PALEX INC, S-3, 1998-06-30

PALEX INC
S-3, 1998-06-30
MILLWOOD, VENEER, PLYWOOD, & STRUCTURAL WOOD MEMBERS

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As filed with the Securities and Exchange Commission on June 30, 1998

REGISTRATION NO. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM S-3

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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PALEX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<CAPTION>
<S> <C> <C>
DELAWARE 2248 76-0520673
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)

</TABLE>
1360 POST OAK BLVD., SUITE 800
HOUSTON, TEXAS 77056
(713) 350-6030
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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EDWARD E. RHYNE
VICE PRESIDENT AND GENERAL COUNSEL
1360 POST OAK BLVD., SUITE 800
HOUSTON, TEXAS 77056
(713) 350-6030
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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

CALCULATION OF REGISTRATION FEE

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Proposed
Title of Shares Amount To Be Maximum Proposed Maximum Amount of
to Be Registered Registered Offering Price Aggregate Offering Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share 2,029,674 $9.56/(1)/ $19,403,683 $5,725
Common Stock, $.01 par value per share 538,590/(2)/ $9.75 $ 5,251,253 $1,592/(2)/
=================================================================================================================================
</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the average high and low sale prices of the Common
Stock on the Nasdaq National Market on June 23, 1998.

(2) Pursuant to Rule 429 under the Securities Act of 1933, as amended,
("Securities Act") these shares and the filing fee of $1,592 relating
thereto are being carried forward to this Registration Statement from
Registration Statement No. 333-28027.

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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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.[X]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]

If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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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 JUNE 30, 1998

2,568,264 SHARES

[LOGO OF PALEX APPEARS HERE]

COMMON STOCK
____________________

This Prospectus covers 2,568,264 shares of common stock, $.01 par value (the
"Common Stock), that may be offered by certain stockholders (the "Selling
Stockholders") of PalEx, Inc. (together with is subsidiaries, "PalEx" or the
"Company") from time to time directly or through one or more broker-dealers, in
one or more transactions on The Nasdaq National Market, in the over-the-counter
market, in negotiated transactions or otherwise, or through a combination of
such methods, at fixed prices, which may be changed, at market prices or at
negotiated prices. All of the shares covered by this Prospectus were issued to
the Selling Stockholders in connection with the Company's acquisitions of
various businesses that were previously owned by various Selling Stockholders.
The Company will not receive any of the proceeds from the sale of any shares by
the Selling Stockholders.

The Selling Stockholders and any broker-dealers, agents or underwriters that
participate with any Selling Stockholder in the distribution of the Common Stock
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any commissions or profit received
by them and any profit on the resale of the shares of Common Stock may be deemed
to be underwriting commissions or discounts under the Securities Act.

The Company has agreed to bear all printing and certain legal, filing and
other similar expenses of registration of the Common Stock offered hereby under
federal and state securities laws. The Selling Stockholders will bear all other
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 June 26, 1998 was $9.75 per share.

____________________

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 3.
____________________

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 ________ _____, 1998.
<PAGE>

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The following documents of the Company filed with the Securities and
Exchange Commission (the "Commission") (File No. 000-22237) are incorporated
herein by reference:

(1) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 29, 1998, as filed with the Commission on May 13, 1998;

(2) the Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1997, as filed with the Commission on March 30, 1998 and as amended
on Form 10-K/A, as filed with the Commission on April 27, 1998;

(3) the Company's Current Report on Form 8-K, as filed with the
Commission on February 27, 1998 and amended on Form 8-K/A, as filed with the
Commission on April 28, 1998; and

(4) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A, as filed with the Commission on January 17,
1997, which incorporated by reference the section titled "Description of Capital
Stock" contained in the Prospectus filed with the Commission on December 24,
1996 as part of the Company's Registration Statement on Form S-1 (Registration
No. 333-18683), as amended by the Company's Registration Statement on Amendment
No. 1 to Form 8-A on Form 8-A/A, as filed with the Commission on January 28,
1997, and the Registration Statement on Form 8-A, as filed with the Commission
on March 13, 1997 (Commission File No. 000-22237).

In addition, all reports and other documents filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to the date of
effectiveness of the Registration Statement of which this Prospectus is a part
and prior to the termination of the offering made hereby, shall be deemed to be
incorporated by reference into this Prospectus.

Any statement contained herein or incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.

The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of the documents incorporated by reference herein, excluding the exhibits to
such documents (unless such exhibits are specifically incorporated by reference
into such documents). Requests should be made to PalEx, Inc., 1360 Post Oak
Blvd., Suite 800, Houston, Texas 77056, Attention: Corporate Secretary,
telephone number (713) 350-6030.

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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 businesses
engaged in pallet manufacturing and recycling. Since that time, and through May
31, 1998, the Company has acquired ten additional pallet companies, making it
the largest producer of new pallets and the largest pallet recycler in the U.S.
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); and the processing and marketing of various wood-based by-products
derived from pallet recycling operations. The Company currently conducts its
pallet operations from 38 facilities in Alabama, Arkansas, Arizona, California,
Florida, Georgia, Illinois, Mississippi, North Carolina, Oklahoma, Pennsylvania,
South Carolina, Texas, Virginia and Wisconsin. The Company intends to actively
pursue additional acquisitions of pallet companies as part of its growth
strategy.

In separate transactions in February 1998, PalEx acquired Acme Barrel
Company, Inc., Container Services Company, Consolidated Container Corporation
and Drum Service Co. of Florida (collectively, the "Container Group"), expanding
the Company's operations into the industrial container management industry. As a
result of these acquisitions, the Company is now the largest reconditioner of
steel drums in the U.S. The Company currently conducts drum reconditioning
operations from 12 facilities in California, Colorado, Florida, Georgia,
Illinois, Kansas, Minnesota, Utah and Washington. The Company intends to
actively pursue additional acquisitions of steel drum reconditioners as part of
its growth strategy.

The Company believes that it is in a position 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 also anticipates that, once the individual operations of
the Container Group are integrated with the Company's operations, its
acquisition of the Container Group will result in synergies and economies of
scale by allowing the combined enterprises to more efficiently utilize their
transportation fleets and systems, cross-sell services and products to the
combined enterprises' customers and combine duplicate administrative functions.

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.

In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the U.S. federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, projected or anticipated benefits from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings, or other aspects of operating results. The words
"expect," "believe," "anticipate," "project," "estimate," and similar
expressions are intended to identify forward-looking statements. The Company
cautions readers that such statements are not guarantees of future performance
or events and are subject to a number of factors that may tend to influence the
accuracy of the statements and the projections upon which the statements are
based, including but not limited to those discussed below. As noted elsewhere
in this report, all phases of the Company's operations are subject to a number
of uncertainties, risks, and other influences, many of which are outside the
control of the Company, and any one of which, or a combination of which, could
materially affect the results of the Company's operations and whether forward-
looking statements made by the Company ultimately prove to be accurate.

The following discussion, and discussions elsewhere in this Prospectus,
outlines certain factors that could affect the Company's consolidated results of
operations for 1998 and beyond and cause them to differ materially from those
that may be set forth in forward-looking statements made by or on behalf of the
Company.

