<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 11, 1998
PALEX, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-22237
Delaware 76-0520673
-------------------------------- ------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.)
1360 Post Oak Blvd., Suite 800
Houston, Texas 77056
------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 350-6030
<PAGE>
As indicated in the Registrant's Form 8-K as filed with the Securities and
Exchange Commission on September 23, 1998, the financial and pro forma financial
information required to be filed therewith would be filed not later than
November 25, 1998. Accordingly, Items 7(a) and 7(b) of the Form 8-K are hereby
amended to read in their entirety as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
a. Financial Statements of business acquired.
The following Financial Statements of SMG Corporation as of May 31, 1998
are attached hereto and made a part hereof:
(i) Auditors' Report to the Shareholders
(ii) Consolidated Balance Sheet
(iii) Consolidated Statement of Earnings and Retained Earnings
(iv) Consolidated Statement of Cash Flows
(v) Notes to Consolidated Financial Statements
b. Pro forma financial information
The following Unaudited Pro Forma Consolidated Financial Statements are attached
hereto and made a part hereof:
(i) Basis of Presentation
(ii) Unaudited Pro Forma Consolidated Statement of Income for the Year
Ended December 28, 1997
(iii) Unaudited Pro Forma Consolidated Statement of Income for the Nine
Months Ended September 27, 1998
(iv) Notes to Unaudited Pro Forma Consolidated Financial Statements
i
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Consent of Independent Public Accountants 1
Historical Financial Statements
SMG Corporation
Auditors' Report to the Shareholders................................ 3
Consolidated Balance Sheet.......................................... 4
Consolidated Statement of Earnings and Retained Earnings............ 5
Consolidated Statement of Cash Flows................................ 6
Notes to Consolidated Financial Statements.......................... 7-14
Unaudited Pro Forma Consolidated Financial Statements
Basis of Presentation............................................... 15
Unaudited Pro Forma Consolidated Statement of Income for the Year
Ended December 28, 1997........................................... 16
Unaudited Pro Forma Consolidated Statement of Income for the Six
Months Ended September 27, 1998................................... 17
Notes to Unaudited Pro Forma Consolidated Financial Statements...... 18
ii
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PALEX, INC.
Date: November 25, 1998 By: /s/ EDWARD RHYNE
----------------------------------
Edward Rhyne
Vice President and General Counsel
iii
<PAGE>
Consent of Independent Public Accountants
The Board of Directors
SMG Corporation
We consent to the incorporation by reference in the registration statement (No.
333-58057) on Form S-3 of PalEx, Inc. of our report dated August 10, 1998,
except as to note 17 which is as of November 18, 1998, with respect to the
consolidated balance sheet of SMG Corporation as of May 31, 1998, and the
related consolidated statements of earnings and retained earnings and cash flows
for the year ended May 31, 1998, which report appears in the Form 8-K/A of
PalEx, Inc. dated September 11, 1998.
/s/ KPMG LLP
- -------------------
Kelowna, B.C.
November 18, 1998
1
<PAGE>
Consolidated financial statements of
SMG CORPORATION
Year ended May 31, 1998
2
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheet of SMG Corporation as at May 31,
1998 and the consolidated statements of earnings and retained earnings and cash
flows for the year then ended. These financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of SMG Corporation as at May 31, 1998
and the results of its operations and the changes in its cash flows for the year
then ended in accordance with generally accepted accounting principles in the
United States.
Kelowna, Canada
August 10, 1998, except as to note 17 which is as of November 18, 1998
3
<PAGE>
SMG CORPORATION
Consolidated Balance Sheet
May 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 327,902
Short term investments (note 3) 2,039,330
Accounts receivable 1,884,637
Canadian Pallet Council pallet inventory 1,362,854
Other inventories 204,146
Deposits and prepaid expenses 306,889
-------------------------------------------------------------------------------
6,125,758
Pallet rental pool (note 4) 3,773,395
Capital assets (note 5) 491,498
Advances to related parties (note 6) 437,667
Investment in partnership 29,277
Goodwill, net of accumulated amortization of $33,027 297,248
- --------------------------------------------------------------------------------
$11,154,843
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness (note 7) $ 373,042
Bankers acceptance sold short (note 8) 270,995
Accounts payable and accrued liabilities 1,058,338
Promissory note payable (note 9) 349,336
Income taxes payable 461,119
Current portion of long term debt 686,347
-------------------------------------------------------------------------------
3,199,177
Advances from related parties (note 10) 851,454
Long term debt (note 11) 2,059,020
Deferred income taxes (note 12) 572,374
Shareholders' equity
Share capital (note 13) 3,618,019
Retained earnings 882,988
-------------------------------------------------------------------------------
4,501,007
Foreign currency translation adjustment (28,189)
-------------------------------------------------------------------------------
4,472,818
Commitments (note 15)
Subsequent events (note 17)
- --------------------------------------------------------------------------------
$11,154,843
================================================================================
See accompanying notes to consolidated financial statements.
