<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 12, 1998
PALEX, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 000-22237
Delaware 76-0520673
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.)
1360 Post Oak Blvd., Suite 800
Houston, Texas 77056
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (713) 350-6030
<PAGE>
As indicated in the Registrant's Form 8-K as filed with the Securities and
Exchange Commission on February 27, 1998, the financial and pro forma financial
information required to be filed therewith would be filed not later than April
28, 1998. Accordingly, Items 7(a) and 7(b) of the Form 8-K are hereby amended to
read in their entirety as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
a. Financial Statements of businesses acquired.
The following Financial Statements of Acme Barrel Company, Inc. as of
December 31, 1997 are attached hereto and made a part hereof :
(i) Report of Independent 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 Consolidated Drum Reconditioning Co.,
Inc. and Subsidiaries as of December 31, 1997 are attached hereto and made a
part hereof:
(i) Reports of Independent Public Accountants
(ii) Consolidated Balance Sheets
(iii) Consolidated Statements of Income and Accumulated Earnings
(Deficit)
(iv) Consolidated Statements of Cash Flows
(v) Notes to Consolidated Financial Statements
The following Supplemental Financial Statements of PalEx, Inc. and Subsidiaries
as of November 30, 1996 and December 28, 1997 are attached hereto and made a
part hereof:
(i) Report of Independent Public Accountants
(ii) Supplemental Consolidated Balance Sheets
(iii) Supplemental Consolidated Statements of Income
(iv) Supplemental Consolidated Statements of Changes in
Stockholders' Equity
(v) Supplemental Consolidated Statements of Cash Flows
(vi) Notes to Supplemental Consolidated Financial Statements
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 Balance Sheet as of December
28, 1997
(iii) Unaudited Pro Forma Consolidated Statement of Income for the
Year Ended December 28, 1997
(iv) Notes to Unaudited Pro Forma Consolidated Financial Statements
i
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Historical Financial Statements
Acme Barrel Company, Inc.
Report of Independent Public Accountants...................................... 1
Balance Sheet................................................................. 2
Statement of Operations....................................................... 3
Statement of Changes in Stockholders' Equity.................................. 4
Statement of Cash Flows....................................................... 5
Notes to Financial Statements................................................. 6
Consolidated Drum Reconditioning Co., Inc. and Subsidiaries
Reports of Independent Public Accountants..................................... 15
Consolidated Balance Sheets................................................... 17
Consolidated Statements of Income and Accumulated Earnings (Deficit).......... 18
Consolidated Statements of Cash Flows......................................... 19
Notes to Consolidated Financial Statements.................................... 20
Palex, Inc. and Subsidiaries
Report of Independent Public Accountants...................................... 26
Supplemental Consolidated Balance Sheets...................................... 27
Supplemental Consolidated Statements of Operations............................ 28
Supplemental Consolidated Statements of Changes in Stockholders' Equity....... 29
Supplemental Consolidated Statements of Cash Flows............................ 30
Notes to Supplemental Consolidated Financial Statements....................... 31
Unaudited Pro Forma Consolidated Financial Statements
Basis of Presentation......................................................... 46
Unaudited Pro Forma Consolidated Balance Sheet as of December 28, 1997........ 48
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 28, 1997........................................................... 49
Notes to Unaudited Pro Forma Consolidated Financial Statements................ 50
</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: April 28, 1998 By: /s/ EDWARD RHYNE
---------------------------
Edward Rhyne
Vice President and General Counsel
iii
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Acme Barrel Company, Inc.:
We have audited the accompanying balance sheet of Acme Barrel Company, Inc.
(an Illinois 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 Acme Barrel 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
ARTHUR ANDERSEN LLP
Houston, Texas
January 28, 1998
1
<PAGE>
ACME BARREL COMPANY, INC.
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1997
---------
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents...................................................................... $ 1,640
Accounts receivable, net of allowance of $50................................................... 3,587
Inventories.................................................................................... 301
Prepaids and other current assets.............................................................. 605
-------
Total current assets......................................................................... 6,133
PROPERTY, PLANT AND EQUIPMENT, net................................................................ 3,100
OTHER ASSETS...................................................................................... 1,680
-------
Total assets................................................................................. $10,913
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........................................................... $ 499
Accounts payable............................................................................... 1,783
Accrued expenses............................................................................... 1,556
-------
Total current liabilities.................................................................... 3,838
LONG-TERM DEBT, net of current maturities......................................................... 4,120
Other long-term liabilities.................................................................... 175
-------
Total liabilities............................................................................ 8,133
-------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10 par value; 10,000 shares authorized, issued and outstanding.................. 100
Preferred stock $.20 par value; 3,500,000 shares authorized, issued and outstanding............ 700
Unearned compensation.......................................................................... (1,770)
Retained earnings.............................................................................. 3,750
-------
Total stockholders' equity................................................................... 2,780
-------
Total liabilities and stockholders' equity................................................... $10,913
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ACME BARREL COMPANY, INC.
