994 1995 1996
----- ------- -------
Tax at federal statutory rate at 34% ............ $ 775 $ 1,228 $ 2,040
Add (deduct)-
State income taxes, net of federal benefit ... 115 119 254
Income taxable to stockholders ............... (86) (685) (1,381)
Nondeductible expenses and other ............. 15 79 102
----- ------- -------
$ 819 $ 741 $ 1,015
===== ======= =======
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 (in
thousands):
NOVEMBER 30,
------------------
1995 1996
----- -------
Deferred income tax liabilities-
Property and equipment ............................... $(806) $(1,023)
Depreciation and amortization ........................ (35) (67)
Accruals and reserves not deductible until paid ...... (14) (47)
Sales ................................................ (74) --
Deferred income tax assets-
Accruals and reserves ................................ 185 429
Allowance for doubtful accounts ...................... 19 25
State taxes .......................................... 48 62
Other assets ......................................... 70 58
----- -------
Total deferred income tax liabilities .................. $(607) $ (563)
===== =======
20
<PAGE>
The Company 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.
8. 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 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.
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.
OPERATING LEASE AGREEMENTS
The Company conducts a portion of its operations and warehouses certain of
its products in leased facilities classified as operating leases.
Minimum future rental payments under the noncancelable operating leases as
of November 30, 1996, are as follows:
Year ending November 30-
1997............................................. $1,012
1998............................................. 705
1999............................................. 396
2000............................................. 56
2001............................................. 50
Thereafter....................................... 101
------
$2,320
======
The leases provide for payment of taxes and other expenses by the Company.
Rent expense for operating leases was approximately $382,000, $547,000 and
$815,000 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 No. 119, "Disclosures 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.
21
<PAGE>
10. EVENTS SUBSEQUENT TO NOVEMBER 30, 1996:
THE OFFERING
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 overallotment 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 discussed above in the amount of
$2.0 million and $1.0 million on April 22, 1997, and May 2, 1997, respectively.
In addition, prior to the closing of the Acquisition, Fraser made
distributions in respect of Fraser'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 nonoperating asset at its net book value of
approximately $203,000 to a stockholder prior to the merger.
Fraser agreed to pay a director an amount up to $50,000 for advisory
services contingent upon the successful completion of the acquisition. In
connection with the Acquisition, PalEx paid this amount upon the Acquisition's
completion.
SUPPLEMENTAL PROFIT-SHARING CONTRIBUTION
During the six-month period ended June 1, 1997, the Founding Companies
made supplemental contributions totaling $1.1 million to their respective
profit-sharing plans. In connection with the Acquisitions, PalEx agreed to
satisfy the supplemental profit-sharing obligations through the issuance of
shares of Common Stock.
STOCK OPTIONS
Under the terms of the Company's 1996 Profit-Sharing Plan (the Plan),
directors, officers, key employees and certain other persons may be awarded
stock options. The aggregate amount of Common Stock with respect to which
options are granted may not exceed the greater of 1,800,000 shares or 15 percent
of the Company's outstanding Common Stock, as determined on each option grant
date. Options granted under the Plan may be either nonqualified stock options or
may qualify as incentive stock options. In general, the compensation committee
composed of nonemployee directors establishes the terms of the option awards.
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 nonemployee director will receive a nonqualified option to purchase
20,000 shares of Common Stock, and continuing nonemployee directors annually
will receive options to purchase 5,000 shares of Common Stock. Options granted
to nonemployee directors are fully exercisable following the expiration of six
months from the date of grant.
22
<PAGE>
During fiscal 1997, effective with the Offering, options to purchase
928,000 shares of Common Stock were granted with an exercise price equal to the
Offering price of $7.50 per share and, as of August 1, 1997, options to purchase
999,000 shares of Common Stock were outstanding with exercise prices ranging
from $7.50 per share to $14.13 per share.
The Company accounts for its option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." As no stock options were outstanding through November
30, 1996, the disclosures will be included beginning with the Company's
financial statements for the year ended November 30, 1997.