Termination of Relationship with CHEP. On April 29, 1998, the Company
notified its largest customer, CHEP USA ("CHEP"), that PalEx was terminating all
of its existing agreements with CHEP. During the fiscal year ended December 28,
1997 and the quarter ended March 29, 1998, approximately 35% and 21%,
respectively, of the Company's revenues were attributable to CHEP. Certain of
the Company's facilities dedicated to CHEP production may be closed, while
operations at certain other facilities are reduced or converted to alternative
business activities. The Company's results of operations for the quarter ended
June 28, 1998 will include an after tax charge to continuing operations of
between $1.0 million and $3.0 million, which represents management's estimate of
the restructuring costs associated with the closing or conversion of such
facilities. There can be no assurance that the Company will be able to replace
the revenues attributable to CHEP or that any replacement business will be more
profitable than CHEP's business.

Limited Combined Operating History. The Company was formed in January 1996
and conducted no operations prior to the acquisition of its three founding
companies in March 1997. From its inception through May 31, 1998, PalEx
acquired 17 companies, and it intends to continue to make acquisitions. In most
cases, the managers of the acquired companies have continued to operate their
companies after being acquired by the Company. There can be no assurance that
the Company will be able to successfully integrate these companies into the
Company's operations or that any successful integration could occur without
substantial costs, delays or other problems. In addition, there can be no
assurance that the Company's executive management group will be able to oversee
the combined entity and effectively implement the Company's operating or growth
strategies in each of the markets that the Company serves. Finally, there can
be no assurance that the pace of PalEx's acquisitions will not adversely affect
the Company's efforts to integrate acquisitions and manage those acquisitions
profitably.

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

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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.
While the Company purchases plywood and lumber from numerous vendors, 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 1997, 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.

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, hire and retain employees,
obtain raw materials at acceptable prices, open additional 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 and drum reconditioning companies.
There can be no assurance that the Company will be able to identify or acquire
additional businesses or integrate and manage such additional businesses
successfully. Acquisitions may involve a number of risks, including: adverse
short-term effects on the Company's reported operating results; diversion of
management's attention; dependence on retention, hiring and training of key
personnel; risks associated with unanticipated problems or legal liabilities;
and amortization of acquired intangible assets. Some or all of these risks
could have a material adverse effect on the Company's financial condition or
results of operations. In addition, if consolidation becomes more prevalent in
the industries in which the Company operates, then 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.

Financing. The Company intends to continue 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.

The Company is a party to a credit facility with Bank One, Texas, NA and a
syndicate of banks (the "Credit Facility") that allows the Company to borrow up
to $125.0 million to be used for general corporate purposes, future
acquisitions, capital expenditures and working capital. The Credit 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. The amount available to be
borrowed under the Credit Facility for acquisitions or to refinance acquired
company indebtedness varies from time to time depending on the level of, on a
pro forma basis reflecting consummated acquisitions, the Company's capital
expenditures, consolidated tangible assets, net worth, earnings before interest,
taxes, depreciation and amortization and total indebtedness and related interest
expense. The approximate level of borrowings available under the Credit
Facility at June 15, 1998 was approximately $26.4 million.

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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 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 in 1997.

Seasonality; Fluctuation of Operating Results. The Company's businesses
can be subject to seasonal variations in operations and demand. The Company's
operations experience the greatest demand for new pallets and reconditioned
drums during the citrus and produce harvesting seasons (generally October
through May), with significantly lower demand from the citrus and produce
industries in the summer months. Moreover, yearly results can also fluctuate
significantly, particularly in the southeast and western regions 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. Quarterly results may also be
materially affected by the timing of acquisitions, the timing and magnitude of
acquisition assimilation costs, costs of opening new facilities, gain or loss of
a material customer, variation in product mix and weather conditions. In
addition, the Company's revenues and gross margins can fluctuate significantly
with variations in lumber prices. Accordingly, the Company's performance in any
particular quarter may not be indicative of the results which can be expected
for any other quarter or for the entire year.

Labor Relations. At March 31, 1998, the Company had approximately 3,200
employees. Approximately 375 employees of the Company's drum reconditioning
subsidiaries are members of various labor unions. The Company's inability to
negotiate acceptable contracts with these unions as existing agreements expire
could result in strikes by the affected workers and increased operating costs as
a result of higher wages or benefits paid to union members. If the unionized
employees were to engage in a strike or other work stoppage, or other employees
were to become unionized, the Company could experience a significant disruption
of its operations and higher ongoing labor costs, which could have a material
adverse effect on the Company's business and results of operations.

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.
If the Company is unable to manage its growth efficiently and effectively, or is
unable to attract and retain additional qualified management, then the Company's
financial condition and results of operations could be materially adversely
affected.

Competition. The markets for pallet manufacturing and recycling services
and drum reconditioning 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 or provide drum reconditioning
services 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
or drum reconditioning business in the future, changing the competitive

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dynamics of each of these industries. The Company has competed in the past, and
will continue to compete, with lumber mills in the sale of new pallets and with
manufacturers of new steel and plastic drums. 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 and that non-
steel drums currently account for approximately 30% of the 55-gallon drum
market, there can be no assurance that the Company will not face increasing
competition in the future from pallets fabricated from non-wooden components and
55-gallon drums fabricated from non-steel components.

Effect of Non-Compete Agreement. Sonoma Pacific and its former
stockholders are parties to non-competition agreements which may restrict until
July 31, 1998, Sonoma Pacific's and its affiliates' and 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. Interstate and its former
stockholder were parties to similar non-competition agreements that terminated
on January 14, 1998. 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.

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.

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.

Control by Existing Management and Stockholders. The Company's executive
officers, directors and key employees (including officers of the Company's
subsidiaries who were the principal stockholders of such companies prior to
their acquisition by the Company), and entities and persons affiliated with
them, beneficially owned, as of June 18, 1998, 67% 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.

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

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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. See
"Business - Regulation."

In February 1998, a wholly owned subsidiary of the Company acquired Drum
Service of Florida, a steel drum reconditioning company with a facility in
Florida ("Drum Service"). In 1982, Drum Service was notified by the U.S.
Environmental Protection Agency (the "EPA) and the Florida Department of
Environmental Regulation (the "DER") that Drum Service had been identified as a
potentially responsible party ("PRP") with respect to the Zellwood Groundwater
Contamination Site in Orange County, Florida (the "Zellwood Site"). The
Zellwood Site was designated a "Superfund" environmental clean-up site after the
DER discovered arsenic contamination in a shallow monitoring well adjacent to
the site. The Drum Service facility is located on a portion of the 57 acres
constituting the Zellwood Site. The Company believes that Drum Service and its
former sole shareholder were among approximately 25 entities and individuals
identified as PRPs by the EPA.

