PALEX INC, POS AM, 1997-09-03

PALEX INC
POS AM, 1997-09-03
MILLWOOD, VENEER, PLYWOOD, & STRUCTURAL WOOD MEMBERS

Previous: SOROS FUND MANAGEMENT LLC, SC 13D, 1997-09-03

Next: SENTRY TECHNOLOGY CORP, S-8, 1997-09-03

As filed with the Securities and Exchange Commission on September 3, 1997
REGISTRATION NO. 333-28027

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

------------------

PALEX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

2248
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)

DELAWARE 76-0520673
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

3555 TIMMONS LANE, SUITE 610
HOUSTON, TEXAS 77027
(713) 626-9711
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

------------------

EDWARD E. RHYNE
VICE PRESIDENT AND GENERAL COUNSEL
3555 TIMMONS LANE, SUITE 610
HOUSTON, TEXAS 77027
(713) 626-9711
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box.|X|
------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1997

4,000,000 SHARES

[PALEX LOGO]

COMMON STOCK
--------------------

This Prospectus covers 4,000,000 shares of Common Stock of PalEx, Inc.
("PalEx" or the "Company") which may be offered and issued from time to time by
the Company in connection with its acquisition of the securities and assets of
other businesses. It is expected that the terms of acquisitions involving the
issuance and sale by the Company of Common Stock covered by this Prospectus will
be determined by direct negotiations with the owners or controlling persons of
the businesses whose securities or assets are acquired. The Company expects that
the shares of Common Stock issued in exchange for securities or assets in
business combination transactions will be valued at prices reasonably related to
market prices of the Common Stock either at the time the terms of an acquisition
are agreed upon or at or about the time of delivery of such shares of Common
Stock.

The Common Stock is listed on The Nasdaq National Market and trades
under the symbol "PALX." The last reported sale price of the Common Stock on The
Nasdaq National Market on August 25, 1997 was $12.13 per share.

All expenses of this offering will be paid by the Company. No
underwriting discounts or commissions will be paid in connection with the
issuance of Common Stock, although finder's fees may be paid with respect to
specific acquisitions. Any person receiving a finder's fee may be deemed to be
an Underwriter within the meaning of the Securities Act of 1933, as amended (the
"Securities Act").

--------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
--------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS SEPTEMBER _, 1997.
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION AND
SHARE AND PER SHARE DATA IN THIS PROSPECTUS GIVE EFFECT TO A 1,021-FOR-1 STOCK
SPLIT OF THE COMMON STOCK EFFECTED IN DECEMBER 1996.

THE COMPANY

PalEx was formed in January 1996 to create a national provider of
pallets and related services. Concurrently with the closing of its initial
public offering on March 25, 1997 (the "Offering"), PalEx acquired three pallet
businesses in separate transactions (the "Acquisitions"), and since that time
has completed two additional acquisitions, making it one of the largest
producers of new pallets and one of the largest pallet recyclers in the U.S. The
Company believes that these acquisitions will enable it to capitalize on the
significant trends currently affecting product manufacturing and distribution
practices throughout the U.S., including the increasing reliance by shippers and
logistics agents on a smaller number of better capitalized, more sophisticated
vendors. The Company provides a broad variety of pallet products and related
services, including the manufacture and distribution of new pallets; the
recycling of pallets (including used pallet retrieval, repair, remanufacture and
secondary marketing); maintenance of depot operations and the sorting and
storage of pallets for selected customers; and the processing and marketing of
various wood-based by-products derived from pallet recycling operations.

In connection with the Offering, the Company acquired Ridge Pallets,
Inc. ("Ridge"), Fraser Industries, Inc. ("Fraser") and Interstate Pallet Co.,
Inc. ("Interstate" and, together with Ridge and Fraser, the "Founding
Companies"). On August 1, 1997, the Company acquired Sheffield Lumber & Pallet
Company, Inc. ("Sheffield") and Sonoma Pacific Company ("Sonoma Pacific" and,
together with Sheffield, the "Pooled Companies") in two separate transactions
accounted for as poolings-of-interests. The Company now operates from 28
facilities in Florida, Texas, Virginia, California, Arizona, Arkansas, Georgia,
Illinois, Mississippi, North Carolina and South Carolina. The Company intends to
actively pursue additional acquisitions of leading pallet companies as part of
its growth strategy.

The pallet industry produces a variety of storage and shipping
platforms. Pallets are typically constructed of wood and used in virtually all
U.S. industries where products are physically distributed, including the
automotive, chemical, consumer products, grocery, produce and food production,
paper and forest products, retail, and steel and metals industries. Based on
information supplied by industry sources, the Company estimates that the U.S.
pallet industry generated revenues of approximately $5 billion in 1995 and that
it is served by approximately 3,600 companies, most of which are small,
privately held, operate in only one location and serve customers within a
limited geographic radius.

The pallet industry has experienced significant changes and growth
during the past several years. These changes are due, among other factors, to
the focus by FORTUNE 1000 businesses on improving the logistical efficiency of
their manufacturing and distribution systems. This focus has caused many of
these businesses to attempt to reduce significantly the number of vendors
serving them in order to simplify their procurement and product distribution
processes. It has also prompted large manufacturers and distributors to
outsource key elements of those processes that are not within their core
competencies and to develop just-in-time procurement, manufacturing and
distribution systems. With the adoption of these systems, expedited product
movement has become increasingly important and the demand for a high quality
source of pallets has increased. Palletized freight facilitates movement through
the supply chain, reducing costly loading and unloading delays at distribution
centers and warehouse facilities. However, the use of low-quality or improperly
sized pallets may increase the level of product damage during shipping or
storage. As a result, there has been an increased demand for high-quality
pallets in an attempt to reduce product damage during shipping and storage.

2
<PAGE>
The broad changes affecting U.S. industry have created significant
demand for higher quality pallets distributed through an efficient, more
sophisticated system. Environmental and cost concerns have also accelerated the
trend toward increased reuse or "recycling" of previously used pallets, further
increasing the importance of the quality of newly manufactured pallets. In
recognition of these trends, Chep USA ("CHEP") has established a national pallet
leasing program that provides high-quality pallets to customers throughout the
U.S. for a daily fee. CHEP is a partnership created by Brambles Industries
Limited, an Australian publicly-held corporation, and GKN, Ltd., a publicly-held
U.K. corporation. The Company manufactures and repairs pallets for CHEP and
provides a variety of logistical services with respect to its existing pallet
pool, including the repair, storage and just-in-time delivery of pallets. CHEP
currently does not manufacture or repair pallets. During the fiscal year ended
November 30, 1996, approximately 26% of the Company's pro forma revenues and a
significant percentage of the Company's growth were attributable to CHEP. The
Company expects to continue to build its relationship with CHEP both
geographically and by providing additional logistical services.

PalEx, Inc. was incorporated in Delaware in January 1996. Its executive
offices are located at 3555 Timmons Lane, Suite 610, Houston, Texas 77027, and
its telephone number at that address is (713) 626-9711.

GROWTH STRATEGY

The Company's goal is to become a leading national provider of pallets
and related services by pursuing an aggressive acquisition strategy and by
continuing to expand its existing operations.

GROWTH THROUGH ACQUISITIONS. The Company intends to actively pursue
acquisitions of leading companies whose management and operating philosophies
are complementary to those of the Founding Companies. The Company also intends
to expand within its existing markets through "tuck-in" acquisitions to increase
its market penetration as well as to provide a broader range of services to
existing customers in those markets. These tuck-in acquisitions will generally
involve smaller pallet companies whose operations can be incorporated into the
Company's existing operations without a significant increase in infrastructure.

INTERNAL GROWTH. The Company has opened nine new locations in the past
three years and expects to open additional locations in the future. The Company
intends to expand the service offerings at many of its locations to include a
combination of manufacturing, repair, recycling and the sale of by-products. The
Company also expects to be able to accelerate the internal growth of the
Founding Companies, the Pooled Companies and other businesses acquired in the
future by continuing to develop the Company's relationship with CHEP and other
large customers and by developing and implementing a "best practices" program.

PalEx believes that a significant market opportunity exists for a
company that can consistently offer high-quality pallets and related value-added
services to large pallet users in the U.S. The Company believes that the
prominence and operating strength of the Founding Companies and the Pooled
Companies and the experience of its executive management will provide the
Company with a significant competitive advantage as it pursues its growth
strategy.

3
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

PalEx acquired the Founding Companies simultaneously with the
consummation of the Offering and subsequently acquired the Pooled Companies. For
financial statement presentation purposes, however, Fraser, one of the Founding
Companies, has been identified as the "accounting acquiror." The following
summary unaudited pro forma consolidated financial data presents certain data
for the Company, as adjusted for (i) the Acquisitions, (ii) the acquisitions of
the Pooled Companies, (iii) the effects of certain pro forma adjustments to the
historical financial statements and (iv) the consummation of the Offering. See
"Selected Financial Data," the Unaudited Pro Forma Financial Statements, the
historical financial statements of PalEx, the supplemental consolidated
financial statements of PalEx, the historical financial statements of Ridge and
the financial statements of each of the Pooled Companies and the respective
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
NOVEMBER 30, 1996 JUNE 1, 1997
------------ ------------
<S> <C> <C>
INCOME STATEMENT DATA(1):
Revenues .................................................................. $ 139,906 $ 82,234
Gross profit .............................................................. 21,826 13,973
Selling, general and administrative expenses(2) ........................... 8,857 6,156
Supplemental profit sharing contribution .................................. -- 1,069
Goodwill amortization(3) .................................................. 556 278
Income from operations .................................................... 12,413 6,470
Interest income (expense), net(4) ......................................... (649) (415)
Net income ................................................................ 7,176 3,682(6)
Net income per share ................................................. $ .57 $ 0.29(6)
Shares used in computing pro forma net income per
share(5) ............................................................... 12,579,289 12,836,846
</TABLE>
SUPPLEMENTAL AS OF
JUNE 1, 1997(7)
-------
BALANCE SHEET DATA:
Working capital .................................. $13,867
Total assets ..................................... 77,286
Total debt, including current portion ............ 12,354
Stockholders' equity ............................. 52,260

(1) The pro forma income statement data assume that the Offering, the
Acquisitions and the acquisitions of the Pooled Companies were closed on
December 1, 1995 and are not necessarily indicative of the results the
Company would have obtained had these events actually occurred at that time
or of the Company's future results. During the periods presented above, the
Founding Companies and the Pooled Companies were not under common control or
management and, therefore, the data presented may not be comparable to or
indicative of post-combination results to be achieved by the Company. The
pro forma combined income statement data is based on preliminary estimates,
available information and certain assumptions that management deems
appropriate and should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus. The pro
forma income statement data for 1996 include operating results of Ridge for
the twelve months ended December 1, 1996, Interstate for the fiscal year
ended August 31, 1996 and the Pooled Companies for the year ended December
31, 1996. The pro forma income statement data for the six months ended June
1, 1997 include operating results of Ridge, Interstate and the Pooled
Companies for the six months ended June 1, 1997.

4
<PAGE>
(2) The pro forma income statement data for the fiscal year ended November 30,
1996 and the six months ended June 1, 1997 reflect an aggregate of
approximately $2.0 million and $324,000, respectively, in pro forma
reductions in salary and benefits of the former owners of the Founding
Companies and the Pooled Companies to which they have agreed prospectively,
and the effect of revisions of certain lease agreements between one of the
Founding Companies and its stockholder. In addition, the pro forma income
statement for 1996 includes a $300,000 non-recurring, non-cash charge
representing the difference between the amounts paid for shares issued to
the Company's President and Chief Executive Officer and their estimated fair
value on the date of sale assuming the Acquisitions would be consummated,
reduced by $125,000 to adjust compensation to the amount that he will
receive prospectively. See "Certain Transactions."

(3) Reflects amortization of the goodwill recorded as a result of the
Acquisitions (which are accounted for under the purchase method of
accounting) over a 30-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Consolidated Financial Statements.

(4) Includes interest income (expense) and other income (expense), net and
reflects the reduction of interest expense attributed to the repayment of
debt with proceeds from the Offering and the increase in interest expense
attributed to incremental borrowings.

(5) Includes (i) 5,910,000 shares issued to the owners of the Founding
Companies, (ii) 2,455,400 shares issued in connection with the acquisition
of the Pooled Companies, (iii) 50,000 shares issued to the management of
PalEx, (iv) 1,021,389 shares issued to Main Street Capital Partners, L.P.
("Main Street"), (v) 3,000,000 shares sold in the Offering, and (vi) 142,500
shares issued to the Founding Companies' profit sharing plans. In addition,
the period ended June 1, 1997 includes the effect of the weighted average of
450,000 shares issued in April 1997 as a result of the exercise of the
over-allotment option by the underwriters of the Offering and the effect of
options to purchase 999,000 shares that were outstanding as of June 1, 1997
using the treasury stock method. See "Certain Transactions."

(6) Excluding the effect of the supplemental profit sharing contribution of $1.1
million ($637,000 net of tax), pro forma net income and pro forma earnings
per share would have been $4.3 million and $0.34 per share, respectively.

(7) The supplemental balance sheet data of PalEx as of June 1, 1997 has been
derived from the unaudited supplemental consolidated financial statements of
PalEx included elsewhere herein. The supplemental consolidated financial
statements include the retroactive restatement for the acquisition of the
Pooled Companies.

5
<PAGE>
RISK FACTORS

AN INVESTMENT IN THE COMPANY INVOLVES A SIGNIFICANT DEGREE OF RISK.
PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH BELOW, AS
WELL AS THE OTHER INFORMATION PROVIDED ELSEWHERE IN THIS PROSPECTUS, BEFORE
MAKING AN INVESTMENT IN THE COMMON STOCK.

WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE," "ESTIMATE," AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING
ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
ANTICIPATED OR ESTIMATED. THESE AND OTHER FACTORS ARE DISCUSSED BELOW AND
ELSEWHERE IN THIS PROSPECTUS.

ABSENCE OF COMBINED OPERATING HISTORY. Prior to March 25, 1997, the
Founding Companies operated as separate independent entities. There can be no
assurance that the Company will be able to integrate these businesses on an
economic basis. In addition, there can be no assurance that the recently
assembled management group will be able to oversee the combined entity and
effectively implement the Company's operating or growth strategies. The pro
forma combined financial results of the Founding Companies cover periods when
the Founding Companies and PalEx were not under common control or management
and, therefore, may not be indicative of the Company's future financial or
operating results. The success of the Company will depend on the extent
management is able to centralize and integrate certain administrative and
accounting functions and otherwise integrate the Founding Companies and other
future acquisitions into one organization in a profitable manner. The inability
of the Company to successfully integrate the Founding Companies would have a
material adverse effect on the Company's financial condition and results of
operations and would make it unlikely that the Company's acquisition program
will be successful.

SUPPLY AND DEMAND FOR LUMBER. Pallet prices are closely related to the
changing costs and availability of lumber, the principal raw material used in
the manufacture and repair of wooden pallets. Typically, lumber prices fall in
oversupplied lumber markets, enabling small pallet manufacturers with limited
capital resources to procure lumber and initiate production of low-cost pallets,
depressing pallet prices overall and adversely affecting the Company's revenues
and operating margins. The majority of the lumber used in the pallet industry is
hardwood, which is only grown in certain regions of the country and which is
difficult to harvest in adverse weather, making its pricing volatile. For the
fiscal year ended November 30, 1996, purchases from two lumber vendors accounted
for approximately 9% and 8%, respectively, of the Company's total pro forma
combined lumber purchases. While the Company purchased plywood and lumber from
over 166 vendors during the fiscal year ended November 30, 1996, and believes
that it will benefit from strong relationships with multiple lumber suppliers,
there can be no assurance that the Company will be able to secure adequate
lumber supplies in the future. Lumber supplies and costs are affected by many
factors outside the Company's control, including weather, governmental
regulation of logging on public lands, lumber agreements between Canada and the
U.S. and competition from other industries that use similar grades and types of
lumber. For example, in October through December of 1996, the Company
experienced higher lumber costs resulting from the impact of wet weather on the
harvesting of hardwood timber in the southeast. To the extent the Company
encounters adverse lumber prices or is unable to procure adequate supplies of
lumber, its financial condition and results of operations could be materially
adversely affected. See "Business -- Raw Materials."

FACTORS AFFECTING INTERNAL GROWTH. The Company's ability to generate
internal earnings growth will be affected by, among other factors, its ability
to expand the range of services offered to customers, attract new customers,
increase volumes purchased by existing customers (including CHEP), hire and
retain employees, obtain raw materials at acceptable prices, open additional
manufacturing and repair facilities and reduce operating and overhead expenses.

RELIANCE ON ACQUISITIONS. One of the Company's principal growth
strategies is to increase its revenues and the markets it serves through the
acquisition of additional pallet manufacturing and recycling companies. There
can be no assurance that the Company will be able to identify or acquire
additional businesses or to integrate and manage such additional businesses
successfully. Acquisitions may involve a number of risks, including: adverse
short-term effects

6
<PAGE>
on the Company's reported operating results; diversion of management's
attention; dependence on retention, hiring and training of key personnel; risks
associated with unanticipated problems or legal liabilities; and amortization of
acquired intangible assets. Some or all of these risks could have a material
adverse effect on the Company's financial condition or results of operations. In
addition, to the extent that consolidation becomes more prevalent in the
industry, the prices for attractive acquisition candidates may increase and the
number of attractive acquisition candidates may decrease and, in any event,
there can be no assurance that businesses acquired in the future will achieve
sales and profitability that justify the investment therein. See "Business --
Strategy."

ACQUISITION FINANCING. The Company intends to use its Common Stock for a
portion of the consideration for acquisitions. If the Common Stock does not
maintain a sufficient valuation or potential acquisition candidates are
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to pursue its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through future debt or equity
financings. Using cash to complete acquisitions and finance internal growth
could substantially limit the Company's financial flexibility, using debt could
result in financial covenants that limit the Company's operations and financial
flexibility, and using equity may result in significant dilution of the
ownership interests of the then existing stockholders of the Company. There can
be no assurance that the Company will be able to obtain financing if and when it
is needed or that, if available, it will be available on terms the Company deems
acceptable. As a result, the Company may be unable to pursue its acquisition
strategy successfully. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Supplemental Liquidity and Capital
Resources -- PalEx and Pooled Companies" and "Business -- Strategy."

The Company is a party to a credit facility with Bank One, Texas, NA
("Bank One") which allows the Company to borrow up to $35.0 million to be used
for general corporate purposes including the repayment or refinancing of
indebtedness of the Founding Companies, future acquisitions, capital
expenditures and working capital. The facility requires the Company to comply
with various affirmative and negative covenants (including maintenance of
certain financial ratios) which could limit the Company's operational and
financial flexibility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Supplemental Liquidity and Capital
Resources -PalEx and Pooled Companies".

WEATHER CONDITIONS. The Company sells a significant portion of its
products and services to customers who ship agricultural products. Severe
weather, particularly during the harvesting seasons, may cause a reduction in
demand from agricultural customers, adversely affecting the Company's revenues
and results of operations. A heavy freeze or other weather adversely affecting
the citrus and produce industries in Florida could have a significant negative
impact on the Company's financial condition and results of operations. In
addition, adverse weather conditions may affect the Company's ability to obtain
adequate supplies of lumber at a reasonable cost. In October through December of
1996, the Company experienced higher lumber costs resulting from the impact of
wet weather on the harvesting of hardwood timber in the southeast. Additionally,
freezing weather conditions in south Florida during January 1997 adversely
impacted the produce harvest thereby reducing the demand for pallets. These
conditions adversely affected the Company's results of operations for the first
fiscal quarter ended March 2, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Pro Forma Consolidated
Financial Statements."

SEASONALITY; FLUCTUATION OF OPERATING RESULTS. The pallet manufacturing
business can be subject to seasonal variations in operations and demand.
Approximately 18% of the Company's pro forma revenues for the fiscal year ended
November 30, 1996 were attributable to the agricultural industry in the
southeastern and western U.S., with the citrus and produce industries comprising
the largest components thereof. As a result, the Company's operations experience
the greatest demand for new pallets during the citrus and produce harvesting
seasons (generally October through May) with significantly lower demand in the
summer months. Moreover, yearly results can also fluctuate significantly,
particularly in the southeast region as a result of the size of the citrus and
produce harvests, which, in turn, largely depend on the occurrence and severity
of freezing weather. (See "-- Weather Conditions".) Quarterly results may also
be materially affected by the timing of acquisitions, the timing and magnitude
of acquisition assimilation costs,

7
<PAGE>
costs of opening new facilities, gain or loss of a material customer, variation
in product mix and weather conditions. In addition, the Company's revenues and
gross margins can fluctuate significantly with variations in lumber prices.
Accordingly, the Company's performance in any particular quarter may not be
indicative of the results which can be expected for any other quarter or for the
entire year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

RELIANCE ON CHEP. During the fiscal year ended November 30, 1996,
approximately 26% of the Company's pro forma revenues and a significant
percentage of the Company's growth were attributable to CHEP. In addition,
certain of the Company's facilities are substantially dependent on CHEP as their
predominant customer. If CHEP were to materially decrease its purchase of
pallets and services from the Company, either because CHEP's operations
encounter financial reversals or as a result of CHEP's determination to
manufacture pallets internally, to buy pallets and services from competitors of
the Company or to substantially increase the number of pallets it repairs or for
any other reason, the Company's financial condition and results of operations
could be materially adversely affected. The Company and CHEP enter into an
agreement for each Company facility which performs CHEP repair or depot
services. These agreements generally do not contain fixed volume requirements,
may be terminated with or without cause depending on the nature of the service
provided and have both indefinite and fixed terms of between one and three
years. The contracts prohibit the Company's contracting facilities from
competing with CHEP in pallet leasing and from repairing pallets for other
leasing companies during the term of the agreement and for a period of up to
three years thereafter. Although CHEP has not terminated or failed to renew any
of these agreements to date, there can be no assurance that CHEP will not
terminate or fail to renew such agreements in the future. See "Business --
Customers."

MANAGEMENT OF GROWTH. The Company expects to grow both internally and
through acquisitions. Management expects to expend significant time and effort
in evaluating, completing and integrating acquisitions and opening new
facilities. There can be no assurance that the Company's systems, procedures and
controls will be adequate to support the Company's operations as they expand.
Any future growth also will impose significant added responsibilities on members
of senior management, including the need to identify, recruit and integrate new
senior level managers and executives. There can be no assurance that such
additional management will be identified and retained by the Company. To the
extent that the Company is unable to manage its growth efficiently and
effectively, or is unable to attract and retain additional qualified management,
the Company's financial condition and results of operations could be materially
adversely affected. See "Business -- Strategy."