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sheffield Lumber and Pallet Co., Inc.:
We have audited the accompanying combined balance sheet of Sheffield Lumber
and Pallet Co., Inc. (a North Carolina corporation), and affiliate as of
December 31, 1996, and the related combined statements of income, changes in
stockholders' equity and cash flows for the year ended December 31, 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Sheffield
Lumber and Pallet Co., Inc., and affiliate as of December 31, 1996, and the
results of their operations and their cash flows for the year December 31, 1996,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 11, 1997
24
<PAGE>
SHEFFIELD LUMBER AND PALLET CO., INC., AND AFFILIATE
COMBINED BALANCE SHEETS
(In thousands, except share data)
December 31, May 31,
1996 1997
------- -------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 121 $ 98
Accounts receivable, net of allowance of $25 and $25 .. 1,360 1,947
Inventories ........................................... 1,330 1,677
Other current assets .................................. 76 15
------- -------
Total current assets ......................... 2,887 3,737
PROPERTY, PLANT AND EQUIPMENT, net ...................... 8,038 8,031
OTHER ASSETS ............................................ 1,329 1,327
------- -------
Total assets .................................. $12,254 $13,095
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit ....................................... $ 360 $ 930
Current maturities of long-term debt .................. 828 828
Accounts payable ...................................... 212 410
Accrued expenses ...................................... 403 560
Notes payable to stockholders ......................... 945 1,270
------- -------
Total current liabilities .................... 2,748 3,998
LONG-TERM DEBT, net of current maturities ............... 2,980 2,609
------- -------
Total liabilities ............................ 5,728 6,607
------- -------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $100 par, 100,000 shares
authorized; 10,000 shares outstanding ................ 1,000 1,000
Additional paid-in capital ............................ 192 192
Retained earnings ..................................... 5,334 5,296
------- -------
Total stockholders' equity ................... 6,526 6,488
------- -------
Total liabilities and stockholders' equity ... $12,254 $13,095
======= =======
The accompanying notes are an integral part of
these combined financial statements.
25
<PAGE>
SHEFFIELD LUMBER AND PALLET CO., INC., AND AFFILIATE
COMBINED STATEMENTS OF INCOME
(In thousands)
SIX MONTHS ENDED
YEAR ENDED -------------------
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1997
-------- ------- -------
(unaudited)(unaudited)
REVENUES .................................. $ 19,057 $ 9,584 $ 9,941
COST OF GOODS SOLD ........................ 16,448 8,166 8,427
-------- ------- -------
Gross profit ................. 2,609 1,418 1,514
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................ 1,104 767 784
-------- ------- -------
Income from operations ....... 1,505 651 730
INTEREST EXPENSE .......................... (526) (310) (223)
OTHER INCOME (EXPENSE), net ............... 136 6 --
-------- ------- -------
NET INCOME ................................ $ 1,115 $ 347 $ 507
======== ======= =======
The accompanying notes are an integral part of
these combined financial statements.
26
<PAGE>
SHEFFIELD LUMBER AND PALLET CO., INC., AND AFFILIATE
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
ADDITIONAL
COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
----- ------ ---- ------- -------
BALANCE, December 31, 1995 ....... 10 $1,000 $192 $ 4,539 $ 5,731
Net income ..................... -- -- -- 1,115 1,115
Dividends ...................... -- -- -- (320) (320)
----- ------ ---- ------- -------
BALANCE, December 31, 1996 ....... 10 1,000 192 5,334 6,526
Adjustment to conform fiscal
year-end to acquiror
(unaudited) ................... -- -- -- 55 55
Net income (unaudited) ......... -- -- -- 507 507
Dividends (unaudited) .......... -- -- -- (600) (600)
----- ------ ---- ------- -------
BALANCE, May 31, 1997
(unaudited) .................... 10 $1,000 $192 $ 5,296 $ 6,488
===== ====== ==== ======= =======
The accompanying notes are an integral part of
these combined financial statements.