Between March 1990 and July 1996, the EPA issued various unilateral
administrative orders and notices to Drum Service and the other PRPs regarding
the Zellwood Site. Those orders and notices demanded reimbursement from the
PRPs of approximately $2 million of the EPA's costs related to the Zellwood Site
and requested the PRPs to accept financial responsibility for additional clean-
up efforts. During that time, the EPA estimated that the cost of the selected
remedy for soil at the Zellwood Site would be approximately $1 million and the
cost of the selected remedy for groundwater at the Zellwood Site would be
approximately $5.1 million. Drum Service and the other PRPs did not agree to
the EPA's demands or agree to fund any additional clean-up. In April 1997, the
EPA issued an order unilaterally withdrawing its previous orders.

Drum Service has maintained comprehensive general liability insurance
coverage over the past 25 years and has notified various insurers of the EPA's
claims regarding the Zellwood Site. A number of those relevant insurance
policies did not contain an exclusion for pollution. In 1992, Drum Service
settled a claim with one insurer for an amount that covered a substantial
portion of the costs Drum Service had incurred in dealing with the EPA and the
DER. Drum Service has identified other umbrella liability policies for which
coverage may also be available and has been approached by the insurer under two
of those policies seeking a settlement. In addition, the former shareholders of
Drum Service have agreed through a contribution agreement with the Company to
bear any liabilities and expenses with respect to the Zellwood Site, to the
extent such liabilities and expenses exceed the Company's insurance recoveries.

The Company does not know when, if ever, the EPA may make a claim against
Drum Service regarding the Zellwood Site. Further, the Company cannot estimate
the amount of any such claim or, in light of the existence of other PRPs, the
extent of any liability of Drum Service or whether any such liability would have
a material adverse effect on the Company or its financial condition or results
of operations. The Company and Drum Service will continue to determine the
availability of additional insurance coverage for this matter.

Possible Volatility of Stock. The Common Stock is quoted and traded 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. 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 Common Stock may be
adversely affected by the sale, or availability for sale, of substantial amounts
of Common Stock in the public market. As of June 18, 1998, the Company had
approximately 18.9 million shares of Common Stock outstanding. After giving
effect to the registration of the shares of Common Stock covered by this
Prospectus, approximately 6.5 million shares are freely tradeable. An

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additional approximately 2.1 million shares are, or after August 1, 1998 will
be, eligible for resale pursuant to Rule 144 and Rule 145 of the Securities Act.
These shares are owned by officers of the Company and its subsidiaries and
former owners of acquired businesses.

Dividends. The Company intends to retain its earnings for continued
development of its businesses and does not intend to pay cash dividends on the
Common Stock in the foreseeable future. In addition, the Credit Facility
includes, and any additional credit facilities obtained in the future may
include, restrictions on the Company's ability to pay dividends without the
consent of the lender.

Year 2000 Compliant Information Systems. The Company uses software
and related technologies throughout its businesses that may be affected by the
so-called "Year 2000 problem." This problem, which is common to most
businesses, concerns the inability of information systems, primarily computer
software programs, to properly recognize and process date sensitive information
after year 2000. The Company is in the process of modifying the software in its
management information system so that all of such software will be year 2000
compliant. The Company believes that it will be able to modify all such
software in time to minimize any detrimental effects on operations. There can
be no assurance, however, that the Company will timely complete such
modifications. Other operational areas that may be affected by year 2000 issues
are being studied. Failure of the Company, its vendors or its customers to
have in place year 2000 compliant systems could have a material adverse affect
on the Company.

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<PAGE>

PRICE RANGE OF COMMON STOCK

The Common Stock has traded on The Nasdaq National Market under the symbol
"PALX" since March 20, 1997, the date of the Company's initial public offering.
The following table sets forth the range of high and low sale prices for the
Common Stock, as reported on The Nasdaq National Market, for the period from
March 20, 1997 through June 15, 1998. During 1997, the Company changed its
fiscal year-end to the last Sunday of each December from a fiscal year ending on
the last Sunday of each November.
<TABLE>
<CAPTION>

High Low
------ ------
<S> <C> <C>

FISCAL YEAR 1997
Second Quarter (March 20, 1997 - June 1, 1997) $10.25 $ 7.75
Third Quarter (June 2, 1997 - August 31, 1997) $14.25 $ 9.63
Fourth Quarter (September 1, 1997 - December 28, 1997) $15.88 $11.25

FISCAL YEAR 1998
First Quarter (December 29, 1997 - March 29, 1998 $15.00 $11.13
Second Quarter (March 30, 1998 - June 26, 1998) $13.38 $ 9.25

</TABLE>

On June 26, 1998, the last reported sale price of the Common Stock on The
Nasdaq National Market was $9.75 per share. On the same date, there were
approximately 152 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 Credit Facility includes,
and any additional credit facilities established in the future may include,
restrictions on the ability of the Company to pay dividends without the consent
of the lender. In addition, any payment of dividends in the future will be at
the discretion of the Board of Directors of the Company and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions with respect to
the payment of dividends and other factors that the Board of Directors deem
relevant.

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<PAGE>

BUSINESS

INTRODUCTION

PalEx was formed in January 1996 to create a national provider of pallets
and related services. Concurrently with the closing of the Offering, PalEx
acquired three businesses engaged in pallet manufacturing and recycling. Since
that time, and through May 31, 1998, the Company acquired ten additional pallet
companies, making it the largest producer of new pallets and the largest pallet
recycler in the U.S. 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); and the processing and marketing of various wood-based by-
products derived from pallet recycling operations. The Company currently
conducts its pallet operations from 38 facilities in Alabama, Arkansas, Arizona,
California, Florida, Georgia, Illinois, Mississippi, North Carolina, Oklahoma,
Pennsylvania, South Carolina, Texas, Virginia and Wisconsin. The Company intends
to actively pursue additional acquisitions of pallet companies as part of its
growth strategy.

The Company's executive offices are located at 1360 Post Oak Blvd., Suite
800, Houston, Texas 77056, and its telephone number at that address is (713)
350-6030.

PALLET INDUSTRY OVERVIEW

Based on information supplied by industry sources, the Company estimates
that the U.S. pallet industry generated revenues of approximately $6 billion in
1996 and that it is served by approximately 3,800 companies, most of which are
small, privately held entities operating in only one location and serving
customers within a limited geographic radius. The industry generally is
composed of companies that manufacture new pallets and companies that

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repair and recycle pallets. The Company estimates, based on industry sources,
that during 1996 approximately 450 million new wooden pallets were produced and
approximately 85 million wooden pallets were recycled. 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 most pallets are made of wood, they may also be
made of 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, which utilizes 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
use pallets having specifications that are appropriate for their particular
needs. Based on information supplied by industry sources, the Company believes
that in 1996 over 90% of the pallets used were of the traditional wooden type,
fabricated from lumber and metal fasteners. The wooden pallet has traditionally
been the basis for the design of storage racks, warehouse storage areas,
forklifts, docks and containers used in shipping goods.

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

The broad changes affecting U.S. industry have created significant demand
for higher quality pallets distributed through an efficient, more sophisticated
system. Environmental and cost concerns have also accelerated the trend toward
increased reuse or "recycling" of previously used pallets, further increasing
the importance of the quality of newly manufactured pallets.

