<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 23, 1998
PALEX, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-22237
Delaware 76-0520673
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.)
1360 Post Oak Blvd., Suite 800
Houston, Texas77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 350-6030
<PAGE>
ITEM 5. OTHER EVENTS
1. From the beginning of fiscal 1998 through October 23, 1998, the
Company, in individual transactions at various times during such period,
acquired 12 companies, all of which are herein collectively referred to as the
"Acquired Businesses," and none of which individually constitutes a "significant
subsidiary" within the meaning of the Regulation S-X. The Acquired Businesses
include American Pallet Recyclers, Inc. ("APR"), Capital Pallet, Incorporated,
Pallet Outlet Company, Inc. ("Pallet Outlet"), Southern Pallets, Inc.
("Southern"), Shipshewana Pallet Co., Inc., Gilbert Lumber Inc., Valley Pallets,
Inc., Duckert Pallet Co., Inc., Continental Associated Investments
("Continental"), Isaacson Lumber Company, McCook Drum & Barrel Co., Inc., and
Charlotte Steel Drum Corporation. The acquisitions of APR, Pallet Outlet,
Southern and Continental were asset purchases and the remaining Acquired
Businesses were structured as stock purchases. All of these acquisitions were
accounted for as purchases for accounting purposes. Two of the 12 companies are
engaged in the reconditioning of industrial steel containers.
Immediately prior to the acquisitions, all of the issued and
outstanding shares of capital stock of the Acquired Businesses were owned by the
individual stockholders of the Acquired Businesses. The Company is unaware of
any pre-existing material relationships between such stockholders and the
Company or any of the Company's affiliates, directors or officers or any
associate of such directors or officers.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
a. Financial Statements of businesses acquired.
The following Financial Statements of Pallet Outlet Company, Inc. as of
December 31, 1997 are attached hereto and made a part hereof:
(i) Report of Independent Certified Public Accountants
(ii) Balance Sheet
(iii) Statement of Operations
(iv) Statement of Changes in Stockholders' Equity
(v) Statement of Cash Flows
(vi) Notes to Financial Statements
The following Financial Statements of Valley Pallets, Inc. and Affiliates
as of December 31, 1997 are attached hereto and made a part hereof:
(i) Report of Independent Certified Public Accountants
(ii) Combined Balance Sheet
(iii) Combined Statement of Operations
(iv) Combined Statement of Changes in Stockholders' Equity
(v) Combined Statement of Cash Flows
(vi) Notes to Combined Financial Statements
The following Financial Statements of Shipshewana Pallet Co., Inc. as of
October 31, 1997 are attached hereto and made a part hereof:
(i) Report of Independent Certified Public Accountants
(ii) Balance Sheet
(iii) Statement of Operations
(iv) Statement of Changes in Stockholders' Equity
(v) Statement of Cash Flows
(vi) Notes to Financial Statements
The following Financial Statements of Isaacson Lumber Company as of
December 31, 1997 are attached hereto and made a part hereof:
(i) Report of Independent Certified Public Accountants
(ii) Balance Sheet
(iii) Statement of Operations
(iv) Statement of Changes in Stockholders' Equity
(v) Statement of Cash Flows
(vi) Notes to Financial Statements
<PAGE>
The following Financial Statements of Charlotte Steel Drum Corporation as
of August 31, 1998 are attached hereto and made a part hereof:
(i) Independent Auditor's Report
(ii) Balance Sheets
(iii) Statement of Income and Retained Earnings
(iv) Statement of Cash Flows
(v) Notes to Financial Statement
b. Pro forma financial information
The following Unaudited Pro Forma Consolidated Financial Statements are attached
hereto and made a part hereof:
(i) Basis of Presentation
(ii) Unaudited Pro Forma Consolidated Statement of Income for the
Year Ended December 28, 1997
(iii) Unaudited Pro Forma Consolidated Statement of Income for the
Nine Months Ended September 27, 1998
(iv) Notes to Unaudited Pro Forma Consolidated Financial Statements
c. Exhibits
Exhibit No.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of McLean, Koehler, Sparks & Hammond
i
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Historical Financial Statements
Pallet Outlet Company, Inc.
Report of Independent Certified Public Accountants 2
Balance Sheet 3
Statement of Operations 4
Statement of Changes in Stockholders' Equity 5
Statement of Cash Flows 6
Notes to Financial Statements 7-10
Valley Pallets, Inc. and Affiliates
Report of Independent Certified Public Accountants 12
Combined Balance Sheet 13
Combined Statement of Operations 14
Combined Statement of Stockholders' and Members' Equity 15
Combined Statement of Cash Flows 16
Notes to Combined Financial Statements 17-23
Shipshewana Pallet Co., Inc.
Report of Independent Certified Public Accountants 25
Balance Sheet 26
Statement of Operations 27
Statement of Changes in Stockholders' Equity 28
Statement of Cash Flows 29
Notes to Financial Statements 30-33
Isaacson Lumber Company
Report of Independent Certified Public Accountants 35
Balance Sheet 36
Statement of Operations 37
Statement of Changes in Stockholders' Equity 38
Statement of Cash Flows 39
Notes to Financial Statements 40-43
Charlotte Steel Drum Corporation
Independent Auditor's Report 45
Balance Sheets 46
Statement of Income and Retained Earnings 47
Statement of Cash Flows 48
Notes to Financial Statement 49-51
Unaudited Pro Forma Consolidated Financial Statements
Basis of Presentation.............................................................................. 52
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended December 28, 1997.......... 53
Unaudited Pro Forma Consolidated Statement of Income for the Six Months Ended September 27, 1998 .. 54
Notes to Unaudited Pro Forma Consolidated Financial Statements..................................... 55
Consents of Independent Certified Public Accountants 56-57
</TABLE>
ii
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PALEX, INC.
Date: December 11, 1998 By: /s/ EDWARD RHYNE
------------ --------------------------------
Edward Rhyne
Vice President and General Counsel
iii
<PAGE>
PALLET OUTLET COMPANY, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Pallet Outlet Company, Inc.:
We have audited the accompanying balance sheet of Pallet Outlet Company, Inc. (a
Pennsylvania corporation) (The Company), as of December 31, 1997, and the
related statement of operations, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pallet Outlet Company, Inc., as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
July 31, 1998
2
<PAGE>
PALLET OUTLET COMPANY, INC.
---------------------------
BALANCE SHEET--DECEMBER 31, 1997
--------------------------------
(In Thousands, Except Share Data)
ASSETS
------
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 809
Accounts receivable, net 719
Inventories 114
------
Total current assets 1,642
PROPERTY, PLANT AND EQUIPMENT, net 1,050
------
Total assets $2,692
======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 14
Accounts payable 77
Accrued expenses 73
Obligations under capital lease 100
------
Total current liabilities 264
LONG-TERM DEBT, net of current maturities 384
------
Total liabilities 648
------
STOCKHOLDERS' EQUITY:
Common stock, no par value; 100,000 shares authorized, 10,000 outstanding 10
Retained earnings 2,034
------
Total stockholders' equity 2,044
------
Total liabilities and stockholders' equity $2,692
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PALLET OUTLET COMPANY, INC.
---------------------------
STATEMENT OF OPERATIONS
-----------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
(In Thousands)
<TABLE>
<S> <C>
REVENUES $6,412
COST OF GOODS SOLD 3,206
------
Gross profit 3,206
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,624
------
Income from operations 1,582
INTEREST EXPENSE 42
OTHER EXPENSE, net 8
------
NET INCOME $1,532
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PALLET OUTLET COMPANY, INC.
---------------------------
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
(In Thousands, Except Number of Shares)
<TABLE>
<CAPTION>
Common Stock Retained
------------------
Shares Amount Earnings Total
------- ------ -------- -----
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 10,000 $ 10 $ 1,017 $ 1,027
Dividends - - (515) (515)
Net Income - - 1,532 1,532
------ ---- ------- -------
BALANCE, December 31, 1997 10,000 $ 10 $ 2,034 $ 2,044
====== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PALLET OUTLET COMPANY, INC.
---------------------------
STATEMENT OF CASH FLOWS
-----------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
(In Thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,532
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation 187
Changes in assets and liabilities-
Accounts receivable (305)
Accounts payable (72)
Accrued expenses 4
-------
Net cash provided by operating activities 1,346
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (451)
-------
Net cash used in investing activities (451)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (134)
Dividends paid (515)
Proceeds from long-term debt 171
-------
Net cash used in financing activities (478)
-------
INCREASE IN CASH AND CASH EQUIVALENTS 417
CASH AND CASH EQUIVALENTS, beginning of year 392
-------
CASH AND CASH EQUIVALENTS, end of year $ 809
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 35
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PALLET OUTLET COMPANY, INC.