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
------------
<S> <C>
REVENUES...................................................... $25,358
COST OF GOODS SOLD............................................ 21,674
-------
Gross profit............................................... 3,684
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................. 3,933
-------
Loss from operations....................................... (249)
INTEREST EXPENSE.............................................. (312)
OTHER INCOME (EXPENSE), net................................... 6
-------
Loss before income taxes................................... (555)
INCOME TAX BENEFIT............................................ 162
-------
NET LOSS...................................................... $ (393)
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ACME BARREL COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Preferred Unearned Retained
Stock Stock Compensation Earnings Total
------ --------- ------------ -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996...................... $ 100 $ 700 $(2,050) $4,143 $2,893
Shares released under leveraged ESOP Plan...... - - 280 - 280
Net loss....................................... - - - (393) (393)
------ ------ ------- ------ ------
BALANCE, December 31, 1997...................... $ 100 $ 700 $(1,770) $3,750 $2,780
====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ACME BARREL COMPANY, INC.
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss........................................................................................ $ (393)
Adjustments to reconcile net loss to net cash provided by operating activities-
Depreciation.................................................................................. 578
Deferred tax benefit.......................................................................... (17)
Changes in assets and liabilities-
Accounts receivable......................................................................... (602)
Inventories................................................................................. (71)
Prepaid expenses and other current assets................................................... 9
Other noncurrent............................................................................ (765)
Accounts payable............................................................................ 910
Accrued expenses............................................................................ 699
Other long-term............................................................................. 30
------
Net cash provided by operating activities................................................. 378
------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in cash surrender value of insurance policies...................................... (9)
Purchase of property, plant and equipment....................................................... (454)
------
Net cash used in investing activities..................................................... (463)
------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt...................................................................... (488)
Proceeds from long-term debt.................................................................... 750
------
Net cash provided by financing activities................................................. 262
------
INCREASE IN CASH AND CASH EQUIVALENTS.............................................................. 177
CASH AND CASH EQUIVALENTS, beginning of year....................................................... 1,463
------
CASH AND CASH EQUIVALENTS, end of year............................................................. $1,640
======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest...................................................................................... $ 372
Income taxes.................................................................................. $ 236
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ACME BARREL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. BUSINESS AND ORGANIZATION:
Acme Barrel Company, Inc. (the Company), is engaged in the reconditioning and
rebuilding of industrial steel containers. The Company is headquartered in
Chicago, Illinois, and operates two facilities located in Chicago. Sales are
primarily to customers located in the Midwest.
The Company and its stockholders intend to enter into a definitive agreement
with PalEx, Inc. (PalEx), pursuant to which all outstanding shares of the
Company's common stock will be exchanged for shares of PalEx common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of 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 valued at an average cost for the year. 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.
Goodwill
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 30 years. As of December 31, 1997, accumulated
amortization was approximately $24.
The Company periodically evaluates the recoverability of intangibles resulting
from business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions.
6
<PAGE>
ACME BARREL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Consulting Agreements
The Company entered into consulting agreements with various individuals.
These agreements required the payment of the fees upon consummation of the
agreements. These consulting agreements expire in 1999. The Company also
entered into another consulting agreement with a former stockholder as discussed
in Note 7.
Noncompete Agreements
The Company entered into noncompete agreements with various individuals.
These noncompete agreements are being amortized over their estimated life
through 2006.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 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. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Provision for income
taxes represents the amount of taxes payable and the applicable changes in
deferred tax assets and liabilities.
Revenue Recognition
The Company recognizes revenue upon delivery of the product to the customer.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenue and
expenses during the reporting period. The Company reviews all significant
estimates affecting its consolidated 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
Markets--Markets for steel drum reconditioning are highly fragmented and
competitive. There are three significant barriers to entry into the steel drum
reconditioning industry.
a. Regulatory permits for facilities and ongoing compliance requirements.
b. Significant distribution barriers as a result of high transportation
costs for containers.
c. Capital-intensive nature of the business.
7
<PAGE>
ACME BARREL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Customers--The Company sells to customers with local, regional and national
operations located primarily in the Midwest in many different industries.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
Estimated
Useful
Lives December 31,
in Years 1997
-------- -----------
Land............................................. - $ 19
Machinery and equipment.......................... 7 6,030
Delivery equipment............................... 5 3,778
Leasehold improvements........................... 5-39 361
Furniture and fixtures........................... 7 176
-------
10,364
Less- Accumulated depreciation................... (7,264)
-------
$ 3,100
=======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Allowance for doubtful accounts consists of the following:
December 31,
1997
-----------
Balance at beginning of year.............................. $ 50
Additions charged to costs and expenses................... -
Deductions for uncollectible receivables written off...... -
----
$ 50
====
Inventory consists of the following:
December 31,
1997
----------
Raw drums................................................. $ 46
Drums in process.......................................... 32
Finished drums............................................ 36
Supplies.................................................. 187
----
$301
====
8
<PAGE>
ACME BARREL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Other current assets consist of the following:
December 31,
1997
-----------
Prepaid consulting fees................................... $250
Prepaid payroll taxes..................................... 142
Prepaid rent.............................................. 115
Other current assets...................................... 98
----
$605
====
Other assets consist of the following:
December 31,
1997
-----------
Goodwill, net............................................. $ 599
Cash surrender value of officer life insurance............ 368
Long-term portion of prepaid consulting fees.............. 250
Noncompete agreements..................................... 215
Other assets.............................................. 248
-----
$1,680
=====
Accrued expenses consist of the following:
December 31,
1997
-----------
Accrued compensation and benefits......................... $1,046
Accrued professional fees................................. 117
Accrued taxes............................................. 106
Accrued workers' compensation............................. 50
Accrued interest payable.................................. 31
Other accrued expenses.................................... 206
------
$1,556
======
9
<PAGE>
ACME BARREL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
5. DEBT:
Long-debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1997
---------------
<S> <C>
Variable rate note issued by the ESOP to fund the purchase of 3,400 shares
of common stock, guaranteed by the Company, payable in 28 quarterly
installments of $70 plus interest, with a final payment in 2002, effective
interest rate of 6.21% in 1997.............................................. $1,770
Note payable to bank, collateralized by all Company assets, payable in
monthly installments of $22 including interest. The note, which bears
interest at the prime rate (8.5% at December 31, 1997), matures with a
final payment of $700 in 2003............................................... 1,683
Note payable to American Steel Container Company, bearing interest at 8.25%,
payable in monthly installments of approximately $16 including interest through
2006, subordinated to all existing and future loans from banks. The note
provides that senior debt cannot be more than $5,000........................ 1,166
------
4,619
Less- Current maturities..................................................... (499)
------
$4,120
======
</TABLE>
Maturity of long-term debt in the years subsequent to 1997 are:
Year ending December 31-
1998........................................ $ 499
1999........................................ 517
2000........................................ 537
2001........................................ 1,627
2002........................................ 395
Thereafter.................................. 1,044
------
Total................................ $4,619
======
6. INCOME TAXES:
Temporary differences giving rise to deferred tax assets consist primarily of
future depreciation on property and equipment capitalized for federal income tax
purposes but expensed for financial reporting, provisions for workers'
compensation claims not allowed as a federal income tax deduction until paid and
different amortization periods for a noncompete agreement.