COMPETITION. The markets for pallet manufacturing and recycling services
are highly fragmented and competitive. Competition on pricing is often intense
and the Company may face increasing competition from pallet leasing or other
pallet systems providers, which are marketed as less expensive alternatives to
new pallet purchasers. CHEP's pallet leasing system competes with new pallet
sales to the grocery and wholesale distribution industries, and may expand into
other industries in the future. In addition, pallet manufacturing and recycling
operations are not highly capital intensive, and the barriers to entry in such
businesses are minimal. Certain other smaller competitors may have lower
overhead costs and, consequently, may be able to manufacture or recycle pallets
at lower costs than the Company. Other companies with significantly greater
capital and other resources than the Company (including CHEP) may enter or
expand their operations in the pallet manufacturing and recycling businesses in
the future, changing the competitive dynamics of the industry. The Company has
competed in the past, and will continue to compete, with lumber mills in the
sale of new pallets. Lumber mills typically view pallet manufacturing as an
opportunity to use the lower grade lumber that would otherwise represent waste
that must be disposed by the mill. While the Company estimates, based on
industry sources, that non-wooden pallets currently account for less than 10% of
the pallet market, there can be no assurance that the Company will not face
increasing competition from pallets fabricated from non-wooden components in the
future. For example, Ridge currently sells agricultural harvesting boxes. For
the past several years, these products have faced increasing competition from
plastic agricultural containers which has materially reduced the number of
agricultural harvesting boxes sold by Ridge. The Company expects competition
with plastic agricultural containers to continue in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Competition."

8
<PAGE>
EFFECT OF NON-COMPETE AGREEMENT. Interstate, Sonoma Pacific and their
stockholders are parties to non-competition agreements which may restrict until
January 14, 1998 and July 31, 1998, respectively, Interstate's, Sonoma Pacific's
and their affiliates' and their former stockholders' ability to engage in any
activity or business enterprise or own an interest in any entity which engages
in any activity or business enterprise which competes with First Alliance
Logistics Management, L.L.C. (the "Alliance"), an organization whose membership
includes pallet recyclers and manufacturers and was created to pursue the
national and global marketing and management of pallet systems, including the
sale or leasing of pallets. The Company has been notified by the Alliance that
it intends to enforce the terms of the non-compete agreements as it deems
appropriate, although the Alliance has not to date commenced legal proceedings
and the Company does not know when, if ever, such proceedings would commence.
The agreements explicitly exclude from their coverage any product or services
offered or sold by Interstate and Sonoma Pacific before October 1995, which are
the same products or services currently offered by Interstate and Sonoma
Pacific. Because of the noncompete provisions' short duration and exclusion of
business currently conducted by Interstate and Sonoma Pacific, the Company
believes that such agreements will not have a material adverse effect on its
operations. See "Business -- Competition."

EFFECT OF CERTAIN CHARTER PROVISIONS. The Board of Directors of the
Company is empowered to issue Preferred Stock without stockholder action. The
existence of this "blank-check" Preferred Stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise, even if such a transaction would
provide greater value to the Company's stockholders than if the Company remained
independent. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. See "Description of Capital Stock."

DEPENDENCE ON KEY PERSONNEL. The Company's operations are dependent on
the continued efforts of its executive officers and on senior management.
Furthermore, the Company will likely be dependent on the senior management of
companies that may be acquired in the future. Although the Company has entered
into an employment agreement with each of the Company's executive officers,
there can be no assurance that any individual will continue in such capacity for
any particular period of time. The loss of key personnel, or the inability to
hire and retain qualified employees could have an adverse effect on the
Company's business, financial condition and results of operations. The Company
does not intend to carry key-person life insurance on any of its employees. See
"Management."

CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. The Company's executive
officers, directors and key employees, and entities and persons affiliated with
them, beneficially own 65% of the outstanding shares of Common Stock. These
persons, if acting in concert, will be able to continue to exercise control over
the Company's affairs, to elect the entire Board of Directors and to control the
disposition of any matter submitted to a vote of stockholders. See "Principal
Stockholders."

POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES. The Company's
operations are subject to various environmental laws and regulations, including
those dealing with handling and disposal of waste products, fuel storage and air
quality. As a result of past and future operations at its facilities, the
Company may be required to incur remediation costs and other expenses related
thereto. In addition, although the Company intends to conduct appropriate due
diligence with respect to environmental matters in connection with future
acquisitions, there can be no assurance that the Company will be able to
identify or be indemnified for all potential environmental liabilities relating
to any acquired business.

NO PRIOR MARKET, POSSIBLE VOLATILITY OF STOCK. Prior to the Offering, no
public market for the Common Stock existed. The Common Stock is quoted on The
Nasdaq National Market, although no assurance can be given that an active
trading market for the Common Stock will continue. The market price of the
Common Stock may be subject to significant fluctuations from time to time in
response to numerous factors, including variations in the reported financial
results of the Company and changing conditions in the economy in general or in
the Company's industry in particular.

9
<PAGE>
In addition, the stock markets experience significant price and volume
volatility from time to time which may affect the market price of the Common
Stock for reasons unrelated to the Company's performance.

SHARES ELIGIBLE FOR FUTURE SALE. The market price of the Common Stock
could be adversely affected by the sale of substantial amounts of Common Stock
in the public market. As of August 25, 1997, 13,029,289 shares of Common Stock
were issued and outstanding. Except for the shares of Common Stock acquired by
affiliates of the Company, the shares sold in the Offering and the shares issued
hereunder are, or when issued will be, generally freely tradeable. The remaining
outstanding shares of Common Stock were not issued in transactions registered
under the Securities Act, and, accordingly, such shares may not be sold except
in transactions registered under the Securities Act or pursuant to an exemption
from registration, including the exemption contained in Rule 144 under the
Securities Act. When these shares become saleable, the market price of the
Common Stock could be adversely affected by the sale of substantial amounts of
the shares in the public market. See "Shares Eligible for Future Sale."

As of August 25, 1997, the Company also had outstanding options to
purchase up to a total of 1,777,500 shares of Common Stock issued pursuant to
the Company's 1996 Stock Option Plan (the "Plan"). The aggregate amount of
Common Stock with respect to which options may be granted under the Plan may not
exceed 15% of the Company's outstanding Common Stock, as determined on each date
an option is granted. The Company intends to register all the shares subject to
these options under the Securities Act for public resale. See "Management --
Stock Option Plan."

The Company has agreed that it will not offer, sell or issue any shares
of Common Stock or options, rights or warrants to acquire any Common Stock for a
period of 180 days after the Offering without the prior written consent of Alex.
Brown & Sons Incorporated, except for the grant of employee stock options and
for shares issued (i) in connection with acquisitions and (ii) pursuant to the
exercise of options granted under the Plan. Further, the Company's directors,
officers and certain stockholders who beneficially own 7,123,889 shares in the
aggregate have agreed not to directly or indirectly offer for sale, sell or
otherwise dispose of any Common Stock for a period of 180 days after the date of
the Offering without the prior written consent of Alex. Brown & Sons
Incorporated. In addition, the owners of the Founding Companies have agreed not
to sell, contract to sell or otherwise dispose of any shares of Common Stock
received as consideration in the Acquisitions for a period of two years
following receipt thereof.

The shares of Common Stock covered by this Prospectus generally will be
freely tradeable after their issuance by persons not affiliated with the Company
unless the Company contractually restricts their resale.

The effect, if any, of the availability for sale, or sale, of the shares
of Common Stock eligible for future sale on the market price of the Common Stock
prevailing from time to time is unpredictable, and no assurance can be given
that the effect will not be adverse.

DIVIDENDS. The Company intends to retain its earnings for continued
development of its business and does not intend to pay cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."

10
<PAGE>
PRICE RANGE OF COMMON STOCK

The Company's Common Stock has traded on The Nasdaq National Market
since March 20, 1997, the effective date of the Offering, under the symbol
"PALX." The following table sets forth the high and low sales prices for the
Common Stock from March, 20, 1997 through August 25, 1997:

LOW HIGH
Second Quarter (from March 20, 1997) $7.75 $10.25
Third Quarter (through August 25, 1997) $9.625 $14.25

On August 25, 1997, the last reported sale price of the Nasdaq National
Market was $12.13 per share. On the same date, there were approximately 85
stockholders of record of the Common Stock.

DIVIDEND POLICY

The Company intends to retain all of its earnings, if any, to finance
the expansion of its business and for general corporate purposes, including
future acquisitions, and does not anticipate paying any cash dividends on its
Common Stock for the foreseeable future. In addition, the Company's revolving
credit facility includes, and any additional lines of credit established in the
future may include, restrictions on the ability of the Company to pay dividends
without the consent of the lender.

11
<PAGE>
SELECTED FINANCIAL DATA

PalEx acquired the Founding Companies simultaneously with the Offering
and subsequently acquired the Pooled Companies. For financial statement
presentation purposes, however, Fraser has been identified as the "accounting
acquiror" of the other Founding Companies. The following selected historical
financial data for PalEx as of November 30, 1995 and 1996 and for the fiscal
years ended November 30, 1994, 1995 and 1996 have been derived from audited
financial statements of PalEx, with Fraser as the accounting acquiror . The
selected historical financial data as of November 30, 1992, 1993 and 1994 and
June 1, 1997 and for the fiscal years ended November 30, 1992 and 1993 and for
the six months ended May 31, 1996 and June 1, 1997 have been derived from
unaudited financial statements of PalEx, which have been prepared on the same
basis as the audited financial statements and, in the opinion of PalEx, reflect
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of such data. The financial statements of PalEx include Fraser
as the accounting acquiror for all periods and include the results of the other
Founding Companies only from March 31, 1997. The following summary unaudited pro
forma consolidated financial data presents certain data for the Company,
adjusted for (i) the Acquisitions, (ii) the acquisitions of the Pooled
Companies, (iii) the effects of certain pro forma adjustments to the historical
financial data and (iv) the consummation of the Offering and the
application of the net proceeds therefrom. See the Unaudited Pro Forma Financial
Statements, the historical financial statements of PalEx, the supplemental
consolidated financial statements of PalEx, the historical financial statements
of Ridge and each of the Pooled Companies and the respective notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>

YEAR ENDED NOVEMBER 30,
------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ------------
(In thousands except share and per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
PALEX
Revenues ...................................... $ 13,110 $ 18,254 $ 23,114 $ 30,135 $ 49,282
Gross profit .................................. 2,193 2,286 2,359 4,576 7,773
Selling, general and administrative expenses .. 1,971 2,080 1,761 2,131 3,171
Income from operations ........................ 222 206 598 2,445 4,602
Interest expense, net(1) ...................... (100) (170) (344) (431) (540)
Net income .................................... $ 118 $ 21 $ 248 $ 1,923 $ 3,846
======== ======== ======== ======== ============

PRO FORMA(2):
Revenues ...................................... $ 139,906
Gross profit .................................. 21,826
Selling, general and administrative expenses(3) 8,857
Supplemental profit sharing contribution ...... --
Goodwill amortization(4) ...................... 556
Income from operations ........................ 12,413
Interest income (expense), net(5) ............. (649)
Net income .................................... $ 7,176
============

Net income per share .......................... $ .57
============
Shares used in computing pro forma net
income per share(6) ....................... 12,579,289
<CAPTION>
SIX MONTHS ENDED
------------------------
MAY 31, JUNE 1,
1996 1997
-------- ------------
(In thousands except
share and per share data)
<S> <C> <C>
INCOME STATEMENT DATA:
PALEX
Revenues ...................................... $ 21,700 $ 39,135
Gross profit .................................. 4,705 6,804
Selling, general and administrative expenses .. 1,705 3,435
Income from operations ........................ 3,000 3,369
Interest expense, net(1) ...................... (328) (172)
Net income .................................... $ 2,672 $ 1,902
======== ============

PRO FORMA(2):
Revenues ...................................... $ 82,234
Gross profit .................................. 13,973
Selling, general and administrative expenses(3) 6,156
Supplemental profit sharing contribution ...... 1,069
Goodwill amortization(4) ...................... 278
Income from operations ........................ 6,470
Interest income (expense), net(5) ............. (415)
Net income .................................... $ 3,682(7)
============

Net income per share .......................... $ 0.29(7)
============
Shares used in computing pro forma net
income per share(6) ....................... 12,836,846

<CAPTION>
AS OF NOVEMBER 30, SUPPLEMENTAL
-------------------------------------------------- AS OF AS OF
1992 1993 1994 1995 1996 JUNE 1, 1997 JUNE 1, 1997 (8)
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
PALEX
Working capital ....................... $ 562 $ 796 $(2,280) $ 997 $ 1,449 $11,511 $13,867
Total assets .......................... 4,630 5,018 9,950 12,295 13,040 52,443 77,286
Total debt, including current portion . 1,901 3,550 5,787 5,920 2,454 2,600 12,354
Stockholders' equity .................. 1,672 1,639 1,887 3,810 7,236 41,572 52,260
</TABLE>
(1) Includes interest expense and other income (expense), net.

12
<PAGE>
(2) The pro forma income statement data assume that the Offering, the
Acquisitions and the acquisitions of the Pooled Companies were closed on
December 1, 1995 and are not necessarily indicative of the results the
Company would have obtained had these events actually occurred at that time
or of the Company's future results. During the periods presented above, the
Founding Companies and the Pooled Companies were not under common control or
management and, therefore, the data presented may not be comparable to or
indicative of post-combination results to be achieved by the Company. The
pro forma income statement data is based on preliminary estimates, available
information and certain assumptions that management deems appropriate and
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus. The pro forma income
statement data for 1996 include operating results of Ridge for the twelve
months ended December 1, 1996, Interstate for the fiscal year ended August
31, 1996 and the Pooled Companies for the year ended December 31, 1996. The
pro forma income statement data for the six months ended June 1, 1997
include operating results of Ridge, Interstate and the Pooled Companies for
the six months ended June 1, 1997.

(3) The pro forma income statement data for the fiscal year ended November 30,
1996 and the six months ended June 1, 1997 reflect an aggregate of
approximately $2.0 million and $324,000, respectively, in pro forma
reductions in salary and benefits of the former owners of the Founding
Companies and the Pooled Companies to which they have agreed prospectively,
and the effect of revisions of certain lease agreements between one of the
Founding Companies and its stockholder. In addition, the pro forma income
statement for 1996 includes a $300,000 non-recurring, non-cash charge
representing the difference between the amounts paid for shares issued to
the Company's President and Chief Executive Officer and their estimated fair
value on the date of sale assuming the Acquisitions would be consummated,
reduced by $125,000 to adjust compensation to the amount that he will
receive prospectively. See "Certain Transactions."

(4) Reflects amortization of the goodwill recorded as a result of the
Acquisitions (which are accounted for under the purchase method of
accounting) over a 30-year period and computed on the basis described in the
Notes to the Unaudited Pro Forma Consolidated Financial Statements.

(5) Includes interest income (expense) and other income (expense), net and
reflects the reduction of interest expense attributed to the repayment of
debt with proceeds from the Offering and the increase in interest expense
attributed to incremental borrowings.

(6) Includes (i) 5,910,000 shares issued to the owners of the Founding
Companies, (ii) 2,455,400 shares issued in connection with the acquisition
of the Pooled Companies, (iii) 50,000 shares issued to the management of
PalEx, (iv) 1,021,389 shares issued to Main Street, (v) 3,000,000 shares
sold in the Offering, and (vi) 142,500 shares issued to the Founding
Companies' profit sharing plans. In addition, the period ended June 1, 1997
reflects the effect of the weighted average of 450,000 shares issued in
April 1997 as a result of the exercise of the over-allotment option by the
underwriters of the Offering and the effect of options to purchase 999,000
shares that were outstanding as of June 1, 1997 using the treasury stock
method. See "Certain Transactions."

(7) Excluding the effect of the supplemental profit sharing contribution of $1.1
million ($637,000 net of tax), pro forma net income and pro forma earnings
per share would have been $4.3 million and $0.34 per share, respectively.

(8) The supplemental balance sheet data of PalEx as of June 1, 1997 has been
derived from the unaudited supplemental consolidated financial statements of
PalEx included elsewhere herein. The supplemental consolidated financial
statements include the retroactive restatement for the acquisition of the
Pooled Companies.

13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with the
financial statements of PalEx, the supplemental consolidated financial
statements of PalEx and the related notes thereto and "Selected Financial Data"
appearing elsewhere in this Prospectus.

The Company's net revenues are derived from: (i) the manufacture and
sale of new pallets; (ii) the repair, remanufacture and sale of recycled pallets
and the provision of pallet management services; (iii) the manufacture and sale
of ancillary products, including agricultural harvesting boxes and specialty
bins, and lumber sales; and (iv) sales of by-products, including landscape mulch
and playground material.

New pallets constitute one of two core product lines and accounted for
approximately 70% of the Company's revenues for the fiscal year ended November
30, 1996 on a pro forma basis. A substantial portion of the cost of a new pallet
is lumber, and new pallet sales prices are strongly influenced by the cost,
availability and type of lumber used. As a result, changes in lumber prices can
significantly impact the Company's revenues and margins. New pallet
manufacturing is generally considered to be a mature industry characterized by
moderate growth rates.

The repair, remanufacture and sale of recycled pallets and the provision
of pallet management services accounted for approximately 20% of the Company's
revenues for the fiscal year ended November 30, 1996 on a pro forma basis and
constitutes the Company's other core product line. These activities are more
labor intensive and require fewer raw materials than new pallets. Recycling
operations generally generate higher gross profits as a percentage of revenues.

Ancillary product and lumber sales accounted for approximately 10% of
the Company's revenues for the fiscal year ended November 30, 1996 on a pro
forma basis. Ancillary products include harvesting boxes and specialty bins used
by the agricultural industry and other products. These products are generally
characterized by higher unit sales costs and higher gross margins than the
Company's core products. Purchases of agricultural harvesting boxes and
specialty bins represent significant capital expenditures to the Company's
customers and can vary significantly from period to period. In addition, sales
of agricultural harvesting boxes to the citrus industry in Florida materially
declined from 1994 through 1996 as a result of competition from plastic
agricultural containers. The Company expects this competition to continue.

The sale of pallet by-products (generally, landscape mulch and
playground material produced by grinding unusable lumber and scrap) does not
represent a significant portion of the Company's revenues. However, these
products produce significant gross margins because the raw materials costs have
been recovered from the production of a core or ancillary product. In addition,
the sale of by-product enables the Company to avoid disposal costs for unusable
lumber and scrap.

Ridge, Fraser and Sonoma Pacific manufacture and repair pallets for CHEP
and provide a variety of logistical services with respect to CHEP's existing
pallet pool, including the repair, storage and just-in-time delivery of pallets.
CHEP currently does not manufacture or repair pallets. During the fiscal year
ended November 30, 1996, approximately 26% of the Company's pro forma revenues
and a significant percentage of the Company's growth were attributable to CHEP,
with a majority of revenue growth generated by the opening of six new Fraser
facilities within the past two years, which are primarily dedicated to providing
services to CHEP.

Although the Company sells products to a broad range of industries,
approximately 18% of the Company's pro forma revenues for the fiscal year ended
November 30, 1996 were attributable to the agricultural industry in the
southeastern and western U.S., with the citrus and produce industries comprising
the largest component thereof. The

14
<PAGE>
pallet purchases associated with these industries are highly seasonal with most
sales revenues concentrated in the period from October through May. Moreover,
severe weather, particularly during the harvesting seasons, may cause a
reduction in demand from agricultural customers, adversely affecting the
Company's revenues and results of operations. Freezing weather conditions in
south Florida during January 1997 adversely impacted the produce harvest,
thereby reducing the demand for pallets. These conditions adversely affected the
Company's results of operations for the first quarter ended March 2, 1997.
Adverse weather conditions may also affect the Company's raw material costs. In
October through December of 1996, the Company experienced higher lumber costs
resulting from the impact of wet weather on the harvesting of hardwood timber in
the southeast.

In August 1994, Ridge purchased its pallet and box manufacturing
business in a management buyout (the "Ridge Buyout") from Ridge Resources, Inc.
("Resources"), a predecessor company owned by three of the stockholders of
Ridge. As consideration for this purchase, Ridge issued notes totaling
approximately $12.6 million to Resources and assumed approximately $1.8 million
of Resources' liabilities. The notes held by Resources and its stockholders are
referred to herein as the "Ridge Notes." A portion of the net proceeds of the
Offering were used to repay the Ridge Notes. See "Certain Transactions."

On August 1, 1997, the Company completed the acquisitions of Sheffield
and Sonoma Pacific. For accounting purposes, the acquisitions were recorded
under the pooling-of-interests method of accounting. The supplemental financial
statements of PalEx reflect the retroactive restatement of the PalEx historical
financial statements for the acquisition of the Pooled Companies.

Both the Founding and Pooled Companies have been managed throughout the
periods presented as independent private companies, and these companies used
different tax structures, which influenced, among other things, their historical
levels of owners' compensation. Selling, general and administrative expenses for
the periods presented are therefore impacted by the amount of compensation and
related benefits that the former owners and certain key employees received from
their respective businesses during these periods. These former owners and key
employees have agreed to certain reductions in salaries and benefits in
connection with the founding of the Company or the acquisition of their
businesses by the Company. See the Unaudited Pro Forma Financial Statements and
the notes thereto included elsewhere in this Prospectus.

The Company recognizes revenue upon the delivery of a product or service
to a customer. The Company does not generally maintain significant finished
goods inventory. Cost of sales are predominately variable costs such as lumber,
labor, fasteners, transportation, equipment maintenance and utilities. Fixed
costs in cost of sales include depreciation of equipment, supervisory labor and
direct overhead. A significant number of the Company's production employees are
paid on a production or "piecework" basis, which the Company believes provides
incentives for increased productivity.

15
<PAGE>
SUPPLEMENTAL RESULTS OF OPERATIONS - PALEX AND POOLED COMPANIES

The following supplemental consolidated financial data sets forth
certain selected financial information for PalEx (with Fraser as the accounting
acquiror in the Acquisitions), restated for the acquisitions of the Pooled
Companies, and includes the results of Ridge and Interstate from March 31, 1997,
the effective date of the Acquisitions. The supplemental consolidated financial
data for the fiscal years ended November 30, 1994, 1995 and 1996 have been
derived from the audited supplemental consolidated financial statements of
PalEx. The supplemental consolidated financial data for the six months ended May
31, 1996 and June 1, 1997 have been derived from unaudited supplemental
consolidated financial statements of PalEx, which have been prepared on the same
basis as the audited supplemental consolidated financial statements and, in the
opinion of PalEx, reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such data (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED
----------------------------------------------------------- --------------------------------------
1994 1995 1996 MAY 31, 1996 JUNE 1, 1997
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .................. $ 61,927 100.0% $ 69,855 100.0% $ 87,158 100.0% $ 39,046 100.0% 61,269 100.0%
Cost of goods
sold ..................... 53,467 86.3 60,034 85.9 73,411 84.2 30,725 78.7 50,527 82.5
Gross profit ............. 8,460 13.7 9,821 14.1 13,747 15.8 8,321 21.3 10,742 17.5

Selling, general and
administrative
expenses ................. 5,359 8.7 5,035 7.2 6,731 7.7 4,300 11.0 5,472 8.9
Income from
operations ............... 3,101 5.0 4,786 6.9 7,016 8.1 4,021 10.3 5,270 8.6
Interest expense .......... (1,015) (1.6) (1,374) (2.0) (1,101) (1.3) (629) (1.6) (480) (0.8)
Other income
(expense), net ........... 192 0.3 201 0.3 84 0.1 (4) -- (30) --
Income before
tax ...................... 2,278 3.7 3,613 5.2 5,999 6.9 3,388 8.7 4,760 7.8
Income taxes .............. 819 1.3 741 1.1 1,015 1.2 268 0.7 1,868 3.0
Net income ................ $ 1,459 2.4% $ 2,872 4.1% $ 4,984 5.7% $ 3,120 8.0% $ 2,892 4.8%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
SIX MONTH PERIOD ENDED JUNE 1, 1997 COMPARED TO MAY 31, 1996

Revenues increased 56.7% to approximately $61.3 million from $39.1
million. This increase is primarily attributable to the acquisition of Ridge and
Interstate and an increase in new pallet sales by Sonoma Pacific.