27
<PAGE>
SHEFFIELD LUMBER AND PALLET CO., INC., AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED ----------------------------
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1997
------- ------- -----
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 1,115 $ 347 $ 507
Adjustment to conform fiscal year-end to
acquiror ....................................................... -- -- 55
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation ................................................. 869 428 369
Changes in assets and liabilities-
Accounts receivable ......................................... 195 (274) (587)
Inventories ................................................. 168 (15) (347)
Prepaid expenses ............................................ (72) 6 61
Other noncurrent ............................................ 7 3 2
Accounts payable ............................................ (52) 370 198
Accrued expenses ............................................ (200) (71) 157
------- ------- -----
Net cash provided by operating
activities .............................................. 2,030 794 415
------- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in cash surrender value of
insurance policies ................................................ (155) (57) --
Purchase of plant, property and equipment ....................... (896) (534) (362)
------- ------- -----
Net cash used in investing activities ..................... (1,051) (591) (362)
------- ------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to owners ......................................... (381) (200) (600)
Payments on long-term debt ...................................... (1,556) (1,041) (371)
Proceeds from long-term debt .................................... 300 300 --
Net (payments) borrowings on notes
payable to stockholders ........................................ 85 85 325
Net borrowings on line of credit ................................ 360 407 570
------- ------- -----
Net cash used in financing activities ..................... (1,192) (449) (76)
------- ------- -----
DECREASE IN CASH AND CASH EQUIVALENTS ............................. (213) (246) (23)
CASH AND CASH EQUIVALENTS, beginning of year ...................... 334 334 121
------- ------- -----
CASH AND CASH EQUIVALENTS, end of year ............................ $ 121 $ 88 $ 98
======= ======= =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for-
Interest ..................................................... $ 556 $ 280 $ 318
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
28
<PAGE>
SHEFFIELD LUMBER AND PALLET CO., INC., AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
(In thousands)
1. BUSINESS AND ORGANIZATION:
Sheffield Lumber and Pallet Co., Inc., and its affiliate (collectively,
the "Company") produce wood pallets and operate a sawmill. The Company consists
of a sawmill in Siler City, North Carolina, and two pallet plants located in
Mocksville, North Carolina, and Siler City, North Carolina. Sales of the
Company's products are primarily in North Carolina.
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 shares of PalEx common
stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
BASIS OF PRESENTATION
The combined financial statements include the accounts and results of
operations of Sheffield Lumber and Pallet Co., Inc., and its affiliated company
which are under the common control and management of two individuals. All
significant intercompany transactions and balances have been eliminated in
combination.
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 combined 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.
The interim financial information for 1997 was conformed to the fiscal
year-end of PalEx; therefore, the six-month period ended May 31, 1997, includes
the one-month period ended December 31, 1996. Unaudited revenues and net loss
for the one-month period ended December 31, 1996, were approximately $1,369,000
and $55,000, respectively. Accordingly, an adjustment is included in the
consolidated statements of stockholders' equity and cash flows for the net
income attributed to this one-month period.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
29
<PAGE>
SHEFFIELD LUMBER AND PALLET CO., INC., AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands)
INVENTORIES
Inventories are valued at the lower of cost or market, with cost
determined on a first-in, first-out basis or by specific identification. The
cost of finished goods inventory includes direct materials, direct labor and
overhead.
PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. Leased property under capital leases is amortized over the lives of the
respective leases or over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for state tax purposes.
Expenditures for maintenance and repairs are charged to operating expense
as incurred. Additions and major replacements or betterments that increase
capacity or extend useful lives are added to the cost of the asset. Upon sale or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net.
NEW ACCOUNTING STANDARD
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or consolidated results of
operations of the Company.
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.
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.
30
<PAGE>
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 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 32
percent of its lumber purchases from one supplier in 1996.