10
<PAGE>
ACME BARREL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Income tax benefit is comprised of the following:
December 31,
1997
--------------
Current-
Federal................................ $125
State.................................. 20
----
Total current tax benefit...... 145
----
Deferred-
Federal................................ 7
State.................................. 10
----
Total deferred tax benefit..... 17
----
Net income tax benefit......... $162
====
The Company has unused empowerment zone credits which expire in 2002. A
100 percent valuation allowance has been provided for these credits since it is
unlikely they can ever be used. Such unused credits are summarized as follows:
Year of
Origination Cost
-------------- --------
1995 $ 35
1996 40
1997 40
----
$115
====
For the year ended December 31, 1997, income tax expense is primarily
computed by applying a blended state tax rate of 5.2 percent to income before
income tax.
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences in the period ended
December 31, 1997, result principally from the following:
December 31,
1997
---------
Deferred income tax liabilities-
Depreciation and amortization............................ $ 137
Deferred income tax assets-
Accruals and reserves.................................... (78)
Empowerment zone credit.................................. (115)
-----
Net deferred income tax assets....................... (193)
Less- Valuation allowance................................. 115
-----
Total deferred income tax liabilities................ $ 59
=====
11
<PAGE>
ACME BARREL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The Company's effective income tax rate is lower than what would be expected
if the federal statutory rate were applied to income primarily because of
empowerment zone credits. Such credits may be used by eligible taxpayers to
reduce federal income taxes. Credits in excess of the annual statutory
limitation may be carried forward until 2002 at which time they expire.
7. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including general and
business auto liability, commercial property and a general umbrella policy. The
Company has not incurred significant claims or losses during the periods
presented in the accompanying financial statements. Workers' compensation is a
self-insured program, managed by an independent professional administration
company and supplemented by specific excess and aggregate excess insurance.
Open claim reserves and loss experience are reflected in the accompanying
financial statements. There are no other known claims.
Consulting Agreement
The Company has a consulting agreement with a former stockholder which
provides for consulting services through the year 2003 in the amount of $200 per
year.
Operating Lease Agreements
The Company leases factory and office facilities under the terms of operating
leases expiring in 1998 and 2006. One of the leased facilities is owned by a
related party. The leases require minimum monthly rental payments, plus
operating expenses, as defined. Future minimum annual rentals under the leases
are as follows:
Related
Year Parties Other Total
---------- ----------- --------- --------
1998 $ 28 $ 90 $118
1999 - 90 90
2000 - 90 90
2001 - 90 90
2002 - 90 90
Thereafter - 323 323
---- ---- ----
$ 28 $773 $801
==== ==== ====
Rent expense for the year ended December 31, 1997, was approximately $174.
8. RELATED-PARTY TRANSACTIONS:
The Company leases factory and office facilities from a related party. Rent
expense for the year ended December 31, 1997, was approximately $84.
12
<PAGE>
ACME BARREL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The Company purchases certain supplies and materials for two entities related
by common ownership. For the year ended December 31, 1997, these purchases have
been rebilled to the entities at approximately $387.
The Company also receives a management fee from two of the above entities.
The net amount of the fee was approximately $72 for the year ended December 31,
1997.
9. EMPLOYEE RETIREMENT PLANS:
The Company has a qualified defined contribution profit-sharing plan covering
all full-time employees not subject to collective bargaining with a specified
period of service. The plan may be amended or terminated at any time. There
were no contributions for the year ended December 31, 1997.
In connection with its collective bargaining agreement with a union, the
Company participates in an areawide union retirement plan covering employees who
are members of such union.
In May 1985, the Company established an employee stock ownership plan (ESOP)
to enable the Company's eligible employees, as defined, to share in the growth
and prosperity of the Company and to provide participants with an opportunity to
accumulate capital for their future economic security. The ESOP is a qualified
plan exempt from taxes under Internal Revenue Code Section 401(a).