4
<PAGE>
SMG CORPORATION
Consolidated Statement of Earnings and Retained Earnings
Year ended May 31, 1998
- --------------------------------------------------------------------------------
Revenue
Rentals $ 3,829,694
Repairs 3,361,725
Retrieval 1,254,823
Canadian Pallet Council pallet sales 1,340,854
Other pallet sales 3,326,071
Other revenue 120,521
- --------------------------------------------------------------------------------
13,233,688
Direct costs
Cost of pallets repaired and sold 3,420,260
Salaries and benefits 2,922,082
Repairs, maintenance and disposal 462,360
Building and equipment rental 835,968
-------------------------------------------------------------------------------
7,640,670
- --------------------------------------------------------------------------------
Gross profit 5,593,018
Expenses
General and administrative 1,363,183
Selling and delivery 878,988
Management fees and salaries 1,208,791
Interest and sundry 74,428
Bad debts 32,969
-------------------------------------------------------------------------------
3,558,359
- --------------------------------------------------------------------------------
Earnings before the undernoted 2,034,659
Amortization 381,887
Equity in loss of partnership 27,089
Foreign exchange gain (3,836)
Loss on disposal of capital assets 1,240
- --------------------------------------------------------------------------------
Earnings before income taxes 1,628,279
- --------------------------------------------------------------------------------
Income taxes
Current 475,811
Deferred 269,480
-------------------------------------------------------------------------------
745,291
- --------------------------------------------------------------------------------
Net earnings, being retained earnings at end of year $ 882,988
================================================================================
See accompanying notes to consolidated financial statements.
5
<PAGE>
SMG CORPORATION
Consolidated Statement of Cash Flows
Year ended May 31, 1998
- --------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings $ 882,988
Items not involving cash:
Amortization 381,887
Equity in loss of partnership 27,089
Loss on disposal of capital assets 1,240
Foreign exchange gain (3,836)
Deferred income taxes 269,480
Impact on earnings of items acquired for non-cash consideration
Cost of pallets repaired and sold 768,787
Deposits and prepaid expenses 62,189
Change in non-cash operating working capital:
Accounts receivable (1,884,637)
Canadian Pallet Council pallet inventory (1,362,854)
Other inventories (204,146)
Deposits and prepaid expenses (306,889)
Accounts payable and accrued liabilities 1,058,338
Income taxes payable 461,119
- ------------------------------------------------------------------------------
150,755
Financing:
Bank indebtedness 373,042
Issuance of promissory note payable 349,336
Advances from related parties 851,454
Proceeds from long term debt 2,745,367
Issuance of share capital 2
- ------------------------------------------------------------------------------
4,319,201
Investments:
Bankers acceptances sold short 270,995
Expenditure on pallet rental pool (1,683,115)
Acquisition of capital assets (236,501)
Proceeds on disposal of capital assets 532
Advances to related parties (437,667)
----------------------------------------------------------------------------
(2,085,756)
- ------------------------------------------------------------------------------
Foreign currency translation adjustment (16,968)
- ------------------------------------------------------------------------------
Cash position, end of year $ 2,367,232
==============================================================================
Cash position represented by:
Cash $ 327,902
Short term investments 2,039,330
- ------------------------------------------------------------------------------
$2,367,232
==============================================================================
See accompanying notes to consolidated financial statements.
6
<PAGE>
SMG CORPORATION
Notes to Consolidated Financial Statements
YEAR ENDED MAY 31, 1998
- ------------------------------------------------------------------------------
SMG Corporation was incorporated under the Ontario Business Corporations Act
on May 30, 1997 and commenced operations on June 1, 1997. Its principal
business activity includes the rental, sale, repair and retrieval of pallets.