STEEL DRUM RECONDITIONING INDUSTRY OVERVIEW

According to industry sources, steel drum recyclers and reconditioners
process an estimated 40 million drums annually, which represents approximately
$500 million in revenues and includes approximately 160 reconditioners. Steel
drums are part of the non-bulk industrial packaging industry and are found in
virtually every industrial facility. The 55 gallon steel drum is used to
transport and store products primarily for the petroleum, chemical, coatings,
agricultural and food processing industries.

Companies that use steel drums can choose between new and reconditioned
steel drums. Reconditioned steel drums are previously used drums that are
cleaned, repaired and refurbished and are a cost effective alternative to new
drums. Steel drums can typically be reconditioned and reused six to eight times
and can then be scraped and recycled. Similar to many other recycling
industries, drum reconditioners return a useful product to the market place and
solve a major disposal problem that would otherwise severely burden industry and
municipalities.

There are two basic types of steel drums - open top and closed top. Open
top drums are those containers that have a removable top that is fastened to the
drum by a locking ring. Open top drums are reconditioned using a thermal

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process using high temperature furnaces. Open top drums are generally used for
agricultural purposes and for viscous materials, such as paints, coatings,
greases and adhesives. Closed top drums are those in which the top is an
integral part of the drum's construction. These drums are reconditioned using a
chemical washing process. Closed top drums are typically used for solvents,
resins and most petroleum products.

Steel drum reconditioners tend to be regionally located in the more
industrialized areas of the country and certain agricultural areas such as the
West Coast and Florida. These companies are regionally located because of the
unfavorable freight costs of shipping empty drums long distances.

DESCRIPTION OF SERVICES

New Pallet Manufacturing. New pallet manufacturing represented
approximately 69% and 61%, respectively, of the Company's revenues for the
fiscal year ended December 28, 1997 and the quarter ended March 29, 1998. 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 hardwoods (including oak, poplar, alder and gum), with the
balance consisting of pine or other softwoods.

The Company uses sawing equipment that 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 that nail the pallets together. 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 by two laborers
utilizing pneumatic nailers. The Company typically manufactures pallets upon
receipt of customer orders and generally does not maintain a significant
inventory of completed pallets.

Pallet Repair, Remanufacture and Recycling. Many new pallets are discarded
by pallet users after one trip. However, pallets can be recovered, repaired, if
necessary, and reused. In addition, used pallets that are beyond repair can be
disassembled, and the recovered lumber can be reused to repair used pallets.
Pallet repair and recycling operations begin 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. Repairable pallets have their damaged boards replaced with
salvaged boards or boards from new stock inventoried at the repair 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 increasing automation, pallet recycling remains a labor intensive
process. Non-CHEP pallet repair, remanufacturing and recycling represented
approximately 12% and 20%, respectively, of the Company's revenues for the 1997
fiscal year and the quarter ended March 29, 1998.

Drum Reconditioning. Although the drum reconditioning process varies
slightly throughout the industry, two basic processes are used to recondition
steel drums, depending on whether the drums to be reconditioned are closed top
drums or open top drums.

Closed top drums are typically used to transport and store oils, solvents
and flowable resins and are steel containers with 2" and 3/4" head openings in
the top of the drum. Closed top drums are reconditioned by cleaning the
interior of the drum at a series of high-pressure alkaline and acid flush-and-
rinse stations. Pneumatic machinery reshapes the drum by removing dents and
restoring chimes (the top and bottom lid seals). Pressure tests are then
performed to check each drum for leakage, which tests are required by Department
of Transportation regulations. The old exterior coatings are stripped from the
drums with an alkaline solution and steel -shot blasting. New decorative

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<PAGE>

coatings are then applied and baked on to provide a new durable exterior finish.
The thermal treatment used on open top drums can not be used on closed top drums
unless the drum heads are removed.

A steel drum with a fully removable head is referred to as an open top
drum. This type of drum is used for a number of agricultural and industrial
applications such as for storing and shipping citrus, berries, foodstuffs,
adhesives and coatings. Open top drums are reconditioned using a thermal
process. This process involves passing drums through a furnace that is heated
to approximately 1,200 degrees Fahrenheit and vaporizing any residual materials
inside the drums. Residual chemicals and compounds created from this process
are then drawn into an afterburner and destroyed by temperatures approaching
1,850 degrees Fahrenheit. Steel-shot blasting then strips old finishes from
both the interiors and exteriors of drums. After the shot blasting process, the
drums pass through a series of hydraulic and pneumatic equipment to restore the
drums' shape and integrity. Finally, new interior protective and exterior
decorative coatings are baked onto the drums.

When closed top drums contain residues that can not be purged through the
standard procedures described above, the drums are converted to open top drums
by cutting off the heads of the drums. The drums are then reconditioned as open
top drums and (i) are used as converted open top drums or (ii) are reseamed and
have new heads installed so that they can be re-used as a slightly shorter
closed top drum.

Waste separated from drums in the reconditioning process is packaged and
shipped to appropriate landfills or incinerated in accordance with strict
environmental controls. Worn out drums that can no longer be reconditioned are
subjected to reconditioning cleaning processes so that they are acceptable raw
material for scrap metal processors.

On a pro forma basis, drum reconditioning represented approximately 28% and
25%, respectively, of the Company's revenues for the 1997 fiscal year and the
quarter ended March 29, 1998.

Container Management. Container management is the process of providing a
combination of services related to a customer's pallet or drum usage, including
the manufacture, repair, retrieval, delivery and storage of pallets or the
reconditioning, retrieval, delivery and storage of drums, as well as the
disposal of unusable drums or pallets and component parts. In a typical
arrangement, the Company will contract with a customer to remove all pallets or
drums from a particular location and transport them to the Company's repair or
reconditioning facility. The pallets or drums are sorted and repaired or
reconditioned as needed and sold to third parties, returned to either the
customer or its 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.
Although in the early stages of development, the Company believes there are
significant opportunities to manage customers' entire shipping container and
platform requirements and that it is in a unique position to develop and offer
these services.

ACQUISITIONS

Since the Company's initial three acquisitions in connection with its
initial public offering in March 1997 and through May 31, 1998, the Company has
purchased ten pallet companies in separate transactions, four of which were
accounted for as poolings-of-interest. These ten companies operate 18
facilities in six states and had pro forma revenues of approximately $110.8
million for the Company's fiscal year ended December 28, 1997 and approximately
$27 million for the quarter ended March 29, 1998. The aggregate consideration
for these acquired companies was approximately 3.7 million shares of Common
Stock, approximately $25.4 million in cash and approximately $7.2 million
principal amount of convertible notes.

In February 1998, PalEx Container Systems, Inc., a wholly owned subsidiary
of the Company, acquired the companies in the Container Group, which conducted
operations from 13 facilities in nine states and which had fiscal year 1997 pro
forma revenues of approximately $90.9 million and pro forma first quarter
revenues of approximately $20.1 million. The Container Group acquisitions
occurred in four separate transactions, three of which were accounted

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<PAGE>

for as poolings-of-interests. The aggregate consideration for the Container
Group acquisitions consisted of approximately 4.2 million shares of Common Stock
and approximately $26.2 million in cash.