Gross profit as a percentage of revenues declined to 17.5% from 21.3%,
primarily as a result of higher raw material unit costs during 1997. The Company
believes that the increase in the unit cost of lumber was influenced by weather
and general economic conditions, the operation of lumber agreements between
Canada and the U.S. and competition from other industries that use similar
grades and types of lumber. A substantial portion of the operations of Ridge is
the manufacture of new pallets, which typically result in a lower gross margin
as a percentage of revenues. Gross profit increased 29.1% to approximately $10.7
million in 1997 from $8.3 million in 1996 primarily as the result of the
acquisitions of Ridge and Interstate.

Selling, general and administrative expenses increased 27.3% to $5.5
million in 1997 from $4.3 million in 1996 and were 8.9% and 11.0% of revenues,
respectively. The increase is primarily attributable to the acquisition of Ridge
and Interstate and the additional costs of being a public company.

16
<PAGE>
Interest expense declined to $480,000 in 1997 from $629,000 in 1996 as
a result of net repayments of debt.

Fraser recorded a charge to income tax expense of approximately $488,000
on March 25, 1997 representing deferred income taxes at that date which were not
previously recorded because of Fraser's status under Subchapter S. Federal and
state income taxes have been provided on earnings subsequent to the
Acquisitions.

As a result of the foregoing, net income decreased approximately
$200,000 to $2.9 million in 1997 from $3.1 million in 1996. Excluding the
$488,000 charge for taxes, net income during the 1997 period would have been
$3.4 million.

YEAR ENDED NOVEMBER 30, 1996 COMPARED TO NOVEMBER 30, 1995

Revenues increased $17.3 million to $87.2 million in 1996 from $69.9
million in 1995. This increase was primarily due to revenues from five plants
opened or acquired in 1995 and a new facility opened during 1996. This increase
was partially offset by a decrease in revenues in west coast operations
resulting from competitive pressures.

Gross profit as a percentage of revenues increased to 15.8% in 1996 from
14.1% in 1995. The increase in gross profit as a percentage of revenues was
generally attributable to growth in repair and recycling operations which are
characterized by lower raw material costs as a percentage of revenue and
generally have higher margins than new pallet operations. Gross profit increased
40.0% to $13.7 million in 1996 from $9.8 million in 1995 primarily as a result
of increased revenues associated with the new facilities.

Selling, general and administrative expenses increased 33.7% to $6.7
million in 1996 from $5.0 million in 1995. The increase was generally
attributable to additional costs associated with the facilities opened or
acquired during both periods and increases in officers' compensation in 1996.

Interest expense declined to $1.1 million in 1996 from $1.4 million in
1995 as a result of net repayments of debt.

As a result of the foregoing, net income increased to $5.0 million in
1996 from $2.9 million in 1995.

YEAR ENDED NOVEMBER 30, 1995 COMPARED TO NOVEMBER 30, 1994

Revenues increased 12.8% to $69.9 million in 1995 from $61.9 million in
1994. This increase is primarily attributable to the opening of five new repair
facilities in 1995 and the commencement of sawmill operations from a mill
constructed in 1994. This increase was partially offset by a decrease in
revenues in west coast operations resulting from competitive pressures.

Gross profit as a percentage of revenues increased to 14.1% in 1995 from
13.7% in 1994. The increase in gross profit as a percentage of revenues was
generally attributable to growth in repair and recycling operations which are
characterized by lower raw material costs as a percentage of revenue and
generally have higher margins than new pallet operations. Gross profit increased
16.1% to $9.8 million in 1995 from $8.5 million in 1994 primarily as a result of
increased revenues associated with the new repair facilities and sawmill
operations.

Selling, general and administrative expenses decreased 6.1% to $5.0
million in 1995 from $5.4 million in 1994. The decrease was generally
attributable to changes in owners' compensation. Selling, general and
administrative expenses as a percentage of revenues declined to 7.2% in 1995
from 8.7% in 1994.

Interest expense increased to $1.4 million in 1995 from $1.0 million in
1994 as a result of additional borrowings to finance the opening of new
facilities.

17
<PAGE>
As a result of the foregoing, net income increased to $2.9 million in
1995 from $1.5 million in 1994.

SUPPLEMENTAL LIQUIDITY AND CAPITAL RESOURCES - PALEX AND POOLED COMPANIES

During the six months ended June 1, 1997, net cash provided from
operating activities was $1.2 million, capital expenditures were $2.3 million
and net payments of debt amounted to $11.1 million. Net proceeds from the sale
of Common Stock amounted to $23.2 million. Net cash paid for the Acquisitions
amounted to $1.1 million and distributions to shareholders were $9.1 million.

On March 25, 1997, PalEx completed the Offering, which involved the sale
by PalEx of 3,000,000 shares of Common Stock at a price to the public of $7.50
per share. The net proceeds to PalEx from the Offering (after deducting
underwriting discounts, commissions and offering expenses) were approximately
$20.1 million. Of this amount, $3.4 million was used to pay the cash portion of
the purchase prices relating to the Acquisitions with the remainder being used
to repay certain indebtedness of the Founding Companies. On April 22, 1997, the
Company sold an additional 450,000 shares of Common Stock at a price to the
public of $7.50 per share (generating net proceeds to the Company of $3.1
million after underwriting discounts and commissions) pursuant to an
over-allotment option granted by the Company to the underwriters in connection
with the Offering. The net proceeds were used to repay debt borrowed under the
Credit Facility.

On March 25, 1997, the Company entered into a credit agreement with Bank
One, Texas, N.A. (the "Credit Facility"). The Credit Facility provides the
Company with an unsecured revolving line of credit of up to $35 million, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies, future acquisitions,
capital expenditures and working capital. Advances under the Credit Facility
bear interest at such bank's designated variable rate plus margins ranging from
0 to 25 basis points, depending on the ratio of the Company's interest bearing
debt to its pro forma trailing earnings before interest, taxes, depreciation and
amortization for the previous four quarters. At the Company's option, the loans
may bear interest based on a designated London interbank offering rate plus a
margin ranging from 75 to 175 basis points, depending on the same ratio.
Commitment fees of 25 basis points per annum are payable on the unused portion
of the line of credit. The Credit Facility contains a limit for standby letters
of credit up to $10.0 million. The Credit Facility prohibits the payment of
dividends by the Company, restricts the Company's incurring or assuming other
indebtedness and requires the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable March 25, 2004. The Company's
subsidiaries have guaranteed the repayment of all amounts due under the Credit
Facility. The approximate level of borrowings available under the Credit
Facility at August 15, 1997 was $24.0 million.

The Company intends to pursue acquisitions. The timing, size or success
of any acquisitions and the resulting additional capital commitments are
unpredictable. The Company expects to fund future acquisitions primarily through
a combination of issuances of additional equity, working capital, cash flow from
operations and borrowings, including the unused portion of the Credit Facility.
To the extent new sources of financing are necessary to fund future
acquisitions, there can be no assurance that the Company can secure such
additional financing if and when it is needed or on terms deemed acceptable to
the Company.

18
<PAGE>
RESULTS OF OPERATIONS - PALEX

The following table sets forth certain selected financial data for PalEx
as previously published (Fraser as the accounting acquiror, before giving effect
to the acquisitions of the Pooled Companies) and as a percentage of revenues for
the periods indicated (dollars in thousands):

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED
------------------------------------------------------------- ---------------------------------------
1994 1995 1996 MAY 31, 1996 JUNE 1, 1997
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............. $ 23,114 100.0% $ 30,135 100.0% $ 49,282 100.0% 21,700 100.0% 39,135 100.0%
Cost of goods sold ... 20,755 89.8 25,559 84.8 41,509 84.2 16,995 78.3 32,331 82.6
Gross profit ....... 2,359 10.2 4,576 15.2 7,773 15.8 4,705 21.7 6,804 17.4
Selling, general
and administrative
expenses ............ 1,761 7.6 2,131 7.1 3,171 6.5 1,705 7.9 3,342 8.5
Amortization of
goodwill ............ -- -- -- -- -- -- -- -- 93 0.2
Income from
operations ......... 598 2.6 2,445 8.1 4,602 9.3 3,000 13.8 3,369 8.7

Interest expense ..... (335) (1.4) (450) (1.5) (387) (0.8) (235) (1.1) (156) (0.4)
Other income
(expense), net ...... (9) (0.1) 19 0.1 (153) (0.3) (93) (0.4) (16) (0.1)
Income before
income tax ......... 254 1.1 2,014 6.7 4,062 8.2 2,672 12.3 3,197 8.2

Provision for
income tax .......... 6 -- 91 0.3 216 0.4 -- -- 1,295 3.3
Net income ........... $ 248 1.1% $ 1,923 6.4% $ 3,846 7.8% $ 2,672 12.3% $ 1,902 4.9%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
SIX MONTHS PERIOD ENDED JUNE 1, 1997 COMPARED TO MAY 31, 1996

Revenues increased 80.4% to $39.1 million from approximately $21.7
million. This increase is primarily attributable to the acquisition of Ridge and
Interstate.

Gross profit as a percentage of revenues declined to 17.4% from 21.7%,
primarily as a result of higher raw material unit costs. The Company believes
that increase in the unit cost of lumber was influenced by weather and general
economic conditions, the operation of lumber agreements between Canada and the
U.S. and competition from other industries that use similar grades and types of
lumber. A substantial portion of the operations of Ridge is the manufacture of
new pallets which typically result in a lower gross margin as a percentage of
revenues. Gross profit increased 44.6% to approximately $6.8 million in 1997
from $4.7 million in 1996 primarily as a result of the acquisition of Ridge and
Interstate.

Selling, general and administrative expenses increased 96.0% to $3.3
million from approximately $1.7 million and is attributable primarily to the
acquisition of Ridge and Interstate and the additional costs of being a public
company. Selling, general and administrative expenses as a percentage of
revenues increased to 8.5% from 7.9%.

Interest expense declined to $156,000 from $235,000 as the result of net
repayments of debt.

19
<PAGE>
As a result of the foregoing, net income decreased approximately
$770,000 to $1.9 million.

YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995.

Revenues increased 63.5% to $49.3 million from $30.1 million. The
increase was primarily due to revenues from five facilities opened or acquired
during 1995 and a new facility opened during 1996.

Gross profit as a percentage of revenues increased to 15.8% from 15.2%.
The increase in gross profit as a percentage of revenues was generally
attributable to growth in repair and recycling operations which are
characterized by lower raw material costs as a percentage of revenues and
generally have higher gross margins than new pallet operations. Gross profit
increased approximately 69.9% to $7.8 million from $4.6 million, primarily as a
result of increased revenues associated with the new facilities.

Selling, general and administrative expenses increased 48.8% to $3.2
million from $2.1 million and were generally attributable to additional costs
associated with the facilities opened or acquired during both periods. Because
of the fixed nature of certain selling, general and administrative expenses,
such expenses decreased as a percentage of revenues to 6.5% from 7.1%.

Interest expense decreased to $387,000 from $450,000 as the result of
net repayments of debt.

Other income (expense), net changed to a net expense of $153,000 from
income of $19,000 due primarily to a casualty loss.

As a result of the foregoing, income before taxes increased to $4.1
million from $2.0 million.

YEAR ENDED NOVEMBER 30, 1995 COMPARED TO YEAR ENDED NOVEMBER 30, 1994.

Revenues increased by 30.4% to $30.1 million from $23.1 million and
primarily reflected the opening of five new repair facilities in 1995.

Gross profit as a percentage of revenues increased to 15.2% from 10.2%.
The increase in gross profit as a percentage of revenues was generally
attributable to growth in repair and recycling operations which are
characterized by lower raw material costs as a percentage of revenues and
generally have higher gross margins than new pallet operations. Gross profit
increased approximately 94.0% to $4.6 million from $2.4 million as a result of
lower raw material costs and additional revenues.

Selling, general and administrative expenses increased 21.0% to $2.1
million from $1.8 million. The increase in operating expenses was primarily
attributable to increased infrastructure costs associated with the additional
facilities opened in 1995.

Interest expense increased to $450,000 from $335,000. The increase was
generally attributable to higher interest expense necessary to fund working
capital needs associated with the new facilities opened in 1995.

Income before taxes increased to $2.0 million from $254,000.

LIQUIDITY AND CAPITAL RESOURCES - PALEX

During the six-month period ending June 1, 1997, net cash provided by
operating activities was $1.2 million, capital expenditures were $1.4 million
and net payments of debt amounted to $13.4 million. Net proceeds from the sale
of Common Stock provided $23.2 million. Net cash paid for the Acquisitions
amounted to $1.1 million and

20
<PAGE>
distributions to shareholders amounted to $9.2 million. See "Supplemental
Liquidity and Capital Resources-PalEx and Pooled Companies" for discussion of
the liquidity and capital resources of the Company.

SEASONALITY

The pallet manufacturing business can be subject to seasonal variations
in operations and demand. The Company has a significant number of agricultural
customers in the southeastern United States and typically experiences the
greatest demand for new pallets from these customers during the citrus and
produce harvesting (generally October through May) with significantly lower
demand in the summer months. Yearly results can fluctuate significantly in this
region depending on the size of the citrus and produce harvest, which, in turn,
largely depend on the occurrence and severity of freezing weather. Facilities in
the southwestern United States supplying agricultural customers can experience
similar fluctuations. The Company's locations serving predominantly
manufacturing and industrial customers experience less seasonality. Management
believes that the effects of such seasonality will diminish as the Company grows
and expands its customer base both internally and through acquisition.

Adverse weather conditions may affect the Company's ability to obtain
adequate supplies of lumber at a reasonable cost and the demand for its
products. For example, the Company experienced higher lumber costs resulting
from the impact of wet weather on the harvesting of both hardwood and pine
timber during the six month period ended June 1, 1997. Additionally, freezing
weather conditions in South Florida during January, 1997, adversely impacted the
produce harvest thereby reducing the demand for new pallets for the remainder of
the 1997 harvest.

INFLATION

Inflation has not had a material impact on the Company's results of
operations for the last three years.

21
<PAGE>
BUSINESS

PalEx was formed in January 1996 to create a national provider of
pallets and related services. Concurrently with the closing of the Offering,
PalEx acquired the three Founding Companies, and since that time has acquired
the Pooled Companies, making it one of the largest producers of new pallets and
one of the largest pallet recyclers in the U.S. The Company believes that these
acquisitions will enable it to capitalize on the significant trends currently
affecting product manufacturing and distribution practices throughout the U.S.,
including the increasing reliance by shippers and logistics agents on a smaller
number of better capitalized, more sophisticated vendors. The Company provides a
broad variety of pallet products and related services, including the manufacture
and distribution of new pallets; the recycling of pallets (including used pallet
retrieval, repair, remanufacture and secondary marketing); maintenance of depot
operations and the sorting and storage of pallets for selected customers; and
the processing and marketing of various wood-based by-products derived from
pallet recycling operations. The Company now operates from 28 facilities in
Florida, Texas, Virginia, California, Arkansas, Arizona, Georgia, Illinois,
Mississippi, North Carolina and South Carolina. The Company intends to actively
pursue additional acquisitions of leading pallet companies as part of its growth
strategy.

INDUSTRY OVERVIEW

Based on information supplied by industry sources, the Company estimates
that the U.S. pallet industry generated revenues of approximately $5 billion in
1995 and that it is served by approximately 3,600 companies, most of which are
small, privately held entities operating in only one location and serving
customers within a limited geographic radius. The industry is generally composed
of companies that manufacture new pallets and companies that repair and recycle
pallets. The Company estimates, based on industry sources, that during 1995
approximately 450 million new wooden pallets were produced. The Company
estimates there are more than two billion pallets in circulation in the U.S.
today.

A pallet is a platform, usually made of wood, that is used for storing
and shipping goods. Pallets are used in virtually all U.S. industries where
products are physically distributed, including the automotive, chemical,
consumer products, grocery, produce and food production, paper and forest
products, retail, and steel and metals industries. Pallets come in a wide range
of shapes and sizes. Although pallets are primarily made of wood, they may also
be made from steel, plastic, cardboard, molded wood fiber and other materials to
satisfy smaller niche markets. The Company believes that there are over 1,000
different sizes and specifications of pallets used in North America. The grocery
industry, however, which accounts for approximately one-third of all new pallets
produced, uses a standard size 48 x 40 pallet, although many different styles
and specifications are manufactured for use in that industry. Other industries
utilize specifications which are appropriate for their particular needs. Based
on information supplied by industry sources, the Company believes that in 1995
over 90% of the pallets used were of the traditional wooden type, fabricated
from lumber and metal fasteners. The wooden pallet has traditionally been the
basis for the design of storage racks, warehouse storage areas, forklifts, docks
and containers used in shipping goods.

22
<PAGE>
The broad changes affecting U.S. industry have created significant
demand for higher quality pallets distributed through an efficient, more
sophisticated system. Environmental and cost concerns have also accelerated the
trend toward increased reuse or "recycling" of previously used pallets, further
increasing the importance of the quality of newly manufactured pallets. In
recognition of these trends, CHEP has established a national pallet leasing
program that provides high-quality pallets to customers throughout the U.S. for
a daily fee. CHEP is a partnership created by Brambles Industries Limited, an
Australian publicly-held corporation, and GKN, Ltd., a publicly-held U.K.
corporation. The Company manufactures and repairs pallets for CHEP and provides
a variety of logistical services with respect to its existing pallet pool,
including the repair, storage and just-in-time delivery of pallets. CHEP
currently does not manufacture or repair pallets. During the fiscal year ended
November 30, 1996, approximately 26% of the Company's pro forma revenues and a
significant percentage of the Company's growth were attributable to CHEP. The
Company expects to continue to build its relationship with CHEP both
geographically and by providing additional logistical services.

CHEP's pallet leasing system represents a significant change in the U.S.
pallet market. CHEP leases a high quality, standardized and easily identifiable
(all CHEP pallets are painted blue) 48" x 40" pallet, primarily for use by
grocery and consumer products customers. CHEP pallets are manufactured to strict
specifications by vendors, including the Company, that have been selected based
on their ability to provide large volumes of pallets manufactured to CHEP
specifications in a timely manner. The advantages CHEP offers to its customers
are high-quality, uniform pallets and just-in-time delivery capabilities.

STRATEGY

The Company's goal is to become a leading national provider of pallets
and related services by pursuing an aggressive acquisition strategy and by
continuing to expand its existing operations.

23
<PAGE>
DESCRIPTION OF SERVICES

NEW PALLET MANUFACTURING. New pallet manufacturing represented
approximately 70% of the Company's pro forma revenues for the fiscal year ended
November 30, 1996. The manufacturing process for new pallets at each of the
Company's facilities is generally the most capital intensive part of the
business, with the majority of assembly and construction being automated. New
pallets are manufactured from an assortment of wood products, varying in type
and quality, with construction specifications being determined by the pallet's
end use. The Company believes that approximately 70% of the wood used in new
pallets manufactured in North America consists of hardwood (including, oak,
poplar, alder and gum) with the balance consisting of pine or other softwoods.

The Company utilizes sawing equipment which cuts large wood sections to
specification. The cut wood is then transported to assembly points where
employees load the side boards ("stringers") and deck boards into nailing
machines which nail the pallets together. A typical nailing machine can produce
an average of 150 pallets per hour with three to five employees. After
construction is completed, pallets are transported to a stacker for shipment or
storage. More customized or smaller orders may be manufactured by hand on
assembly tables utilizing two laborers with pneumatic nailers. The Company
typically manufactures pallets upon receipt of customer orders and does not
generally maintain significant finished goods inventory.

REPAIR, REMANUFACTURE AND RECYCLING. A large portion of new pallets is
currently discarded by pallet users after one trip. However, pallets can be
recovered, repaired, if necessary, and reused. In addition, used pallets which
are beyond repair can be disassembled and the recovered lumber can be reused in
repairing used pallets. Pallet repair and recycling operations are initiated
with the retrieval or purchase of used pallets from a variety of sources. The
condition and size of these pallets vary greatly. Once obtained, the pallets are
sorted by size and condition. A portion of the pallets may require no repair and
can be resold or returned immediately. Pallets that can be repaired have their
damaged boards replaced with salvaged boards or boards from new stock
inventoried at the facility. Pallets that cannot be repaired are dismantled and
the salvageable boards are recovered for use in repairing and building other
pallets. The remaining damaged boards may be ground into wood fiber, which the
Company sells for use as landscaping mulch, fuel, animal bedding, gardening
material and other uses. Despite recent increases in levels of automation,
pallet recycling remains a labor intensive process.

PALLET MANAGEMENT. Pallet management is the process of providing a
combination of services related to a customer's pallet usage, including the
manufacture, repair, retrieval, delivery and storage of pallets as well as the
disposal of unusable pallets and component parts. In a typical arrangement, the
Company will contract with a customer to remove all pallets from a particular
location and transport them back to the Company's repair facility. The pallets
are sorted and repaired as needed and sold to a third party, returned to either
the customer or his supplier, or placed in storage and made available for return
to service ("depot services"). In a typical arrangement, the Company will
contract with a customer to perform any or all of the management services
available. Both Fraser and Interstate have developed such programs and believe
that they may provide a source of additional revenues when applied throughout
the Company.

RECENT ACQUISITIONS

On August 1, 1997, the Company acquired the Pooled Companies (Sheffield
and Sonoma Pacific) in separate transactions involving mergers of wholly-owned
subsidiaries of the Company into Sheffield and Sonoma. In connection with Sonoma
Pacific's acquisition, Sonoma Pacific acquired Salinas Pacific Company, an
affiliated real estate holding company, and certain real property used in the
business of Sonoma Pacific and held by a shareholder and an affiliate of a
shareholder of Sonoma Pacific. Sheffield manufactures wood pallets at two
locations in North Carolina and also manufactures wood pallet components at one
of these locations. Sonoma Pacific manufactures new wood pallets and repairs and
recycles used wood pallets at four locations in California and Arizona. Total
combined revenues of Sheffield and Sonoma Pacific were approximately $38 million
for calendar 1996 and approximately $44 million for the trailing 12 months ended
June 30, 1997. Combined revenues for the six months ended June 30, 1997 were
approximately $23

24
<PAGE>
million. The aggregate consideration for these transactions consisted of
2,455,400 shares of the Company's Common Stock. Each of the acquisitions was
accounted for as a pooling-of-interests.

PROPERTY AND EQUIPMENT

At August 18, 1997, the Company maintained 28 facilities. Most of the
Company's facilities offer more than one service. The Company's corporate
headquarters are located in Houston, Texas. The paragraphs below summarize the
Company's primary operating facilities. The Company owns its facilities located
at Foreman, Arkansas, Salinas, California, Sonoma, California, Bartow, Florida,
Homeland, Florida, Hazlehurst, Georgia, Mocksville, North Carolina, Siler City,
North Carolina, Walterboro, South Carolina and New Boston, Texas. All of its
other facilities are leased. There are no major encumbrances on the titles to
the owned properties or to the leasehold interests in any of the leased
properties, except for liens on the Walterboro, South Carolina facilities
securing the payment of indebtedness incurred to finance these facilities.