---------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(In Thousands, Except Share and Per Share Data)
1. BUSINESS AND ORGANIZATION:
--------------------------
Pallet Outlet Company, Inc. (the Company), a Pennsylvania corporation, is in the
business of manufacturing and repairing wooden pallets.
On February 23, 1998, the Company merged with PalEx through the exchange of all
of the outstanding common stock of the Company for shares of PalEx common stock.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
-------------------
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
Cash Equivalents
- ----------------
The Company considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
Inventories
- -----------
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out basis. The cost of finished goods inventory includes
direct materials, direct labor and factory overhead.
Property, Plant and Equipment
- -----------------------------
Depreciation and amortization are provided for in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service lives.
The straight-line method of depreciation is followed for substantially all
assets for financial reporting purposes.
Expenditures for maintenance and repairs are charged to operating expenses as
incurred. Additions and major replacements or betterments that increase capacity
or extend useful lives are added to the cost of the asset. Upon sale or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective amounts and the resulting gain
or loss is included in other income (expense), net.
Income Taxes
- ------------
The Company elected to have its income taxed under the provisions of Subchapter
S of the Internal Revenue Code. All income or loss is reported through the
stockholders' personal tax returns. The tax returns and the amount of taxable
income or loss are subject to examination by federal and state taxing
authorities. If such examinations result in changes to taxable income or loss,
the tax liabilities of the stockholders could be changed accordingly.
7
<PAGE>
Revenue Recognition
- -------------------
The Company recognizes revenue upon delivery of the product to the customer.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company reviews all significant estimates affecting its
financial statements on a recurring basis and records the effect of any
necessary adjustments prior to their publication. Adjustments made with respect
to the use of estimates often relate to improved information not previously
available. Uncertainties with respect to such estimates and assumptions are
inherent in the preparation of financial statements.
Concentrations of Risk, Customers
- ---------------------------------
The Company sells to customers with local, regional and national operations
located primarily in the Northeast in many different industries. No customer
constitutes more than 10 percent of total sales for the year.
3. PROPERTY, PLANT AND EQUIPMENT:
------------------------------
Property, plant and equipment as of December 31, 1997, consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful
Lives
in Years
--------
<S> <C> <C>
Machinery and delivery equipment 10 $ 1,310
Leasehold improvements 39 89
Furniture and fixtures 10 50
Leased property under capital leases 3 224
-------
1,673
Less- Accumulated depreciation 623
-------
$ 1,050
=======
</TABLE>
4. DETAIL OF CERTAIN
BALANCE SHEET ACCOUNTS:
-----------------------
Inventory as of December 31, 1997, consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Repaired pallets $ 28
Unrepaired pallets 5
Manufactured pallets 23
Nails 40
Saw blades 3
New lumber 15
------
Total $ 114
=====
</TABLE>
8
<PAGE>
Accrued expenses as of December 31, 1997, consist of the following:
<TABLE>
<S> <C>
Accrued wages $ 56
Accrued payroll taxes 8
Accrued state taxes 4
Sales tax payable 5
----
$ 73
====
</TABLE>
5. DEBT:
-----
Long-debt consists of the following:
Notes payable in monthly installments ranging from to $.5 to $1.3 at interest
rates ranging from 7.5% to 9.0%, unsecured. Maturity dates range from
September 1998 to November
<TABLE>
<S> <C>
2002 $ 398
------
Less- Current maturities 14
------
Long-term debt $ 384
======
</TABLE>
Maturity of long-term debt in the years subsequent to 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31-
1998 $ 14
1999 30
2000 157
2001 39
2002 158
-----
Total $ 398
=====
</TABLE>
9
<PAGE>
6. COMMITMENTS AND CONTINGENCIES:
------------------------------
Litigation
- ----------
The Company is involved in various legal actions arising in the ordinary course
of business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
Insurance
- ---------
The Company carries a broad range of insurance coverage, including general and
business auto liability, workers' compensation, commercial property and a
general umbrella policy. The Company has not incurred significant claims or
losses during the periods presented in the accompanying financial statements.
There are no other known claims.
Operating Lease Agreements
- --------------------------
The Company leases buildings and forklifts under the terms of operating leases.
Net aggregate future lease payments under these operating leases totaled $431 at
December 31, 1997, payable as follows:
<TABLE>
<S> <C>
1998 $ 174
1999 154
2000 103
-----
$ 431
=====
</TABLE>
Rent expense for the year ended December 31, 1997, was approximately $186.
7. EMPLOYEE RETIREMENT PLANS:
--------------------------
The Company has a defined 401(k) contribution profit-sharing plan. The plan
provides for the Company to match 25 percent of the percentage contributed by
each employee not to exceed 15 percent of the employee's compensation. Total
matching contributions by the Company under the plan were approximately $7 for
the year ended December 31, 1997.
8. RELATED-PARTY TRANSACTIONS:
---------------------------
The Company leases certain facilities from its stockholders for a nominal
amount.
10
<PAGE>
VALLEY PALLETS, INC. AND AFFILIATES
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
11
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Valley Pallets, Inc. and Affiliates:
We have audited the accompanying combined balance sheet of Valley Pallets,
Inc. (a Georgia corporation) and its affiliated companies identified in Note 1
(collectively, "the Companies") as of December 31, 1997, and the related
combined statements of operations, stockholders' and members' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Valley Pallets, Inc. and its
affiliated companies as of December 31, 1997, and the results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida,
August 7, 1998
12
<PAGE>
VALLEY PALLETS, INC., AND AFFILIATES
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1997 1998
(unaudited)
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable.................................................................... $ 1,907,790 $ 2,893,674
Related-party receivables.............................................................. 870,260 724,355
Inventories............................................................................ 1,594,985 1,441,567
Prepaids and other current assets...................................................... 70,952 -
------------ ------------
Total current assets.................................................. 4,443,987 5,059,596
PROPERTY, PLANT AND EQUIPMENT, net.......................................................... 1,650,081 1,720,706
------------ ------------
Total assets.......................................................... $ 6,094,068 $ 6,780,302
============ ============
LIABILITIES AND STOCKHOLDERS' AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft......................................................................... $ 48,269 $ 106,644
Accounts payable....................................................................... 1,090,965 1,240,036
Accrued expenses....................................................................... 392,533 916,869
Current maturities of long-term debt................................................... 2,079,146 2,195,434
Related party debt..................................................................... 978,963 490,689
Current portion of capital lease obligations........................................... 93,283 93,283
------------ ------------
Total current liabilities............................................. 4,683,159 5,042,955
DEFERRED INCOME TAXES....................................................................... 5,084 5,084
LONG-TERM DEBT, less current maturities..................................................... 431,534 516,267
CAPITAL LEASE OBLIGATIONS, less current portion............................................. 217,624 200,624
------------ ------------
Total liabilities..................................................... 5,337,401 5,764,930
------------ ------------
COMMITMENTS AND CONTINGENCIES...............................................................
STOCKHOLDERS' AND MEMBERS' EQUITY:
Common stock........................................................................... 519,250 519,250
Members' equity........................................................................ 449,973 449,973
Additional paid-in capital............................................................. 62,041 62,041
Accumulated deficit.................................................................... (94,597) 164,108
Less- Treasury stock, at cost.......................................................... (180,000) (180,000)
------------ ------------
Total stockholders' and members' equity............................... 756,667 1,015,372
------------ ------------
Total liabilities and stockholders' and members' equity............... $ 6,094,068 $ 6,780,302
============ ============
</TABLE>
The accompanying notes are an integral part of this combined balance sheet.
13
<PAGE>
VALLEY PALLETS, INC. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31, 1998
1997 (unaudited)
----------- -------------------
<S> <C> <C>
REVENUES $14,837,429 $ 6,341,546
COST OF GOODS SOLD 13,624,517 4,515,779
---------------------------
Gross profit 1,212,912 1,825,767
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,451,966 1,319,196
---------------------------
Loss from operations (239,054) 506,571
INTEREST EXPENSE, net (235,394) (75,397)
---------------------------
Loss before income taxes (474,448) 431,174
PROVISION FOR INCOME TAXES (13,797) (172,469)
---------------------------
NET (LOSS) INCOME $ (488,245) $ 258,705
===========================
</TABLE>
The accompanying notes are an integral part of this combined statement.