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 12 percent of the
Company's revenues in 1996.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
ESTIMATED
USEFUL
LIVES DECEMBER 31,
IN YEARS 1996
-------- --------
Land.............................. $ 143
Machinery and equipment........... 10 8,178
Buildings......................... 40 3,470
Furniture and fixtures............ 5 128
Tractors and trailers............. 5-6 1,012
--------
$ 12,931
Less- Accumulated depreciation.... (4,893)
--------
Property, plant and equipment, net $ 8,038
========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
The major components of inventories are as follows (in thousands):
DECEMBER 31,
1996
--------
Lumber, hardware and fasteners.......... $ 1,220
Finished goods.......................... 110
--------
$ 1,330
========
31
<PAGE>
Other assets consist of the following (in thousands):
DECEMBER 31,
1996
---------
Cash surrender value of key-man life
insurance............................... $ 1,322
Other assets............................ 7
--------
$ 1,329
========
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
1996
---------
Accrued compensation and benefits...... $ 209
Accrued professional fees.............. 90
Accrued interest payable............... 34
Other accrued expenses................. 70
--------
$ 403
========
5. DEBT:
The Company maintains, with a bank, $1,000,000 and $750,000 revolving
lines of credit which bear interest, payable monthly, at prime (8.25 percent at
December 31, 1996) and mature June 1, 1997. The lines of credit mature annually
and the terms are revised. The lines of credit were renewed for a one-year term.
The $1,000,000 line of credit is unsecured while the $750,000 line of credit is
secured by all the equipment of the Company's sawmill. At December 31, 1996,
borrowings outstanding under the $1,000,000 line of credit were approximately
$360,000. There were no borrowings outstanding under the $750,000 line of credit
at December 31, 1996.
Long-term obligations consist of the following (in thousands):
DECEMBER 31,
1996
--------
Note payable to a bank, bearing interest at prime
(8.25% at December 31, 1996) plus .625%, payments
of $57,000 per month through maturity in
January 1998. Secured by certain assets of the
Company and personal guarantees by stockholders.... $ 811
Notes payable to a bank, bearing interest at prime
(8.25% at December 31, 1996) plus .5%, payments of
$36,000 per month through maturity in June 2002.
Secured by certain assets of the Company and
personal guarantees by stockholders................ 2,997
--------
3,808
Less- Current maturities............................. (828)
--------
$ 2,980
========
32
<PAGE>
Future maturities of long-term obligations at December 31, 1996, are as
follows (in thousands):
Year ending December 31-
1997........................ $ 828
1998........................ 899
1999........................ 553
2000........................ 577
2001........................ 626
Thereafter.................. 325
------
$3,808
======
Related-party notes consist of the following (in thousands):
DECEMBER 31,
1996
-------
Notes payable to stockholders, bearing interest at 7%,
payable on demand...................................... $ 211
Notes payable to stockholders, bearing interest from 7%
to prime (8.25% at December 31, 1996) plus 3%, payable
on demand.............................................. 734
-------
$ 945
=======
6. 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, key-man
life and a general umbrella policy. The Company did not incur significant claims
or losses on any of its insurance policies during 1996.
7. PROFIT-SHARING PLAN:
The Company maintains a qualified profit-sharing plan. Company
contributions are voluntary and are at the discretion of the board of directors.
Total profit-sharing contribution expense was $155,000 for 1996.
33
<PAGE>
8. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
and SFAS No. 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.
9. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On August 1, 1997, the Company merged with PalEx through the exchange of
all of the outstanding common stock of the Company for shares of PalEx common
stock.