CLARKSVILLE, ARKANSAS. The Clarksville facility initiated operations in
1995. The facility was initially operated as a repair facility and currently
serves only as a CHEP depot.

FOREMAN, ARKANSAS. The Foreman plant was purchased in 1982. The
facility produces pine lumber for use in the construction of pallets at various
of the Company's manufacturing and repair facilities.

MENA, ARKANSAS. The Mena facility was purchased in 1994. The lumber mill
located on the facility processes lumber for use at the Company's manufacturing
and repair facilities in New Boston, Texas as well as for sale to third parties.

MULBERRY, ARKANSAS. The Company's Mulberry plant was purchased in 1992.
The Mulberry facility manufactures new pallets for the grocery and manufacturing
industries in Oklahoma and Arkansas and also produces cut stock for use in the
Company's manufacturing and repair facilities.

SEARCY, ARKANSAS. The Searcy facility was purchased in 1994. The Searcy
facility serves as a depot and repair facility for CHEP pallets as well as a
repair facility for Wal-Mart pallets. The Searcy facility also sells repaired
pallets to the grocery, agricultural and poultry industries.

PHOENIX, ARIZONA. The leased facility in Phoenix primarily repairs
pallets and was acquired on August 1, 1997.

YUMA, ARIZONA. This leased facility in Yuma primarily manufactures new
pallets and was acquired on August 1, 1997.

SALINAS, CALIFORNIA. The Company acquired the Salinas facility on
August 1, 1997 as part of the Pooled Companies. This facility primarily
manufactures new pallets.

SONOMA, CALIFORNIA. The Sonoma facility was acquired on August 1, 1997
and primarily produces new pallets.

TRACY, CALIFORNIA. The Company's operations in the San Francisco Bay
area were established in 1995 to serve as a CHEP depot and repair facility. The
Company anticipates that it will begin operations as a non-CHEP repair facility
in the future.

BARTOW, FLORIDA. The Company's Bartow facility was established in 1967.
Citrus and produce distributors are the Bartow facility's largest customers, and
the plant produces a broad variety of new pallets as well as agricultural
harvesting boxes and specialty bins, in many instances custom designed to
customer specifications.

25
<PAGE>
HOMELAND, FLORIDA. The Homeland plant was established in 1983. The
Homeland facility produces both new and recycled pallets, primarily for
industrial use, and also processes lumber by-product for sale as landscaping
mulch.

HAZLEHURST, GEORGIA. The Hazlehurst facility was established in 1977.
The Hazlehurst facility produces new pallets for CHEP, with additional non-CHEP
production sold to general industrial accounts.

SMARR, GEORGIA. The Smarr facility was established in 1992 and is on the
site of a lumber mill which provides raw material for its operations as well as
lumber for the Bartow facility. The plant sells production both to local
industrial customers as well as to the Company's Florida customers during peak
produce and citrus harvesting seasons.

EAST ST. LOUIS, ILLINOIS. The Company established its East St. Louis
operation in 1995 as a CHEP repair facility. The Company anticipates adding
non-CHEP repair operations to the facility in the future.

MATTOON, ILLINOIS. The Mattoon plant was constructed by the Company and
opened in June 1997. This facility serves as a CHEP repair facility.

MOCKSVILLE, NORTH CAROLINA. The Mocksville facility was acquired on
August 1, 1997 and primarily produces new pallets.

SILER CITY, NORTH CAROLINA. The Siler City facility was acquired on
August 1, 1997 and also primarily produces new pallets. In addition, there is a
lumber mill at this facility that processes lumber for use at the Company's
pallet facilities at Siler City and Mocksville, North Carolina, as well as for
sale to third parties.

WALTERBORO, SOUTH CAROLINA. The Company's Walterboro plant provides new
pallets to local industrial accounts and also supplements the Bartow facility's
sales to agricultural and industrial customers during peak seasons.
The facility has been recently updated to manufacture CHEP pallets.

HORN LAKE, MISSISSIPPI. The Company opened the Horn Lake facility
(located in the Memphis, Tennessee metropolitan area) in October 1996. This
facility serves as both a CHEP depot and repair and recycling facility for
non-CHEP pallets. The facility's customers are primarily manufacturing
facilities in and around Memphis.

AMARILLO, TEXAS. The Company produces new and remanufactured pallets in
its Amarillo facility which was established in 1976. The Amarillo facility's
primary customers are the manufacturing and beef packing industries of North
Texas.

BIG SPRING, TEXAS. The Company's Big Spring facility initiated
operations in 1977 and primarily produces new pallets. The facility services
several West Texas oil and chemical companies.

FORT WORTH, TEXAS. The Company's facility in Fort Worth opened in
February 1996. The Fort Worth facility was established to provide CHEP depot and
repair operations. The Company currently anticipates expanding into non-CHEP
pallet repairs in the future.

NEW BOSTON, TEXAS. The New Boston location opened in 1994 as the
Company's largest facility in Texas. The New Boston facility manufactures new
and repaired pallets. The plant serves customers in Texas, Oklahoma, Arkansas
and Louisiana.

SAN ANTONIO, TEXAS. The Company supplies its South Texas customers from
its location in San Antonio. This facility, opened in 1995, is a CHEP depot and
repair facility and also repairs pallets for a large regional grocery chain.

26
<PAGE>
TEMPLE, TEXAS. The Temple location was established in 1995. The Temple
facility serves as a CHEP depot and repair facility as well as a repair facility
for Wal-Mart pallets. The facility also repairs pallets for sale to central
Texas grocery, manufacturing and medical industry customers.

RICHMOND, VIRGINIA. The Company has two facilities located in Richmond,
Virginia. Repair and recycling of used pallets constitutes a significant portion
of the operations of these facilities which also offer pallet management systems
to local industrial customers. The Richmond facilities are also engaged in the
manufacture of landscape mulch, playground surfaces and other innovative
applications of pallet by-products.

The Company believes that its properties are generally adequate for its
present needs. Furthermore, the Company believes that suitable additional or
replacement space will be available when required.

OPERATIONS

The Company centralizes its consolidated financial reporting, cash
management, training, human resources, safety and merger and acquisition
activities. The Company otherwise operates on a regional basis, with the
management of each operating location responsible for its day-to-day operations,
profitability and growth. Local management utilizes the Company's "best
practices" program, which seeks to replicate the Founding Companies' and the
Pooled Companies' best practices throughout the entire Company with respect to
new pallet manufacturing, pallet repair and recycling techniques, transportation
and other logistical activities, worker training and participation programs,
financial controls and purchasing information in order to improve productivity,
lower operating costs and improve customer satisfaction to stimulate internal
growth.

SALES AND MARKETING

The Company currently sells to customers within its various geographic
locations. The primary sales and marketing activities involve direct selling by
the Company's sales force and by members of senior management to local and
regional customers at the plant level and to large accounts and target
industries more broadly on a geographic basis. Since pricing is a function of
regional lumber and delivery costs, pricing is established at the regional
level.

Because many of the Company's customers have the need for similar
services on a national scale, the Company is developing a national sales and
marketing plan to provide such services at many locations throughout the U.S.
The Company's network of facilities will allow these customers to: (i)
centralize purchases of new and recycled pallets; (ii) obtain convenient and
dependable service and a consistent supply of uniform quality pallets; (iii)
achieve greater efficiencies in their pallet use; and (iv) meet corporate
recycling goals. The Company has developed relationships with several national
customers and intends to attempt to provide service to these and numerous other
customers on a local, regional and national basis. The pallet needs of national
companies are not uniform and the Company intends to tailor its national
programs for each customer. These programs include a combination of sourcing,
retrieving, repairing and recycling pallets according to individual customer
requirements.

CUSTOMERS

The Company seeks to efficiently serve large numbers of customers across
diverse markets and industries to provide a stable and diversified base for
ongoing sales of products and services. Customers include the automotive,
chemical, consumer products, grocery, produce and food production, paper and
forest products, retail, and steel and metals industries and are both regional
and national in scale. Because a significant part of the Company's products are
sold to the produce and citrus industries, the Company's sales volumes in
certain regions tend to be seasonal. During fiscal year ended November 30, 1996,
the Company sold pallets to over 1,500 customers, with CHEP accounting for
approximately 26% of the Company's pro forma revenues. No other single customer
accounted for 10% or more of

27
<PAGE>
the Company's pro forma revenues. The Company enters into contracts with CHEP on
a facility by facility basis and the terms of such contracts vary in accordance
with the service to be provided. Depot agreements may be terminated with or
without cause, while repair and depot/repair agreements may only be terminated
by CHEP for cause and have both indefinite and fixed terms of between one and
three years. All of the CHEP contracts prohibit the Company's contracting
facilities from competing with CHEP during the term of the agreement and for a
period of up to three years thereafter in the pallet leasing business and from
repairing pallets for other pallet leasing companies. The CHEP contracts
typically do not provide for fixed volumes of repaired or new pallets.

MANAGEMENT INFORMATION AND CONTROLS

The Company's consolidated accounting and financial reporting activities
are centralized at its operational headquarters in Bartow, Florida, while basic
accounting activities are conducted at the regional level. The Company believes
that its current information systems hardware and software are adequate to meet
current and perceived needs for financial reporting and internal management
control information and other necessary information. The Company believes this
system enhances its ability to: (i) monitor each regional operation; (ii)
prepare both operations and capital asset budgets and budget variances; (iii)
assimilate newly acquired operations into its network through standard reporting
mechanisms; (iv) implement operational and productivity measurements and
benchmarking; and (v) conduct individual customer profitability analyses.

RAW MATERIALS

The primary raw materials used in new pallet manufacturing are lumber
and plywood. The Company has long-term relationships with its lumber and plywood
vendors, and the Company believes that these relationships, as well as its
ability to pursue larger volume purchases, will help to ensure adequate lumber
supplies at competitive prices in the future. During the fiscal year ended
November 30, 1996, the Company purchased lumber and plywood from over 166
vendors. Two of these vendors accounted for 9% and 8%, respectively, of the
Company's total pro forma lumber purchases during the fiscal year ended November
30, 1996. The Company does not believe that the loss of either of these vendors
would materially adversely affect its financial condition or results of
operations. The Company intends to continue to pursue a strategy of purchasing
and upgrading low grade and alternative sources of lumber as well as exploiting
pricing aberrations and market trends to take advantage of lower prices in the
marketplace as they occur.

Pallet prices are closely related to the changing costs and availability
of lumber, the principal raw material used in the manufacture and repair of
wooden pallets. Typically, lumber prices fall in oversupplied lumber markets,
enabling small pallet manufacturers with limited capital resources to procure
lumber and initiate production of low-cost pallets, depressing pallet prices
overall and adversely affecting the Company's revenues and operating margins.
While the Company believes that it will benefit from strong relationships with
multiple lumber suppliers, there can be no assurance that the Company will be
able to secure adequate lumber supplies in the future. Lumber supplies and costs
are affected by many factors outside the Company's control, including
governmental regulation of logging on public lands, lumber agreements between
Canada and the U.S. and competition from other industries that use similar
grades and types of lumber. In addition, adverse weather conditions may affect
the Company's ability to obtain adequate supplies of lumber at a reasonable
cost. In October through December of 1996, the Company experienced higher lumber
costs resulting from the impact of wet weather on the harvesting of hardwood
timber in the southeast. The Company tries to take advantage of the price
volatility of lumber by buying additional quantities of lumber when prices are
favorable and storing the inventory for later use. The Company also is able to
buy low quality lumber and upgrade such lumber at its own plants. Though the
Company has studied the broad use of alternative materials for the manufacture
of pallets, such as plastic, it believes that there is not currently an
available alternative raw material that possesses the tensile strength,
recyclability and low cost of wood. The Company continues to evaluate
alternatives to wood and is receptive to their future use in pallet production.

The Company sources the majority of its pallets for reconstruction from
businesses that use pallets and from trucking companies. Businesses that receive
and ship a significant amount of goods are generally good sources for used

28
<PAGE>
pallets. Often the pallets they receive are damaged or do not meet their size or
other specifications for internal systems or shipping. As a result, these
businesses accumulate pallets that can be recycled. The Company identifies these
sources through establishing relationships with pallet users, and by direct
solicitation, telemarketing and advertising. The Company generally achieves
timely pallet removal by placing a trailer at a source which loads unwanted
pallets onto the trailer. The Company then removes the load of pallets at the
same time it delivers recycled pallets to the pallet user. In some cases, the
Company is paid a tipping fee for hauling away the used pallets or is allowed to
take the pallets away at no charge, and, in other cases, the Company buys the
pallets.

COMPETITION

The Company believes that the principal competitive factors in the
pallet industry are price, quality of services and reliability. With over 3,600
industry participants, the pallet manufacturing industry has been and is
expected to remain extremely fragmented and highly competitive. While there are
several companies which have attempted to establish national pallet operations,
most of the Company's competitors are small, privately held companies that
operate in only one location and serve customers within a limited geographic
radius. Competition on pricing is often intense and the Company may face
increasing competition from pallet leasing or other pallet systems providers,
which are marketed as less expensive alternatives to new pallet purchasers.
CHEP's pallet leasing system competes with new pallet sales to the grocery and
wholesale distribution industries, and may expand into other industries in the
future. In addition, pallet manufacturing and recycling operations are not
highly capital intensive and the barriers to entry in such businesses are
minimal. Certain other smaller competitors may have lower overhead costs and
consequently, may be able to manufacture or recycle pallets at lower costs than
the Company. Other companies with significantly greater capital and other
resources than the Company (including CHEP) may enter or expand their operations
in the pallet manufacturing and recycling businesses in the future, changing the
competitive dynamics of the industry. The Company has in the past and will
continue to compete with lumber mills in the sale of new pallets. The lumber
mills typically view pallet manufacturing as an opportunity to use the lower
grade lumber that would otherwise be waste for the mill. While the Company
estimates, based on industry sources, that non-wooden pallets currently account
for less than 10% of the pallet market, there can be no assurance that the
Company will not face increasing competition from pallets fabricated from
non-wooden components in the future. For example, Ridge currently sells
agricultural harvesting boxes. For the past several years, these products have
faced increasing competition from plastic agricultural containers which has
reduced the number of agricultural harvesting boxes sold by Ridge. The Company
expects competition with plastic agricultural containers to continue in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Interstate, Sonoma Pacific and their stockholders are parties to
non-competition agreements which may restrict until January 14, 1998 and July
31, 1998, respectively, Interstate's, Sonoma Pacific's, their affiliates' or
such stockholders' ability to engage in any activity or business enterprise or
own an interest in any entity which engages in any activity or business
enterprise which competes with the Alliance, an organization whose membership
includes pallet recyclers and manufacturers that was created to pursue the
national and global marketing and management of pallet systems, including the
sale or leasing of pallets. Interstate, Sonoma Pacific and their stockholders
(including officers of the Company's subsidiaries and a director of the Company)
joined the Alliance in October of 1995 and in connection therewith executed
agreements pursuant to which each agreed not to compete with the business of the
Alliance for a period of one year from withdrawal. Interstate and Stephen C.
Sykes, its former sole stockholder and a director of the Company notified the
Alliance of such withdrawal on January 14, 1997, in connection with Interstate's
agreement to merge with PalEx. In response, the Alliance notified Interstate
that it intends to enforce the terms of the non-compete agreements as it deems
appropriate, although the Alliance has not to date commenced legal proceedings
and the Company does not know when, if ever, such proceedings would commence.
Sonoma Pacific withdrew from the Alliance effective July 31, 1997. The
non-compete agreements explicitly exclude from their coverage any product or
services sold or offered by Interstate at the time it became a member of the
Alliance. Because Interstate and Sonoma Pacific were engaged in the manufacture
and recycling of pallets in October 1995 and continue in these business lines
currently, the Company believes that the non-compete agreements do not apply to
Interstate's and Sonoma Pacific's current businesses. The Alliance could seek
either injunctive relief or monetary damages from Interstate and Sonoma

29
<PAGE>
Pacific. However, given the non-compete agreements' short duration and exclusion
of the businesses currently conducted by Interstate and Sonoma Pacific, the
Company believes that such agreements, even if enforced, would not have a
material adverse effect on its operations.

LITIGATION

Each of the Founding Companies has, from time to time, been a party to
litigation arising in the normal course of its business, most of which involves
claims for personal injury or property damage incurred in connection with its
operations. Management believes that none of these actions will have a material
adverse effect on the financial condition or results of operations of the
Company.

EMPLOYEES

At August 18, 1997, the Company had approximately 1,700 employees. The
Company is not a party to any collective bargaining agreements. The Company
believes that its relationship with its employees is satisfactory.

30
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information concerning the Company's
directors, executive officers and certain key employees.

NAME AGE POSITION
---- --- --------
Vance K. Maultsby, Jr....... 45 President and Chief Executive Officer
A.E. Holland, Jr............ 50 Chief Operating Officer, Director
Troy L. Fraser.............. 48 Chief Development Officer, Director
Casey A. Fletcher........... 42 Chief Accounting Officer and Secretary
Stephen C. Sykes............ 53 President--Interstate Pallets, Director
Edward E. Rhyne............. 37 Vice President and General Counsel
Tucker S. Bridwell.......... 45 Director(1)(2)
John E. Drury............... 53 Director(1)(2)
Sam W. Humphreys............ 37 Director(1)(2)

- ------------------

(1) Member of audit committee.
(2) Member of compensation committee.

Directors are elected at each annual meeting of stockholders. All
officers serve at the discretion of the Board of Directors, subject to terms of
their employment agreement terms. See " -- Employment Agreements."

VANCE K. MAULTSBY, JR. became President and Chief Executive Officer of
the Company in December 1996. From 1993 to 1996, Mr. Maultsby was a partner with
Ernst & Young LLP in the Dallas, Texas office, where he managed the Dallas
office of its Corporate Finance Group. From 1989 to 1992, Mr. Maultsby was chief
executive officer of Alemar Financial Company (later Alemar Cost Reduction,
Inc.), which provided financial advisory services to a variety of industries.
From 1985 to 1989, Mr. Maultsby was an officer in the Corporate Finance Group
for Stephens Inc., an investment banking firm. Prior thereto, Mr. Maultsby was a
partner with KPMG Peat Marwick, served as the National Director of its Petroleum
Industry Practice, was co-director of its Southwest Area Mergers and
Acquisitions Advisory Practice and practiced public accounting for more than
five years. Mr. Maultsby is a Certified Public Accountant.

A. E. HOLLAND, JR. became Chief Operating Officer and a director of the
Company in March 1997, upon the closing of the Offering. Mr. Holland has over 25
years of experience in the pallet industry. Mr. Holland has been associated with
Ridge since 1969 and has served as President of Ridge since 1980. Mr. Holland
has served on the Board of Directors of the NWPCA and was President of NWPCA
from 1990 to 1991. Mr. Holland has served the Florida Chamber of Commerce as
Treasurer, Chairman of the Finance Committee and member of the State Strategic
Planning Committee.

TROY L. FRASER became Chief Development Officer and a director in March
1997, upon the closing of the Offering. He became President of Fraser in 1975
when he purchased the business with his two brothers from his father. In 1988,
Mr. Fraser was elected to the Texas House of Representatives where he served
three terms, and was named the National Republican Legislator of the Year in
1991. In November 1996, Mr. Fraser was elected to the Texas State Senate. Mr.
Fraser is currently Vice President of the NWPCA and has served for two terms on
the NWPCA's Board of Directors.

31
<PAGE>
CASEY A. FLETCHER became Chief Accounting Officer and Secretary in
March 1997, upon the closing of the Offering. Mr. Fletcher has been employed by
Ridge since 1983 where he has served as Controller and Chief Financial Officer.
Prior to his employment with Ridge, Mr. Fletcher was associated with Arthur
Young from 1976 to 1979. From 1980 to 1983, he was in private industry as an
accountant. Mr. Fletcher is a Certified Public Accountant.

STEPHEN C. SYKES became a director of the Company in March 1997, upon
the closing of the Offering. Mr. Sykes founded Interstate in 1979 and has served
as President and Chief Executive Officer from its inception. From 1974 to 1979,
Mr. Sykes was the Director of Transportation for the Virginia Division of Holly
Farms Poultry. Mr. Sykes has been an active member of the NWPCA since 1981 and
served as its President from 1992 to 1993.

EDWARD E. RHYNE became Vice President and General Counsel in June 1997.
Prior to his employment with the Company, Mr. Rhyne was a partner at Gardere &
Wynne, L.L.P., where he was engaged in the private practice of law for more than
five years.

TUCKER S. BRIDWELL became a director of the Company in March 1997, upon
the closing of the Offering. Since 1992, Mr. Bridwell has been President of Fred
Hughes Motors, Inc., the owner of ten new-car franchises in the Abilene, Texas
area. Mr. Bridwell is also the President of Topaz Exploration Company, an oil
and gas exploration company, a position he has held since 1980. From 1985 to
1992, Mr. Bridwell was President of Ard Drilling Company, an oilfield drilling
company, and served as President of Texzona Corporation, a private investment
company, from 1979 to 1980. From 1976 to 1979, Mr. Bridwell was Tax Manager with
Condley & Company and was an accountant with Price Waterhouse from 1974 to 1976.
Mr. Bridwell is a Certified Public Accountant.

JOHN E. DRURY became a director of the Company in March 1997, upon the
closing of the Offering. Mr. Drury is the Chairman and Chief Executive Officer
of USA Waste Services, Inc. ("USA Waste"), the third largest solid waste company
in North America. Mr. Drury has held these positions since May 1994, when USA
Waste and Envirofil, Inc. ("Envirofil") completed their merger. Following this
merger, USA Waste acquired publicly-held Chambers Development Company, Western
Waste Industries, Inc., Sanifill, Inc. and United Waste Systems, Inc.,
increasing its revenues from approximately $100 million in 1993 to approximately
$2.0 billion in 1997. From February 1991 through April 1994, Mr. Drury was a
Managing Director of Sanders Morris Mundy, Inc., an investment banking firm.
From 1982 through January 1991, Mr. Drury was President and Chief Operating
Officer of Browning-Ferris Industries, Inc. ("BFI"), where he was responsible
for the worldwide operations of BFI. Mr. Drury is a special limited partner in
Main Street.

SAM W. HUMPHREYS has been a director of the Company since January 1996
and became non-executive Chairman of the Board in March 1997, upon the closing
of the Offering. Mr. Humphreys is a Managing Director of Main Street, a merchant
banking firm, and has been a partner in that firm since its formation in January
1996. From April 1994 until March 1997, Mr. Humphreys held various executive
positions with U.S. Delivery Systems, Inc. ("U.S. Delivery"), the largest
same-day local delivery company in the U.S., most recently serving as Vice
Chairman. Following U.S. Delivery's initial public offering in May 1994 and
during Mr. Humphreys' tenure, it completed 80 acquisitions and grew from
approximately $100 million to approximately $800 million in annual revenues.
Prior to joining U.S. Delivery, Mr. Humphreys served from May 1993 until April
1994 as Senior Vice President and General Counsel of Envirofil, which merged
with USA Waste in April 1994. Prior thereto, Mr. Humphreys was a partner at
Andrews & Kurth L.L.P., where he was engaged in the private practice of law for
more than five years. Mr. Humphreys is also a director of Aviation Sales
Company, one of the world's largest providers of aircraft spare parts.