14
<PAGE>
VALLEY PALLETS, INC. AND AFFILIATES
COMBINED STATEMENT OF STOCKHOLDERS' AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------
Shares Issued Additional
and Members' Paid-in Capital
---------------
Outstanding Amount Equity
------------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996......................................... 412,500 $ 518,500 $ 3,668 $ 59,629
Issuance of Valley Crating and Packaging, Inc. Common Stock 750 750 - 2,412
Issuance of Valley Wood Holdings LLC members' equity.......... - - 443,185 -
Dividends..................................................... - - - -
Distributions to stockholders................................. - - - -
Net income (loss)............................................. - - 3,120 -
--------- ---------- -------- ------------
BALANCE, December 31, 1997......................................... 413,250 $ 519,250 $449,973 $ 62,041
========= ========== ======== ============
<CAPTION>
Retained
Earnings
(Accumulated Treasury
Deficit) Stock Total
----------- -------- -------
<S> <C> <C> <C>
BALANCE, December 31, 1996......................................... $ 949,059 $ (180,000) $ 1,350,856
Issuance of Valley Crating and Packaging, Inc. Common Stock - - 3,162
Issuance of Valley Wood Holdings LLC members' equity.......... - - 443,185
Dividends..................................................... (109,106) - (109,106)
Distributions to stockholders................................. (443,185) - (443,185)
Net income (loss)............................................. (491,365) - (488,245)
--------- ----------- -----------
BALANCE, December 31, 1997......................................... $ (94,597) $ (180,000) $ 756,667
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of this combined statement.
15
<PAGE>
VALLEY PALLETS, INC. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31, 1998
1997 (unaudited)
------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................................... $ (488,245) $ 258,705
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation...................................................... 238,868 59,288
Loss from sale of property, plant and equipment................... 6,011 -
Deferred income taxes............................................. 5,084 -
Changes in assets and liabilities-
Accounts receivable........................................... (101,502) (839,979)
Inventories................................................... (968,314) 153,418
Prepaids and other current assets............................. 38,585 70,952
Bank overdraft................................................ 48,269 58,375
Accounts payable.............................................. 538,934 149,071
Accrued expenses.............................................. 173,683 524,336
--------- --------
Net cash (used in) provided by operating activities....... (508,627) 434,166
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................. (501,409) (129,913)
--------- --------
Net cash used in investing activities..................... (501,409) (129,913)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under secured notes......................................... 26,386 111,284
Net borrowings under lines of credit....................................... 855,402 140,228
Net borrowings from (payments to) related parties.......................... 83,410 (538,765)
Principal payments for capital lease obligations........................... (67,795) (17,000)
Proceeds from issuance of common stock..................................... 50,486 -
Dividends paid............................................................. (109,106) -
--------- --------
Net cash provided by (used in) financing activities....... 838,783 (304,253)
--------- --------
NET DECREASE IN CASH............................................................ (171,253) -
CASH, beginning of period....................................................... 171,253 -
--------- --------
CASH, end of period............................................................. $ - -
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest.......................................................... $ 239,145 $ 75,397
Income taxes...................................................... $ 144,722 $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Acquisition of property and equipment under capital lease.................. $ 226,062 $ --
Assumption of net liability in connection with issuance of
Valley Crating & Packaging, Inc. common stock.......................... $ 47,324 $ --
</TABLE>
The accompanying notes are an integral part of this combined statement.
16
<PAGE>
VALLEY PALLETS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined financial statements include the accounts of
Valley Pallets, Inc. ("VP"), a Georgia corporation, Valley Crating & Packaging,
Inc. ("VCP"), a Georgia corporation, Valley Wood Products, Inc. ("VWP"), a North
Carolina corporation, and Valley Wood Holdings LLC ("VWH"), a North Carolina
limited liability corporation (collectively, "the Companies"). The Companies are
under common management and are presented herein on a combined basis. The
Companies are engaged in the manufacturing of wooden pallets and crating
products, and resale of packaging products from their production and warehouse
facilities in Georgia, Ohio, Mississippi, North Carolina and Tennessee. The
Companies' products are marketed and sold primarily to manufacturers with
production facilities in those states. Intercompany transactions and account
balances among the Companies have been eliminated.
In June 1998, the Companies and its stockholders entered into a merger
agreement with PalEx, Inc. ("PalEx") pursuant to which all of the Companies'
outstanding shares of capital stock and ownership interests were exchanged for
cash and shares of PalEx common stock (see Note 8).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of significant accounting policies consistently applied in
the preparation of the accompanying combined financial statements follows.
Inventories
Inventories are valued at the lower of cost or market, with cost
determined on the first-in, first-out basis. The cost of finished goods
inventory includes direct materials, direct labor and factory overhead to
manufacture wooden crates and pallets. Finished goods also include packaging
material and products.
Property, Plant and Equipment
Owned property, plant and equipment is stated at cost, net of
accumulated depreciation. Fixed assets acquired under capital leases are stated
at the present value of future minimum lease payments, net of accumulated
depreciation. Depreciation is provided for in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated service lives.
Approximately 25 percent and 75 percent of the Companies' depreciable fixed
assets are depreciated using straight-line method and accelerated methods,
respectively.
Machinery and equipment of $260,052 and trucks and autos of $148,712
represent gross fixed assets under capital leases. These amounts are included
net of depreciation of $94,851 in property, plant and equipment at December 31,
1997.
17
<PAGE>
Expenditures for maintenance and repairs are charged to operating
expenses as incurred. Additions and major replacements or betterments that
increase capacity or extend useful lives are added to the cost of the asset.
Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts and the
resulting gain (or loss) is included in other income (or operating expense),
net.
Income Taxes
VP accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Deferred income taxes resulted due to differences in recording
depreciation for financial reporting and income tax purposes. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes in the
accompanying combined financial statements primarily represents taxes payable
for the year. The change during the year in deferred tax assets and liabilities
was immaterial. The effective tax rate approximates the federal and state
statutory rates.
VCP and VWP, with the consent of their stockholders, elected to be
taxed as Subchapter S corporations under sections of the federal and state
income tax laws which provide that, in lieu of corporate income taxes, the
stockholders separately account for items of income, deductions, losses and
credits on their individual income tax returns. Therefore, the accompanying
combined financial statements do not include a provision for income taxes
(credits) for VCP and VWP. As long as the Subchapter S corporation elections
remain in effect, these companies may, from time to time, pay dividends to their
stockholders sufficient to enable the stockholders to pay the taxes due on their
share of these companies' items of income, deductions, losses and credits which
have been allocated to them for reporting on their individual income tax
returns. The tax returns and the income distributed to the shareholders are
subject to examination by federal and state taxing authorities. If such
examination results in changes to distributable income or loss, the tax
liability of the shareholders would be changed accordingly.
VWH has elected to be taxed under the partnership provisions of the
Internal Revenue Code. Under those provisions, the members are liable for
individual federal income taxes on their respective share of VWH's taxable
income. Consequently, no provision or liability for federal income taxes has
been provided for in the accompanying combined financial statements. The tax
returns and the partnership income distributed to the partners are subject to
examination by federal and state taxing authorities. If such examination results
in changes to distributable partnership income or loss, the tax liability of the
partners would be changed accordingly.
Revenue Recognition
The Companies recognize revenue upon shipment of the product to the
customer.