In May 1994, the ESOP purchased 3,400 shares of common stock (34 percent of
outstanding common shares) from a stockholder for $2,601 ($765 per share). The
ESOP funded the purchase by issuing a Company-guaranteed variable rate note to a
commercial bank. The Company accounts for its ESOP in accordance with Statement
of Position 93-6 (SOP 93-6), "Employers' Accounting for Employee Stock Ownership
Plan." Accordingly, the debt of the ESOP is recorded as long-term debt and the
shares pledged as collateral are reported as unearned compensation. As shares
are released from collateral, the Company reports compensation expense equal to
the current estimated market price of the shares. The ESOP obligation is
included in the Company's balance sheet as discussed in Note 5.
Contributions to the ESOP amounted to approximately $727 for the year ended
December 31, 1997. These contributions include interest paid of approximately
$122 for the year ended December 31, 1997, on the loan used to purchase the ESOP
shares. Since the obligation is secured by the shares purchased and the note is
guaranteed by the Company, all amounts relating to this transaction are
considered unearned compensation of the employees until such time as the note is
deemed paid and the corresponding shares are released to the individual
participants of the plan. The balance in unearned compensation at December 31,
1997, of $1,770 results from the leveraged ESOP stock purchase less the deemed
release of shares at cost.
The activity relating to the ESOP shares was as follows:
Year Ended
December 31,
1997
-----------
Allocated shares at beginning of year..................... 3,724
Shares deemed released for the current period............. 366
Unallocated shares........................................ 2,510
-----
Total ESOP shares.............................. 6,600
=====
13
<PAGE>
ACME BARREL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
In accordance with SOP 93-6, additional paid-in capital is adjusted
whenever the market value of the shares released is more or less than the cost
of the shares released. There is no adjustment in the current year as the
market value has not changed.
In 1995, the Company adopted a nonqualified funded retirement plan for a
management employee. Such funds are available to settle creditors' claims,
should they arise. The Company records the fund balance as an asset with a
corresponding liability. The annual contribution to the plan is recorded as an
expense. Such expense amounted to approximately $60 for the year ended December
31, 1997.
10. PREFERRED STOCK:
The Company's articles of incorporation, as amended, provide that holders of
the Company's preferred stock are not entitled to receive noncumulative
dividends upon declarations by the board of directors. The articles of
incorporation further provide that, upon liquidation or dissolution of the
Company, after the payment of creditors, the holders of the preferred stock are
entitled to be paid the par value of their shares before any payments to the
Company's common stockholders.
The Company is a party to a redemption agreement with a stockholder owning
3,445,000 shares of preferred stock. Upon such stockholder's death, the Company
is required to redeem such shares at $.20 per share, for an approximate total of
$689, plus interest at 8 percent, payable over a seven-year period, as described
in such redemption agreement.
11. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS (UNAUDITED):
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. On February 25, 1998, the Company paid its entire obligation in regards
to a consulting agreement with a former stockholder in the amount of $950.
14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Consolidated Drum Reconditioning Co., Inc.
We have audited the accompanying consolidated balance sheet of Consolidated Drum
Reconditioning Co., Inc. and subsidiaries (the "Company") as of December 31,
1997, and the related statements of income and accumulated earnings (deficit)
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Consolidated Drum
Reconditioning Co., Inc. and subsidiaries at 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 Anderson LLP
ARTHUR ANDERSEN LLP
Houston, Texas
January 23, 1998
15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Consolidated Drum Reconditioning Co., Inc.
We have audited the accompanying consolidated balance sheet of Consolidated Drum
Reconditioning Co., Inc. and subsidiaries (the "Company") as of December 31,
1996, and the related statements of income and accumulated earnings (deficit)
and of cash flows for years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Company at December 31, 1996,
and the results of their operations and their cash flows for the years ended
December 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
/s/ Deloitte and Touche LLP
DELOITTE AND TOUCHE LLP
Los Angeles, California
June 20, 1997, except for Note 6, as to which the date is July 28, 1997
16
<PAGE>
Consolidated Drum Reconditioning Co., Inc. And Subsidiaries
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS (Notes 7 and 8) 1997 1996
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 167,503 $ 31,568
Accounts receivable, net of allowance for doubtful accounts of
$85,243, and $24,166, at 1997 and 1996, respectively 2,723,883 3,029,180
Inventory 1,378,546 1,682,184
Prepaid expenses and other current assets 215,597 284,404
-------------- --------------
Total current assets 4,485,529 5,027,336
PROPERTY AND EQUIPMENT, Net (Note 4) 2,456,122 2,675,454
INTANGIBLE ASSETS, Net (Note 5) 6,712,709 7,248,523
RELATED-PARTY RECEIVABLES (Note 6) 1,223,497 1,082,037
-------------- --------------
TOTAL $ 14,877,857 $ 16,033,350
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable (includes bank overdraft of $497,460 at 1996) $ 1,834,615 $ 3,900,810
Line of credit (Note 7) 1,176,568 2,134,358
Current portion of long-term debt (Note 8) 845,424 250,560
Current portion of unsecured debt (Note 9) 592,697 1,074,150
Accrued liabilities 686,666 665,681
Customer drum allowance 340,653 1,056,816
-------------- --------------
Total current liabilities 5,476,623 9,082,375