The Board of Directors has established an Audit Committee and
Compensation Committee. The Audit Committee recommends the appointment of
auditors and oversees the accounting and audit functions of the Company. The
Compensation Committee determines executive officers' and key employees'
salaries and bonuses and administers the Plan. Messrs. Bridwell, Drury and
Humphreys serve as members of the Company's Compensation Committee and Audit
Committee.

32
<PAGE>
DIRECTORS' COMPENSATION

Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives a fee of $1,000 for attendance at each Board of Directors
meeting and $500 for each committee meeting (unless held on the same day as a
Board of Directors meeting). Directors of the Company are reimbursed for
out-of-pocket expenses incurred in attending meetings of the Board of Directors
or committees thereof, and for other expenses incurred in their capacity as
directors of the Company. Each non-employee director receives stock options to
purchase 20,000 shares of Common Stock upon election to the Board of Directors
and an annual grant of 5,000 options. See " -- Stock Option Plan."

EXECUTIVE COMPENSATION

PalEx was incorporated in January 1996 and, prior to the Offering, did
not conduct any operations other than activities related to the Acquisitions and
the Offering. While the Company did not pay any compensation to its executive
officers prior to December 1996, in November 1996 PalEx recognized a
nonrecurring, non-cash charge of $300,000, representing the difference between
amounts paid for the 50,000 shares of Common Stock issued to Mr. Maultsby and
the estimated fair market value of such shares on the date of the sale assuming
the Acquisitions would be consummated. During 1997, the annualized salaries of
the Company's most highly compensated executive officers will be: Mr. Maultsby,
$175,000; Mr. Rhyne, $152,000; and $125,000 for each of Messrs. Holland,
Fletcher, Fraser and Sykes. In fiscal 1997, the Company will not pay any bonuses
in addition to these salaries.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with each executive
officer and certain key employees of the Company which prohibits such individual
from disclosing the Company's confidential information and trade secrets and
generally restricts these individuals from competing with the Company for a
period of five years after the date of the Acquisitions. Each of the agreements
has an initial term of between one and three years and provides for an automatic
annual extension at the end of its initial term and is terminable by the Company
for "cause" upon ten days' written notice and without "cause" by either party
upon thirty days' written notice. All employment agreements provide that if the
officer's employment is terminated by the Company without "cause," such officer
will be entitled to receive a lump-sum severance payment at the effective time
of termination equal to the base salary at the rate then in effect for the
greater of (i) the time period remaining under the initial term of the agreement
or (ii) one year. In addition, all employment agreements provide that in the
event of termination without "cause," the time period during which such officer
is restricted from competing with the Company will be shortened from five years
to one year. The Company anticipates it will incur lower selling, general and
administrative expenses than the Founding Companies and the Pooled Companies' on
a pro forma combined basis because the compensation to be paid to the executive
officers and employees by the Company is generally less than the compensation
previously paid by the Founding Companies and the Pooled Companies. See
"Selected Financial Data" and "Unaudited Pro Forma Financial Statements."

The employment agreements of Messrs. Maultsby, Holland, Fraser,
Fletcher, Rhyne, Sykes and certain other employees contain certain provisions
concerning a change-in-control of the Company, including the following: (i) in
the event five days' advance notice of the transaction giving rise to the change
in control is not received by the Company and such officer, the change in
control will be deemed a termination of the employment agreement by the Company
without "cause," and the provisions of the employment agreement governing the
same will apply, except that the severance amount otherwise payable (discussed
in the preceding paragraph) shall be tripled and the provisions which restrict
competition with the Company shall not apply; (ii) in any change-of-control
situation, such officer may elect to terminate his employment by giving five
days' written notice prior to the anticipated closing of the transaction giving
rise to the change-in-control, which will be deemed a termination of the
employment agreement by the Company without "cause," and the provisions of the
employment agreement governing the same will apply, except that the severance
amount otherwise payable shall be doubled and the time period during which such
officer is restricted from competing with the Company will be shortened from
five years to two years; and (iii) the officer must be given sufficient

33
<PAGE>
time and opportunity to elect whether to exercise all or any of his options to
purchase Common Stock, including any options with accelerated vesting under the
provisions of the Plan, such that the officer may acquire the Common Stock at or
prior to the closing of the transaction giving rise to the change-in-control, if
he so desires.

STOCK OPTION PLAN

The Board of Directors has adopted, and the stockholders of the Company
have approved, the Plan. The purpose of the Plan is to provide directors,
officers, key employees and certain other persons who will be instrumental in
the success of the Company or its subsidiaries with additional incentives by
increasing their proprietary interest in the Company. The aggregate amount of
Common Stock with respect to which options may be granted may not exceed 15% of
the Company's outstanding Common Stock, as determined on each date an option is
granted.

The Plan is administered by the Compensation Committee, which is
composed of non-employee directors (the "Committee"). Subject to the terms of
the Plan, the Committee generally determines to whom options will be granted and
the terms and conditions of option grants. Options granted under the Plan may be
either non-qualified stock options or may qualify as incentive stock options.

The exercise price of any option may not be less than the fair market
value of the underlying Common Stock as of the date of grant and no consultant
may receive an option in any year to purchase more than 51,000 shares of Common
Stock. The Committee determines the period over which options become
exercisable, provided that all options become immediately exercisable upon death
of the grantee or upon a change-in-control (as defined in the Plan) of the
Company.

The Plan also provides for automatic option grants to directors who are
not otherwise employed by the Company or its subsidiaries. Upon commencement of
service, a non-employee director will receive a non-qualified option to purchase
20,000 shares of Common Stock, and continuing non-employee directors annually
will receive options to purchase 5,000 shares of Common Stock. Options granted
to non-employee directors are fully exercisable following the expiration of six
months from the date of grant.

Mr. Maultsby has been granted options to purchase 200,000 shares of
Common Stock under the Plan all of which have an exercise price equal to the
initial public offering price. Mr. Rhyne has been granted options to purchase
65,000 shares of Common Stock under the Plan at an exercise price of $8.88 per
share. Messrs. Maultsby's and Rhyne's options vest annually in 25% increments
beginning in November 1997 and April 1998, respectively. The potential
realizable values of Mr. Maultsby's and Mr. Rhyne's options, assuming 5% and 10%
annual rates of appreciation over ten years for the Company's Common Stock, is
$943,341 and $2,390,613, and $362,794 and $919,390, respectively. These
potential realizable values were determined based upon assumed rates of
appreciation and are not intended to forecast the possible future appreciation,
if any, of the price or value of the Company's Common Stock.

CERTAIN TRANSACTIONS

ORGANIZATION OF THE COMPANY

PalEx was initially capitalized in January 1996 by Main Street. Sam W.
Humphreys, a director of the Company, is a partner in Main Street and John E.
Drury, a director of the Company, is a special limited partner in Main Street.
As a result of stock splits, the 1,000 shares of common stock initially issued
by PalEx to Main Street total 1,021,389 shares of Common Stock. From early 1996
until the completion of the Offering, Main Street advanced funds to PalEx
pursuant to a commitment to enable PalEx to pay various expenses incurred in
connection with its efforts to complete the Acquisitions and effect the
Offering.

Simultaneously with the closing of the Offering, each of the Founding
Companies merged with a separate special purpose subsidiary of PalEx, at which
time each Founding Company became a wholly owned subsidiary of the

34
<PAGE>
Company. The aggregate consideration paid by PalEx to acquire the Founding
Companies consisted of (i) approximately $3.4 million in cash and (ii) 5,910,000
shares of Common Stock. In addition, the Company repaid substantially all of the
indebtedness of the Founding Companies with proceeds from the Offering and
borrowings under its credit facility (see " -- Transactions Involving Certain
Officers, Directors and Stockholders" below and "Use of Proceeds") and also
issued 142,500 shares of Common Stock to the Founding Companies' profit sharing
plans.

35
<PAGE>
The following table sets forth for each Founding Company the
consideration paid to the stockholders of the Founding Companies (i) in cash and
(ii) in shares of Common Stock.

SHARES OF
CASH COMMON STOCK
--------------- --------------
Fraser................................... $ 2,200,000 2,893,704
Ridge.................................... -- 2,640,768
Interstate............................... 1,200,000 375,528
--------------- --------------
Total.................................... $ 3,400,000 5,910,000
=============== ==============

In addition, immediately prior to consummation of the Acquisitions, the
Founding Companies made distributions of approximately $10.4 million in the
aggregate, representing S Corporation earnings previously taxed to their
respective stockholders. The Founding Companies also distributed certain
non-operating assets prior to consummation of the Acquisitions with an aggregate
net book value of approximately $175,000.

Pursuant to the agreements relating to the Acquisitions, all
stockholders of each of the Founding Companies have agreed not to compete with
the Company for a period of five years commencing on the date of closing of the
Acquisitions.

Individuals who are officers or directors of the Company received the
following consideration in the Acquisitions for their interests in the Founding
Companies.

SHARES OF
CASH (1) COMMON STOCK
-------------- ------------
Ridge
A.E. Holland..................... $ -- 319,583
Casey A. Fletcher................ $ -- 319,583
Fraser
Troy L. Fraser................... $1,078,000 1,417,915
Interstate
Stephen C. Sykes................. $1,200,000 375,528

- ------------------

(1) Excludes distributions representing previously taxed S Corporation earnings
made to each of the persons listed above. The amount of such distributions
to the former owners of the Founding Companies totaled approximately $10.4
million.

36
<PAGE>
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS

In August 1994, Ridge purchased its pallet and box manufacturing
business in a management buyout from Resources, a predecessor company owned by
A. E. Holland, Jr., Chief Operating Officer and a director of the Company, and
two other employees of Ridge. As consideration for this purchase, Ridge issued
the Ridge Notes for a total of approximately $12.6 million to Resources and
assumed approximately $1.8 million of Resources' liabilities. Resources
subsequently distributed an interest in a portion of its note receivable from
Ridge directly to Mr. Holland and the other two stockholders. The Ridge Notes
would have matured in January 2000 and pay interest at the prime rate (8.25% at
November 30, 1996). Ridge paid approximately $909,000 and $982,000 in interest
expense under the Ridge Notes during fiscal 1995 and 1996, respectively. Upon
repayment of the Ridge Notes, $2.25 million was paid to Resources and $2.25
million each to Mr. Holland and the other two stockholders. Resources maintains
a lumber and fastener brokerage business as well as other businesses.

Fraser had notes outstanding to certain affiliates in the total amount
of approximately $105,000. Two notes in the aggregate amount of $60,000 accrued
interest at 14.0% per annum and would have matured in January 2005. A third note
in the amount of $45,000 accrued interest at 8% per annum and matured in
December 1997. These notes were prepaid in connection with the Offering.

Interstate had a note outstanding to its stockholder in the amount of
approximately $343,000. The note was non-interest bearing and was due on demand.
This note was repaid in connection with the Offering.

The Company repaid all of the Ridge Notes, the Fraser notes and the
Interstate note with the proceeds of the Offering and borrowings under its
credit facility.

Prior to consummation of the Offering, Troy L. Fraser purchased an
airplane from Fraser for its net book value of $203,000.

Certain stockholders of certain of the Founding Companies, who are
directors, executive officers or key employees of the Company, have guaranteed
indebtedness and other obligations of each of their respective Founding
Companies. These guarantees were terminated after the completion of the
Offering.

Main Street paid $1.25 million of the Company's expenses, including
legal and accounting fees, incurred in connection with the Offering and the
Acquisitions.

In connection with the Acquisitions, the Company issued 82,500, 50,000
and 10,000 shares of Common Stock to the Ridge Pallets, Inc. Profit Sharing
Plan, the Fraser Industries, Inc. Profit Sharing Plan and the Interstate Pallet
Co., Inc. Profit Sharing Plan, respectively. The plans will distribute the
Common Stock in accordance with the terms of such plans. Certain officers and
directors of the Company are participants in these plans and will benefit from
the contribution of the Common Stock under the terms of such plans.

In fiscal years 1994, 1995 and 1996, Ridge sold approximately $977,000,
$484,000 and $666,000, respectively, of lumber to Sunbelt Forest Products
Corporation ("Sunbelt"), a chemical wood preserving company, which is owned by
Mr. Holland and two other employees of Ridge. During fiscal year 1994 Ridge
recorded $193,000 of interest income from loans made to Sunbelt. Mr. Fletcher is
a director of Sunbelt. Additionally, Ridge purchased from Resources
approximately $199,000 and $421,000 of fasteners during fiscal years 1995 and
1996, respectively. The sales prices charged Sunbelt and the purchase prices
paid by Ridge were competitive with those charged or paid to unaffiliated third
parties. In addition, Ridge provides certain accounting, human resource and
managerial services to Sunbelt and received as payment therefor $135,000,
$75,000 and $55,000 for the fiscal years 1994, 1995 and 1996, respectively. The
Company intends to continue to transact business with Sunbelt in the future on
terms which are comparable to those that would be available from an unaffiliated
third party.

Mr. Bridwell received a payment from the Company of $50,000 and options
to purchase 20,000 shares of Common Stock, exercisable at the initial public
offering price per share pursuant to the Plan, for providing advice to

37
<PAGE>
Fraser in connection with the Acquisitions. Mr. Bridwell also received options
to purchase 20,000 shares of Common Stock in connection with his election to the
Company's Board of Directors exercisable at the initial public offering price of
$7.50 per share. See "Principal Stockholders."

Mr. Maultsby acquired 50,000 shares of Common Stock in connection with
the formation of the Company. In connection with this issuance, PalEx recognized
a nonrecurring, non-cash charge of $300,000 in November 1996, representing the
difference between amounts paid for the 50,000 shares of Common Stock issued to
Mr. Maultsby and the estimated fair market value of such shares on the date of
the sale assuming the Acquisitions would be consummated.

Interstate leases its operating facilities and certain equipment from
Mr. Sykes. The Company purchased the leased equipment for its estimated fair
market value of approximately $88,000 and continues to lease the property from
Mr. Sykes at market rates. Mr. Sykes has the right to require the Company to
purchase the property at its appraised value, estimated by management to be
between $1.0 million and $1.4 million. This right can be exercised during the
period beginning six months and ending 12 months after the closing of the
Offering.

John E. Drury, a director of the Company, purchased 50,000 shares of
Common Stock in the Offering.

COMPANY POLICY

In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved by a majority of the Board of Directors, including a majority of
disinterested members of the Board of Directors.

38
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock as of August 25, 1997, by (i) all
persons known to the Company to be the beneficial owner of 5% or more thereof,
(ii) each director, (iii) each executive officer and (iv) all executive officers
and directors as a group. Unless otherwise indicated, the address of each such
person is c/o PalEx, Inc., 3555 Timmons Lane, Suite 610, Houston, Texas 77027.
All persons listed have sole voting and investment power with respect to their
shares unless otherwise indicated.

SHARES PERCENTAGE OWNED
--------- ----
Vance K. Maultsby, Jr.(1) ............... 50,000 0.4%
A. E. Holland, Jr ....................... 319,583 2.5
Troy L. Fraser .......................... 1,417,915 10.9
Stephen C. Sykes ........................ 375,528 2.9
Casey A. Fletcher(2) .................... 319,583 2.5
Tucker S. Bridwell(3) ................... 45,000 0.3
John E. Drury(4) ........................ 95,000 0.7
Sam W. Humphreys(5) ..................... 1,021,389 7.8
Main Street Capital Partners, L.P. ...... 1,021,389 7.8
R. Stephen Fraser(6) .................... 868,111 6.7
Robert D. Ekedahl(7) .................... 1,044,240 8.0
Gregg C. Gibson(8) ...................... 696,160 5.3
All executive officers and directors
as a group (9 persons)(9) ............ 3,553,998 27.3%

- ------------------

(1) Excludes options to purchase 200,000 shares at the initial public offering
price of $7.50 per share granted under the Plan. Such options vest at 25%
a year over the four-year period with the first vesting period ending
November 1997 and the final vesting period ending November 2000.

(2) Excludes 2,200 shares which are owned by Mr. Fletcher's two sons. Mr.
Fletcher disclaims beneficial ownership of such shares.

(3) Includes 40,000 shares which may be acquired upon the exercise of options
granted under the Plan.

(4) Includes 20,000 shares which may be acquired upon the exercise of options
granted under the Plan and 25,000 shares deemed to be beneficially owned
by Mr. Drury as a special limited partner in Main Street.

(5) Includes 1,021,389 shares issued to Main Street. Mr. Humphreys is a
partner in Main Street.

(6) Mr. Fraser's address is 111 East 7th Street, Big Spring, Texas 79720.

(7) Includes 1,044,240 shares owned by The Ekedahl 1981 Revocable Trust. Mr.
Ekedahl and his wife, Diana Ekedahl, are co-trustees and the grantors of
this trust and share voting and investment power over the shares. The
address of the trust and Mr. and Mrs. Ekedahl is 1325 Bay Laurel Drive,
Merlo Park, California 94025.

39
<PAGE>
(8) Includes 669,204 shares owned by The Gibson 1982 Revocable Trust. Mr.
Gibson and his wife, Judith Gibson, are co-trustees and the grantors of
this trust and share voting and investment power over the shares. The
address for the trust and Mr. and Mrs. Gibson is 47 South Oak, San
Anselmo, California 94960.

(9) Excludes 325,000 shares subject to options which become exercisable during
the four-year period ending November 2000.

40
<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred
Stock, par value $0.01 per share. As of August 25, 1997, 13,029,289 shares of
Common Stock were issued and outstanding. The following summary of the terms and
provisions of the Company's capital stock does not purport to be complete and is
qualified in its entirety by reference to the Company's Amended and Restated
Certificate of Incorporation and By-laws, which have been filed as exhibits to
the Company's registration statement, of which this Prospectus is a part, and
applicable law.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share on
all matters voted upon by stockholders, including the election of directors.

Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Holders of Common Stock are entitled
to share ratably in the net assets of the Company upon liquidation after payment
or provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of the Company. All outstanding shares of Common Stock are, and the
shares of Common Stock to be sold by the Company pursuant to this Prospectus
when payment is received therefor will be, fully paid and nonassessable.

PREFERRED STOCK

The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Amended and Restated Certificate of Incorporation and
limitations prescribed by law, the Board of Directors is expressly authorized to
adopt resolutions to issue the shares, to fix the number of shares and to change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares constituting
any class or series of the Preferred Stock, in each case without any further
action or vote by the stockholders. The Company has no current plans to issue
any shares of Preferred Stock of any class or series.

One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for the Common Stock at a premium or may otherwise adversely affect the
market price of the Common Stock.

STATUTORY BUSINESS COMBINATION PROVISION

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of

41
<PAGE>
a broad range of business combinations with a person or an affiliate, or
associate of such person, who is an "interested stockholder" for a period of
three years from the date that such person became an interested stockholder
unless: (i) the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the Board of Directors
of the corporation before the person becomes an interested stockholder, (ii) the
interested stockholder acquired 85% or more of the outstanding voting stock of
the corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans), or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned by the
interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.

A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage. The Company has not adopted
such an amendment to its Amended and Restated Certificate of Incorporation or
By-laws.

LIMITATION ON DIRECTORS' LIABILITIES

Pursuant to the Company's Amended and Restated Certificate of
Incorporation and under Delaware law, directors of the Company are not liable to
the Company or its stockholders for monetary damages for breach of fiduciary
duty, except for liability in connection with a breach of the duty of loyalty,
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, for dividend payments or stock repurchases
illegal under Delaware law or any transaction in which a director has derived an
improper personal benefit. The Company has entered into indemnification
agreements with each of its directors and executive officers which indemnify
such person to the fullest extent permitted by its Amended and Restated
Certificate of Incorporation, its By-laws and the Delaware General Corporation
Law. The Company also intends to obtain directors' and officers' liability
insurance.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Harris Trust and
Savings Bank.

SHARES ELIGIBLE FOR FUTURE SALE

The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market. As of August
25, 1997, 13,029,289 shares of Common Stock were issued and outstanding. Except
for shares of Common Stock acquired by affiliates of the Company, the shares of
Common Stock sold in the Offering and the shares issued hereunder are, or when
issued will be, generally freely tradeable. The remaining outstanding shares of
Common Stock were not issued in transactions registered under the Securities
Act, and, accordingly, such shares may not be sold except in transactions
registered under the Securities Act or pursuant to an exemption from
registration, including the exemption contained in Rule 144 under the Securities
Act.

In general, under Rule 144 as amended effective April 29, 1997, a
person, or persons whose shares are aggregated, who has beneficially owned his
or her shares for at least one year but not more than two years, or a person who
may be deemed an "affiliate" of the Company who has beneficially owned shares
for at least one year, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of the Common Stock or the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the date on which notice of the
proposed sale is sent to the Securities and Exchange Commission. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the

42
<PAGE>
availability of current public information about the Company. A person who is
not deemed to have been an affiliate of the Company at any time for 90 days
preceding a sale and who has beneficially owned his shares for at least two
years would be entitled to sell such shares under Rule 144 without regard to the
volume limitations, manner of sale provisions, notice requirements or the
availability of current public information about the Company.

At August 25, 1997, the Company had outstanding options to purchase
1,177,500 shares of Common Stock under the Plan. The aggregate amount of Common
Stock with respect to which options may be granted under the Plan may not exceed
15% of the outstanding Common Stock, as determined on each date an option is
granted. The Company intends to file a registration statement on Form S-8 under
the Securities Act registering the issuance and resale of shares subject to
options granted under the Plan. As a result, such shares will be eligible for
resale in the public market.

The Company has agreed that it will not offer, sell or issue any shares
of Common Stock or options, rights or warrants to acquire any Common Stock for a
period of 180 days after the date of the Offering without the prior written
consent of Alex. Brown & Sons Incorporated, except for the grant of employee
stock options and for shares issued (i) in connection with acquisitions and (ii)
pursuant to the exercise of options granted under the Plan. Further, the
Company's directors, officers and certain stockholders who beneficially own
7,123,889 shares in the aggregate have agreed not to directly or indirectly
offer for sale, sell or otherwise dispose of any Common Stock for a period of
180 days after the date of the Offering without the prior written consent of
Alex. Brown & Sons Incorporated. In addition, the owners of the Founding
Companies have agreed not to sell, contract to sell or otherwise dispose of any
shares of Common Stock received as consideration in the Acquisitions for a
period of two years following receipt thereof.

No predictions can be made as to the effect that sales of Common Stock
under Rule 144, pursuant to a registration statement, or otherwise, or the
availability of shares of Common Stock for sale, will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market, or the perception that such sales could occur, could depress
the prevailing market price. Such sales may also make it more difficult for the
Company to issue or sell equity securities or equity-related securities in the
future at a time and price that it deems appropriate. See "Risk Factors --
Shares Eligible for Future Sale."

The former stockholders of the Founding Companies and certain officers,
directors and stockholders holding in the aggregate 6,981,389 shares of Common
Stock are entitled to certain rights with respect to the registration of their
shares of Common Stock under the Securities Act. None of such persons has
registration rights to include shares of Common Stock for sale in the
Registration Statement of which this Prospectus is a part. If the Company
proposes to register any of its securities under the Securities Act, such
stockholders are entitled to notice of such registration and are entitled to
include, at the Company's expense, all or a portion of their shares therein,
subject to certain conditions.