18
<PAGE>
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the combined financial statements and the reported amount of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RELATED-PARTY RECEIVABLES:
Related-party receivables consist of unsecured notes receivable from
shareholders of VCP, which are payable on demand and bear interest at 10
percent.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Raw materials........................................ $ 704,277
Work in process...................................... 152,378
Finished goods....................................... 738,330
----------
$1,594,985
==========
</TABLE>
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated
Useful
Lives In December 31,
Years 1997
------------- --------------
<S> <C> <C>
Land..................................................... - $ 66,710
Building................................................. 15-31 405,323
Leasehold improvements................................... 15-31 81,903
Machinery and equipment.................................. 5- 7 1,346,795
Trucks and autos......................................... 5 298,226
Furniture and fixtures................................... 5- 7 25,859
----------
2,224,816
Less- Accumulated depreciation........................... (574,735)
----------
$1,650,081
==========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Accrued expenses consisted of the following:
December 31,
1997
------------
<S> <C>
Accrued compensation.................................................... $ 210,792
Accrued income and payroll taxes........................................ 93,477
Accrued interest payable................................................ 56,786
Other................................................................... 31,478
---------
$ 392,533
=========
</TABLE>
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
Long-term debt consisted of the following:
December 31,
1997
------------
<S> <C>
Secured Notes
Note payable to bank, $350,000 face, collateralized by building and land,
payable in monthly installments of $4,529 including interest, bears
interest at the prime rate plus 0.5% (9.0% at December 31, 1997),
matures with a final payment of remaining interest and principal in
2001............................................................. $ 326,388
Notes secured by property, equipment and autos, bears interest at fixed rates
ranging from 7.9% to 12.0% and a variable rate of prime rate plus 2.0%
(10.5% at December 31, 1997), due in varying monthly installments of
$297 to $1,116 with maturity dates through 2002.................. 175,582
Lines of Credit
Note payable under a $500,000 revolving line of credit, secured by
accounts receivable and cash of VP, bears interest at 10.5% payable
monthly, with all outstanding principal due in February 1998, paid
in full, June 1998............................................... 493,601
Note payable under revolving line of credit limited to the lesser of
$500,000 or 75% of accounts receivable under 60 days old of VWP,
secured by accounts receivable of VWP, bears interest at the prime
rate plus 0.5% (9.0% at December 31, 1997) payable monthly, with all
outstanding principal due May 1998, subject to renewal, paid in
full, June 1998.................................................. 325,000
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
December 31,
1997
--------------
<S> <C>
Note payable under a $2,000,000 revolving line of credit, secured by accounts
receivable of VCP, bears interest at 10.75% payable monthly, with all
outstanding principal due October 1998, subject to renewal. Advances
under the line of credit are limited to the face amount less all
outstanding debt with the creditor. Advances of approximately $334,000
were available and unused at December 31, 1997........................ 1,115,402
Related-party Debt
Unsecured notes payable to a related parties, bearing interest at rates
ranging from 10.0% to 10.5%, principal callable....................... 978,963
Unsecured payable to a related party, noninterest-bearing, principal payable
on demand............................................................. 74,707
--------------
$ 3,489,643
Less- Current maturities................................................... (3,058,109)
--------------
$ 431,534
==============
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1997, are
as follows:
Year ending December 31,
1998.............................................. $3,058,109
1999.............................................. 75,939
2000.............................................. 69,915
2001.............................................. 265,446
2002.............................................. 20,234
-------------
$3,489,643
=============
6. COMMITMENTS AND CONTINGENCIES:
Inventory Supply Commitment
VCP entered into a letter of intent to produce and supply its largest
customer, Modern Tool and Die ("MTD"), with certain inventory products for five
years commencing August 1997. If performance standards (as defined under the
letter of intent) are not met, MTD may terminate its purchase obligations.
Revenue Concentration
For the year ended December 31, 1997, the Companies derived
substantially all of their revenues from the three largest customers, and
approximately 78 percent of revenues from MTD (see contingency above).
21
<PAGE>
Lease Agreements
The Companies lease factory and office facilities, equipment and autos
used in operations under both operating and capital leases. Rent expense for the
year ended December 31, 1997, was approximately $278,000. Future minimum annual
rentals under the leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending December 31, Leases Leases
------------- ------------
<S> <C> <C>
1998.......................................................... $ 377,950 $ 119,864
1999.......................................................... 348,854 119,419
2000.......................................................... 281,756 88,235
2001.......................................................... 203,226 30,937
2002.......................................................... 139,390 -
----------- ---------
Total minimum rental commitments.............................. $ 1,351,176 358,455
===========
Less- Amount representing interest expense.................... (47,548)
---------
Present value of minimum lease payments....................... 310,907
Less- Current portion......................................... (93,283)
---------
Long-term capital lease obligations........................... $ 217,624
=========
</TABLE>
7. STOCKHOLDERS' AND MEMBERS' EQUITY:
<TABLE>
<CAPTION>
The capital structure of the combining companies consisted of the following:
December 31,
1997
------------
<S> <C>
VP
Common stock, $1 par value; 5,000 shares authorized,
500 shares issued and outstanding................................... $ 500
Additional paid-in capital.............................................. 59,629
Retained earnings....................................................... 672,948
VCP
Preferred stock, $1 par value; 1,000,000 shares authorized,
none issued and outstanding......................................... $ -
Common stock, $1 par value; 5,000,000 shares authorized,
750 shares issued and outstanding................................... 750
Additional paid-in capital.............................................. 2,412
Accumulated deficit..................................................... (484,818)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
December 31,
1997
-----------
<S> <C>
VWP
Common stock, $1 par value; 1,000,000 shares authorized, 518,000 shares
issued, 412,000 shares outstanding.................................. $518,000
Accumulated deficit..................................................... (282,727)
Treasury stock, 106,000 shares at cost.................................. (180,000)
VWH
Members' equity......................................................... $449,973
</TABLE>
During 1997, VWP distributed property, plant and equipment with a net book value
of $443,185 to its shareholders. The same shareholders contributed such assets
in exchange for issuance of members' equity in VWH.
8. SUBSEQUENT EVENTS:
Effective January 1, 1998, VP elected to convert to Subchapter S corporation
status under the provisions of the Internal Revenue Code.
On June 17, 1998, the Companies merged with PalEx through the exchange of all of
the Companies' outstanding common stock and ownership interests for cash and
shares of PalEx common stock, pursuant to a definitive agreement.
23
<PAGE>
SHIPSHEWANA PALLET CO., INC.
FINANCIAL STATEMENTS
AS OF OCTOBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Shipshewnana Pallet Co., Inc.:
We have audited the accompanying balance sheet of Shipshewana Pallet
Co., Inc. (an Indiana corporation), as of October 31, 1997, and the related
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Shipshewana Pallet
Co., Inc., as of October 31, 1997, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida
July 23, 1998
25
<PAGE>
SHIPSHEWANA PALLET CO., INC.
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
October 31, 1998
1997 (Unaudited)
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................................ $ 5 $ (7)
Accounts receivable, net of allowance of $4................................................. 457 483
Inventories................................................................................. 898 1,468
Prepaids and other current assets........................................................... 31 7
-------- --------
Total current assets........................................................... 1,391 1,951
PROPERTY AND EQUIPMENT, net.................................................................... 1,444 1,527
OTHER ASSETS................................................................................... 36 36
-------- --------
Total assets................................................................... $ 2,871 $ 3,514
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable................................................................................ $ 100 $ --
Line of credit.............................................................................. 109 629
Accounts payable............................................................................ 152 226
Accrued expenses............................................................................ 232 183
Notes payable to employees.................................................................. 77 67
-------- --------
Total current liabilities...................................................... 670 1,105
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 35,000 shares authorized; 369 shares issued and 336
shares outstanding........................................................................ 59 59
Retained earnings .......................................................................... 2,175 2,383
Treasury stock; 33 shares, at cost.......................................................... (33) (33)
-------- --------
Total stockholders' equity..................................................... 2,201 2,409
-------- --------
Total liabilities and stockholders' equity..................................... $ 2,871 $ 3,514
======== ========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
26
<PAGE>
SHIPSHEWANA PALLET CO., INC.
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Five Months
Ended
October 31, March 31, 1998
1997 (Unaudited)
----------- -------------
<S> <C> <C>
REVENUES $ 6,046 $ 2,538
COST OF GOODS SOLD 4,729 1,931
-------- --------
Gross profit 1,317 607
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 744 324
-------- --------
Income from operations 573 283
INTEREST EXPENSE (36) (14)
OTHER INCOME 1 1
-------- --------
NET INCOME $ 538 $ 270
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
SHIPSHEWANA PALLET CO., INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Retained Treasury
Stock Earnings Stock
------ -------- -----
<S> <C> <C> <C> <C>
BALANCE, October 31, 1996...................... $ 59 $ 2,037 $ (33) $ 2,063
Distributions to stockholders............... - (400) - (400)
Net income.................................. - 538 - 538
----- -------- -------- --------
BALANCE, October 31, 1997...................... $ 59 $ 2,175 $ (33) $ 2,201
===== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
SHIPSHEWANA PALLET CO., INC.
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Five Months
Ended
October 31, March 31, 1998
1997 (Unaudited)
----------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 538 $270
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation 430 172
Gain on sale of equipment (1) (2)
Changes in assets and liabilities-
Accounts receivable (36) (26)
Inventories (265) (570)
Prepaid expenses and other current assets (5) 24
Other assets 5 -
Accounts payable and accrued expenses (35) 25
----------- -------
Net cash provided by (used in) operating activities 631 (107)
----------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 2 -
Purchases of property and equipment (270) (258)
----------- -------
Net cash used in investing activities (268) (258)
----------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 109 520
Payments on note payable (79) (100)
Proceeds from notes payable to employees 59 13
Payments on notes payable to employees (98) (23)
Distributions to stockholders (400) (62)
----------- -------
Net cash (used in) provided by financing activities (409) 348
----------- -------
DECREASE IN CASH (46) (17)
CASH, beginning of period 51 5
----------- -------
CASH, end of period $ 5 $(12)
=========== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 36 $ 19
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
SHIPSHEWANA PALLET CO., INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands)
1. BUSINESS AND ORGANIZATION:
Shipshewana Pallet Co., Inc. (the Company) is a sawmill producer of
grade lumber and manufacturer of wooden pallets at its production facility in
Shipshewana, Indiana. The Company sells primarily to customers engaged in the
food processing, medical supplying, manufacturing and lumber distributing
industries in the Midwestern United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
Inventories
Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out basis. The cost of finished goods
inventory includes direct materials, direct labor and factory overhead.