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 decentralized basis, with the
management of each operating location responsible for its day-to-day operations,
profitability and growth. Local management uses the Company's "best practices"
program, which seeks to replicate acquired companies' best practices throughout
the entire Company with respect to operations and processes, transportation and
other logistical activities, worker training and participation programs,
financial controls, and purchasing information in order to improve productivity,
reduce operating costs and improve customer satisfaction to stimulate internal
growth.

SALES AND MARKETING

The Company currently sells to pallet and drum customers within the various
geographic regions in which the Company conducts operations. 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. Because pricing is a function of regional material and delivery costs,
pricing is established at the regional level.

Because many of the Company's customers need pallets and/or container
management 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. and to effectively cross-sell products and services between pallet and
drum customers. The Company seeks to continue to develop a network of
facilities that will allow these customers to: (i) centralize purchases of new
and recycled pallets, reconditioned drums and container management services;
(ii) obtain convenient and dependable service and a consistent supply of uniform
quality pallets, reconditioned drums and container management services; (iii)
achieve greater efficiencies in their shipping platform and container 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
shipping platform and container management 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 and drums 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 in all its operations.

Customers of the Company include companies in the automotive, chemical,
consumer products, grocery, produce and food production, petroleum, 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 and
services are sold to customers engaged in the produce and citrus industries, the
Company's sales volumes in certain regions tend to be seasonal.

On April 29, 1998, the Company notified its largest customer, CHEP, that
PalEx was terminating all its existing agreements with CHEP. CHEP operates a
national pallet leasing program that provides 48" x 40" pallets primarily to
grocery and consumer products customers throughout the U.S. for a daily fee.
The Company has manufactured and repaired pallets for CHEP and has provided a
variety of logistical services with respect to CHEP's pallet pool, including the
storage and just-in-time delivery of pallets. CHEP currently does not
manufacture or repair pallets. During the fiscal year ended December 28, 1997
and the quarter ended March 29, 1998, approximately 35% and 21%, respectively,
of the Company's revenues were from its services to CHEP.

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<PAGE>

The Company's CHEP business had become far less profitable in recent
periods than it had been historically. When the Company was unable to
successfully address this situation with CHEP, management determined that it was
in the Company's best long-term interest to terminate its CHEP relationship and
redirect its resources toward higher margin businesses.

Effective on April 29, 1998, the Company ceased supplying CHEP with new
pallets and provided advance notice (generally, ten to sixty days) under
contractual arrangements to discontinue repair and depot services for CHEP. The
termination of the Company's relationship with CHEP is expected to affect the
operations of certain of the Company's facilities in the southeastern and
western United States. Certain of the Company's facilities dedicated to CHEP
production will be closed. Operations at certain other facilities will be
reduced or converted to alternative business activities. Management expects
reductions in the work force to occur. The Company's results of operations for
the quarter ended June 28, 1998 will include an after tax charge to continuing
operations of between $1.0 and $3.0 million representing management's estimate
of the restructuring costs associated with the conversion or closing of
facilities. Management is in the process of evaluating the impact on earnings
of Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" for
possible application.

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 analysis.

RAW MATERIALS

Pallets. 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 December 28, 1997, the Company purchased lumber and plywood from over 175
vendors. Two of these vendors accounted for approximately 7% and 6%,
respectively, of the Company's total lumber purchases during the fiscal year
ended December 28, 1997. 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 1997, the
Company experienced higher lumber costs resulting from high demand and the
impact

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of wet weather on the harvesting of hardwood timber in the southeast regions of
the U.S. 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, management believes that there is not currently an available
alternative raw material that possesses the tensile strength, recyclability and
low cost of wood. The Company continues to evaluate alternatives to wood and is
receptive to their future use in pallet production.

The Company sources the majority of its pallets for reconstruction from
businesses that use pallets and from trucking companies. Businesses that
receive and ship a significant amount of goods are generally good sources for
used pallets. Often the pallets they receive are damaged or do not meet their
size or other specifications for internal systems or shipping. As a result,
these businesses accumulate pallets that can be 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; in other cases, the Company
buys the used pallets.

Drum Reconditioning. Drum demand in certain regions of the United States
has required more drums to be shipped outside of the region than are shipped
into the region. Consequently, the acquisition costs of used drums, the primary
raw materials for reconditioned drums, in these regions are significantly higher
since the used drum deficit must be replaced by collecting and shipping used
drums from over 250 miles away. The West Coast and Southeast are regions that
tend to be net exporters of open top drums because of their emphasis on
agriculture. The Midwest, on the other hand, tends to be a significant
accumulator of drums because of its greater industrial content and usage of
petroleum products, coatings and chemicals.

COMPETITION

Pallets. The Company believes that the principal competitive factors in
the pallet industry are price, quality of services and reliability. With over
3,800 industry participants, the pallet manufacturing industry has been, and is
expected to remain, extremely fragmented and highly competitive. Though several
companies 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 to new pallet purchasers as less expensive alternatives. 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.

The Company's wholly owned subsidiary Sonoma Pacific is a party (with its
former stockholders) to non-competition agreements which may restrict until July
31, 1998, Sonoma Pacific's (and its affiliates' or such 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"),

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an organization of pallet recyclers and manufacturers created to pursue the
national and global marketing and management of pallet systems, including the
sale or leasing of pallets. The Company's wholly owned subsidiary Interstate and
its former stockholder were parties to similar non-competition agreements that
terminated on January 14, 1998. Interstate, Sonoma Pacific and their former
stockholders (including current officers of the Company's subsidiaries and a
current director of the Company) joined the Alliance in October 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 a subsidiary of
PalEx. In response, the Alliance notified Interstate of its intent to enforce
the terms of the non-competition agreements as it may deem appropriate. The
Alliance has not yet commenced legal proceedings, however, and the Company does
not know when, if ever, such proceedings might be commenced. Sonoma Pacific
withdrew from the Alliance effective July 31, 1997. The non-competition
agreements explicitly exclude from their coverage any product or services sold
or offered by Interstate or Sonoma Pacific at the time they became members 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 Pacific. However, given the expiration of Interstate's non-
competition agreement and the short duration of Sonoma Pacific's non-competition
agreement and the 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.

Drum Reconditioning. Drum reconditioning businesses generally compete on
three criteria: price, manufacturing responsiveness and delivery performance.
Customers typically give less than 24 hours notice for a majority of orders.
This practice requires reconditioners to maintain flexibility in their
manufacturing capacity across product lines, carry sufficient levels of
inventory to meet customer demands and develop distribution systems with rapid
pick-up and delivery capabilities. Although the primary competitive criteria is
price, the increasing movement toward just-in-time delivery increases the
importance of customer service.

Transportation and regulatory requirements are key competitive factors in
the drum reconditioning industry. Due to the high costs of transporting drums,
the competitive range of a reconditioning facility is approximately 250 miles.
In addition, drum reconditioning operations are subject to significant
regulatory oversight, which makes it difficult to open new facilities. For
instance, as previously discussed, open top drum reconditioning operations
require the use of large furnaces, the use of which require regulatory permits.
According to industry sources, less than five new furnace permits have been
granted in the last 10 years in the U.S.