RESALES AND PLAN OF DISTRIBUTION

This Prospectus, as appropriately amended or supplemented, may be used
by the Company to offer and issue shares of Common Stock from time to time in
connection with the acquisition of the securities or assets of other businesses.

This Prospectus, as appropriately amended or supplemented, may also be
used by the persons who receive from the Company shares of Common Stock in
connection with direct and indirect acquisitions by the Company of securities
and assets of businesses held by such persons, or their transferrees, and who
wish to offer and sell such shares (such persons being referred to herein as
"Selling Stockholders") in transactions in which they and any broker-dealer
through whom such shares are sold may be deemed to be underwriters within the
meaning of the Securities Act; provided, however, that no Selling Stockholder
will be authorized to use this Prospectus for any offer of such shares of Common
Stock without first obtaining the written consent of the Company. The Company
may consent to the use of this Prospectus by Selling Stockholders for a limited
period of time and subject to conditions and limitations that may vary as to any
given Selling Stockholder. The Company will receive none of the proceeds from
any such sale of shares of Common Stock by Selling Stockholders.

43
<PAGE>
Agreements with Selling Stockholders permitting use of this Prospectus
may provide that any such offering be effected in an orderly manner through
securities dealers, acting as broker or dealer, selected by the Company; that
Selling Stockholders enter into custody agreements with certain persons with
respect to such shares; and that sales be made only by one or more of the
methods described in this caption, as appropriately supplemented or amended as
required.

The Selling Stockholders may from time to time sell all or a portion of
the shares of Common Stock in transactions on The Nasdaq National Market, in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The shares of
Common Stock may be sold directly or through broker-dealers. If shares of Common
Stock are sold through broker-dealers, the Selling Stockholders may pay
brokerage commissions and charges. The methods by which the shares of Common
Stock may be sold include (a) a block trade (which may involve crosses) in which
the broker or dealer so engaged will attempt to sell the securities as agent but
may position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its own account pursuant to this Prospectus; (c) exchange
distributions and/or secondary distributions in accordance with the rules of The
Nasdaq National Market; (d) ordinary brokerage transactions and transactions in
which the broker solicits purchasers; and (e) privately negotiated transactions.

The Selling Stockholders and any broker-dealer participating in the
distribution of the shares of Common Stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any profit and any commissions
paid or any discounts or concessions allowed to any such broker-dealer may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Selling Stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of shares of Common Stock against certain
liabilities, including liabilities under the Securities Act.

There can be no assurances that the Selling Stockholders will sell any
or all of the shares of Common Stock offered hereunder.

VALIDITY OF SECURITIES

The validity of the Common Stock offered hereby will be passed upon by
Edward E. Rhyne, the Vice President and General Counsel of the Company. Mr.
Rhyne owns options to purchase 65,000 shares of Common Stock. See "Management -
Stock Option Plan."

EXPERTS

The audited historical and supplemental financial statements of PalEx
and the audited financial statements of Ridge, Sonoma Pacific and Sheffield
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is included as part of the Registration Statement, does not
contain all the information contained in the Registration Statement, certain
portions of which have been omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
the exhibits and schedules thereto. Statements made in the Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete

44
<PAGE>
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected, without charge, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Citicorp Center, 500 West Madison Street, Room 1400, Chicago, IL 60661, and 7
World Trade Center, Suite 1300, New York, NY 10048 or on the Internet at
http:www.sec.gov. Copies of such material can also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined by an independent public
accounting firm for each fiscal year.

45
<PAGE>
INDEX TO FINANCIAL STATEMENTS

PAGE
Unaudited Pro Forma Consolidated Financial Statements
Basis of Presentation............................................... F-2
Pro Forma Consolidated Statement of Income for the Year Ended
November 30, 1996................................................... F-3
Pro Forma Consolidated Statement of Income for the Six Months
Ended June 1, 1997.................................................. F-4
Notes to Unaudited Pro Forma Consolidated Statements of Income...... F-5
Historical Financial Statements
PalEx, Inc.
Report of Independent Public Accountants..................... F-6
Balance Sheets............................................... F-7
Statements of Income......................................... F-8
Statements of Changes in Stockholders' Equity................ F-9
Statements of Cash Flows.....................................F-10
Notes to Financial Statements................................F-11
PalEx, Inc. and Subsidiaries
Report of Independent Public Accountants.....................F-21
Supplemental Consolidated Balance Sheets.....................F-22
Supplemental Consolidated Statements of Income...............F-23
Supplemental Consolidated Statements of Changes in
Stockholders' Equity.........................................F-24
Supplemental Consolidated Statements of Cash Flows...........F-25
Notes to Supplemental Consolidated Financial Statements......F-26
Sheffield Lumber and Pallet Co., Inc. and Affiliate
Report of Independent Public Accountants.....................F-39
Combined Balance Sheets......................................F-40
Combined Statements of Income................................F-41
Combined Statements of Changes in Stockholders' Equity.......F-42
Combined Statements of Cash Flows............................F-43
Notes to Combined Financial Statements.......................F-44
Sonoma Pacific Company, Inc. and Affiliate
Report of Independent Public Accountants.....................F-50
Combined Balance Sheets......................................F-51
Combined Statements of Income................................F-52
Combined Statements of Changes in Stockholders' Equity.......F-53
Combined Statements of Cash Flows............................F-54
Notes to Combined Financial Statements.......................F-55
Ridge Pallets, Inc.
Report of Independent Public Accountants.....................F-61
Balance Sheets...............................................F-62
Statements of Income (Loss)..................................F-63
Statements of Changes in Stockholders' Equity................F-64
Statements of Cash Flows.....................................F-65
Notes to Financial Statements................................F-66
PalEx, Inc. (Prior to Offering and Acquisitions)
Report of Independent Public Accountants.....................F-74
Balance Sheets...............................................F-75
Statements of Income.........................................F-76
Statements of Changes in Stockholders' Equity................F-77
Notes to Financial Statements................................F-78

F-1
<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.

F-2
<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.

F-3
<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.

F-4
<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.

F-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To PalEx, Inc.:

We have audited the accompanying balance sheets of PalEx, Inc. (a Delaware
corporation), as of November 30, 1995 and 1996, and the related statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended November 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PalEx, Inc., as of November 30,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended November 30, 1996, in conformity with
generally accepted accounting principles.

As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis with Fraser Industries, Inc., as the
accounting acquiror.

ARTHUR ANDERSEN LLP

Houston, Texas
August 1, 1997

F-6
<PAGE>
PALEX, INC.
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 ................................................ $ 115 $ 4 $ 1,172
Accounts receivable, net of allowance of $30, $57
and $194 ................................................................... 3,169 2,852 8,973
Inventories .............................................................. 3,289 2,750 7,322
Other current assets ..................................................... 150 -- 576
------- ------- --------

Total current assets .............................................. 6,723 5,606 18,043

PROPERTY, PLANT AND EQUIPMENT, net ......................................... 5,215 7,279 14,819

GOODWILL, net of accumulated amortization of $93 ........................... -- -- 17,774

OTHER ASSETS ............................................................... 357 155 1,807
------- ------- --------

Total assets ...................................................... $12,295 $13,040 $ 52,443
======= ======= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit ........................................................... $ 2,950 $ 455 $ --
Current maturities of long-term debt ..................................... 608 737 50
Accounts payable ......................................................... 1,314 1,487 3,818
Accrued expenses ......................................................... 854 1,478 2,664
------- ------- --------

Total current liabilities ......................................... 5,726 4,157 6,532

LONG-TERM DEBT, net of current maturities .................................. 2,362 1,262 2,550

DEFERRED INCOME ............................................................ 360 336 323

DEFERRED INCOME TAXES ...................................................... 37 49 1,466

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 30,000,000
shares; 2,893,704, 2,893,704 and 10,573,889 shares
outstanding ............................................................. 29 29 106
Capital in excess of par value ........................................... -- -- 41,557
Retained earnings ........................................................ 3,781 7,207 (91)
------- ------- --------

3,810 7,236 41,572
------- ------- --------

Total liabilities and stockholders' equity ........................ $12,295 $13,040 $ 52,443
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-7
<PAGE>
PALEX, INC.
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 ............................ $ 23,114 $ 30,135 $ 49,282 $ 21,700 $ 39,135
COST OF GOODS SOLD .................. 20,755 25,559 41,509 16,995 32,331
----------- ----------- ----------- ----------- -----------
Gross profit .................... 2,359 4,576 7,773 4,705 6,804
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ........... 1,761 2,131 3,171 1,705 3,342

GOODWILL AMORTIZATION ............... -- -- -- -- 93
----------- ----------- ----------- ----------- -----------
Income from operations .......... 598 2,445 4,602 3,000 3,369

INTEREST EXPENSE .................... (335) (450) (387) (235) (156)

OTHER INCOME (EXPENSE), net ......... (9) 19 (153) (93) (16)
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES .......... 254 2,014 4,062 2,672 3,197

PROVISION FOR INCOME TAXES .......... 6 91 216 -- 1,295
----------- ----------- ----------- ----------- -----------
NET INCOME .......................... $ 248 $ 1,923 $ 3,846 $ 2,672 $ 1,902
=========== =========== =========== =========== ===========
Earnings per share .................. $ .09 $ .66 $ 1.33 $ .92 $ .34
=========== =========== =========== =========== ===========
Weighted average shares
outstanding ......................... 2,893,704 2,893,704 2,893,704 2,893,704 5,640,324
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-8
<PAGE>
PALEX, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
CAPITAL
COMMON IN EXCESS RETAINED
SHARES STOCK OF PAR EARNINGS TOTAL
------ ---- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, November 30, 1993 .......................... 2,894 $ 29 $ -- $ 1,610 $ 1,639
Net income ........................................ -- -- -- 248 248
------ ---- ------- ------- --------
BALANCE, November 30, 1994 .......................... 2,894 29 -- 1,858 1,887
Net income ........................................ -- -- -- 1,923 1,923
------ ---- ------- ------- --------
BALANCE, November 30, 1995 .......................... 2,894 29 -- 3,781 3,810
Net income ........................................ -- -- -- 3,846 3,846
Distributions ..................................... -- -- -- (420) (420)
------ ---- ------- ------- --------
BALANCE, November 30, 1996 .......................... 2,894 29 -- 7,207 7,236
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
Distributions (unaudited) ......................... -- -- -- (9,200) (9,200)
Net income (unaudited) ............................ -- -- -- 1,902 1,902
------ ---- ------- ------- --------
BALANCE, June 1, 1997 (unaudited) ................... 10,574 $106 $41,557 $ (91) $ 41,572
====== ==== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-9
<PAGE>
PALEX, INC.
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 ........................................ $ 248 $ 1,923 $ 3,846 $ 2,672 $ 1,902
Adjustments to reconcile net income
to net cash provided by operating
activities--
Depreciation and amortization .................. 736 956 1,192 537 923
Loss on sale of assets ......................... 1 10 146 80 26
Deferred income taxes .......................... 6 21 12 (37) 481
Changes in operating assets and
liabilities--
Accounts receivable ........................... (854) (772) 317 (140) (910)
Inventories ................................... (257) (925) 539 (446) 480
Other current assets .......................... 123 60 150 (10) (392)
Other assets .................................. (86) (104) 190 155 (150)
Accounts payable and accrued
expenses ............................................ 416 295 797 (156) 1,026
Deferred income ............................... 385 (25) (24) 11 (13)
------- ------- ------- -------- --------
Net cash provided by
operating activities .......................... 718 1,439 7,165 2,666 3,373
------- ------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment ................................. (2,974) (1,497) (3,513) (1,870) (1,440)
Proceeds from sale of equipment ................... 15 13 123 75 37
Cash paid for business
acquisitions, net of cash
acquired ......................................... -- -- -- -- (1,098)
------- ------- ------- -------- --------
Net cash used in investing
activities ................................ (2,959) (1,484) (3,390) (1,795) (2,501)
------- ------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term debt, net .................. -- -- -- (260) (455)
Proceeds from long-term debt ...................... 2,237 740 2,180 -- 6,464
Payments on long-term debt ........................ -- (607) (5,646) (306) (19,754)
Net proceeds from issuance of common
stock ............................................... -- -- -- -- 23,241
Distribution to stockholders ...................... -- -- (420) (420) (9,200)
------- ------- ------- -------- --------
Net cash provided by (used
in) financing activities ...................... 2,237 133 (3,886) (986) 296
------- ------- ------- -------- --------
Net increase (decrease) in
cash and cash equivalents ........................ (4) 88 (111) (115) 1,168

CASH AND CASH EQUIVALENTS, beginning
of year ........................................... 31 27 115 115 4
------- ------- ------- -------- --------
CASH AND CASH EQUIVALENTS, end of year .............. $ 27 $ 115 $ 4 $ -- $ 1,172
======= ======= ======= ======== ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for--
Interest ....................................... $ 354 $ 446 $ 402 $ 235 $ 98
Income taxes ................................... 6 3 34 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-10
<PAGE>
PALEX, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

PalEx, Inc. ("PalEx" or the "Company"), was founded in January 1996 to
create a nationwide provider of pallet products and related services. 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
Pallets, Inc. ("Interstate" and, together with Fraser and Ridge, collectively
referred to as the "Founding Companies"). The consideration for the Acquisitions
consisted of a combination of cash and Common Stock.

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 of the Founding
Companies has been initially assigned and recorded based on preliminary
estimates of fair value and may be revised as additional information concerning
the valuation of such assets and liabilities becomes available. The accompanying
historical financial statements present Fraser through March 31, 1997, and
thereafter include the Acquisitions with PalEx. Unless the context otherwise
requires, all references herein to the Company include PalEx and the Founding
Companies.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.

FISCAL YEAR

Historically, 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 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.

CASH EQUIVALENTS

The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.

F-11
<PAGE>
PALEX, INC.
NOTES TO FINANCIAL STATEMENTS

INVENTORIES

Inventories are valued at the lower of cost or market, with cost
determined on a first-in, first-out basis or by specific identification. The
cost of finished goods inventory includes direct materials, direct labor and
overhead.

PROPERTY, PLANT AND EQUIPMENT

Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. Leased property under capital leases is amortized over the lives of the
respective leases or over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for state tax purposes.

Expenditures for maintenance and repairs are charged to operating expense
as incurred. Additions and major replacements or betterments that increase
capacity or extend useful lives are added to the cost of the asset. Upon sale or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net.

INCOME TAXES

The stockholders of Fraser elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code prior to the Acquisitions. 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
Fraser's net earnings. Effective with the Acquisitions, the Company began being
subject to federal and state taxes. The provision for income taxes prior to
March 31, 1997, is composed entirely of state income taxes.

REVENUE RECOGNITION

The Company recognizes revenue upon delivery of the product to the
customer.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING STANDARD

In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement establishes the recognition and measurement standards related to
the impairment of long-lived assets. The Company 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.

F-12
<PAGE>
PALEX, INC.
NOTES TO FINANCIAL STATEMENTS

EARNINGS PER SHARE

The historical periods through March 31, 1997, represent the results of
operations of Fraser under its historical capital and income tax structure.
Accordingly, the 2,893,704 shares of Common Stock attributable to Fraser are
presented to calculate earnings per share for these periods. The computation of
net income per share for the six-month period ended June 1, 1997, is based on
the weighted average of Common Stock outstanding as follows (unaudited):

Weighted
Average
Shares,
June 1,
TOTAL 1997
--------- ---------
Shares of PalEx attributed to Fraser ................... 2,893,704 2,893,704
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
---------
5,640,324

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. The Company received
approximately 14 percent and 17 percent of its lumber purchases from one
supplier in 1995 and 1996, respectively.

MARKETS--Markets for pallet manufacturing and repair services are highly
fragmented and competitive. Pallet manufacturing and recycling operations are
not capital-intensive; therefore, barriers to entry in such businesses are
minimal.

F-13
<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 24 percent and 47
percent of the Company's revenues in 1995 and 1996, respectively. As of November
30, 1996, this customer had an outstanding accounts receivable balance which
represented approximately 27 percent of the Company's total accounts receivable.

3. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following (in thousands):

ESTIMATED
USEFUL
LIVES NOVEMBER 30,
IN YEARS 1995 1996
--------- ------ -------
Land........................................... $ 41 $ 41
Machinery and equipment........................ 5-7 8,000 10,666
Buildings...................................... 15 938 1,065
Furniture and fixtures......................... 7 393 393
------ -------
9,372 12,165
Less-- Accumulated depreciation of property,
plant and equipment, net.................. (4,157) (4,886)
------ -------
$5,215 $ 7,279
====== =======

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):

NOVEMBER 30,
-------------------
1994 1995 1996
---- ---- ---
Balance at beginning of year ............................. $-- $-- $30
Additions charged to costs and expenses .................. 22 57 27
Deductions for uncollectible receivables written off ..... (22) (27) --
---- ---- ---
$-- $ 30 $57
==== ==== ===

The major components of inventories are as follows (in thousands):

NOVEMBER 30,
---------------------
1995 1996
------ ------
Lumber, hardware and fasteners ................... $3,197 $2,359
Finished goods ................................... 92 391
------ ------
$3,289 $2,750
====== ======

F-14
<PAGE>
Accrued expenses consist of the following (in thousands):

NOVEMBER 30,
---------------------
1995 1996
------ ------
Accrued compensation and benefits ................ $ 574 $1,014
Accrued taxes .................................... 127 203
Other accrued expenses ........................... 153 261
------ ------
$ 854 $1,478
====== ======

5. DEBT:

The Company's borrowings under a $3,000,000 revolving line of credit with
a bank bear interest, payable monthly, at prime (8.25 percent at November 30,
1996) and mature in April 1997. The line of credit is secured by inventory,
machinery and equipment. At November 30, 1995 and 1996, borrowings outstanding
under the line of credit were approximately $2,950,000 and $455,000,
respectively.

Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------
1995 1996
------- -------
<S> <C> <C>
Note payable to a bank, bearing interest at prime (8.25% at
November 30, 1996), payable monthly, principal payments of
$50,000 per month through maturity in April 1998. Secured by
substantially all assets of the Company .................... $ 2,250 $ 1,650
Notes payable to related parties, bearing interest at 14% per
annum, payable monthly, through maturity in January 2005 ... 65 60
Notes payable to stockholders, bearing interest at 8% to 10%
per annum, payable annually, through maturities ranging from
December 1996 to December 1997 ............................. 641 279
Capital leases ............................................... 14 10
------- -------
2,970 1,999
Less--Current maturities ..................................... (608) (737)
------- -------
$ 2,362 $ 1,262
======= =======
</TABLE>
Future maturities of long-term obligations at November 30, 1996, are as
follows (in thousands):

Year ending November 30-
1997............................................. $ 737
1998............................................. 1,215
1999............................................. 8
2000............................................. 8
2001............................................. 8
Thereafter....................................... 23
------
$1,999
======

F-15
<PAGE>
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 0 to 25 basis points, depending on the ratio of the
Company's interest-bearing debt to its pro forma trailing earnings before
interest, taxes, depreciation and amortization for the previous four quarters.
At the Company's option, the loans may bear interest based on a designated
London Interbank Offering Rate plus a margin ranging from 75 to 175 basis
points, depending on the same ratio. Commitment fees of 25 basis points per
annum are payable on the unused portion of the line of credit. The Credit
Facility contains a limit for standby letters of credit up to $10.0 million. The
Credit Facility prohibits the payment of dividends by the Company, restricts the
Company's incurring or assuming other indebtedness and requires the Company to
comply with certain financial covenants. The Credit Facility will terminate and
all amounts outstanding thereunder, if any, will be due and payable March 25,
2004. The Company's subsidiaries have guaranteed the repayment of all amounts
due under the Credit Facility. The approximate level of borrowings available
under the Credit Facility at August 1, 1997 was $24.0 million.

6. INCOME TAXES:

State income taxes are as follows (in thousands):

YEAR ENDED NOVEMBER 30,
------------------------------------
1994 1995 1996
---- ---- ----
State-
Current ....................... $ -- $ 70 $204
Deferred ...................... 6 21 12
---- ---- ----

$ 6 $ 91 $216
==== ==== ====

For the years ended November 30, 1994, 1995 and 1996, income tax expense
is primarily computed by applying a blended state tax rate of 5.2 percent to
income before income tax.

NOVEMBER 30,
---------------
1995 1996
---- ----
Deferred income tax liabilities-
Depreciation and amortization .......................... $ 35 $ 67
Accruals and reserves not deductible until paid ........ 14 17
Deferred income tax assets-
Inventory .............................................. (4) (7)
Other assets ........................................... (8) (28)
---- ----

Total deferred income tax liabilities .................... $ 37 $ 49
==== ====

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.

F-16
<PAGE>
7. COMMITMENTS AND CONTINGENCIES:

LITIGATION

The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, in the opinion of the Company's management,
all such proceedings are 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 presented in the
accompanying financial statements.

OPERATING LEASE AGREEMENTS

The Company conducts a portion of its operations and warehouses certain of
its products in leased facilities classified as operating leases.

Minimum future rental payments under the noncancelable operating leases as
of November 30, 1996, are as follows:

Year ending November 30-
1997............................................. $ 746
1998............................................. 449
1999............................................. 251
2000............................................. 6
------
$1,452
======

The leases provide for payment of taxes and other expenses by the Company.
Rent expense for operating leases was approximately $294,000, $477,000 and
$726,000 in 1994, 1995 and 1996, respectively.

8. 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.

F-17
<PAGE>
9. EVENTS SUBSEQUENT TO NOVEMBER 30, 1996:

THE OFFERING

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 below, in the amounts of
$2.0 million and $1.0 million on April 22, 1997, and May 2, 1997, respectively.

Prior to the closing of the Acquisitions, the Company made distributions
in respect of the Company's estimated S Corporation Accumulated Adjustment
Account at the time of closing in the amount of approximately $6.7 million. The
Company also sold a nonoperating asset at its net book value of approximately
$203,000 to a stockholder prior to the merger.

ACQUISITIONS

On August 1, 1997, PalEx acquired two wooden pallet manufacturing
businesses. Consideration in these transactions consisted of 2,455,400 shares of
the Company's Common Stock. The business acquisitions will be accounted for
using 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
REVENUES INCOME REVENUES INCOME REVENUES NET 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>

F-18
<PAGE>
The acquisitions of Ridge and Interstate were accounted for as purchases
and have been reflected in the Company's consolidated balance sheet as of March
31, 1997, and included in the Company's operating results thereafter. The
aggregate consideration paid in these transactions was $1.2 million in cash and
$17.0 million of Common Stock. The allocations of purchase price, subject to
final adjustment, 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)
========

The following table sets forth pro forma results of operations of the
Company to reflect adjustments to the restated consolidated revenues, net income
and per share data to present the effect of the acquisitions of the Pooled
Companies, Ridge and Interstate as if the acquisitions were effective as of
December 1, 1995 (in thousands):

YEAR ENDED SIX MONTHS ENDED
NOVEMBER 30, ------------------------
------------ MAY 31, JUNE 1,
1996 1996 1997
----------- ----------- ----------
(unaudited) (unaudited) (unaudited)
Revenues ....................... $ 139,906 $ 67,747 $82,234
========= ======== =======
Net income ..................... $ 7,167 $ 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.