-------------- --------------
LONG-TERM DEBT (Note 8) 2,133,695 1,341,018
-------------- --------------
UNSECURED DEBT (Note 9) 4,369,027 5,146,805
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY
Common stock, par value $100; 1,500 shares authorized,
issued and outstanding 150,000 150,000
Additional paid-in capital 1,144,802 1,119,756
Accumulated earnings (deficit) 1,603,710 (806,604)
-------------- --------------
Total shareholders' equity 2,898,512 463,152
-------------- --------------
TOTAL $ 14,877,857 $ 16,033,350
============== ==============
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
</TABLE>
17
<PAGE>
Consolidated Drum Reconditioning Co., Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND
ACCUMULATED EARNINGS (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES $ 29,116,607 $ 23,276,334 $ 13,291,130
COST OF SALES 20,129,630 17,224,602 9,976,489
-------------- -------------- --------------
GROSS PROFIT 8,986,977 6,051,732 3,314,641
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,674,927 3,695,832 2,131,726
AMORTIZATION OF INTANGIBLES (Note 5) 535,815 460,050 243,409
-------------- -------------- --------------
OPERATING INCOME 4,776,235 1,895,850 939,506
-------------- -------------- --------------
OTHER EXPENSE:
Interest expense (Notes 7, 8 and 9) (1,492,434) (1,171,142) (543,718)
Other expense (873,487) (283,348) (30,295)
-------------- -------------- --------------
Total other expense (2,365,921) (1,454,490) (574,013)
-------------- -------------- --------------
NET INCOME 2,410,314 441,360 365,493
SHAREHOLDERS' DISTRIBUTIONS - - (579,705)
ACCUMULATED DEFICIT, BEGINNING OF YEAR (806,604) (1,247,964) (1,033,752)
-------------- -------------- --------------
ACCUMULATED EARNINGS (DEFICIT), END OF YEAR $ 1,603,710 $ (806,604) $ (1,247,964)
============== ============== ==============
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
</TABLE>
18
<PAGE>
Consolidated Drum Reconditioning Co., Inc. And Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,410,314 $ 441,360 $ 365,493
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,068,408 876,972 446,621
Loss on sale of property and equipment 44,534 - 4,731
Changes in operating assets and liabilities, net of businesses
acquired:
Accounts receivable 305,297 (365,670) (101,282)
Inventory 303,638 398,541 (241,403)
Prepaid expenses and other current assets 68,807 (175,460) 46,806
Accounts payable (1,568,735) 273,623 422,439
Accrued liabilities 20,985 113,174 (179,795)
Customer drum allowance (716,163) 168,463 151,636
------------- ------------- ------------
Net cash provided by operating activities 1,937,085 1,731,003 915,246
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses - (2,633,795) -
Purchases of property and equipment (395,846) (343,431) (138,592)
Proceeds from sale of property and equipment 38,053 - 21,282
Net increase in related-party receivables (141,460) (319,836) (65,652)
------------- ------------- ------------
Net cash used in investing activities (499,253) (3,297,062) (182,962)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in lines of credit (957,790) (32,920) 435,386
Net (decrease) increase in bank overdraft (497,460) 306,303 (43,042)
Borrowings of long-term debt 1,651,593 1,528,629 -
Payments on long-term debt (753,727) (201,394) (71,231)
Borrowings on unsecured debt 144,397 - -
Payment on unsecured debt (913,956) (592,158) (472,508)
Shareholders' contributions (distributions) 25,046 587,983 (579,705)
------------- ------------- ------------
Net cash (used in) provided by financing activities (1,301,897) 1,596,443 (731,100)
------------- ------------- ------------
NET INCREASE IN CASH 135,935 30,384 1,184
CASH, BEGINNING OF YEAR 31,568 1,184 -
------------- ------------- ------------
CASH, END OF YEAR $ 167,503 $ 31,568 $ 1,184
============= ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,493,661 $ 1,185,745 $ 544,129
Franchise taxes 4,500 9,020 8,000
Noncash financing activities -
(see Note 2 for a description of acquisitions, including noncash elements)
The accompanying notes to consolidated financial statements are an intergral part of these financial statements.
</TABLE>
19
<PAGE>
CONSOLIDATED DRUM RECONDITIONING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Drum Reconditioning Co., Inc. ("CDRC") and its subsidiaries,
CDRCo HC, LLC ("Holdings"), CDRCo SW, LLC ("Southwest"), and CDRCo NW, LLC
("Northwest") (collectively, the "Company"), purchase, recondition and sell
previously manufactured steel drums as well as provide steel drum
reconditioning services for customers. The Company is headquartered in
Montebello, California, with operations in Los Angeles, California and
Seattle, Washington. Sales are made to customers primarily on the West Coast
of the United States.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of CDRC and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company's 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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable, which are
generally diversified due to the large number of entities comprising the
Company's customer base. Substantially all customers are granted credit and
are located in the western United States. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential credit
losses. The Company generally does not require collateral or other security
to support customer receivables.
INVENTORY - Inventory is stated at the lower of cost or market. Cost is
determined using the weighted-average method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. The estimated lives range from 3 to 40
years. Leasehold improvements are amortized over the lesser of the lease
periods or useful lives of the assets.
INTANGIBLE AND LONG-LIVED ASSETS - The Company reviews the recoverability of
intangible and long-lived assets whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. If
the expected future cash flows from the use of such assets (undiscounted and
without interest charges) are less than the carrying value, the Company's
policy is to record a writedown that is determined based on the difference
between the carrying value of the asset and its estimated fair value.