34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sonoma Pacific Company:
We have audited the accompanying combined balance sheet of Sonoma Pacific
Company (a California corporation) and affiliates as of December 31, 1996, and
the related combined statements of income, changes in stockholders' equity and
cash flows for the year then ended. 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Sonoma
Pacific Company and affiliates as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 11, 1997
35
<PAGE>
SONOMA PACIFIC COMPANY AND AFFILIATES
COMBINED BALANCE SHEETS
(In thousands, except share data)
December 31, May 31,
1996 1997
-------- --------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 405 $ 63
Accounts receivable, net of allowance for doubtful
accounts of $58 and $58, respectively............. 1,731 3,454
Inventories............................................ 2,934 4,570
Other current assets................................... 45 63
-------- --------
Total current assets.......................... 5,115 8,150
PROPERTY, PLANT AND EQUIPMENT, net....................... 2,666 2,900
OTHER ASSETS............................................. 112 97
-------- --------
Total assets.................................. $ 7,893 $ 11,147
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to related parties....................... $ 1,405 $ 2,125
Line of credit......................................... 50 1,450
Current maturities of long-term debt................... 104 87
Accounts payable....................................... 489 626
Accrued expenses....................................... 1,391 765
Unearned revenue....................................... 85 1,081
Dividends payable...................................... 187 --
-------- --------
Total current liabilities..................... 3,711 6,134
LONG-TERM DEBT, net of current maturities................ 474 455
-------- --------
Total liabilities............................. 4,185 6,589
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par, 120,000 shares
authorized; 120,000 shares outstanding 120 120
Retained earnings................................... 3,588 4,438
-------- --------
Total stockholders' equity................. 3,708 4,558
-------- --------
Total liabilities and stockholders' equity. $ 7,893 $ 11,147
======== ========
The accompanying notes are an integral part of
these combined financial statements.
36
<PAGE>
SONOMA PACIFIC COMPANY AND AFFILIATES
COMBINED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1997
-------- ------- --------
(unaudited)
<S> <C> <C> <C>
REVENUES ............................................................. $ 18,819 $ 7,762 $ 12,193
COST OF GOODS SOLD ................................................... 15,454 5,564 9,769
-------- ------- --------
Gross profit ....................................... 3,365 2,198 2,424
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......................... 2,456 1,828 1,253
-------- ------- --------
Income from operations ............................. 909 370 1,171
INTEREST EXPENSE ..................................................... (188) (84) (101)
OTHER INCOME (EXPENSE), net .......................................... 101 83 (14)
-------- ------- --------
NET INCOME ........................................................... $ 822 $ 369 $ 1,056
======== ======= ========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
37
<PAGE>
SONOMA PACIFIC COMPANY AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------- ---- ------- -------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 .................................. 120,000 $120 $ 3,244 $ 3,364
Net income ................................................ -- -- 822 822
Dividends ................................................. -- -- (478) (478)
------- ---- ------- -------
BALANCE, December 31, 1996 .................................. 120,000 120 3,588 3,708
Net income (unaudited) .................................... -- -- 1,056 1,056
Adjustment to conform fiscal year-end
to acquiror (unaudited) .................................. -- -- (171) (171)
Dividends (unaudited) ..................................... -- -- (35) (35)
------- ---- ------- -------
BALANCE, May 31, 1997 (unaudited) ........................... 120,000 $120 $ 4,438 $ 4,558
======= ==== ======= =======
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
38
<PAGE>
SONOMA PACIFIC COMPANY AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
December 31, June 30, May 31,
1996 1996 1997
------- ----- -------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 822 $ 369 $ 1,056
Adjustment to conform fiscal year-end to acquiror ...................... -- -- (171)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation ........................................................ 443 288 199
(Gain) loss on sale of property, plant and
equipment ......................................................... (3) -- 2
Changes in assets and liabilities-
Accounts receivable ................................................ 257 (518) (1,723)
Inventories ........................................................ (766) (882) (1,636)
Other current assets ............................................... 28 22 (18)
Other assets ....................................................... (46) 16 15
Accounts payable ................................................... 241 495 137
Accrued expenses ................................................... 880 275 (813)
Unearned revenue ................................................... (54) (139) 996
------- ----- -------
Net cash provided by (used in) operating
activities ..................................................... 1,802 (74) (1,956)
------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment .................... 9 -- --
Purchase of property, plant and equipment .............................. (431) (71) (435)
------- ----- -------
Net cash used in investing activities ............................ (422) (71) (435)
------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from (distributions to) owners ........................... (291) 16 (35)
Payments of long-term debt ............................................. (80) (44) (36)
Net (payments) borrowings on notes payable to
related parties .......................................................... (160) 365 720
Net (payments) borrowings on line of credit ............................ (650) (365) 1,400
------- ----- -------
Net cash provided by (used in) financing
activities ..................................................... (1,181) (28) 2,049
------- ----- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 199 (173) (342)
CASH AND CASH EQUIVALENTS, beginning of year ............................. 206 206 405
------- ----- -------
CASH AND CASH EQUIVALENTS, end of year ................................... $ 405 $ 33 $ 63
======= ===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest ............................................................ $ 188 $ 84 $ 101
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
39
<PAGE>
SONOMA PACIFIC COMPANY AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Sonoma Pacific Company (the "Company") is a manufacturer of wood pallets.