1. TRANSLATION OF FINANCIAL STATEMENTS:
SMG Corporation operates in Canada and its operations are conducted in Canadian
currency.
These statements are presented in United States currency for the convenience of
readers accustomed to United States currency. The method of translation
applied is as follows:
i) Assets and liabilities are translated at the rate of exchange in effect
at the balance sheet date, being US $1.00 per Cdn $1.4570.
ii) Revenues and expenses are translated at the average exchange rate for
the year ended May 31, 1998, being US $1.00 per Cdn $1.4105.
iii) The net adjustment arising from the translation is recorded as a
separate component of shareholders' equity called "foreign currency
translation adjustment".
2. SIGNIFICANT ACCOUNTING POLICIES:
a) Basis of presentation:
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in the United
States.
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries and reflect the merger of the
operations of Superior Pallet Corporation and Pallet Rental Group
(comprising Pallet Rental Systems Inc., Pallet Management Services Inc.
and Save-On-Pallets Ltd.) effective June 1, 1997. Under the terms of the
Master Merger Agreement, dated March 9, 1998, all of the operating assets
of Superior Pallet Corporation and Pallet Rental Group (the
"transferors") were transferred to SMG Corporation and its subsidiary
companies (the "transferees") at values agreed between the parties to
represent their best estimate of fair market values. Pursuant to the
Agreement, Superior Pallet Corporation and Pallet Rental Group share
equally in the ownership, decision making and earnings of the Company.
Accordingly, the merged company has been treated as a joint venture for
accounting purposes and the contributed assets are reflected in these
consolidated financial statements at predecessor cost. The parties have
agreed to utilize the tax deferred rollover provisions of Section 85(1)
of the Canadian Income Tax Act with respect to eligible assets
transferred. All inter-company transactions have been eliminated in these
consolidated financial statements.
7
<PAGE>
SMG CORPORATION
Notes to Consolidated Financial Statements (page 2)
YEAR ENDED MAY 31, 1998
- ------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
b) Canadian Pallet Council pallet inventory:
Canadian Pallet Council pallet inventory consists of Canadian Pallet Council
pallets held for resale or use in the pallet rental pool. Canadian Pallet
Council pallet inventory is stated at the lower of cost, on a first-in,
first-out basis, and net realizable value. Where the Company repairs its
own pallets, cost includes the laid-down cost of materials plus the cost
of direct labour and an applicable share of overhead.
c) Other inventories:
Other inventories, comprising repair materials and other pallets held for
sale, are stated at the lower of cost, on a first-in, first-out basis,
and net realizable value.
d) Investment in partnership:
The investment consists of a 5.52% interest in First Alliance Logistics
Management LLC, a United States limited liability corporation. The
investment is recorded on the equity basis. The market value of the
investment at May 31, 1998 is $28,231.
e) Pallet rental pool:
Pallet rental pool consists of Canadian Pallet Council pallets held for
rental and is stated at cost. Where the company repairs its own pallets,
cost includes the laid-down cost of materials plus the cost of direct
labour and an applicable share of overhead. Pallet rental pool, net of
residual values of $6.50 per pallet ($ Canadian), is amortized on a
straight-line basis at a rate of 20% per annum. Amortization in the year
of acquisition is recorded at one-half of the normal rate.
f) Capital assets:
Capital assets are stated at cost. Amortization is provided on the declining
balance basis using the following annual rates.
============================================================
Asset Rate
------------------------------------------------------------
Automotive equipment 30%
Computer hardware 30%
Computer software 100%
Leasehold improvements 20%
Office equipment 20%
Production equipment 30%
------------------------------------------------------------
Amortization in the year of acquisition of an asset is recorded at one-half of
the normal rate.