CUSTOMER DRUM ALLOWANCE - The Company has recorded a liability for used drums
obtained from its customers for reconditioning. The Company has an obligation
to provide a reconditioned drum subject to a reconditioning charge.
INCOME TAXES - The Company has elected to be taxed as an S corporation for
federal and California state income tax purposes. As such, the taxable income
or loss of the Company is allocated directly to the shareholders. Other than
a 1.5% California franchise tax, there is no income tax at the corporate
level. The Company's subsidiaries are limited liability companies that are
not subject to federal or state income taxes. Other than certain minimum
franchise taxes based upon revenues, there is no income tax at the subsidiary
level. Franchise taxes are included in selling, general and administrative
expenses.
20
<PAGE>
2. ACQUISITIONS
During 1996, the Company purchased substantially all of the assets of two
companies, Northwest Cooperage Company ("Northwest Cooperage") and Waymire
Drum Company ("Waymire"). Both companies were engaged in the purchasing,
reconditioning and selling of steel drums.
On January 26, 1996 and August 26, 1996, the Company acquired substantially
all of the assets of Northwest Cooperage and Waymire, respectively. The
purchase price for Northwest Cooperage consisted of $2,533,795 in cash and
notes payable of $2,293,658. The purchase price of Waymire consisted of
approximately $100,000 in cash, notes payable to seller of $1,461,618 and the
assumption of $4,208,134 in liabilities, including debt of $2,352,400.
Both acquisitions were accounted for as purchases, and accordingly, the
purchase price was allocated to the net assets acquired on the basis of their
respective fair values. The purchase price was allocated to the acquired
assets as follows:
Northwest Waymire
Cooperage
Accounts receivable $ -- $1,408,134
Inventory 790,044 504,000
Property and equipment 1,337,400 759,225
Cost in excess of net assets acquired 2,700,009 3,098,393
---------- ----------
Total purchase price $4,827,453 $5,769,752
========== ==========
The cost in excess of net assets acquired is being amortized over 15 years
(see Note 5).
3. INVENTORY
Inventory consists of the following:
December 31
-----------------------
1997 1996
---------- ----------
Raw materials (principally drums) $ 557,851 $ 841,780
Raw materials (principally drum parts) 417,340 263,856
Finished goods 403,355 576,548
---------- ----------
Total $1,378,546 $1,682,184
========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31
------------------------
1997 1996
----------- -----------
Machinery and equipment $ 2,632,475 $ 2,904,715
Transportation equipment 1,196,462 1,156,775
Furniture and fixtures 390,536 286,240
Leasehold improvements 104,748 104,444
Construction in Process 66,108 0
----------- -----------
Total 4,390,329 4,452,174
Less accumulated depreciation and amortization 1,934,207 1,776,720
----------- -----------
Property and equipment, net $ 2,456,122 $ 2,675,454
=========== ===========
21
<PAGE>
5. INTANGIBLE ASSETS
Intangible assets arose principally as a result of the Northwest Cooperage
and Waymire acquisitions in 1996 and an acquisition in 1992 and are being
amortized using the straight-line method. Intangible assets consist of the
following:
<TABLE>
<CAPTION>
Amortization December 31
---------------- -----------------------------
Period 1997 1996
--------- ----------
<S> <C> <C> <C>
Consulting contracts 5 years $ 520,228 $ 520,228
Covenants not to compete 5 years 463,057 463,057
Cost in excess of net assets acquired 15-40 years 7,668,502 7,668,502
---------- ----------
Total 8,651,787 8,651,787
Less accumulated amortization 1,939,078 1,403,264
---------- ----------
Intangible assets, net $6,712,709 $7,248,523
========== ==========
</TABLE>
6. RELATED-PARTY RECEIVABLES
The Company has made noninterest-bearing advances to its shareholders and an
entity owned by its shareholders. During 1996, the shareholders contributed
$587,983 to the Company.
In July 1997, the shareholders signed promissory notes totaling $1,082,037
which bear interest at 10% with interest only payments for the first two
years and principal and interest payments of $55,000 per month thereafter.
These notes were amended at December 31, 1997 to increase the amount due to
$1,223,497.
7. LINE OF CREDIT
At December 31, 1997, the Company had a financing agreement with a commercial
bank. The financing agreement provides for maximum borrowings under line of
credit facilities up to $3,850,000 at the prime rate (8.25% at December 31,
1997) plus 1.5%, subject to a borrowing base, and $1.6 million under a term
loan facility. The line of credit expires in May 1998, and the term loan
expires in May 1999. The financing agreement is collateralized by
substantially all of the Company's assets.
At December 31, 1996, the Company had line of credit agreements with a
finance company and a commercial bank. The line of credit agreement with the
finance company provided for borrowings of up to $2 million at the prime rate
plus 5.75%. The maximum available borrowings were based upon eligible
accounts receivable. The line of credit with the finance company was
collateralized by substantially all of the Company's assets, exclusive of
those of its subsidiary, Northwest. At December 31, 1996, there were no
available borrowings under this line. The line of credit with the commercial
bank provided for borrowings of up to $750,000 at 1% above the bank's prime
rate. The line of credit was collateralized by substantially all of
Northwest's assets.