The Company's operations are conducted at four pallet plants located in Sonoma,
California; Yuma, California; Salinas, California; and Phoenix, Arizona. Sales
of the Company's products are primarily in
California and Arizona.
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 shares of PalEx common
stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
BASIS OF PRESENTATION
The combined financial statements include the accounts and results of
operations of Sonoma Pacific Company and its affiliated companies which are
under common control and management of two individuals. All significant
intercompany transactions and balances have been eliminated in combination.
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 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.
The interim financial information for 1997 was conformed to the fiscal
year-end of PalEx, therefore the six-month period ended May 31, 1997, includes
the one-month period ended December 31, 1996. Unaudited revenues and net income
for the one-month period ended December 31, 1996, were approximately $1,925,000
and $171,000, respectively. Accordingly, an adjustment is included in the
combined statements of stockholders' equity and cash flows for the net income
attributed to this one-month period.
CASH AND 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.
40
<PAGE>
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. 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, plant and equipment, the cost and related accumulated
depreciation and amortization are eliminated from the respective accounts and
the resulting gain or loss is included in other income (expense), net.
NEW ACCOUNTING STANDARD
Effective January 1, 1996, the Company adopted 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." Accordingly, in
the event that facts and circumstances indicate that property, plant and
equipment, and intangible or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset is compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is necessary. Adoption of this standard did not have
a material effect on the financial position or combined results of operations of
the Company.
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.
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.
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 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.
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 25 percent of the
Company's revenues in 1996.
41
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
ESTIMATED
USEFUL
LIVES DECEMBER 31,
IN YEARS 1996
-------- ------------
(in thousands)
Land............................. $ 589
Machinery and equipment.......... 5-7 3,721
Buildings........................ 15-40 979
Furniture and fixtures........... 5-8 242
Tractors and trailers............ 5 671
--------
6,202
Less- Accumulated depreciation and
amortization................... (3,536)
--------
Property, plant and equipment, net $ 2,666
========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
The major components of inventories are as follows (in thousands):
DECEMBER 31,
1996
--------
Lumber, hardware and fasteners.......... $ 1,972
Finished goods.......................... 962
--------
$ 2,934
========
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
1996
--------
Accrued compensation and benefits...... $ 1,013
Accrued profit sharing................. 250
Accrued professional fees.............. 90
Other accrued expenses................. 38
--------
$ 1,391
========
42
<PAGE>
5. DEBT:
The Company maintains a $2,500,000 revolving line of credit with a bank
which bears interest, payable monthly, at LIBOR plus 1.75 percent and matures
May 14, 1997. The line of credit matures annually, and the terms are revised.
The line of credit was renewed for a one-year term. The line of credit is
secured by inventory, machinery and equipment. At December 31, 1996, borrowings
outstanding under the line of credit were approximately $50,000.
Long-term obligations consist of the following (in thousands):
DECEMBER 31,
1996
--------
Note payable to a bank, bearing interest at 9.2%,
payments of $1,771 per month through maturity in
March 2004. Secured by certain assets of the
Company and personal guarantees by stockholders.... $201
Note payable to U.S. Small Business Administration,
bearing interest at 6.94% stepped rate, $921 per
month through maturity in March 2014. Secured by
certain assets of the Company and personal
guarantees by stockholders......................... 204
Note payable to a bank, bearing interest at LIBOR plus
2%, payments of $3,773 per month through maturity in
December 1998. Secured by certain assets of the
Company and personal guarantees by stockholders.... 92
Notes payable to a bank, bearing interest at LIBOR
plus 2%, payments of $2,250 per month through
maturity in December 1999. Secured by certain
assets of the Company and personal guarantees by
stockholders....................................... 81
--------
578
Less- Current maturities............................. (104)
--------
$ 474
========
Related-party notes consist of the following:
The Company had notes payable to stockholders and officers outstanding of
$1,405,000 which bear interest at LIBOR plus 1.75 percent and are payable on
demand.