8
<PAGE>
SMG CORPORATION
Notes to Consolidated Financial Statements (page 3)
YEAR ENDED MAY 31, 1998
- ------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
g) Goodwill:
Goodwill represents the cost of the deferred income tax liability
attributable to the excess of the carrying values of the Canadian Pallet
Council pallet inventory, the pallet rental pool and capital assets over
their cost for income tax purposes at June 1, 1997. Goodwill is being
amortized on a straight-line basis over ten years.
h) Income taxes
The Company uses the liability method of accounting for income taxes,
wherein, deferred tax assets and liabilities are recognized for future
tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to reverse. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company's consolidated tax provision is based on rates and allowances
applicable in Canada and each of the provinces in which the Company
operates.
i) Financial instruments:
The carrying amounts for cash, short term investments, accounts receivable,
bank indebtedness, bankers acceptance sold short, accounts payable and
accrued liabilities and income taxes payable approximate fair value
because of the short term nature of these instruments. The fair value of
long term debt approximates its carrying value because it has a market
rate of interest attached to its repayment. It is not possible to arrive
at a fair value for advances to or from related parties and promissory
note payable as their maturity dates are not determinable.
j) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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.
9
<PAGE>
SMG CORPORATION
Notes to Consolidated Financial Statements (page 4)
YEAR ENDED MAY 31, 1998
- ------------------------------------------------------------------------------
3. SHORT TERM INVESTMENTS:
Royal Bank of Canada bankers acceptance,
bearing interest at 5.0%, maturing August 13, 1998 $1,626,284
Canadian Imperial Bank of Commerce
bankers acceptance bearing interest at 4.1%,
maturing June 30, 1998 68,626
Treasury bill mutual fund 343,171
Accrued interest 1,249
--------------------------------------------------------------------------
$2,039,330
==========================================================================
4. PALLET RENTAL POOL:
==========================================================================
Accumulated Net book
Cost amortization value
--------------------------------------------------------------------------
Pallet rental pool $3,952,510 $179,115 $3,773,395
==========================================================================
Amortization of $179,115 was charged to operations for the year.
5. CAPITAL ASSETS:
==========================================================================
Accumulated Net book
Cost amortization value
--------------------------------------------------------------------------
Automotive equipment $ 48,447 $ 14,534 $ 33,913
Computer hardware 75,307 18,894 56,413
Computer software 20,625 10,511 10,114
Leasehold improvements 29,384 5,877 23,507
Office equipment 46,522 8,384 38,138
Production equipment 428,769 99,356 329,413
--------------------------------------------------------------------------
$649,054 $157,556 $ 491,498
==========================================================================
Amortization of $157,556 was charged to operations for the year.
6. ADVANCES TO RELATED PARTIES:
Save-on-Pallets Ltd. $ 37,447
Superior Pallet Corporation 400,220
--------------------------------------------------------------------------
$ 437,667
==========================================================================
The advances to related parties bear no interest and have no fixed terms of
repayment.
7. BANK INDEBTEDNESS:
The Company has an operating line of credit to a maximum amount of $343,171
bearing interest at prime plus 0.50%, secured by the $343,171 treasury bill
mutual fund.
10
<PAGE>
SMG CORPORATION
Notes to Consolidated Financial Statements (page 5)
YEAR ENDED MAY 31, 1998
- ------------------------------------------------------------------------------
8. BANKERS ACCEPTANCE SOLD SHORT:
Royal Bank of Canada bankers acceptance
sold short, bearing interest at 5.3%, maturing
August 13, 1998 $ 270,995
--------------------------------------------------------------------------
9. PROMISSORY NOTE PAYABLE:
The promissory note is payable to a shareholder and is
non-interest bearing and due on demand.
10. ADVANCES FROM RELATED PARTIES:
Adian Industrial Sales Ltd. $ 18,018
Canadawide Pallet Services Ltd. 64,773
Pallet Management Services Inc. 319,992
Pallet Rental Systems Inc. 381,235
Superior Pallet Services Ltd. 67,436
--------------------------------------------------------------------------
$ 851,454
--------------------------------------------------------------------------
The advances from related parties bear no interest and have no fixed terms
of repayment.