Property and Equipment
Depreciation is provided for in amounts sufficient to relate the cost
of depreciable assets to operations over their estimated service lives.
Depreciation is computed using both straight-line and accelerated methods.
Expenditures for maintenance and repairs are charged to operating
expenses as incurred. Additions and major replacements or betterments that
increase capacity or extend useful lives are added to the cost of the asset.
Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts and the
resulting gain or loss is included in other income.
Income Taxes
The Company has elected to report its earnings, under Subchapter "S"
of the Internal Revenue Code. All income or loss is reported through the
stockholders' personal tax returns. The tax returns and the amount of taxable
income or loss are subject to examination by federal and state taxing
authorities. If such examinations result in changes to taxable income or loss,
the tax liabilities of the stockholders could be changed accordingly.
Revenue Recognition
The Company recognizes revenue upon delivery of the product to the
customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
30
<PAGE>
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful
Lives October 31,
in Years 1997
-------- ------------
<S> <C> <C>
Buildings and improvements................................. 15-40 $ 861
Machinery and equipment.................................... 5-10 3,366
Transportation equipment................................... 4-7 989
Office furniture and equipment............................. 5-10 120
--------
5,336
Less- Accumulated depreciation............................. (3,892)
--------
$ 1,444
========
</TABLE>
Allowance for doubtful accounts consists of the following:
<TABLE>
<CAPTION>
October 31,
1997
-----------
<S> <C>
Balance at beginning of year.............................................. $ 17
Additions charged to costs and expenses................................... 10
Deductions for uncollectible receivables written off...................... (23)
----
$ 4
====
</TABLE>
Inventory consists of the following:
<TABLE>
<CAPTION>
October 31,
1997
-----------
<S> <C>
Standing timber........................................................... $ 377
Logs...................................................................... 320
Milled Lumber............................................................. 122
Finished Goods............................................................ 42
Other..................................................................... 37
------
$ 898
======
</TABLE>
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
October 31,
1997
-----------
<S> <C>
Accrued compensation and benefits......................................... $ 144
Accrued property and withholding taxes.................................... 86
Other accrued expenses.................................................... 2
-------
$ 232
=======
</TABLE>
31
<PAGE>
4. NOTE PAYABLE AND LINE OF CREDIT:
The Company has a note payable (the Note) to First Source Bank (the
Lender), which was renegotiated in April 1997, after which interest only
payments are due monthly with the principal balance due December 1997. The Note
bears interest at the prime rate plus one-half percent (9.0% as of October 31,
1997).
The Company also has a $750 line of credit agreement (the Line) with
the Lender that expires in February 1998. The Company had $641 in available
credit under the Line as of October 31, 1997. The Line bears interest at the
prime rate (8.5% as of October 31, 1997).
The Note and the Line contain certain financial and non-financial
covenants. The Company was in compliance with all covenants as of October 31,
1997. The Note and the Line are secured by the Company's accounts receivable,
inventory, and equipment.
5. NOTES PAYABLE TO EMPLOYEES:
The Company has unsecured notes payable with a number of non-
stockholder employees. These notes bear interest at one percent below the prime
rate (7.5% as of October 31, 1997), have three-month terms and renew
automatically.
6. COMMITMENTS AND CONTINGENCIES:
Revenue Concentration
The Company recognized approximately 57 percent of total revenues from
its 10 largest customers for the year ended October 31, 1997. The Company
recognized approximately 12 percent of total revenues from its largest customer
during the year ended October 31, 1997. Effective February 1998, the Company
ceased doing business with this customer. Management believes that loss of this
customer is not expected to have a material impact on income from operations.
Litigation
The Company is involved in legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Operating Lease Agreements
The Company leases the land on which its production facility is
located (the Land) from the Company's stockholders under a one-year term. Rental
expense under this lease was approximately $62 for the year ended October 31,
1997.
32
<PAGE>
7. SUBSEQUENT EVENTS:
On May 21, 1998, the Company sold all of its outstanding common stock
to PalEx, Inc. (Palex) in exchange for cash and shares of Palex common stock
(the Sale). In connection with the Sale, each of the Company's two previous
stockholders entered into two-year employment agreements with Palex that provide
for annual base salaries of $50. Additionally, Palex entered into an agreement
to lease the Land from the previous stockholders for a four-year term (the New
Lease), which terminated the existing lease. The New Lease contains similar
terms as the existing lease.
33
<PAGE>
ISAACSON LUMBER COMPANY
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
34
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Isaacson Lumber Company:
We have audited the accompanying balance sheet of Isaacson Lumber
Company (a Maine corporation), as of December 31, 1997, and the related
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Isaacson Lumber
Company, as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida
August 7, 1998 (except with respect to
the matter discussed in Note 9, as to
which the date is August 31, 1998)
35
<PAGE>
ISAACSON LUMBER COMPANY
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(unaudited)
------------ --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ - $ 281
Accounts receivable, net of allowance of $25................................. 1,115 1,479
Inventories.................................................................. 919 421
Prepaid expenses and other current assets.................................... 22 37
-------- -------
Total current assets............................................ 2,056 2,218
PROPERTY AND EQUIPMENT, net..................................................... 1,977 2,006
-------- -------
Total assets.................................................... $ 4,033 $ 4,224
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable.......................................... $ 242 242
Related party notes payable.................................................. 771 765
Accounts payable............................................................. 263 256
Accrued expenses............................................................. - 79
Bank overdrafts.............................................................. 164 -
Pension obligation........................................................... 41 59
-------- -------
Total current liabilities....................................... 1,481 1,401
NOTES PAYABLE, less current maturities 669 666
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10 par value; 50,000 shares authorized, 33.335 shares issued
and outstanding............................................................ - -
Additional paid-in-capital................................................... 435 435
Retained earnings............................................................ 1,448 1,722
-------- -------
Total stockholders' equity...................................... 1,883 2,157
-------- -------
Total liabilities and stockholders' equity...................... $ 4,033 $ 4,224
======== =======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
36
<PAGE>
ISAACSON LUMBER COMPANY
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, 1998
December 31, (unaudited)
1997
------------ --------------
<S> <C> <C>
REVENUES $ 12,491 $ $6,845
COST OF GOODS SOLD 9,028 4,728
-------- --------
Gross profit 3,463 2,117
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,228 1,235
-------- --------
Income from operations 1,235 882
INTEREST EXPENSE, net (140) (84)
-------- --------
NET INCOME $ 1,095 $ 798
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
37
<PAGE>
ISAACSON LUMBER COMPANY
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Additional Retained
Stock Paid-in-Capital Earnings Total
-------- ----------------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996..................... $ - $ 435 $ 1,018 $ 1,453
Distributions to stockholders.......... - - (665) (665)
Net income.................................. - - 1,095 1,095
-------- ----------- -------- --------
BALANCE, December 31, 1997..................... $ - $ 435 $ 1,448 $ 1,883
======== =========== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
38
<PAGE>
ISAACSON LUMBER COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30, 1998
1997 (unaudited)
------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,095 $ 798
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation 293 184
Changes in assets and liabilities-
Accounts receivable (211) (364)
Inventories (92) 498
Prepaid expenses and other current assets (1) (15)
Accounts payable 55 (7)
Bank overdrafts (47) (164)
Accrued expenses (28) 79
Pension obligation (38) 18
--------- --------
Net cash provided by operating activities 1,026 1,027
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (655) (213)
--------- --------
Net cash used in investing activities (655) (213)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on related party notes payable (8) (6)
Proceeds from issuance of notes payable 546 148
Payments on notes payable (244) (151)
Distributions to stockholders (665) (524)
--------- --------
Net cash used in financing activities (371) (533)
--------- --------
CHANGE IN CASH - 281
CASH, beginning of period - -
--------- --------
CASH, end of period $ - $ 281
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 148 $ 62
</TABLE>
The accompanying notes are an integral part of this financial statement.
39
<PAGE>
ISAACSON LUMBER COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
1. BUSINESS AND ORGANIZATION:
Isaacson Lumber Company (the Company) is a sawmill manufacturer of
wooden pallets and producer of grade lumber at its production facility in
Livermore Falls, Maine. The Company sells primarily to customers engaged in the
plastics, food and beverage, consumer goods and lumber distribution industries
in the Northeastern United States, which together represented 42 percent of the
Company's revenues for the year ended December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
Inventories
Logs and supply inventories are stated at the lower of cost or market,
with cost determined on the first-in, first-out basis. The cost of precut lumber
and finished goods inventory includes direct materials, direct labor and factory
overhead.