Future maturities of long-term obligations at December 31, 1996, are as
follows (in thousands):
Year ending December 31-
1997........................ $104
1998........................ 63
1999........................ 59
2000........................ 32
2001........................ 32
Thereafter.................. 288
----
$578
====
43
<PAGE>
6. 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, key-man
life and a general umbrella policy. The Company has not incurred significant
claims or losses on any of its insurance policies during 1996.
STOCK REPURCHASE AGREEMENT
By agreement dated December 17, 1980, between the Company and its stockholders,
the Company is obligated to repurchase its common shares from the stockholders
upon the occurrence of certain events. The redemption price would be equal to
the greater of (a) available insurance proceeds or (b) the value periodically
agreed to by the stockholders, prorated according to shares owned. The
redemption price in excess of insurance proceeds would be payable, as cash flow
permits, over a period not to exceed 15 years from the date of the activation
event. Amounts owed would bear interest at 1 percent more than the rate for the
corporate bond yield equivalent for the issue of Government National Mortgage
Association (GNMA) pass-through certificates.
OPERATING LEASE AGREEMENTS
The Company conducts a portion of its operations and warehouses certain of its
products in leased facilities classified as operating leases.
Minimum future rental payments under the noncancelable operating leases as of
December 31, 1996, are as follows (in thousands):
Year ending December 31-
1997........................ $266
1998........................ 256
1999........................ 145
2000........................ 50
2001........................ 50
Thereafter.................. 101
----
$868
====
The leases provide for payment of taxes and other expenses by the Company. Rent
expense for operating leases was approximately $215,000 in 1996. Of this amount,
approximately $126,000 was to related parties.
7. PROFIT-SHARING PLAN:
The Company maintains a qualified profit-sharing plan. Company
contributions are voluntary and are at the discretion of the board of directors.
Total profit-sharing contribution expense was $250,000 for 1996.
44
<PAGE>
8. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments," and SFAS No. 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.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On August 1, 1997, the Company merged with PalEx through the exchange of
all of the outstanding common stock of the Company for shares of PalEx common
stock.
45
<PAGE>
PALEX, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
BASIS OF PRESENTATION
(Unaudited)
The following unaudited pro forma consolidated statements of income
include the supplemental consolidated financial statements included elsewhere
herein for the year ended November 30, 1996, and the six months ended June 1,
1997. The pro forma consolidated statements of income 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 "Founding Company Acquisitions")
occurred simultaneously with the closing of PalEx's initial public offering (the
"Offering") on March 25, 1997, 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. In addition,
during the third quarter of 1997, PalEx acquired two additional manufacturers of
wood pallets using the pooling-of-interests method of accounting (the "Pooled
Companies"). The supplemental consolidated financial statements of PalEx reflect
the historical financial statements of PalEx retroactively restated for the
acquisitions of the Pooled Companies, with Fraser as the accounting acquiror
included for all periods presented and Ridge and Interstate included from March
31, 1997. The unaudited pro forma consolidated statements of income give effect
to the acquisitions of the Founding and Pooled Companies 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. 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 statements
of income 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 results of operations would actually have been if such
transactions in fact had occurred on those dates or to project the Company's
results of operations for any future period. Since the Founding Companies and
Pooled 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 consolidated statements of income should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Registration Statement. See "Risk Factors" included elsewhere
herein.