EMPLOYEES

At March 15, 1998, the Company had approximately 2,800 employees,
approximately 705 of which were employees of the Container Group. Approximately
375 employees of the Container Group at three locations are covered by
collective bargaining agreements. The Company has not experienced any work
stoppage and believes that its relationship with its employees is satisfactory.

REGULATION

General. All of the Company's businesses are subject to evolving
environmental, health, safety, and transportation laws and regulations at the
federal, state, and local levels. These regulations are administered by the EPA
and various other federal, state, and local environmental, zoning, health, and
safety agencies, many of which periodically examine the Company's operations to
monitor compliance with such laws and regulations.

The Container Group's businesses are subject to extensive regulations
governing siting, design, operations, monitoring, site maintenance and
corrective actions. Many drums received by the Container Group for
reconditioning

-17-
<PAGE>

may have contained products classified as a solid waste, a hazardous substance,
or a hazardous waste by applicable laws or regulations. The Container Group must
ensure that used drums received for reconditioning are "empty" as determined by
applicable EPA regulations. Otherwise, such used drums are classified as
hazardous wastes and must be handled and disposed of in an expensive manner in
accordance with stringent regulatory requirements. In addition, in order to
construct and operate a furnace for open top drum reconditioning, the Company
must obtain and maintain one or more construction or operating permits and
licenses and, in certain instances, applicable zoning approvals. Obtaining the
necessary permits and approvals is difficult, time-consuming and expensive.
Maintaining the necessary permits is also a significant effort. Once obtained,
operating permits are subject to modification and revocation by the issuing
agency.

Compliance with current and future regulatory requirements may require the
Company, as well as others in the steel drum reconditioning industry, from time
to time, to make significant capital and operating expenditures. The Company
makes a continuing effort to anticipate regulatory, political, and legal
developments that might affect operations, especially the operations of the
Container Group, but it will not always be able to do so. The Company cannot
predict the extent to which any legislation or regulation that may be enacted,
amended, repealed, interpreted, or enforced in the future may affect the
operations of the Container Group or other businesses of the Company. Such
actions could adversely affect the Company's operations or impact the Company's
financial condition or earnings for one or more fiscal quarters or years.

Governmental authorities have the power to enforce compliance with
regulations and permit conditions, to obtain injunctions or to impose civil or
criminal penalties in case of violations. During the ordinary course of its
operations, the Container Group or other subsidiaries of the Company may from
time to time receive citations or notices of violations or orders from such
authorities. Upon receipt of such citations or notices, the subsidiaries will
work with the authorities to address their concerns. Failure to be in full
compliance with applicable governmental requirements could lead to civil or
criminal penalties, curtailed operations, facility closures, or the inability to
obtain or retain necessary operating permits. In addition, the Company or its
subsidiaries could be responsible for the remediation of an off-site source
through its status as a transporter of certain chemicals.

As a result of changing government and public attitudes in the area of
environmental regulation and enforcement, management anticipates that changing
requirements in health, safety, and environmental protection laws will require
the Container Group to continually modify or replace various facilities and
alter methods of operation at costs that may be substantial. Substantial
expenditures are incurred by the Container Group in the operation of its
businesses in order to comply with the requirements of environmental laws. These
expenditures relate to waste stream containment and treatment, facility upgrades
and corrective actions. The majority of these expenditures are made in the
normal course of the Container Group's businesses and neither materially
adversely affect the Company's earnings nor place the Company at any competitive
disadvantage. Although the Company, to its knowledge, is currently in
compliance in all material respects with all applicable federal, state, and
local laws, permits, regulations, and orders affecting its operations where
noncompliance would result in a material adverse effect on the Company's
financial condition, results of operations or cash flows, there is no assurance
that the Company will not have to expend substantial amounts for environmental
matters in the future.

The Container Group expects to grow in part by acquiring existing drum
reconditioning operations. Although the Company conducts due diligence
investigations of the past waste management practices and the environmental
condition of the businesses that it acquires, it can have no assurance that,
through its investigation, it will identify or quantify all potential
environmental problems or risks. As a result, the Company may have acquired, or
may in the future acquire, properties that have environmental problems and
related liabilities. The Company seeks to mitigate the foregoing risks by
obtaining environmental representations and indemnities from the sellers of the
businesses that it acquires or requiring remediation of known environmental
contamination before acquisition. However, there can be no assurance that the
Company will be able to rely on any such actions if an environmental liability
exists.

-18-
<PAGE>

Federal Regulation. The primary U.S. federal statutes affecting the
business of the Company are summarized below. These statutes regulate
activities such as discharges of hazardous substances and waste to air and water
and permitting, as well as handling and disposal practices for solid and
hazardous wastes.

The Solid Waste Disposal Act ("SWDA"), as amended by the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"). The SWDA and its
implementing regulations establish a framework for regulating the handling,
transportation, treatment, and disposal of hazardous and nonhazardous waste.
They also require states to develop programs to ensure the safe disposal of
solid waste in landfills. Container residues may be hazardous waste under RCRA
or the corresponding state regulations and as such require special handling,
transporting, storing and disposal of not only the residues but also the
containers. The Company, as well as other entities with drum reconditioning
operations, could incur significant costs in complying with such regulations;
however, the Company does not believe that the costs of complying with such
standards will have a material adverse effect on its operations.

The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA"). CERCLA, among other things, provides for the
cleanup of sites from which there is a release or threatened release of a
hazardous substance into the environment and the recovery of natural resource
damages. Courts have interpreted CERCLA to impose strict, retroactive, joint and
several liability for the costs of cleanup and for damages to natural resources
upon the present and former owners or operators of facilities or sites from
which there is a release or threatened release of hazardous substances with
limited defenses. Generators of hazardous substances and transporters are also
strictly liable. As a practical matter, at sites where there are multiple
responsible parties for a cleanup, the costs of cleanup are typically allocated
according to a volumetric or other standard among the parties. Under the
authority of CERCLA and its implementing regulations, detailed requirements
apply to the manner and degree of remediation of facilities and sites where
hazardous substances have been or are threatened to be released into the
environment. Also, CERCLA imposes substantial penalties for failure to report
the release of a hazardous substance.

Liability under CERCLA is not dependent upon the intentional disposal of
"hazardous wastes," as defined under RCRA. Such liability can be imposed upon
the release or threatened release, even as a result of lawful, unintentional,
and non-negligent action, of any one of more than 700 "hazardous substances,"
including very small quantities of such substances. CERCLA requires the EPA to
establish a National Priorities List ("NPL") of sites at which hazardous
substances have been or are threatened to be released and which require
investigation or cleanup. Because of the extremely broad definition of
"hazardous substances," the same is true of other industrial properties with
which the Company or its predecessors has been, or with which the Company may
become, associated as an owner or operator. Consequently, if there is a release
or threatened release of such substances into the environment from a site
currently or previously owned or operated by the Company, the Company could be
liable under CERCLA for the cost of removing such hazardous substances at the
site, remediation of contaminated soil or groundwater, and for damages to
natural resources, even if those substances were deposited at the Company's
facilities before the Company acquired or operated them.