Property and Equipment
Depreciation is provided for in amounts sufficient to relate the cost
of depreciable assets to operations over their estimated service lives.
Depreciation is computed using both straight-line and accelerated methods.
Expenditures for maintenance and repairs are charged to operating
expenses as incurred. Additions and major replacements or betterments that
increase capacity or extend useful lives are added to the cost of the asset.
Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts and the
resulting gain or loss is included in other income.
Income Taxes
The Company has elected to report its earnings under Subchapter "S" of
the Internal Revenue Code. All income or loss is reported through the
stockholders' personal tax returns. The tax returns and the amount of taxable
income or loss are subject to examination by federal and state taxing
authorities. If such examinations result in changes to taxable income or loss,
the tax liabilities of the stockholders could be changed accordingly.
Revenue Recognition
The Company recognizes revenue upon delivery of the product to the
customer.
40
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful
Lives December 31,
in Years 1997
--------- -----------
<S> <C> <C>
Land........................................... - $ 255
Buildings and improvements..................... 18-39 557
Machinery and equipment........................ 7-15 2,587
Transportation equipment....................... 5 860
Office furniture and equipment................. 5 30
----------
4,289
Less- Accumulated depreciation................. (2,312)
----------
$ 1,977
==========
<CAPTION>
Inventory consists of the following:
December 31,
1997
-----------
<S> <C>
Logs....................................................... $ 812
Pre-cut lumber............................................. 32
Finished Goods............................................. 42
Supplies................................................... 33
----------
$ 919
==========
</TABLE>
4. NOTES PAYABLE:
The Company has notes payable to Livermore Falls Trust (the Lender) and
vehicle notes payable to other financing institutions (collectively, the Notes),
under which interest and principal payments are due monthly. The Notes bear
interest at rates ranging from 8.55 percent to 9.25 percent. The Notes are
secured by the Company's property and equipment. The Company's stockholders have
also guaranteed payment of the Notes.
41
<PAGE>
Maturities of the Notes in the years subsequent to 1997 are:
<TABLE>
<S> <C>
Year ending December 31-
1998.................................... $ 242
1999.................................... 271
2000.................................... 291
2001.................................... 11
2002.................................... 7
Thereafter.............................. 89
------
$ 911
======
</TABLE>
5. RELATED PARTY NOTES PAYABLE:
The Company has unsecured notes payable with a number of non-stockholder
employees. These notes bear interest at rates ranging from 9.0 percent to 9.43
percent and are due on demand.
6. LINE OF CREDIT
The Company has a $750 line of credit (the Line) with the Lender, which
expires on June 30 of each year and is renewable annually by the Lender. The
Line accrues interest on the outstanding balance at a variable rate (9.75
percent at December 31, 1997). No amounts were drawn on the Line as of December
31, 1997.
7. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in legal actions arising in the ordinary course
of business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
Operating Lease Agreements
The Company leases property and equipment on a year-to-year basis. Rental
expense under these leases was approximately $28 for the year ended December 31,
1997.
8. EMPLOYEE RETIREMENT PLAN:
The Company sponsors a noncontributory defined benefit pension plan (the
Plan) covering substantially all employees. The Plan provides retirement
benefits for employees based generally on years of service and compensation
during active employment. The funding of the Plan is determined in accordance
with statutory funding requirements.
42
<PAGE>
The components of net periodic pension cost for the Plan are as follows
for the year ended December 31, 1997:
<TABLE>
<S> <C>
Service cost of benefits earned during the period $ 24
Interest cost of projected benefit obligation 58
Actual return on assets (56)
Net amortization and deferral 19
----
Net periodic pension cost $ 45
----
</TABLE>
The amounts included in the accompanying balance sheet were based on the
funded status of the Plan as of December 31, 1997:
<TABLE>
<S> <C>
Benefit obligations-
Vested benefits $ 713
Nonvested benefits 15
-----
Accumulated benefit obligation 728
Effect of projected compensation increases 176
-----
Projected benefit obligation 904
Plan assets at fair value 687
-----
Projected benefit obligation in excess of plan assets 217
Unrecognized net gain 14
Unrecognized net transition obligation (264)
Minimum pension obligation 74
-----
Net pension obligation $ 41
=====
</TABLE>
The projected benefit obligation as of December 31, 1997 was determined
using an assumed discount rate of 7.0 percent and assumed compensation increases
of 5.5 percent. The assumed long-term rate of return on Plan assets was 9.0
percent as of December 31, 1997. Plan assets consist principally of interests in
debt and equity mutual funds.
9. SUBSEQUENT EVENT:
On August 31, 1998, the Company sold all of its outstanding common stock
to PalEx, Inc. (Palex) in exchange for cash and shares of Palex common stock
(the Sale). In connection with the Sale, three of the Company's previous
shareholders entered into employment agreements with Palex.
43
<PAGE>
CHARLOTTE STEEL DRUM
CORPORATION
AUDITED FINANCIAL STATEMENTS
August 31, 1998
44
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Charlotte Steel Drum Corporation
Charlotte, North Carolina
We have audited the accompanying balance sheets of Charlotte Steel Drum
Corporation as of August 31, 1998 and 1997, and the related statements of
income, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Charlotte Steel Drum
Corporation as of August 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ McLean, Koehler, Sparks & Hammond
September 17, 1998
45
<PAGE>
CHARLOTTE STEEL DRUM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, 1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 97,106 $ 162,502
Accounts receivable 454,834 492,701
Inventories 125,783 99,928
Prepaid expenses 6,360 7,024
Refundable income taxes - 7,491
----------------- -----------------
Total current assets 684,083 769,646
----------------- -----------------
Property, Plant and Equipment, at cost:
Land 47,304 47,304
Land improvements 221,864 221,864
Building 125,000 125,000
Building improvements 80,886 48,884
Machinery and equipment 861,768 889,640
Burner 438,851 434,452
Automotive equipment 906,523 893,526
Furniture and fixtures 17,009 27,130
----------------- -----------------
Total 2,699,205 2,687,800
Less accumulated depreciation 1,874,627 1,680,371
----------------- -----------------
Net property, plant and equipment 824,578 1,007,429
----------------- -----------------
Other Assets:
Note receivable - affiliate 86,715 -
Cash surrender value of life insurance policies,
cumulative face value of $2,950,000 68,070 50,126
Deposits 10,800 10,800
----------------- -----------------
Total other assets 165,585 60,926
----------------- -----------------
TOTAL ASSETS $ 1,674,246 $ 1,838,001
================= =================
</TABLE>
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 142,228 $ 57,039
Current maturities of long-term debt 79,552 73,014
Trade accounts payable 182,416 241,803
Payroll and payroll taxes 45,046 147,612
Accrued expenses 6,745 8,796
Income tax payable 6,724 -
Retirement plan contribution - 100,000
----------------- -----------------
Total current liabilities 462,711 628,264
Long-Term Debt 180,895 260,466
----------------- -----------------
Total Liabilities 643,606 888,730
Stockholders' Equity:
Common stock - no par, non-convertible,
non-voting; Authorized 1,000 shares;
Issued and outstanding - 30 shares 670 670
Preferred stock
Class A - Voting, par value $100 per
share; Authorized, issued and outstanding -
3 shares 300 300
Retained earnings 1,029,670 948,301
----------------- -----------------
Total stockholders' equity 1,030,640 949,271
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 1,674,246 $ 1,838,001
================= =================
</TABLE>
The notes to financial statements are an integral part of these statements.