46
<PAGE>
PALEX, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1996
-------------------------------------------------------------------------
SUPPLEMENTAL
FINANCIAL 1997 PRO FORMA
STATEMENTS ACQUISITIONS ADJUSTMENTS PRO FORMA
-------- -------- ------- ------------
<S> <C> <C> <C> <C>
REVENUES ...................................... $ 87,158 $ 52,748 $ -- $ 139,906
COST OF GOODS SOLD ............................ 73,411 44,669 -- 118,080
-------- -------- ------- ------------
Gross profit ............................... 13,747 8,079 -- 21,826
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ..................... 6,731 4,248 (2,122)(a) 8,857
GOODWILL AMORTIZATION ......................... -- -- 556 (b) 556
-------- -------- ------- ------------
Income from operations ..................... 7,016 3,831 1,566 12,413
INTEREST INCOME (EXPENSE) AND
OTHER INCOME, net ........................... (1,017) (753) (324)(c) (649)
-- -- 1,445 (d) --
-------- -------- ------- ------------
Income before income taxes ................. 5,999 3,078 2,687 11,764
PROVISION FOR INCOME TAXES .................... 1,015 127 3,446 (e) 4,588
-------- -------- ------- ------------
NET INCOME .................................... $ 4,984 $ 2,951 $ (759) $ 7,176
======== ======== ======= ============
Net income per share .......................... $ .57(f)
============
Shares used in computing net
income per share ............................ 12,579,289(g)
============
</TABLE>
The accompanying notes are an integral part of
these unaudited financial statements.
47
<PAGE>
PALEX, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 1, 1997
-----------------------------------------------------------------------
SUPPLEMENTAL
FINANCIAL 1997 PRO FORMA
STATEMENTS ACQUISITIONS ADJUSTMENTS PRO FORMA
-------- -------- ----- ------------
<S> <C> <C> <C> <C>
REVENUES ..................................... $ 61,269 $ 20,965 $ -- $ 82,234
COST OF GOODS SOLD ........................... 50,527 17,749 (15) 68,261
-------- -------- ----- ------------
Gross profit .............................. 10,742 3,216 15 13,973
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .................... 5,004 1,476 (324)(a) 6,156
SUPPLEMENTAL PROFIT-SHARING
CONTRIBUTION ............................... 375 694 -- 1,069
GOODWILL AMORTIZATION ........................ 93 -- 185 (b) 278
-------- -------- ----- ------------
Income from operations .................... 5,270 1,046 154 6,470
INTEREST INCOME (EXPENSE) AND
OTHER INCOME, net .......................... (510) (403) (17)(c) (415)
-- -- 515 (d) --
-------- -------- ----- ------------
Income before income taxes ................ 4,760 643 652 6,055
PROVISION FOR INCOME TAXES ................... 1,868 400 105 (e) 2,373
-------- -------- ----- ------------
NET INCOME ................................... $ 2,892 $ 243 $ 547 $ 3,682(1)
======== ======== ===== ============
Net income per share ......................... $ .29(f)(1)
============
Shares used in computing net
income per share ........................... 12,836,846(g)
============
</TABLE>
(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 six-month period ended June 1, 1997, would have been $4.3
million and $.34 per share, respectively.
The accompanying notes are an integral part of
these unaudited financial statements.
48
<PAGE>
PALEX, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
1. UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME ADJUSTMENTS:
a. Adjusts compensation to the level the owners of the Founding and Pooled
Companies have agreed to receive as a result of the acquisitions and reflects
the revisions of certain lease agreements between a stockholder and a Founding
Company as a result of the purchase by the Company of the related assets. The
supplemental 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 for 1996 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.
e. Reflects the incremental provision for federal and state income taxes
relating to the other income statement adjustments and for income taxes on the
Founding Companies' S Corporation income.
f. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("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 for November 1996, (i) 1,071,389 shares issued by PalEx prior to
the Offering, (ii) 2,455,400 shares issued to the stockholders of the Pooled
Companies, (iii) 5,910,000 shares issued to the stockholders of the Founding
Companies in connection with the acquisitions, (iv) 142,500 shares issued to
satisfy the obligations of the Founding Companies to their respective
profit-sharing plans and (v) 3,000,000 shares issued in connection with the
Offering. For June 1997, also includes (i) the weighted average portion of
450,000 shares sold pursuant to the overallotment option and (ii) the effect,
using the treasury stock method, of options for 999,000 shares granted to
management, directors and key employees.
49
<PAGE>