The Federal Water Pollution Control Act of 1972 (the "Clean Water Act").
The Clean Water Act regulates the discharge of pollutants into streams, rivers,
lakes or the ocean from a variety of sources, including nonhazardous solid waste
disposal sites. The Clean Water Act regulates storm water runoff and indirect
discharges and the Company is required to apply for and obtain discharge
permits, conduct sampling and monitoring, and, under certain circumstances,
reduce the quantity of pollutants in those discharges. The Clean Water Act
provides civil, criminal, and administrative penalties for violations of its
provisions.

The Clean Air Act. The Clean Air Act provides for the federal, state, and
local regulation of the emission of air pollutants. These regulations impose
emission limitations and monitoring and reporting requirements on various
operations of the Company, including the operations of the Container Group's
open top drum reconditioning furnaces. The costs of compliance with Clean Air
Act permitting and emission control requirements are not anticipated to have a
material adverse effect on the Company.

-19-
<PAGE>

State and Local Regulation. The states in which the Company operates have
their own laws and regulations that may be more strict than comparable federal
laws and regulations governing hazardous and nonhazardous solid waste disposal,
water and air pollution, releases and cleanup of hazardous substances and
liability for such matters. The states also have adopted regulations governing
the permitting and operation of furnaces such as those used in the open top drum
reconditioning operations of the Container Group. The Container Group's
facilities and operations are likely to be subject to many, if not all, of these
types of requirements.

Zellwood Superfund Site. In February 1998, a wholly owned subsidiary of
the Company acquired Drum Service of Florida, a steel drum reconditioning
company with a facility in Florida ("Drum Service"). In 1982, Drum Service was
notified by the EPA and the DER that Drum Service had been identified as a PRP
with respect to the Zellwood Groundwater Contamination Site in Orange County,
Florida (the "Zellwood Site"). The Zellwood Site was designated a "Superfund"
environmental clean-up site after the DER discovered arsenic contamination in a
shallow monitoring well adjacent to the site. The Drum Service facility is
located on a portion of the 57 acres constituting the Zellwood Site. The
Company believes that Drum Service and its former sole shareholder were among
approximately 25 entities and individuals identified as PRPs by the EPA.

Drum Service has maintained comprehensive general liability insurance
coverage over the past 25 years and has notified various insurers of the EPA's
claims regarding the Zellwood Site. A number of those relevant insurance
policies did not contain an exclusion for pollution. In 1992, Drum Service
settled a claim with one insurer for an amount that covered a substantial
portion of the costs Drum Service had incurred in dealing with the EPA and the
DER. Drum Service has identified other umbrella liability policies for which
coverage may also be available and has been approached by the insurer under two
of those policies seeking a settlement. In addition, the former shareholders of
Drum Service have agreed through a contribution agreement with the Company to
bear liabilities and expenses with respect to the Zellwood Site, to the extent
such liabilities and expenses exceed the Company's insurance recoveries.

-20-
<PAGE>

SELLING STOCKHOLDERS

The following table sets forth certain information as of June 18, 1998
regarding the beneficial ownership of the Common Stock by each of the Selling
Stockholders. Unless otherwise indicated below, each Selling Stockholder has
sole voting and investment power with respect to their shares of Common Stock.

Shares Beneficially Shares Beneficially
Owned Before Offering Number of Owned After Offering/(1)/
--------------------- Shares Being -------------------------
Selling Stockholder Number Percent Offered Number Percent
------------------- ------ ------- ------------ ------ -------
<S> <C> <C> <C> <C> <C>
Acme Barrel Company Employee Stock
Ownership Plan/(2)/ 1,301,485 6.9 1,301,485 - -
Michael Bank/(2)/ 3,213 * 3,213 - -
A.Y. Dworsky Marital Trust/(3)/ 19,656 * 19,656 - -
Mischa Dworsky, as Trustee of the Mischa
Dworsky Revocable Trust Dated August 13,
1992/(3)/ 294,795 1.6 294,795 - -
Peretz Dworsky/(3)/ 24,239 * 24,239 - -
John Phillip Dworsky/(3)/ 85,925 * 85,925 - -
William B. Dworsky/(3)/ 85,925 * 85,925 - -
Robert D. Ekedahl and Diana F. Ekedahl, as
Co-Trustees of the Ekedahl 1981 Revocable
Trust dated January 19, 1981/(4)/ 538,590 2.8 120,894 417,696 2.2
Gregg C. Gibson and Judith M. Gibson, as
Co-Trustees of the Gibson 1982 Revocable
Trust dated December 30, 1982/(4)/ 696,160 3.7 417,696 417,696 2.2
Mark Hansen/(2)/ 3,213 * 3,213 - -
Richard Hansen/(2)/ 3,213 * 3,213 - -
Barton A. Kaminsky/(2)/ 106,021 * 106,021 - -
Jordan Pearlman/(2)/ 4,819 * 4,819 - -
Charles H. Perlman/(2)/ 4,819 * 4,819 - -
Kurt Richardson/(2)/ 3,213 * 3,213 - -
Mark B. Spitz/(2)/ 3,213 * 3,213 - -
Jonathan W.R. Stein/(3)/ 85,925 * 85,925 - -
</TABLE>
-----------------------------

* Less than 1%

(1) Assumes all of the shares offered are sold in this offering. There is no
assurance, however, that the Selling Stockholders will sell all or any of
such shares.

(2) Former stockholders of Acme Barrel Company, Inc. or affiliated companies
which were acquired by PalEx on February 23, 1998 in exchange for Common
Stock.

-21-
<PAGE>

(3) Acquired shares of Common Stock in connection with the Company's
acquisition of Consolidated Container Corporation on February 27, 1998.
Mr. Stein is currently the President, and Messrs. Phillip Dworsky and
William Dworsky are currently Vice Presidents, of Consolidated Container
Corporation, a wholly owned subsidiary of the Company.

(4) Former stockholders of Sonoma Pacific Company, which corporation was
acquired by PalEx on August 1, 1997 in exchange for Common Stock. Mr.
Gibson is currently the President of Sonoma Pacific Company, a wholly
owned subsidiary of the Company.

The Company will pay all costs and expenses incurred in connection with the
registration under the Securities Act of the shares offered hereby including,
but not limited to, all registration and filing fees, The Nasdaq National Market
listing fee, printing expenses and fees and disbursements of counsel and
accountants for the Company. The Selling Stockholders will pay all brokerage
fees and commissions, if any, incurred in connection with the sale of the shares
offered hereby.

PLAN OF DISTRIBUTION

The shares of Common Stock registered hereunder and owned by the Selling
Stockholders may be offered and sold by means of this Prospectus from time to
time as market conditions permit in one or more transactions on The Nasdaq
National Market, in the over-the-counter market, in negotiated transactions or
otherwise, or through a combination of such methods, at fixed prices, which may
be changed, at prices and terms then prevailing or at prices related to the
then-current market price, or at negotiated prices. These shares may be sold by
one or more of the following methods, without limitation: (a) a block trade in
which a broker or dealer so engaged will attempt to sell the shares 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 account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (d) face-to-face transactions between sellers and purchasers without a
broker-dealer. The Selling Stockholders may also loan or pledge the shares
registered hereunder to a broker-dealer and the broker-dealer may sell such
loaned shares or upon a default the broker-dealer may effect sales of the
pledged shares pursuant to this Prospectus. In effecting sales, brokers or
dealers engaged by the Selling Stockholders may arrange for other brokers or
dealers to participate. Such brokers or dealers may receive commissions or
discounts from Selling Stockholders in amounts to be negotiated.