RELATED PARTY

Fraser agreed to pay a director of the Company an amount up to $50,000 for
advisory services contingent upon the successful completion of the acquisition
of Fraser by the Company. In connection with the acquisition, PalEx paid this
amount upon the acquisition's completion.

F-19
<PAGE>
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
PalEx 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.

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 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.

F-20
<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

F-21
<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.

F-22
<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.

F-23
<PAGE>
PALEX, INC., AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TOTAL
------------------- EXCESS OF RETAINED STOCKHOLDERS'
SHARES AMOUNT PAR VALUE EARNINGS EQUITY
------ ---- ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, November 30, 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.

F-24
<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.

F-25
<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.

F-26
<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

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

PROPERTY, PLANT AND EQUIPMENT

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.

F-27
<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

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.

F-28
<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

F-29
<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.

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)
========

F-30
<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):

SIX MONTHS ENDED
YEAR ENDED -----------------------
NOVEMBER 30, MAY 31, JUNE 1,
1996 1996 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
========= ======== =======

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
======= =======

F-31
<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
====== ======

F-32
<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):
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------
1995 1996
------- -------
<S> <C> <C>
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
======= =======
</TABLE>

F-33
<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):
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------
1995 1996
------ ------
<S> <C> <C>
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
====== ======
</TABLE>
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.

F-34
<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 shareholders ....... (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)
===== =======

F-35
<PAGE>
8. COMMITMENTS AND CONTINGENCIES:

LITIGATION

INSURANCE

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:

F-36
<PAGE>
10. EVENTS SUBSEQUENT TO NOVEMBER 30, 1996:

THE OFFERING

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

STOCK OPTIONS

F-37
<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 to $14.13 per share.

F-38
<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

F-39
<PAGE>
SHEFFIELD LUMBER AND PALLET CO., INC., AND AFFILIATE
COMBINED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1997
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.

F-40
<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.

F-41
<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.

F-42
<PAGE>
SHEFFIELD LUMBER AND PALLET CO., INC., AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)

SIX MONTHS ENDED
YEAR ENDED ------------------
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1997
------- ------- -----
(unaudited)(unaudited)
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

The accompanying notes are an integral part of these
combined financial statements.

F-43
<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 located 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.

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.

F-44
<PAGE>
INVENTORIES

PROPERTY, PLANT AND EQUIPMENT

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

F-45
<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.

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
========

F-46
<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
========

F-47
<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.

F-48
<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.

F-49
<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.

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

F-50
<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.

F-51
<PAGE>
SONOMA PACIFIC COMPANY AND AFFILIATES
COMBINED STATEMENTS OF INCOME
(In thousands)

SIX MONTHS ENDED
YEAR ENDED -------------------
DECEMBER 31, JUNE 30, MAY 31,
1996 1996 1997
-------- ------- --------
(unaudited)
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
======== ======= ========

The accompanying notes are an integral part of
these combined financial statements.

F-52
<PAGE>
SONOMA PACIFIC COMPANY AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)

COMMON STOCK
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------- ---- ------- -------
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
======= ==== ======= =======

The accompanying notes are an integral part of
these combined financial statements.

F-53
<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.

F-54
<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.

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

F-55
<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

REVENUE RECOGNITION

The Company recognizes revenue upon delivery of the product to the
customer.

USE OF ESTIMATES

CONCENTRATIONS OF RISK

F-56
<PAGE>
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.

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
========

F-57
<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
====

F-58
<PAGE>
6. COMMITMENTS AND CONTINGENCIES:

LITIGATION

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:

F-59
<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.

F-60
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Ridge Pallets, Inc.:

We have audited the accompanying balance sheet of Ridge Pallets, Inc. (a
Florida corporation) (the "Company"), as of July 30, 1995 and July 28, 1996, and
the related statement of income, changes in stockholders' equity and cash flows
for the years then ended, and the statements of income, changes in stockholders'
equity and cash flows of the Predecessor Company (as defined in Note 1) for the
year ended July 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ridge Pallets, Inc.,
as of July 30, 1995 and July 28, 1996, and the results of its operations and
cash flows for the years then ended, and the results of the Predecessor
Company's operations and cash flows for the year ended July 31, 1994, in
conformity with generally accepted accounting principles.

As explained in Note 1 to the financial statements, controlling
ownership of the Predecessor Company was acquired by stockholders of Ridge
Pallets, Inc. in a purchase transaction effective for accounting purposes as of
August 1, 1994. The acquisition was accounted for as a purchase, and,
accordingly, the purchase price was allocated to the assets and liabilities of
the Predecessor Company based on their estimated fair values at August 1, 1994.
Accordingly, the financial statements of Ridge Pallets, Inc. are not comparable
to those of the Predecessor Company.

ARTHUR ANDERSEN LLP

Houston, Texas
December 8, 1996

F-61
<PAGE>
RIDGE PALLETS, INC.
BALANCE SHEETS - JULY 30, 1995, JULY 28, 1996, AND JANUARY 26, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 26,
JULY 30, 1995 JULY 28, 1996 1997
-------------- ------------ ------------
<S> <C> <C> <C>
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents......................... $ 4,259 $1,250 $ 487
Accounts receivable, net of allowance of $155, $123
and $88.......................................... 2,560 3,376 4,688
Inventories....................................... 4,228 3,687 4,616
Other current assets.............................. 350 144 114
---------- --------- ---------
Total current assets....................... 11,397 8,457 9,905
Property, plant and equipment, net................ 5,211 6,151 6,850
Other assets...................................... 1,055 1,101 1,005
--------- --------- ---------
Total assets............................... $17,663 $15,709 $17,760
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities
Current portion of long-term debt................. $ 1,050 $ 1,050 $ 1,850
Accounts payable.................................. 338 796 1,349
Accrued expenses.................................. 780 1,003 1,611
Dividends payable................................. 1,050 -- --
------- ------- -------
Total current liabilities.................. 3,218 2,849 4,810
Long-term debt, net of current maturities......... 12,221 8,600 8,550
------ ------ ------
Total liabilities.......................... 15,439 11,449 13,360
------ ------ ------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $1 par value, 5,000,000 shares authorized;
483,000 shares and 549,500 shares issued and outstanding
for 1995 and 1996, respectively................... 483 550 550
Additional paid-in capital................................ 179 496 496
Retained earnings......................................... 1,562 3,214 3,354
-------- -------- --------
Total stockholders' equity........................ 2,224 4,260 4,400
-------- -------- --------
Total liabilities and stockholders' equity........ $17,663 $15,709 $17,760
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial
statements.

F-62
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED JULY 31, 1994, JULY 30, 1995, AND JULY 28,
1996 AND FOR THE SIX MONTHS ENDED JANUARY 28, 1996 AND JANUARY 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
THE -----------------------------------------------------------
PREDECESSOR SIX MONTHS ENDED
COMPANY --------------------------
JULY 31, JULY 30, JULY 28, JANUARY 28, JANUARY 26,
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $ 47,946 $ 54,450 $ 48,341 $ 22,640 $ 24,090
Cost of goods sold ............................ 40,606 46,388 40,540 19,008 21,126
-------- -------- -------- -------- --------
Gross profit .......................... 7,340 8,062 7,801 3,632 2,964
Selling, general and adminstrative
expenses .................................... 4,018 3,826 3,825 1,929 1,876
Supplemental profit-sharing
contribution ................................ -- -- -- -- 618
-------- -------- -------- -------- --------
Income from operations ................ 3,322 4,236 3,976 1,703 470
Interest Expense .............................. (80) (962) (1,032) (535) (398)
Other income (expense), net ................... 922 101 199 89 83
-------- -------- -------- -------- --------
Income before income taxes .................... 4,164 3,375 3,143 1,257 155
Provision for income taxes .................... 99 83 76 30 15
-------- -------- -------- -------- --------
Net income .................................... $ 4,065 $ 3,292 $ 3,067 $ 1,227 $ 140
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-63
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1994, JULY 30, 1995, AND JULY 28, 1996
AND THROUGH JANUARY 28, 1996 AND JANUARY 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
The Predecessor Company:
Balance, July 26, 1993 ...................... 1,875 $ 1,875 $-- $ 13,402 $ 15,277
Stock issued ................................ 27 27 64 -- 91
Net income .................................. -- -- -- 4,065 4,065
Dividends ................................... -- -- -- (1,503) (1,503)
Stock Redemption ............................ (27) (27) (64) (131) (222)
------ ------- ----- -------- --------
Balance, July 31, 1994 ...................... 1,875 $ 1,875 $-- $ 15,833 $ 17,708
====== ======= ===== ======== ========
The Company:
Balance - initial capitalization,
August 1, 1994 ................................. 350 350 $-- $ -- $ 350
Stock issued ................................ 133 133 179 -- 312
Net income .................................. -- -- -- 3,292 3,292
Dividends ................................... -- -- -- (1,730) (1,730)
------ ------- ----- -------- --------
Balance, July 30, 1995 ............................ 483 483 179 1,562 2,224
Stock issued ................................ 67 67 317 -- 384
Net income .................................. -- -- -- 3,067 3,067
Dividends ................................... -- -- -- (1,415) (1,415)
------ ------- ----- -------- --------
Balance, July 28, 1996 ............................ 550 550 496 3,214 4,260
Net income (unaudited) ...................... -- -- -- 140 140
------ ------- ----- -------- --------
Balance, January 26, 1997 (unaudited) ............. 550 $ 550 $ 496 $ 3,354 $ 4,400
====== ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-64
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1994, JULY 30, 1995, AND JULY 28,
1996 AND FOR THE SIX MONTHS ENDED JANUARY 28, 1996 AND JANUARY 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
THE --------------------------------------------
PREDECESSOR SIX MONTHS ENDED
COMPANY ----------------------
JULY 31, JULY 30, JULY 28, JANUARY 28 JANUARY 26,
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Provided by Operating Activities:
Net income (loss) ............................................. $ 4,065 $ 3,292 $ 3,067 $ 1,227 $ 140
Additions (deductions) for noncash activities -
Depreciation and amortization ................................. 1,182 605 734 350 465
(Gain) loss on sale of property, plant and equipment .......... (6) 13 -- (8) (55)
Deferred income taxes ......................................... 4 45 (2) -- --
Changes in operating assets and
liabilities -
Accounts receivable ........................................... (646) 1,340 (816) (1,606) (1,312)
Inventories ................................................... 103 167 541 (1,700) (929)
Prepaid expenses and other current assets ..................... (115) 10 206 100 30
Other assets .................................................. (415) (275) (49) 30 96
Accounts payable .............................................. 75 (229) 458 386 553
Accrued expenses .............................................. (899) 35 229 46 608
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities .................................... 3,348 5,003 4,368 (1,175) (404)
------- ------- ------- ------- -------
Cash from Investing Activities:
Proceeds from sale of property, plant and equipment ........... 64 223 90 51 72
Proceeds from redemption of insurance policies ................ 669 -- -- -- --
Purchase of property, plant and equipment ..................... (892) (899) (1,765) (571) (1,181)
------- ------- ------- ------- -------
Net cash used in investing activities ...................... (159) (676) (1,675) (520) (1,109)
------- ------- ------- ------- -------
Cash from Financing Activities:
Issuance of common stock ...................................... 91 312 384 390 --
Dividends paid ................................................ (1,540) (680) (2,465) (1,292) --
Payment of long-term debt ..................................... (50) (50) (3,621) (1,060) (50)
Redemption of common stock .................................... (222) -- -- -- --
Net borrowings on line of credit .............................. -- -- -- -- 800
Other ......................................................... (59) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing activities ........ (1,780) (418) (5,702) (1,962) 750
------- ------- ------- ------- -------
Increase (decrease) in cash and cash equivalents .................. 1,409 3,909 (3,009) (3,657) (763)
Cash and cash equivalents, beginning of year ...................... 2,263 350 4,259 4,259 1,250
------- ------- ------- ------- -------
Cash and cash equivalents, end of year ............................ $ 3,672 $ 4,259 $ 1,250 $ 602 $ 487
======= ======= ======= ======= =======

Supplemental Disclosure of Cash Flow Information:
Cash paid for -
Interest .................................................. $ 37 $ 816 $ 1,018 $ 391 $ 256
Income taxes .............................................. 66 69 90 10 30
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-65
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

On August 1, 1994, The FMP Group, Inc., purchased from Ridge Pallets, Inc.,
(the "Predecessor Company"), substantially all of its assets used in the pallet
and bin manufacturing business and the name "Ridge Pallets,Inc.," for notes
payable of approximately $12,600,000 and the assumption of approximately
$1,800,000 in liabilities. Simultaneously with the transaction, the seller
changed its name to Ridge Resources, Inc., and the FMP Group, Inc., changed its
name to Ridge Pallets, Inc. (the "Company"). The statements of income,
stockholders equity and cash flows for the year ended July 31, 1994, represent
those of the Predecessor Company prior to the purchase by the Company. As a
result of the transaction, the cost bases of the Predecessor Company and the
Company are different, as discussed further below. References to the Company
hereinafter may also include periods prior to August 1, 1994.

The Company is a manufacturer of wooden pallets and agricultural harvesting
boxes and bins. Manufacturing facilities are located in Florida, Georgia and
South Carolina, with the Company's headquarters located in Bartow, Florida.
Sales of the Company's products are primarily in Florida and the Southeastern
United States. The Company's customer base is approximately 40 percent
agricultural, with the balance comprised of the cement, roof and tile, auto,
grocery, beverage and seafood industries.

The Company and its stockholders intend to enter into a definitive agreement
with PalEx, Inc. ("PalEx"), pursuant to which all outstanding shares of the
Company's common stock will be exchanged for cash and shares of PalEx common
stock concurrent with the consummation of the initial public offering of the
common stock of PalEx.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

FISCAL YEAR

The fiscal year of the Company is a 52-week or 53-week period that ends on
the last Sunday in July. The years ended July 31, 1994, July 30, 1995, and July
28, 1996, were 53-, 52- and 52-week periods, respectively.

INTERIM FINANCIAL INFORMATION

The interim financial statements are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the consolidated interim financial
statements have been included. The results of operations for the interim periods
are not necessarily indicative of the results for the entire fiscal year.

INVENTORIES

Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis or by specific identification. The cost of
finished goods inventory includes direct material, direct labor and overhead.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation for the
year ended July 31, 1994, was calculated using an accelerated method.
Depreciation for the years ended July 30, 1995, and July 28, 1996, is provided
on the straight-line method based upon the estimated useful lives of the assets.

F-66
<PAGE>
Expenditures for maintenance and repairs are charged to operating expense as
incurred. Additions and major replacements or betterments that increase capacity
or extend useful lives are added to the cost of the asset. Upon sale or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net.

INCOME TAXES

CASH EQUIVALENTS

For purposes of the statements of cash flows and balance sheets, the Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.

NONCASH ACTIVITIES

In fiscal year 1995, the Company issued notes payable of approximately
$12,600,000 and assumed approximately $1,800,000 of liabilities in connection
with the acquisition of the pallet and bin manufacturing business of Ridge
Resources, Inc. The assets acquired were recorded at fair value as follows:

(IN THOUSANDS)
Property, plant and equipment............... $ 5,372
Inventories................................. 4,394
Accounts Receivable......................... 3,899
Other assets................................ 720
Goodwill.................................... 23
---------
$14,408
=======

In addition, dividends of $1,050,000 were included in dividends payable at
July 30, 1995. Accordingly, these noncash investing and financing activities
have been excluded from the accompanying statements of cash flows.

The Predecessor Company maintained deferred compensation agreements with
shareholders and key members of management through July 31, 1994. The agreements
were terminated in connection with the formation of the Company. The Predecessor
Company recognized a gain of approximately $631,000 upon cancellation of the
deferred compensation liability, which has been reflected in other income
(expense), net for the year ended July 31, 1994.

REVENUE RECOGNITION

The Company recognizes revenues upon delivery of the product to the
customer.

USE OF ESTIMATES

F-67
<PAGE>
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

NEW ACCOUNTING STANDARD

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and For Long-Lived Assets to be Disposed Of." This
statement establishes the recognition and measurement standards related to the
impairment of long-lived assets. The Company will be required to adopt this
standard during fiscal 1997. It is the opinion of management that the adoption
of this standard will not have a material adverse effect on the Company's
financial position or the results of operations.

CONCENTRATIONS OF RISKS

MATERIALS - Pallet prices are closely related to the changing costs and
availability of lumber, the principal raw material used in the manufacture and
repair of wooden pallets. Lumber supplies and costs are affected by many factors
including weather, governmental regulation of logging on public lands, lumber
agreements between Canada and the United States and competition from other
industries that use similar grades and types of lumber. The Company received
approximately 40 percent, 39 percent and 46 percent of its lumber purchases from
two suppliers in 1994, 1995 and 1996, respectively.

MARKETS - Markets for pallet manufacturing and repair services are highly
fragmented and competitive. Pallet manufacturing and recycling operations are
not capital-intensive; therefore, barriers to entry in such businesses are
minimal.

CUSTOMERS - The Company's sales are made to customers with local, regional
and national operations in many different industries and geographical locations.
Of such customers, one customer accounted for approximately 17 percent, 22
percent and 21 percent of revenues in 1994, 1995 and 1996. As of July 28, 1996,
the customer had an outstanding accounts receivable balance which represented
approximately 10 percent of total accounts receivable.

3. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:

ESTIMATED
USEFUL LIVES IN JULY 30, JULY 28,
YEARS 1995 1996
--------------- ----------- ----------
(IN THOUSANDS)
Land................................. -- $ 721 $ 721
Machinery and equipment.............. 7-10 2,033 2,675
Vehicles and rolling stock........... 5 694 1,141
Buildings and building improvements.. 15-40 2,229 2,608
Furniture and fixtures............... 5-10 124 277
Less - Accumulated depreciation...... (590) (1,271)
-------- -------
Property, plant and equipment, net $ 5,211 $ 6,151
======= =======

F-68
<PAGE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

The major components of inventories are as follows:

JULY 30, 1995 JULY 28, 1996
---------- -------------
(IN THOUSANDS)

Lumber, hardware and fasteners ........ $3,701 $3,054
Work in process ....................... 88 85
439 548
------ ------
Finished goods ........................ $4,228 $3,687
====== ======

JULY 30, JULY 28,
1995 1996
------ -------
Activity In The Company's Allowance For Doubtful (IN THOUSANDS)
Accounts Consists Of The Following:

Balance at beginning of the year ......................... $ 35 $ 155
Additions charged to expense (recoveries) ................ 120 (5)
Deductions for uncollectible receivables written off ..... -- (27)
------ -------
$ 155 $ 123
====== =======
Other assets are as follows:
Certificate of deposit-restricted ........................ $ 535 $ 554
Cash surrender values of officers' life insurance ........ 130 146
Notes receivable ......................................... 131 90
Other assets ............................................. 259 311
------ -------
$1,055 $ 1,101
====== =======

Accrued expenses consist of the following:
Accrued workers' compensation ............................ $ 250 $ 250
Accrued salaries and benefits ............................ 90 378
Accrued interest payable ................................. 140 133
Accrued taxes ............................................ 110 81
Other accrued expenses ................................... 190 161
------ -------
$ 780 $ 1,003
5. DEBT: ====== =======

The Company maintains a $4 million line of credit which expires in June
1997. There were no borrowings on the line as of July 30, 1995, and July 28,
1996. Provisions of the line of credit contain certain restrictive covenants,
the most restrictive of which requires the Company to maintain a net worth of at
least $250,000. The borrowings are collateralized by the personal guarantees of
six of the Company's shareholders. The interest rate is at prime (prime rate was
8.25 percent at July 28, 1996).

F-69
<PAGE>
Long-term debt consisted of the following:

JULY 30, JULY 28,
1995 1996
-------- -------
(IN THOUSANDS)
Notes payable to Ridge Resources, Inc. and its
shareholders, at prime, interest due quarterly,
principal due in annual installments totaling
$1,000,000 to $1,500,000, maturing January 3,
2000, and collateralized by property, plant,
equipment, receviables and inventory and secured
by shares of the Company held by its six shareholders ... $ 12,571 $ 9,000
Industrial development bond, interest variable,
approximating 80 percent of prime, interest due
monthly, $50,000 principal due annually;
collateralized by property, plant, and equipment
and a standby letter of credit from a bank in the
amount of $695,000 .................................... 700 650
-------- -------
13,271 9,650
Less - Current portion .................................. (1,050) (1,050)
-------- -------
Total long-term debt ................................ $ 12,221 $ 8,600
======== =======

The aggregate principal maturities for each of the next five fiscal years are as
follows (in thousands):

Fiscal year ending -
1997.................................... $1,050
1998.................................... 1,550
1999.................................... 1,550
2000.................................... 5,050
2001.................................... 50
Thereafter.............................. 400
------
$9,650
======
6. INCOME TAXES:

State income taxes are as follows:

JULY 31, JULY 30, JULY 28,
1994 1995 1996
--- --- ----
(IN THOUSANDS)
State -
Current ..................... $95 $38 $ 78
Deferred .................... 4 45 (2)
--- --- ----
$99 $83 $ 76
=== === ====

For the years ended 1994, 1995 and 1996, actual income tax expenses is
primarily computed by applying the blended state tax rate of 2.4 percent to
income before income taxes.

F-70
<PAGE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences for the years ended
1995 and 1996 result principally from the following:

JULY 30, JULY 28,
1995 1996
---- ----
(IN THOUSANDS)
Deferred income tax liabilities -
Depreciation and amortization .......................... $ 3 $ 9
Fiscal year-end deferral ............................... 48 44
Deferred income tax assets -
Inventory .......................................... (3) (3)
Other assets ........................................... (4) (7)
---- ----
Net current deferred income tax liabilities ........ $ 44 $ 43
==== ====

7. RELATED-PARTY TRANSACTIONS:

The Company is related to Sunbelt Forest Products Corporation ("Sunbelt")
and Ridge Resources, Inc., through certain common ownership, officers and
directors.

The following amounts are included in the statements of income:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
JULY 31, JULY 30, JULY 28,
1994 1995 1996
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales to Sunbelt........................... $977 $484 $666
Purchases from Sunbelt..................... -- -- 11
Accounting and managerial services revenue from
Sunbelt................................ 135 75 55
Purchases from Ridge Resources, Inc........ -- 199 421
Interest income from Sunbelt............... 193 -- --
Interest expense to Ridge Resources, Inc... -- 909 982
</TABLE>
F-71
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

The following amounts are included in the balance sheets:

JULY 30, JULY 28,
1995 1996
----------- ----------
(IN THOUSANDS)
Accounts receivable from Sunbelt........... $ 7 $ 6
Due from Ridge Resources, Inc.............. 5 1
Note payable to Ridge Resources, Inc....... 12,571 9,000

8. COMMITMENTS AND CONTINGENCIES:

LITIGATION

The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.

INSURANCE

The Company has a workers' compensation and general liability policy,
subject to a $250,000 deductible. As such, any claim within the first $250,000
per incident would be the financial obligation of the Company. In addition, the
policy limits coverage to $850,000 per year. The Company maintains a certificate
of deposit as security in the amount of approximately $554,000, which is
included in other assets at July 28, 1996.