11. LONG TERM DEBT:
Royal Bank of Canada loans bearing interest at prime
plus 0.50%, secured by general security agreements,
assignments of insurance and guarantees and
postponements of claim from the shareholders
repayable in monthly instalments of $45,756 $2,059,025
repayable in monthly instalments of $11,439 686,342
--------------------------------------------------------------------------
2,745,367
Less current portion 686,347
--------------------------------------------------------------------------
$2,059,020
--------------------------------------------------------------------------
The aggregate principal payments on account of long term debt for the years
subsequent to May 31, 1998, translated to United States currency as at
May 31, 1998, are as follows:
1999 - $686,347; 2000 - $686,347; 2001 - $686,347; 2002 - $549,068;
2003 - $137,257
11
<PAGE>
SMG CORPORATION
Notes to Consolidated Financial Statements (page 6)
YEAR ENDED MAY 31, 1998
- ------------------------------------------------------------------------------
12. INCOME TAXES:
The consolidated tax provision differs from that expected by applying the
combined Canadian Federal and provincial income rates to consolidated
earnings before income taxes, for the following reasons:
Expected combined Canadian federal and provincial income tax rate 44.07%
Expected provision for income taxes at the above rate $717,583
Increase (decrease) in income taxes resulting from:
Reduction of income tax rate for small business corporation (27,083)
Permanent differences 16,712
Large corporations tax 21,269
Increase in taxable income for non-deductible amortization
of goodwill 15,035
Other 1,775
----------------------------------------------------------------------------
Income taxes $745,291
----------------------------------------------------------------------------
Consisting of:
Current $475,811
Deferred 269,480
----------------------------------------------------------------------------
Income taxes $745,291
----------------------------------------------------------------------------
Deferred income taxes attributable principally to differences in carrying
values and tax costs of assets acquired in accordance with the Master Merger
Agreement (note 2a) are as follows:
Excess (deficiency)
of carrying value
over tax cost Deferred income
Asset at May 31, 1998 tax liability
---------------------------------------------------------------------------
Pallet rental pool $1,460,132 $643,480
Capital assets (161,347) (71,106)
---------------------------------------------------------------------------
$572,374
===========================================================================
12
<PAGE>
SMG CORPORATION
Notes to Consolidated Financial Statements (page 7)
YEAR ENDED MAY 31, 1998
- ------------------------------------------------------------------------------
13. SHARE CAPITAL:
Authorized:
Authorized share capital consists of an unlimited number of
shares of the following classes:
Common shares, entitled to one vote per share and entitled to dividends
as declared by directors, subject to a priority in favour of Class A
and Class B shares.
Class A non-voting shares, redeemable and retractable at the fair market
value of the consideration received on the issuance thereof, entitled
to non-cumulative dividends of not less than 1% and not more than 3%
of their redemption amount.
Class B non-voting shares, redeemable and retractable at the fair market
value of the consideration received on the issuance thereof, entitled
to non-cumulative dividends of not less than 1% and not more than 3%
of their redemption amount.
================================================================================
Number of shares Amount
- --------------------------------------------------------------------------------
Issued:
Common shares
For cash 2 $ 2
For assets 18,735,900 3,618,017
- -------------------------------------------------------------------------------
Balance, May 31, 1998 18,735,902 $3,618,019
===============================================================================
14. RELATED PARTY TRANSACTIONS:
During the year, the Company sold goods to, purchased goods from, purchased
services from and paid management fees to related parties. The total related
party transactions recorded in the statement of operations and deficit are
as follows:
Revenue
Repairs $ 59,631
Other pallet sales 308,133
- --------------------------------------------------------------------------------
$ 367,764
================================================================================
Direct costs
Cost of pallets repaired and sold $ 145,373
Salaries and benefits 85,073
Repairs, maintenance and disposal 17,356
Building and equipment rental 361,227
- --------------------------------------------------------------------------------
$ 609,029
================================================================================
13
<PAGE>
SMG CORPORATION
Notes to Consolidated Financial Statements (page 8)
YEAR ENDED MAY 31, 1998
- -------------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS (CONTINUED):
Expenses
General and administrative $ 533,274
Selling and delivery 54,781
Management fees and salaries 967,387
- -------------------------------------------------------------------------------
$1,555,442
===============================================================================
Of these amounts, $77,461 is included in accounts receivable and $207,847 is
included in accounts payable and accrued liabilities at May 31, 1998.
15. COMMITMENTS:
The Company, is committed to minimum payments under operating leases, with
various expiry dates for automobiles, equipment and premises though 2003.
Translated to United States currency as at May 31, 1998, the aggregate
amount of these payments is $1,824,100 and minimum annual payments are:
1999 - $702,569; 2000 - $523,358; 2001 - $352,922; 2002 - $230,977;
2003 - $14,275.