46
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 142,228 $ 57,039
Current maturities of long-term debt 79,552 73,014
Trade accounts payable 182,416 241,803
Payroll and payroll taxes 45,046 147,612
Accrued expenses 6,745 8,796
Income tax payable 6,724 -
Retirement plan contribution - 100,000
----------------- -----------------
Total current liabilities 462,711 628,264
Long-Term Debt 180,895 260,466
----------------- -----------------
Total Liabilities 643,606 888,730
Stockholders' Equity:
Common stock - no par, non-convertible,
non-voting; Authorized 1,000 shares;
Issued and outstanding - 30 shares 670 670
Preferred stock
Class A - Voting, par value $100 per
share; Authorized, issued and outstanding -
3 shares 300 300
Retained earnings 1,029,670 948,301
----------------- -----------------
Total stockholders' equity 1,030,640 949,271
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 1,674,246 $ 1,838,001
================= =================
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE>
CHARLOTTE STEEL DRUM CORPORATION
Statements of Income and Retained Earnings
<TABLE>
<CAPTION>
For the years ended August 31, 1998 1997
------------------ ------------------
<S> <C> <C>
INCOME
Net sales $ 4,478,635 $ 4,279,464
Cost of goods sold 3,893,821 3,664,710
------------------ -----------------
Gross profit 584,814 614,754
------------------ -----------------
Other income and expenses:
Selling, general and administrative expenses 559,065 427,526
Profit-sharing contribution - 100,000
Interest expense 30,866 31,159
Other income (129,286) (59,856)
------------------ -----------------
Net other income and expenses 460,645 498,829
------------------ -----------------
Income before income taxes 124,169 115,925
Federal and state income tax - current 42,800 36,400
------------------ -----------------
Net income $ 81,369 $ 79,525
================== =================
RETAINED EARNINGS
Retained earnings, beginning of year $ 948,301 $ 868,776
Net income 81,369 79,525
------------------ -----------------
Retained earnings, end of year $ 1,029,670 $ 948,301
================== =================
</TABLE>
The notes to financial statements are an integral part of these statements
47
<PAGE>
CHARLOTTE STEEL DRUM CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended August 31, 1998 1997
---------------- ----------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 81,369 $ 79,525
Adjustments to reconcile net income to cash
provided by operations:
Depreciation 250,658 218,209
Loss on disposal of equipment 4,037 31,579
(Increase) / decrease in:
Accounts receivable 50,542 (108,577)
Inventories (25,855) 8,609
Prepaid expenses 664 (5,024)
Income taxes 14,215 (7,011)
Cash value of life insurance (17,944) (22,391)
Increase / (decrease) in:
Accounts payable (59,387) 47,315
Payroll and payroll taxes (102,566) 42,572
Accrued expenses (2,051) 2,569
Accrued retirement plan contribution (100,000) 100,000
--------------- ---------------
Net cash provided by operating activities 93,682 387,375
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of property and equipment (71,845) (423,377)
Loan to affiliate, net repayments of $10,610 (99,390) -
--------------- ---------------
Net cash used in investing activities (171,235) (423,377)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from short-term borrowings 115,000 30,500
Principal payments on short-term borrowings (29,810) (57,860)
Proceeds from long-term borrowings - 250,000
Principal payments on long-term borrowings (73,033) (99,156)
---------------- ---------------
Net cash provided by financing activities 12,157 123,484
---------------- ---------------
Net increase (decrease) in cash (65,396) 87,482
Cash, beginning of year 162,502 75,020
--------------- ---------------
Cash, end of year $ 97,106 $ 162,502
=============== ===============
</TABLE>
The notes to financial statements are an integral part of these statements.
48
<PAGE>
CHARLOTTE STEEL DRUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the years ended August 31, 1998 and 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business Operations
-----------------------------
Charlotte Steel Drum Corporation provides reconditioned steel drums through
responsible container management for various industries including textile
chemicals, foods, and paints and stains in the southeastern United States.
Cash and Cash Equivalents
-------------------------
The Company considers cash on hand, deposits in banks, certificates of
deposit maturing in 90 days or less and short-term marketable securities as
cash and cash equivalents for the purposes of the statement of cash flows.
Inventories
-----------
Inventories consist primarily of used steel drums and new drum parts and
accessories which are priced at the lower of first-in, first-out cost or
market.
Property, Plant and Equipment
-----------------------------
Major renewals and betterments are charged to property accounts;
replacements, maintenance and repairs which do not improve or extend the
useful life of the respective assets are charged to operations.
Depreciation is provided by a combination of straight-line and accelerated
methods over the estimated useful lives of the respective assets, ranging
from five to fifteen years, except for the building structure, with an
estimated useful life of 20 years.
Profit or loss on disposition of assets is credited or charged to
operations and related asset costs and accumulated depreciation are removed
from the respective accounts.
Income Taxes
------------
Income taxes are provided on all income and expense items included in the
statements of income, giving effect to those items representing a permanent
difference between pretax accounting income and taxable income.
Deferred income taxes are accounted for using the liability method whereby
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities
(i.e., temporary differences) and are measured using enacted tax rates.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
2. BANK LINE OF CREDIT
The Company has a bank line of credit totaling $200,000. Interest is due
monthly at prime plus .5% and the line is collateralized by inventory and
accounts receivable. The balance outstanding was $142,228 and $57,039 at
August 31, 1998 and 1997, respectively.
49
<PAGE>
3. LONG-TERM DEBT
Long-term debt consisted of an equipment installment note, with monthly
payments of $8,220 including interest at 8.5% to August, 2001. The note is
secured by a blanket lien on machinery, equipment, inventories and accounts
receivable. The balance at August 31, 1998 and 1997 was $260,447 and
$333,480, respectively.
Aggregate maturities under the above notes for the years subsequent to
August 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 79,552
2000 86,584
2001 94,311
---------
$ 260,447
=========
</TABLE>
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Operating Leases
----------------
The Company leases a lot for drum storage on a month to month basis for
$230 per month. In April 1995, the Company entered into an equipment
operating lease through April 1997. Total rental expense under all leases,
including those on a month to month renewal basis, for the year ended
August 31, 1997 amounted to approximately $8,000.
Effective October 1, 1997, the Company entered into a long-term lease
agreement through September 30, 2007 with Rocky LLC, a limited liability
company owned by the shareholders of Charlotte Steel Drum Corporation.
Under terms of the agreement, the Company will lease the buildings and land
adjacent to the current plant for $7,000 a month. The Company is
responsible for all expenses associated with the property. At closing on
the property, the Company loaned the LLC $110,000 under terms of a 7 year
note at 9.5%. The balance of the note receivable - affiliate at August 31,
1998 was $99,390, represented by the current portion of $12,675 in current
accounts receivable.
At August 31, 1998, the future minimum lease payments were $84,000 annually
through 2007.
Retirement and Profit-Sharing Plan
----------------------------------
The Company has a profit-sharing plan covering substantially all of its
employees with one or more years of continuous service. Contributions
totaled $0 and $100,000 for the years ended August 31, 1998 and 1997.
Contributions to the profit-sharing plan are discretionary and are limited
to 15% of the compensation of participating employees.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended August 31 is as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash payments for interest $ 39,646 $ 30,198
Income taxes paid $ 29,530 $ 44,600
</TABLE>
50
<PAGE>
6. STOCK REDEMPTION AGREEMENT AND COMMITMENT
The Company has in effect an agreement with its three shareholders whereby
upon death or disability, the Company would be required to purchase the
shares of such shareholder at amounts and on such terms as defined in the
agreement. The Company currently carries insurance coverage on the
shareholders' lives sufficient to satisfy the potential liability for the
repurchase of shares in the event of a shareholder's death. Disability
insurance is not carried to cover the possible commitment.
7. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of a checking account with a financial
institution in North Carolina that exceeds the FDIC insurance coverage levels.
The Company believes there is minimal credit risk relative to its cash and cash
equivalents.
8. SALE OF THE COMPANY
The Company signed a letter of intent in June, 1998 to sell the company and
related affilated entity to a publicaly traded company consolidating the
container industry. The transaction will be structured as a merger /
reorganization under Section 368 of the Internal Revenue Code. Negotiations
continue at release date of the financial statements.
51
<PAGE>
PALEX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma consolidated statements of income include
the supplemental consolidated financial statements as previously filed in Form
8-K/A with the Commission on April 28, 1998 for the year ended December 28,
1997. The unaudited pro forma consolidated financial statements give effect to
the acquisitions by PalEx, Inc. ("PalEx" or the "Company") of Fraser Industries,
Inc. ("Fraser"), Ridge Pallets, Inc. ("Ridge") and Interstate Pallet Company,
Inc. ("Interstate") (together, the "Founding Companies"). These acquisitions
(the "Founding Company Acquisitions") occurred simultaneously with the closing
of PalEx's initial public offering (the "Offering") on March 25, 1997, and are
accounted for using the purchase method of accounting. Fraser, one of the
Founding Companies, has been identified as the accounting acquiror for financial
statement presentation purposes. During the third and fourth quarters of 1997,
PalEx acquired five additional manufacturers of wooden pallets, four of which
were accounted for using the pooling-of- interests method of accounting (the
"Pooled Companies"). The fifth company, Summers Pallet Manufacturing, Inc.
("Summers") was accounted for as a purchase.
Through October 23, 1998, the Company has acquired 18 additional companies,
4 of which, Acme Barrel Company, Inc. ("Acme"), Drum Service Co. of Florida
("DSF"), Consolidated Container Corporation ("CCC") and Western Container,
Limited Liability Company ("Western"), were accounted for as poolings-of-
interests (the "1998 Pooled Companies"). The other 14 companies, Consolidated
Drum Reconditioning, Inc. ("CDR"), American Pallet Recyclers, Inc. ("APR"),
Capital Pallet, Incorporated ("Capital"), Pallet Outlet Company, Inc. ("POC"),
Southern Pallets, Inc. ("Southern"), Shipshewana Pallet Co., Inc.