22
<PAGE>
8. LONG-TERM DEBT
Long-term debt, all of which is guaranteed by the Company's shareholders,
consists of the following:
<TABLE>
<CAPTION>
December 31
1997 1996
---- ----
<S> <C> <C>
Term loan agreement due to a commercial bank,
principal payable monthly at $34,000 plus interest
at the prime rate (8.25% at December 31, 1997) plus
1.5%. The agreement is collateralized by substantially
all of the assets of the Company. $1,396,000
Term loan agreement due to a commercial bank,
principal payable monthly at $10,420 plus interest
at the prime rate (8.25% at December 31, 1997) plus
1.5%. The agreement is collateralized by substantially
all of the assets of the Company's subsidiary, Northwest 1,031,180 $ 1,156,220
Due to a finance company payable at $8,000 per month plus
interest at the prime rate (8.25% at December 31, 1996) plus
5.75%, The note was collateralized by substantially all of
the assets of the Company, except those of its Northwest subsidiary - 387,913
Payable to former shareholders of an acquired business;
payable at $25,000 per quarter, including interest ranging
from 14.7% to 15.2% and maturing in 2001 268,210 -
Due to a trust, monthly interest payments at 10% payable
upon demand 133,047 -
Due to a bank, payable in aggregate quarterly payments of
$43,367, and additional payments of $33,000 in the months
of June, July and August, including interest at 12.5% and
maturing in July 1998 or upon sale of the collateral. Amount
represents 76.9% of the total obligation, the balance of
which is owed by the former shareholders of an acquired business
and is collateralized by real property owned by the former shareholders 88,261 -
Due to equipment finance companies, with aggregate monthly
payments ranging from $320 to $1,193, including interest
ranging from 13.4% to 22.7%. The notes mature through 1999
and are collateralized by the related equipment 62,421 47,445
--------- ---------
Total 2,979,119 1,591,578
Less current maturities 845,424 250,560
--------- ---------
Long-term portion $2,133,695 $1,341,018
========= =========
</TABLE>
23
<PAGE>
Covenants in connection with the term loan agreement and the line of credit
with a commercial bank impose restrictions and requirements relating to,
among other things, maintenance of specified financial ratios and limitations
on outside indebtedness, incurrence of lease obligations, acquisitions,
mergers, dividends and capital expenditures. In addition, Northwest is
prohibited from paying more than $200,000 to its parent or other related
parties unless certain cash flow requirements are achieved, in which case
Northwest may pay up to $500,000.
The aggregate maturities of long-term debt obligations are $845,424 in 1998,
$1,981,077 in 1999, $90,792 in 2000, $53,426 in 2001, $4,600 in 2002 and
$3,800 thereafter.
9. UNSECURED DEBT
Unsecured debt consists of the following:
<TABLE>
<CAPTION>
December 31
1997 1996
---- ----
<S> <C> <C>
Payable to former shareholders of Northwest at $148,438
per quarter through January 25, 1998 and thereafter at
$118,500 per quarter, including interest at an imputed
interest rate of 18% and maturing in 2005 $1,889,980 $2,117,388
Payable to former shareholders of Waymire at $26,092 per
month decreasing to $20,121 per month, including interest
at an imputed interest rate of 18%, maturing in 2006 1,232,748 1,311,099
Due to an investment company, $21,334 payable monthly,
including interest at 8.5% and maturing in 2002 939,967 1,108,230
Due to a trust fund, $25,778 payable quarterly, including
interest at 15.2% and maturing in 2003 or upon sale of the
Company 368,137 411,011
Payable to former shareholders of an acquired business;
interest ranging from 14.7% to 15.2% and maturing in 2001 - 322,595
Due to a trust, monthly interest payments at 10%
Due to a bank, interest at 12.5%; amount represents
76.9% of the total obligation, the balance of
which is owed by the former shareholders of an acquired
business and is collateralized by real property owned by
the former shareholders - 245,388
Due to shareholders, interest at 10%, principal and interest
due in 2000 150,000 150,000
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Payable to former shareholder of Waymire at $4,425 per month
decreasing to $3,412 per month, including interest discounted
at 18% maturing in 2009. Payments commence in 1999 164,969 137,979
Other 215,923 153,026
---------- ---------
Total 4,961,724 6,220,955
Less current maturities 592,697 1,074,150
---------- ----------
Long-term portion $4,369,027 $5,146,805
========== ==========
</TABLE>
The aggregate maturities are $592,697 in 1998, $655,210 in 1999, $693,484 in
2000, $706,517 in 2001, $539,982 in 2002, and $1,773,834 thereafter.
Certain debt which was subordinated in 1996 was reclassified as long-term
debt in 1997 due to the debtholders unwillingness to subordinate their debt
to the Commercial Bank with whom the Company entered into a debt agreement in
1997.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its buildings, land and automobiles under various
noncancelable operating leases. Future minimum lease payments required under
these operating leases are $752,130 in 1998, $592,649 in 1999, $422,623 in
2000, $394,237 in 2001, $256,900 in 2002 and $334,125 thereafter. Certain
leases provide for options to extend and require the payment of insurance,
property taxes and maintenance costs. Total rent expense from operating
leases was $624,662 and $610,229, for the years ended December 31, 1997
and 1996, respectively.
11. SUBSEQUENT EVENT (UNAUDITED)
The Company has entered into a letter of intent to sell substantially all of
the Company's assets to PalEx, Inc.