16. SEGMENTED INFORMATION:
Management has determined that the Company operates in one dominant industry
segment which involves pallet services.
17. SUBSEQUENT EVENTS:
a) Canadian Pallet Council pallet purchase:
Effective September 9, 1998, the Company, through a wholly-owned
subsidiary, purchased Canadian Pallet council pallets, rental contracts
and the business names from St-Remi Pallet (Canada) Inc. and Lo-Kost
Pallet Leasing Corp. The aggregate purchase price was Cdn $5,969,003,
which was equivalent to US $3,924,394 as at September 9, 1998 and was
paid in cash.
b) Sale of SMG Corporation:
On September 11, 1998, a wholly owned Canadian subsidiary of PalEx, Inc.,
a United States public corporation, acquired all of the issued and
outstanding shares of the Company.
14
<PAGE>
PALEX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma consolidated statements of income include
the supplemental consolidated financial statements as previously filed in Form
8-K/A with the Commission on April 28, 1998 for the year ended December 28,
1997. The unaudited pro forma consolidated financial statements give effect to
the acquisitions by PalEx, Inc. ("PalEx" or the "Company") 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. During the third and fourth quarters of 1997,
PalEx acquired five additional manufacturers of wooden pallets, four of which
were accounted for using the pooling-of-interests method of accounting (the
"Pooled Companies"). The fifth company, Summers Pallet Manufacturing, Inc.
("Summers") was accounted for as a purchase.
Through October 22, 1998, the Company has acquired 17 additional companies,
4 of which, Acme Barrel Company, Inc. ("Acme"), Drum Service Co. of Florida
("DSF"), Consolidated Container Corporation ("CCC") and Western Container,
Limited Liability Company ("Western"), were accounted for as poolings-of-
interests (the "1998 Pooled Companies"). The other 13 companies, Consolidated
Drum Reconditioning, Inc. ("CDR"), American Pallet Recyclers, Inc. ("APR"),
Capital Pallet, Incorporated ("Capital"), Pallet Outlet Company, Inc. ("POC"),
Southern Pallets, Inc. ("Southern"), Shipshewana Pallet Co., Inc.
("Shipshewana"), Gilbert Lumber Inc. ("Gilbert"), Valley Pallets, Inc.
("Valley"), Duckert Pallet Co., Inc. ("Duckert"), Continental Associated
Investments ("Continental"), Isaacson Lumber Company (Isaacson), McCook Drum &
Barrel Co., Inc. ("McCook"), and SMG Corporation ("SMG") were accounted for as
purchases (the "1998 Purchased Companies" and, together with Summers, the
"Purchased Companies"). Six of the 17 companies acquired after fiscal 1997 and
through September 1998 are engaged in the reconditioning and rebuilding of
industrial steel containers. SMG is engaged in the rental of pallets in Canada.
The accompanying unaudited pro forma consolidated statements of income
present Fraser and the other Founding Companies combined with the Pooled
Companies, the 1998 Pooled Companies and the Purchased Companies as if they had
occurred on January 1, 1997. All significant intercompany transactions have been
eliminated.
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
they offset, cannot be quantified accurately. Neither the anticipated savings
nor the anticipated costs have been included in the proforma statements of
income of PalEx.
The proforma 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,
Pooled Companies, 1998 Pooled Companies and Purchased 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 Company's
supplemental consolidated financial statements.