("Shipshewana"), Gilbert Lumber Inc. ("Gilbert"), Valley Pallets, Inc.
("Valley"), Duckert Pallet Co., Inc. ("Duckert"), Continental Associated
Investments ("Continental"), Isaacson Lumber Company (Isaacson), McCook Drum &
Barrel Co., Inc. ("McCook"), SMG Corporation ("SMG") and Charlotte Steel Drum
Corporation ("Charlotte") were accounted for as purchases (the "1998 Purchased
Companies" and, together with Summers, the "Purchased Companies"). Seven of the
18 companies acquired after fiscal 1997 and through October 23, 1998 are engaged
in the reconditioning and rebuilding of industrial steel containers. SMG is
engaged in the rental of pallets in Canada.
The accompanying unaudited pro forma consolidated statements of income present
Fraser and the other Founding Companies combined with the Pooled Companies,
Summers, the 1998 Pooled Companies, and the Purchased Companies as if they had
occurred on January 1, 1997. All significant intercompany transactions have been
eliminated.
The Company has preliminarily analyzed the savings that it expects to be
realized by consolidating certain operational and general and administrative
functions. It is anticipated that these savings will be partially offset by the
costs of being a publicly held company and the incremental increase in costs
related to the Company's new management. However, these costs, like the savings
they offset, cannot be quantified accurately. Neither the anticipated savings
nor the anticipated costs have been included in the proforma statements of
income of PalEx.
The proforma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The pro forma financial data does not purport to represent
what the Company's results of operations would actually have been if such
transactions in fact had occurred on those dates or to project the Company's
results of operations for any future period. Since the Founding Companies,
Pooled Companies, 1998 Pooled Companies and Purchased Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma consolidated
balance sheet and statement of income should be read in conjunction with the
Company's supplemental consolidated financial statements.
52
<PAGE>
PALEX, INC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 28, 1997
(In thousands, except share and per share date)
<TABLE>
<CAPTION>
Supplemental Total
Financial Purchase Pro Forma
Statements Acquisitions Adjustments Pro Forma
(Note 1) (Note 2)
<S> <C> <C> <C> <C>
REVENUES $ 222,993 $ 154,774 $ 377,767
COST OF GOODS SOLD 188,084 117,766 305,850
--------------------------------------------------------
Gross Profit 34,909 37,008 - 71,917
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,155 21,128 (8,099) [a] 34,184
-
GOODWILL AMORTIZATION 593 - 3,559 [b] 4,152
--------------------------------------------------------
Income from operations 13,161 15,880 4,540 33,581
INTEREST EXPENSE (1,722) (3,093) (4,995) [c] (9,153)
657 [d]
OTHER INCOME (EXPENSE), NET (95) (2,143) (2,238)
--------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 11,344 10,644 202 22,190
PROVISION FOR INCOME TAXES 4,704 4,498 [e] 9,202
--------------------------------------------------------
NET INCOME (LOSS) $ 6,640 $ 10,644 $(4,296) $ 12,988
========================================================
Net income per share - diluted $ 0.63 [f]
===========
Shares used in computing net income
per share - diluted 20,625,703 [g]
===========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements
53
<PAGE>
PALEX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the nine months ended September 27,1998
(In thousands, except for share and per share data)
<TABLE>
<CAPTION>
Total
As Previously Purchase Pro Forma
Reported Acquisitions Adjustments Pro Forma
(Note 1) (Note 2)
<S> <C> <C> <C> <C>
REVENUES $ 230,244 $ 59,687 $ - $ 289,931
COST OF GOODS SOLD 186,499 46,587 - 233,086
INVENTORY VALUATION ADJUST 1,679 - - 1,679
-------------------------------------------------------------------
Gross Profit 42,066 13,100 - 55,166
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 24,109 10,115 (1,097) [a] 33,127
POOLING EXPENSES 1,841 - (1,841) [a] -
COMPENSATION DIFFERENTIAL 1,062 - (1,062) [a] -
GOODWILL AMORTIZATION 1,843 - 1,255 [b] 3,098
RESTRUCTURING EXPENSE 2,404 - - 2,404
PLANT CLOSURE COSTS AND ASSET
ABANDONMENT LOSS 1,369 - - 1,369
-------------------------------------------------------------------
Income from operations 9,438 2,985 2,745 15,168
INTEREST EXPENSE (5,320) (776) (2,326) [c] (8,129)
293 [d]
OTHER INCOME (EXPENSE), NET 273 (14) - 259
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INCOME BEFORE PROVISION
FOR INCOME TAXES 4,391 2,195 712 7,298
PROVISION FOR INCOME TAXES 1,885 - 1,248 [e] 3,133
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NET INCOME (LOSS) $ 2,506 $ 2,195 $ (536) $ 4,165
===================================================================
Net income per share - diluted $ 0.20 [f]
==============
Shares used in computing net
income per share - diluted 20,662,695 [g]
==============
</TABLE>
The accompanying notes are an integral part of these unaudited
pro forma consolidated financial statements
54
<PAGE>
PALEX, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
1. TOTAL PURCHASE ACQUISITIONS
The total purchase acquisitions reflected in the unaudited pro forma
consolidated statements of income include the operations of Ridge, Interstate
and the Purchased Companies from the beginning of the period presented through
their respective acquisition dates.
2. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME ADJUSTMENTS:
a. Adjusts compensation to the level the owners of the Founding, Pooled, 1998
Pooled and Purchased Companies have agreed to receive as a result of the
acquisitions, revisions of certain lease agreements between certain stockholders
and the Company as a result of the purchase by the Company of the related assets
and pooling expenses incurred in conjunction with the Pooled and 1998 Pooled
Companies.
b. Reflects amortization of goodwill using a 30-year estimated life.
c. Reflects the increase in interest expense attributed to incremental
borrowings.
d. Reflects the reduction in interest expense attributed to obligations
retired.
e. Reflects the incremental provision for federal and state income taxes
relating to the other income statement adjustments and for income taxes on the
Founding Companies S Corporation income.
f. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." The Company adopted SFAS No. 128 for the year ended December 28, 1997.
SFAS No. 128 simplifies the standards required under current accounting rules
for computing earnings per share and replaces the presentation of primary net
income per share and fully diluted net income per share with a presentation of
basic net income per share ("Net income per share") and diluted net income per
share ("Net income per share - diluted"). Net income per share excludes dilution
and is determined by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period. Net
income per share - diluted reflects the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock. Net income per share - diluted is computed similarly to fully
diluted net income per share under previous accounting rules.
g. Includes for December 28, 1997 (i) 1,071,389 shares issued by PalEx prior
to the Offering, (ii) 3,160,742 shares issued to the stockholders of the Pooled
Companies, (iii) 5,910,000 shares issued to the stockholders of the Founding
Companies in connections with the acquisitions, (iv) 142,500 shares issued to
satisfy the obligations of the Founding Companies to their respective profit-
sharing plans, (v) 3,000,000 shares issued in connection with the Offering, (vi)
285,675 shares issued in connection with the purchase of Summers, (vii)
3,624,215 shares issued to the stockholders of the 1998 Pooled Companies,
(viii) 2,593,930 shares issued in connection with the purchase of the 1998
Purchased Companies, (ix) 6,500 shares issued in accordance with option
agreements with key employees, (x) the weighted average portion of 450,000
shares sold pursuant to the overallotment option and (xi) the effect, using the
treasury stock method, of option shares granted to management, directors and key
employees (380,752 shares for the year ended December 28, 1997 and 417,744
shares for the nine months ended September 27, 1998).
55
<PAGE>
Exhibit 23.1
Consent of Independent Certified Public Accountants
As independent certified public accountants, we hereby consent to the
incorporation of our reports included in this Form 8-K, into the Company's
previously filed Registration Statement File No. 333-58057 and Registration
Statements on Form S-8s (SEC File Nos. 333-48239 and 333-53693).
/s/ Arthur Andersen
56
<PAGE>
Exhibit 23.2
Consent of Independent Certified Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
report dated September 17, 1998 on the August 31, 1998 audited financial
statements of Charlotte Steel Drum Corporation included in this Form 8-K, into
the previously filed Registration Statement File No. 333-58057 and Registration
Statements on Form S-8s (SEC File Nos. 333-48239 and 333-53693) of PalEx, Inc.
/s/ McLean, Koehler, Sparks & Hammond
57