The Selling Stockholders and any broker-dealers who act in connection with
the sale of the shares offered hereby may be deemed to be "underwriters" within
the meaning of 2(11) of the Securities Act, and any commissions received by them
and profit on any resale of the shares of Common Stock covered by this
Prospectus as principal might be deemed to be underwriting discounts and
commissions under the Securities Act. In addition, the shares of Common Stock
covered by this Prospectus that qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than pursuant to this
Prospectus.

The Selling Stockholders will be subject to the applicable provisions of
the Exchange Act, and the rules and regulations thereunder, including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales of any shares of Common Stock by the Selling Stockholders. All of the
foregoing may affect the marketability of the Common Stock.

In order to comply with certain states' securities laws, if applicable,
the Common Stock will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the Common Stock
may

-22-
<PAGE>

not be sold unless the Common Stock has been registered or qualified for sale in
such state or an exemption from registration or qualification is available and
is complied with.

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 holds options to purchase 100,000 shares of Common Stock, 16,250 of which
are exercisable as of the date of this Prospectus or become exercisable within
60 days of such date.

EXPERTS

The financial statements of PalEx and subsidiaries, and the consolidated
balance sheet of Consolidated Drum Reconditioning Co. as of December 31, 1997
and the related statements of income and accumulated earnings (deficit) and of
cash flows for the year ended December 31, 1997, incorporated by reference in
this Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.

The consolidated balance sheet of Consolidated Drum Reconditioning Co., as
of December 31, 1996 and the related statements of income and accumulated
earnings (deficit) and of cash flows for the years ended December 31, 1996 and
1995 have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report, and have been incorporated by reference from the Company's Form
8-K/A, as filed with the Commission on April 28, 1998, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-3 (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
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. In addition, the Company is
subject the informational requirements of the Exchange Act, and in accordance
therewith, files reports, proxy statements and other information with the
Commission

The Registration Statement and the exhibits thereto and such reports,
proxy statements and other information 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. Such materials may
also be inspected and copied at the offices of the Nasdaq National Market, 1735
K Street, N.W., Washington, D.C. 20006.

-23-
<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
<TABLE>
<CAPTION>
PAGE
<S> <C>

INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE....... 2
THE COMPANY..................... 3
RISK FACTORS.................... 3
PRICE RANGE OF COMMON STOCK..... 9
BUSINESS........................ 10
PLAN OF DISTRIBUTION............ 22
VALIDITY OF SECURITIES.......... 22
EXPERTS......................... 23
AVAILABLE INFORMATION........... 23

</TABLE>

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

2,568,264 SHARES

[LOGO OF PALEX APPEARS HERE]

COMMON STOCK

______________________

PROSPECTUS
______________________

_________ ___, 1998

================================================================================
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. 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.

<S> <C>
SEC Registration Fee................................ $ 5,725
Nasdaq National Market Listing Fees................. 36,500
Accounting Fees and Expenses........................ 3,000
Legal Fees and Expenses............................. 2,000
Miscellaneous....................................... 775
-------
Total............................................... $48,000
=======
</TABLE>

ITEM 15. 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 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.
<PAGE>

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.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-----------
<C> <S>
4.1 Specimen Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-18683))
5.1 Opinion of Edward E. Rhyne as to the legality of the securities
being registered
23.1 Consent of Edward E. Rhyne (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
25.1 Power of Attorney (contained on the signature page of this
Registration Statement)
</TABLE>

I-B-2
<PAGE>

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes:

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

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

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

(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;

provided, however, that paragraphs (i) and (ii) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in this 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.

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the bona fide offering thereof.

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.

I-B-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and 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 June 29, 1998.

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 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.
<TABLE>
<CAPTION>

<S> <C> <C>
/s/ VANCE K. MAULTSBY, JR. President and Chief Executive June 29, 1998
- ----------------------------- Officer (Principal Executive
Vance K. Maultsby, Jr. Officer)

/s/ CASEY A. FLETCHER Chief Accounting Officer June 29, 1998
- ----------------------------- (Principal Financial and
Casey A. Fletcher Accounting Officer)

/s/ TUCKER S. BRIDWELL Director June 29, 1998
- -----------------------------
Tucker S. Bridwell

/s/ A. JOSEPH CRUZ Director June 29, 1998
- -----------------------------
A. Joseph Cruz

/s/ JOHN E. DRURY Director June 29, 1998
- -----------------------------
John E. Drury

/s/ TROY L. FRASER Director June 29, 1998
- -----------------------------
Troy L. Fraser

/s/ A.E. HOLLAND Director June 29, 1998
- -----------------------------
A.E. Holland

/s/ SAM W. HUMPHREYS Director June 29, 1998
- -----------------------------
Sam W. Humphreys

/s/ ELLIOT S. PEARLMAN Director June 29, 1998
- -----------------------------
Elliot S. Pearlman

/s/ STEPHEN C. SYKES Director June 29, 1998
- -----------------------------
Stephen C. Sykes
</TABLE>

<PAGE>

[LOGO OF PALEX APPEARS HERE]

1360 Post Oak Blvd., Suite 800 EXHIBIT 5.1
Houston, Texas 77056

June 29, 1997

PalEx, Inc.
Suite 800
1360 Post Oak Blvd.
Houston, Texas 77056

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 Company's Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on June 29, 1998, as the same 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 the sale
of up to 2,568,264 shares of the Company's Common Stock, par value $0.01 per
share (the "Common Stock"), which may be offered and sold from time to time by
the Selling Stockholders identified in the Registration Statement.

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 was 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
Vice President and General Counsel

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------

As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 10, 1998
in PalEx's Form 10-K for the year ended December 28, 1997, and our reports dated
January 23, 1998 and February 27, 1998 in PalEx, Inc.'s Current Report on
Form 8-K/A, and to all references to our firm included in this registration
statement.

ARTHUR ANDERSEN LLP

Houston, Texas
June 29, 1998

<PAGE>

EXHIBIT 23.3

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Registration Statement of
PalEx, Inc. on Form S-3 of our report dated June 20, 1997, except for Note 6, as
to which the date is July 28, 1997, on the consolidated balance sheet of
Consolidated Drum Reconditioning Co., Inc. as of December 31, 1996 and the
consolidated statements of income and accumulated earnings (deficit) and of cash
flows for the years ended December 31, 1996 and 1995, appearing in PalEx, Inc.'s
Form 8-K/A, as filed with the Commission on April 28, 1998, and to the reference
to us under the heading "Experts" in the prospectus, which is part of this
Registration Statement.

Deloitte & Touche LLP

Los Angeles, CA
June 24, 1998