15
<PAGE>
PALEX, INC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 28, 1997
(In thousands, except share and per share date)
<TABLE>
<CAPTION>
Supplemental Total
Financial Purchase Pro Forma
Statements Acquisitions Adjustments Pro Forma
(Note 1) (Note 2)
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
REVENUES $222,993 $150,391 - $ 373,384
COST OF GOODS SOLD 188,084 114,015 - 302,099
-------- -------- -------- -----------
Gross Profit 34,909 36,376 71,285
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,155 20,610 (7,944) [a] 33,821
GOODWILL AMORTIZATION 593 3,439 [b] 4,032
-------- -------- -------- -----------
Income from operations 13,161 15,766 4,505 33,432
INTEREST EXPENSE (1,722) (3,058) (4,745) [c] (8,877)
648 [d]
OTHER INCOME (EXPENSE), NET (95) (2,223) - (2,318)
-------- -------- -------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 11,344 10,485 408 22,237
PROVISION FOR INCOME TAXES 4,704 4,346 [e] 9,050
NET INCOME (LOSS) $ 6,640 $ 10,485 $ (3,938) $ 13,187
======== ======== ======== ===========
Net income per share - diluted $ 0.65 [f]
===========
Shares used in computing net income
per share - diluted 20,350,033 [g]
===========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements
16
<PAGE>
PALEX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 27, 1998
(In thousands, except for share and per share data)
<TABLE>
<CAPTION>
Total
Purchase Pro Forma
As Previously Acquisitions Adjustments
Reported (Note 1) (Note 2) Pro Forma
------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
REVENUES $230,244 $55,945 $ - $286,189
COST OF GOODS SOLD 186,499 43,299 - 229,798
INVENTORY VALUATION ADJUST 1,679 - - 1,679
-------- ------- ------- ---------
Gross Profit 42,066 12,646 - 54,712
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 24,109 9,761 (1,041) (a) 32,829
POOLING EXPENSES 1,841 - (1,841) (a) -
COMPENSATION DIFFERENTIAL 1,062 - (1,062) (a) -
GOODWILL AMORTIZATION 1,843 - 1,165 (b) 3,008
RESTRUCTURING EXPENSE 2,404 - - 2,404
PLANT CLOSURE COSTS AND ASSET
ABANDONMENT LOSS 1,369 - - 1,369
-------- ------- ------- ---------
Income from Operations 9,438 2,885 2,779 15,102
INTEREST EXPENSE (5,320) (741) (2,147) [c] (7,922)
- - 286 [d]
OTHER INCOME (EXPENSE), NET 273 (89) - 184
-------- ------- ------- ---------
INCOME BEFORE PROVISION
FOR INCOME TAXES 4,391 2,055 918 7,364
PROVISION FOR INCOME TAXES 1,885 - 1,348 [e] 3,233
-------- ------- ------- ---------
NET INCOME (LOSS) $ 2,506 $ 2,055 $ (430) $ 4,131
======== ======= ======= =========
Net income per share - diluted 0.20 [f]
Shares used in computing net
income per share - diluted 20,387,025 [g]
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements
17
<PAGE>
PALEX, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
1. TOTAL PURCHASE ACQUISITIONS
The total purchase acquisitions reflected in the unaudited pro forma
consolidated statements of income include the operations of Ridge, Interstate
and the Purchased Companies from the beginning of the period presented through
their respective acquisition dates.
2. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME ADJUSTMENTS:
a. Adjusts compensation to the level the owners of the Founding, Pooled, 1998
Pooled and Purchased Companies have agreed to receive as a result of the
acquisitions, revisions of certain lease agreements between certain stockholders
and the Company as a result of the purchase by the Company of the related assets
and pooling expenses incurred in conjunction with the Pooled and 1998 Pooled
Companies.
b. Reflects 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 No. 128 ("SFAS No. 128", "Earnings Per
Share"). The Company adopted SFAS No. 128 for the year ended December 28, 1997.
SFAS No. 128 simplifies the standards required under current accounting rules
for computing earnings per share and replaces the presentation of primary net
income per share and fully diluted net income per share with a presentation of
basic net income per share ("Net income per share") and diluted net income per
share ("Net income per share - diluted"). Net income per share excludes dilution
and is determined by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period. Net
income per share - diluted reflects the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock. Net income per share - diluted is computed similarly to fully
diluted net income per share under previous accounting rules.
g. Includes (i) 1,071,389 shares issued by PalEx prior to the Offering, (ii)
3,160,742 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,
(v) 3,000,000 shares issued in connection with the Offering, (vi) 285,675 shares
issued in connection with the purchase of Summers, (vii) 3,624,215 shares issued
to the stockholders of the 1998 Pooled Companies, (viii) 2,318,260 shares issued
in connection with the purchase of the 1998 Purchased Companies, (ix) 6,500
shares issued in accordance with option agreements with key employees, (x)
450,000 shares sold pursuant to an overallotment option and (xi) the effect,
using the treasury stock method, of option shares granted to management,
directors and key employees (380,752 shares for the year ended December 28, 1997
and 417,744 shares for the nine months ended September 27, 1998).
18