The accrued insurance claims payable represents managements estimate of the
Company's potential claims costs in satisfying the deductible provisions of the
insurance policy for claims occurring through July 28, 1996. The accrual is
based upon known facts and historical trends, and management believes such
accrual to be adequate.

The Company self-insures its employees' health insurance program. A trust
was established in July 1983 to administer this program. Effective August 1,
1994, the Company became the new trust sponsor. By agreement between the Company
and the trust, the Company must contribute sufficient funds to the trust to
ensure that the trust has sufficient monies to pay claims as provided in the
employee health insurance plan document. The Company contributed $205,000,
$185,000 and $145,000 in fiscal years 1994, 1995 and 1996, respectively.

The trust obtained tax-exempt status from the Internal Revenue Service
during 1985. Its trustees are employees of the Company.

9. PROFIT-SHARING PLAN

The Company maintains a qualified profit-sharing plan. Company contributions
are voluntary and at the discretion of the board of directors. Annual
contributions, in order to be deductible for income tax purposes by the Company,
cannot exceed 15 percent of salaries and wages.

F-72
<PAGE>
Effective January 1, 1995, the Company amended the Plan to qualify under
Internal Revenue Code Section 401(k). In accordance with the Plan, the Company
will match 50 percent of employee 401(k) contributions, not to exceed 4 percent
of the employees' qualified compensation related to the Plan.

Total profit sharing and 401(k) expense was $400,000 for fiscal years 1994,
1995 and 1996.

10. DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:

SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," and
SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," require the disclosure of the fair value of financial
instruments, both assets and liabilities recognized and not recognized on the
balance sheet, for which it is practicable to estimate fair value. The carrying
value of the Company's financial instruments approximates fair value.

11. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):

The Company and its shareholders entered into a definitive agreement with
PalEx providing for the acquisition of the Company by PalEx. Such transaction
closed on March 25, 1997.

In December 1996, the Company declared a contribution to its defined
contribution profit-sharing plan of approximately $968,000. In connection with
the acquisition, PalEx satisfied a portion of the Company's obligation
(supplemental profit-sharing obligation) through the issuance to such plan of
approximately 82,500 shares of PalEx common stock. In addition, prior to the
closing of the acquisition, the Company made distributions in respect of the
Company's estimated S Corporation Accumulated Adjustment Account at the time of
closing in the amount of approximately $3.3 million. The Company also
distributed non-operating assets with a net book value of approximately $175,000
to its shareholders prior to the merger with PalEx.

The Company agreed to pay an investment banking firm an amount up to
$468,000 for advisory services contingent upon the successful completion of with
the acquisition of the Company by PalEx. In connection with the Acquisition,
PalEx paid this amount upon the acquisition's completion.

F-73
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To PalEx, Inc.:

We have audited the accompanying balance sheet of PalEx, Inc. (a Delaware
corporation), as of November 30, 1996, and the related statement of income and
statement of changes in stockholders' equity for the period from inception
(January 8, 1996) to November 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PalEx, Inc., as of November
30, 1996, and the results of its operations for the period from inception
(January 8, 1996) to November 30, 1996, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 31, 1997

F-74
<PAGE>
PALEX, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

NOVEMBER 30, MARCH 2,
1996 1997
----- -------
(UNAUDITED)
Assets:
Cash and cash equivalents ................................... $ 1 $ 1
Other assets ................................................ 300 1,100
----- -------
Total assets ............................................ $ 301 $ 1,101
===== =======
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
no shares issued ....................................... $ -- $ --
Common stock, $.01 par value, 30,000,000 shares authorized
1,071,389 shares issued and outstanding ................. 11 11
Additional paid-in capital .................................. 599 1,399
Retained deficit ............................................ (309) (309)
----- -------
Total stockholders' equity .............................. $ 301 $ 1,101
===== =======

The accompanying notes are an integral part of these financial statements.

F-75
<PAGE>
PALEX, INC.
STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Inception (January 8, 1996) Three Months Ended
to November 30, 1996 March 2, 1997
-------------------------- ------------------
(unaudited)
<S> <C> <C>
Revenues .............................................. $ -- $ --
Selling, general and administrative expenses .......... 300 --
----- -----
Loss before income taxes .............................. (300) --
----- -----
Income tax benefit .................................... -- --
----- -----
Net loss .............................................. $(300) $ --
===== =====
</TABLE>
F-76
<PAGE>
PALEX, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----- --- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Initial Capitalization .................................. 1,021 $10 $ -- $ (9) $ 1
Offering costs incurred by stockholder .................. -- -- 300 -- 300
Issuance of management shares ........................... 50 1 299 -- 300
Net loss ................................................ -- -- -- (300) (300)
----- --- ------ ------- -------
Balance, November 30, 1996 .............................. 1,071 $11 $ 599 $ (309) $ 301
Offering costs incurred by stockholder .................. -- -- 800 -- 800
----- --- ------ ------- -------
Balance, March 2, 1997 (unaudited) ...................... 1,071 $11 $1,399 $ (309) $ 1,101
===== === ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-77
<PAGE>
PALEX, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

PalEx, Inc. ("PalEx" or the "Company"), was founded in January 1996 to
create a nationwide provider of pallet products and related services. PalEx
intends to acquire three U.S. pallet businesses (the "Acquisitions"), complete
an initial public offering (the "Offering") of its common stock and, subsequent
to the Offering, continue to acquire, through merger or purchase, similar
companies to expand its national operations.

PalEx has not conducted any operations, and all activities to date have
related to the acquisitions and the initial public offering ("IPO"). Cash of
$1,000 was generated from the initial capitalization of the Company (see Note
2). All other expenditures to date have been funded by the majority stockholder,
Main Street Capital Partners, L.P. ("Main Street"), on behalf of the Company.
Accordingly, a statement of cash flows would not provide meaningful information
and has been omitted. Main Street has committed to fund the first $1.25 million
of offering costs. PalEx treated these costs as deferred costs and contributed
capital as incurred by Main Street. As of November 30, 1996 and March 2, 1997,
costs of approximately $300,000 and $1.1 million, respectively, had been
incurred by Main Street in connection with the IPO.

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.
Simultaneously with the closing of the Offering, PalEx acquired in separate
transactions three companies (the "Founding Companies") for an aggregate
consideration of $3.4 million in cash and 5,910,000 shares of PalEx common
stock. The effective closing of the acquisitions of the Founding Companies and
the IPO for accounting purposes is March 31, 1997. The accompanying financial
statements reflect the activities of PalEx prior to the acquisitions of the
Founding Companies and the IPO. Reference is made to the historical financial
statements and supplemental financial statements of PalEx, Inc. included
elsewhere herein.

In connection with the Acquisitions, PalEx will assume certain obligations
of the Founding Companies. Additionally, in connection with the Acquisitions,
PalEx agreed to satisfy profit sharing obligations of the Founding Companies
totaling approximately $802,000 through the issuance of approximately 142,500
shares of PalEx common stock.

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 principals, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the consolidated interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.

2. STOCKHOLDER'S EQUITY:

In connection with the organization and initial capitalization of PalEx, the
Company issued 1,000 shares of common stock for $1,000 (see note 3).

In November 1996, the Company issued 50,000 shares (after reflecting the
stock dividend discussed in Note 3) of its common stock to the Chief Executive
Officer at an aggregate price of $500. The Company recorded a nonrecurring,
noncash charge of approximately $300,000 representing the difference between the
amounts paid for the shares and the estimated fair value of the shares on the
date of the sale as if the Acquisitions were completed.

3. SUBSEQUENT EVENTS:

In December 1996, PalEx declared a stock dividend of approximately 1,021
shares of common stock for each share of common stock then outstanding. In
addition, PalEx increased the number of authorized shares of common stock to
30,000,000 and authorized 5,000,000 shares of $.01 par value preferred stock.
The effects of the common stock dividend

F-78
<PAGE>
and the increase in the number of common shares authorized have been
retroactively reflected on the balance sheet and in the accompanying notes.

PalEx and separate wholly owned subsidiaries have signed definitive
agreements to acquire by merger three companies ("Founding Companies") to be
effective with the IPO. The companies to be acquired are Fraser Industries, Inc.
("Fraser"), Ridge Pallets, Inc. ("Ridge"), and Interstate Pallets, Inc.
("Interstate"). Consideration that will be paid by PalEx to acquire the Founding
Companies is approximately $36.5 million (unaudited)(based upon an offering
price of $7.50 per share, net of a 25 percent discount) consisting of a
combination of cash and common stock.

On March 25, 1997, the Company entered into a credit agreement with Bank
One, Texas, N.A. (The "Credit Facility"). The Credit Facility provides the
Company with an unsecured revolving line of credit of up to $35 million, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies, future acquisitions,
capital expenditures and working capital. Advances under the Credit Facility
bear interest at such bank's designated variable rate plus margins ranging from
0 to 25 basis points, depending on the ratio of the Company's interest bearing
debt to its pro forma trailing earnings before interest, taxes, depreciation and
amortization for the previous four quarters. At the Company's option, the loans
may bear interest based on a designated London interbank offering rate plus a
margin ranging from 75 to 175 basis points, depending on the same ratio.
Commitment fees of 25 basis points per annum are payable on the unused portion
of the line of credit. The Credit Facility contains a limit for standby letters
of credit up to $10.0 million. The Credit Facility prohibits the payment of
dividends by the Company, restricts the Company's incurring or assuming other
indebtedness and requires the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable March 25, 2004. The Company's
subsidiaries have guaranteed the repayment of all amounts due under the Credit
Facility. On the date of the Offering, the Company borrowed $6.2 million under
the Credit Facility, at an interest rate of 8.25%. Subsequent to March 2, 1997,
the Company repaid $1.2 million of such indebtedness with cash generated from
operations and converted the remaining $5.0 million of the borrowings to loans
based on the London interbank offering rate bearing various interest rates
averaging approximately 6.5%.

Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," allows entities to choose between a new fair
value based method of accounting for employee stock options or similar equity
instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25").
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.

The Company has authorized the issuance of 1,800,000 shares of its common
stock in accordance with its stock option plan. The Company intends to file a
registration statement on Form S-8 under the Securities Act registering the
issuance of shares upon exercise of options granted under the Plan. The Company
expects to grant options to purchase a total of approximately 728,000 shares of
common stock at the initial public offering price upon consummation of the
Offering. The Chief Executive Officer was also granted 200,000 options to
purchase PalEx common stock at IPO price.

F-79
<PAGE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOT ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

----------------------

TABLE OF CONTENTS
PAGE

Prospectus Summary............................................... 2
Risk Factors..................................................... 6
Price Range of Common Stock...................................... 11
Selected Financial Data.......................................... 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 14
Business......................................................... 25
Management....................................................... 34
Certain Transactions............................................. 37
Principal Stockholders........................................... 41
Description of Capital Stock..................................... 43
Index to Financial Statements.................................... F-1

4,000,000 SHARES

[PALEX LOGO]

COMMON STOCK

----------------------
PROSPECTUS
----------------------

September _, 1997
<PAGE>
PART I-B

PALEX, INC.

The prospectus contained in Part I-B may be used from time to time by
shareholders who seek to sell shares of Common Stocks in transactions in which
they or the broker-dealers through whom such shares are sold may be deemed to be
underwriters under the Securities Act of 1933, as amended.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

[Alternate Prospectus Cover Page]

SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1997

[PALEX LOGO]

COMMON STOCK
--------------------

This Prospectus, as appropriately amended or supplemented, may be used from
time to time principally by persons who have received shares of Common Stock,
$.01 par value (the "Common Stock"), of PalEx, Inc. (the "Company") in
connection with the direct or indirect acquisition by the Company of securities
or assets held by such persons, or their transferees, and who wish to offer and
sell such Common Stock in transactions in which they and any broker-dealer
through whom such shares are sold may be deemed to be underwriters within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"), as
more fully described herein. Any commissions paid or concessions allowed to any
broker-dealer, and, if any broker-dealer purchases such shares as principal, any
profits received on the resale of such shares, may be deemed to be underwriting
discounts and commissions under the Securities Act. Printing, filing and other
similar expenses of this offering will be paid by the Company. Selling
Stockholders will bear all expenses of this offering, including brokerage fees
and any underwriting discounts or commissions.

The Common Stock is listed on The Nasdaq National Market and trades under
the symbol "PALX." The last reported sale price of the Common Stock on The
Nasdaq National Market on August 25, 1997 was $12.13 per share.

--------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
--------------------

THE DATE OF THIS PROSPECTUS IS ______________ _____, 1997
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the expenses to be paid by the Company in
connection with the offering described in this Registration Statement. All of
such expenses (except the SEC Registration Fee) are estimated.

SEC Registration Fee........................... $11,818
Nasdaq National Market Listing Fee............. 35,000
Accounting Fees and Expenses................... 80,000
Legal Fees and Expenses........................ 40,000
Printing Expenses.............................. 5,000
Miscellaneous.................................. 10,182
--------
Total.......................................... $182,000
========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Subsection (a) of section 145 of the General Corporation Law of the State of
Delaware (the "DGCL") empowers a corporation to indemnify any person who was or
is a party to or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than by an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.

Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect to any claim,
issue or matter as to which such person shall have been made to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.

Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against

II-1
<PAGE>
any liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such whether or not the corporation would have the
power to indemnify him against such liabilities under Section 145.

Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided such provision shall not eliminate or
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law, (iii) under Section 174 of DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit.

Article Eight of the Company's Amended and Restated Certificate of
Incorporation states that:

"No director of the corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article
Eight shall not eliminate or limit the liability of a director to the extent
provided by applicable law (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit. No
amendment or repeal of this Article Eight shall apply to, or have any effect
on, the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal. If the DGCL is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the DGCL, as so
amended."

In addition, Article VI of the Company's By-Laws further provides that the
Company shall indemnify its officers, directors and employees to the full extent
permitted by law.

The Company has entered into indemnification agreements with each of its
executive officers and directors which indemnifies such person to the fullest
extent permitted by its Amended and Restated Certificate of Incorporation, its
Bylaws and the DGCL. The Company also maintains directors' and officers'
liability insurance coverage.

Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify, under certain
conditions, the Company, its officers and directors, and persons who control the
Company within the meaning of the Securities Act of 1933, as amended, against
certain liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Set forth below is certain information concerning all sales of securities by
the Company during the past three years that were not registered under the
Securities Act of 1933. The description presented below gives effect to the
Company's recent reorganization and accompanying 1,021 for one stock split on
December 20, 1996.

(a)On January 8, 1996, the Company issued 1,021,389 shares of Common
Stock for an aggregate price of $1,000 to Main Street in connection with the
formation of the Company.

(b)On November 6, 1996, the Company issued 50,000 shares of Common Stock
to Vance Maultsby, Jr. for an aggregate price of $500 in connection with his
hiring by the Company. In connection with his hiring by the Company, Mr.
Maultsby received options to purchase 200,000 shares of Common Stock at an
exercise price equal to the initial public offering price.

(c)See "Certain Transactions" for a discussion of the issuance of shares
of Common Stock and options to purchase shares of Common Stock in connection
with the Acquisitions.

II-2
<PAGE>
(d)On August 1, 1997, the Company issued 715,000 shares of Common Stock
to the former stockholders of Sheffield Lumber & Pallet Company, Inc. in
connection with the acquisition of the Pooled Companies.

(e)On August 1, 1997, in connection with the acquisition of the Pooled
Companies, the Company issued 1,740,400 shares of Common Stock to the former
stockholders of Sonoma Pacific Company, Salinas Pacific Company (a former
affiliate of Sonoma Pacific Company that holds real estate used in the
business of Sonoma Pacific Company) and The Ekedahl 1981 Revocable Trust and
Gregg C. Gibson (former affiliates of Sonoma Pacific Company who transferred
to Sonoma Pacific Company certain real estate used in its business in
exchange for shares of Common Stock).

These transactions were completed without registration under the Securities
Act of 1933 in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

EXHIBIT
NO. 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.

3.1** Amended and Restated Certificate of Incorporation

3.2** Bylaws

4.1** Specimen Common Stock Certificate

5.1 Opinion of Edward E. Rhyne as to the legality of the securities
being registered.

10.1** Agreement and Plan of Reorganization and Merger dated as of December
20, 1996 between PalEx, Inc. and Ridge Pallets, Inc.

10.2** Agreement and Plan of Reorganization and Merger dated as of December
20, 1996 between PalEx, Inc. and Fraser Industries, Inc.

10.3** Agreement and Plan of Reorganization and Merger dated as of December
20, 1996 between PalEx, Inc. and Interstate Pallet Co., Inc

II-3
<PAGE>
10.4** Form of Employment and Noncompetition Agreement (the terms of each
agreement are identical except that each of Messrs. Holland,
Fletcher, Fraser and Sykes will have a $125,000 annual salary and
Messrs. Maultsby and Rhyne will have annual salaries of $175,000 and
$152,000, respectively).

10.5** Form of Officer and Director Indemnification Agreement

10.6** PalEx, Inc. 1996 Stock Option Plan

10.7 Credit Agreement dated as of March 25, 1997 between PalEx, Inc. and
Bank One, Texas, N.A. (incorporated by reference from Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q (Commission File No.
000-22237) for the fiscal quarter ended June 1, 1997, as filed with
the Commission on July 14, 1997)

10.8 Guaranty dated as of March 25, 1997 from Fraser Industries, Inc. to
Bank One, Texas, N.A. (incorporated by reference from Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q (Commission File No.
000-22237) for the fiscal quarter ended June 1, 1997, as filed with
the Commission on July 14, 1997)

10.9 Guaranty dated as of March 25, 1997 from Ridge Pallets, Inc. to Bank
One, Texas, N.A. (incorporated by reference from Exhibit 10.3 to the
Company's Quarterly Report on Form 10- Q (Commission File No.
000-22237) for the fiscal quarter ended June 1, 1997, as filed with
the Commission on July 14, 1997)

10.10 Guaranty dated as of March 25, 1997 from Interstate Pallet Company,
Inc. to Bank One, Texas, N.A. (incorporated by reference from
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-22237) for the fiscal quarter ended June 1,
1997, as filed with the Commission on July 14, 1997)

21.1 List of subsidiaries of PalEx, Inc.

23.1 Consent of Edward E. Rhyne (included in Exhibit 5.1)

23.2 Consent of Arthur Andersen LLP

25.1 Power of Attorney (contained on the signature page of this
Registration Statement)

27.0 Financial Data Schedule

- ----------------------

* Incorporated by reference from the exhibits, bearing the same respective
numbers, to the Company's Current Report on Form 8-K (Commission File No.
000-22237) as filed with the Commission on August 7, 1997.

** Incorporated by reference from the exhibits, bearing the same respective
numbers, to the Company's Registration Statement on Form S-1 (Registration
No. 333-18683).

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

II-4
<PAGE>
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offering therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment of
any of the securities being registered which remain unsold at the termination of
the offering.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

II-5
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on September 2, 1997.

PALEX, INC.

By:/s/ Vance K. Maultsby, Jr.
Vance K. Maultsby, Jr.
President and Chief Executive Officer

KNOW MEN BY ALL THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Sam W. Humphreys and Edward E. Rhyne, and each of
them, his true and lawful attorneys-in-fact and agents with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any subsequent registration statements filed
by the Registrant pursuant to Rule 462(b) of the Securities Act of 1933, which
relates to this Registration Statement, and to file same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitutes, may
lawfully do or cause to be done by virtue hereof.

/s/ Vance K. Maultsby, Jr. President and Chief Executive September 2, 1997
Vance K. Maultsby, Jr. Officer (Principal Executive
Officer)

/s/ Casey A. Fletcher Chief Accounting Officer September 2, 1997
Casey A. Fletcher (Principal Financial and
Accounting Officer)

/s/ Sam W. Humphreys Director September 2, 1997
Sam W. Humphreys

/s/ A.E. Holland Director September 2, 1997
A.E. Holland

/s/ Troy L. Fraser Director September 2, 1997
Troy L. Fraser

/s/ Tucker S. Bridwell Director September 2, 1997
Tucker S. Bridwell

/s/ John E. Drury Director September 2, 1997
John E. Drury

/s/ Stephen C. Sykes Director September 2, 1997
Stephen C. Sykes

II-6

EXHIBIT 5.1

[PALEX LETERHEAD]

September 3, 1997

PalEx, Inc.
Suite 610
3555 Timmons Lane
Houston, Texas 77027

Gentlemen:

You have requested the undersigned's opinion in his capacity as General
Counsel of PalEx, Inc., a Delaware corporation (the "COMPANY"), in connection
with the Registration Statement on Form S-1 (Registration No. 333-28027) of
PalEx, Inc. (the "COMPANY"), a Delaware corporation, filed with the Securities
and Exchange Commission, and as may be amended or supplemented from time to time
(the "REGISTRATION STATEMENT"), in connection with the registration under the
Securities Act of 1933, as amended, of 4,000,000 shares of the Company's Common
Stock, par value $0.01 per share (the "COMMON STOCK"), which may be offered and
issued from time to time by the Company in connection with its acquisition of
the securities and assets of other businesses.

With respect to the foregoing, the undersigned has examined such documents
and questions of law as the undersigned deemed necessary to render the opinions
expressed below. Based upon the foregoing, the undersigned is of the opinion
that the Common Stock, when issued, sold and delivered in the manner described
in the Registration Statement and for consideration of not less than $0.01 per
share, will be duly and validly issued, fully paid and nonassessable under the
General Corporation Law of the State of Delaware.

The undersigned consents to the use of this opinion as Exhibit 5.1 to the
Registration Statement.

This opinion letter is as of the date hereof, and the undersigned undertakes
no obligation, and expressly disclaims any obligation, to advise you of any
change in the matters set forth herein. Please note that the opinions expressed
herein relate only to the matters specifically set forth, and no opinion is
implied or should be inferred as to any other matters.

Sincerely,

By: /s/ Edward E. Rhyne
Edward E. Rhyne, General Counsel

EXHIBIT 21.1

SUBSIDIARIES OF PALEX, INC.

Name of Subsidiary State of Incorporation
-----------------------------------------------------------------------
Fraser Industries, Inc. Texas
Interstate Pallet Company, Inc. Virginia
Ridge Pallets, Inc. Florida
Sheffield Lumber & Pallet Company, Inc. North Carolina
Sonoma Pacific Company, Inc. California

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.

ARTHUR ANDERSEN LLP

Houston, Texas
September 3, 1997

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 530
<SECURITIES> 0
<RECEIVABLES> 6,083
<ALLOWANCES> (140)
<INVENTORY> 7,014
<CURRENT-ASSETS> 14,003
<PP&E> 31,298
<DEPRECIATION> (13,315)
<TOTAL-ASSETS> 33,582
<CURRENT-LIABILITIES> 10,616
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 16,903
<TOTAL-LIABILITY-AND-EQUITY> 33,582
<SALES> 87,158
<TOTAL-REVENUES> 87,158
<CGS> 73,411
<TOTAL-COSTS> 80,142
<OTHER-EXPENSES> (84)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,101
<INCOME-PRETAX> 5,999
<INCOME-TAX> 1,015
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,984
<EPS-PRIMARY> .93
<EPS-DILUTED> .93

</TABLE>