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying supplemental consolidated balance sheets
of PalEx, Inc. (a Delaware corporation) and subsidiaries as of November 30,
1996 and December 28, 1997, and the related supplemental consolidated statements
of income, changes in stockholders' equity and cash flows for the years ended
November 30, 1995 and 1996 and December 28, 1997. These supplemental financial
statements give retroactive effect to acquisitions made by the Company during
the first quarter of 1998 which have been accounted for as poolings-of-
interests. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the supplemental consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the supplemental
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the supplemental consolidated
financial position of PalEx, Inc. and subsidiaries as of November 30, 1996 and
December 28, 1997, and the supplemental results of their operations and their
cash flows for the years ended November 30, 1995 and 1996 and December 28, 1997,
after giving retroactive effect to certain pooling-of-interests transactions, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN, LLP
Houston, Texas
February 27, 1998
26
<PAGE>
PALEX, INC AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share data) November 30, December 28,
1996 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,865 $ 7,448
Accounts receivable, net of allowances
of $253 & $617 13,590 21,592
Inventories 9,284 20,383
Deferred income taxes 512 945
Prepaid expenses and other current
assets 1,539 3,387
------ ------
Total current assets 27,790 53,755
PROPERTY, PLANT AND EQUIPMENT, net 25,757 37,850
GOODWILL, net of accumulated amortization
of $--- & $593 1,614 26,262
OTHER ASSETS 2,707 2,138
------ ------
Total assets $57,868 $120,005
======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Line of credit $ 1,515 $ 1,150
Current maturities of long-term debt 2,500 1,057
Notes payable to related parties 2,980 -
Accounts payable 7,427 9,342
Accrued expenses 5,466 5,094
Income taxes payable 272 1,407
------ ------
Total current liabilities 20,160 18,050
LONG-TERM DEBT, net of current
maturities 11,653 30,673
DEFERRED REVENUE 421 568
DEFERRED INCOME TAXES 1,101 3,167
OTHER LONG-TERM LIABILITIES 90 110
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value;
30,000,000 shares authorized; 9,433,414
and 17,644,520 shares outstanding 94 176
Capital in excess of par 6,561 54,107
Unearned compensation (1,980) (1,770)
Retained earnings 20,644 14,924
Less 250 and 0 treasury
shares, at cost (876) -
------ ------
Total stockholders' equity 24,443 67,437
------ ------
Total liabilities and stockholders'
equity $57,868 $120,005
======= ========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements
27
<PAGE>
PALEX, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
One Month
Period Ended Year Ended
Year Ended November 30, December 31, December 28,
1995 1996 1996 1997
---------- ---------------- -------------------- ------------------
<S> <C> <C> <C> <C>
REVENUES $125,707 $145,030 $ 3,828 $222,993
COST OF GOODS SOLD 105,195 121,865 3,121 188,084
-------- -------- ------- --------
Gross Profit 20,512 23,165 707 $ 34,909
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 13,333 14,063 749 21,155
GOODWILL AMORTIZATION - - - 593
-------- -------- ------- --------
Income (loss) from
operations 7,179 9,102 (42) 13,161
INTEREST EXPENSE (1,845) (1,576) (25) (1,722)
OTHER INCOME (EXPENSE), NET 394 346 1 (95)
-------- -------- ------- --------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES 5,728 7,872 (66) 11,344
PROVISION FOR INCOME
TAXES 1,594 1,833 - 4,704
-------- -------- ------- --------
NET INCOME (LOSS) $ 4,134 $ 6,039 $ (66) $ 6,640
======== ======== ======= ========
Net income (loss) per share $ 0.44 $ 0.64 $ (0.01) $ 0.43
Net income (loss) per share - diluted $ 0.44 $ 0.64 $ (0.01) $ 0.42
Shares used in computing net
income (loss) per share 9,433,414 9,433,414 9,433,414 15,561,489
Shares used in computing net
income (loss) per share - diluted 9,433,414 9,433,414 9,433,414 15,914,157
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements
28
<PAGE>
PALEX, INC AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Capital in Total
---------------- Excess of Unearned Retained Treasury Stockholders'
Shares Amount Par Value Compensation Earnings Shares Equity
------ ------- --------- ------------ -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1994 9,433 $ 94 $ 4,372 $ (2,540) $ 14,742 - $ 16,668
Distributions to stockholders, net - - - - (2,042) - (2,042)
Capital contributions equal to the current income
taxes of S corporations - - 860 - - - 860
Purchase treasury shares - - - - - (876) (876)
Shares released under leveraged ESOP Plan - - - 280 - - 280
Net income - - - - 4,134 - 4,134
------ ---- ------- -------- ------- ----- -------
Balance, November 30, 1995 9,433 94 5,232 (2,260) 16,834 (876) 19,024
Distributions to stockholders, net - - - - (2,229) - (2,229)
Capital contributions equal to the current income
taxes of S corporations - - 1,329 - - - 1,329
Shares released under leveraged ESOP Plan - - - 280 - - 280
Net income - - - - 6,039 - 6,039
------ ---- ------- -------- ------- ----- -------
Balance, November 30, 1996 9,433 94 6,561 (1,980) 20,644 (876) 24,443
Issuance of Common Stock:
Shares issued to profit sharing plans 143 1 800 - - - 801
Public offering, net of offering costs 3,450 35 23,529 - - - 23,564
Acquisition of Founding Companies 4,087 41 17,228 - - - 17,269
Acquisition of Purchased Company 286 3 4,457 - - - 4,460
Acquisition of pooled company
at inception 245 2 92 - 497 - 591
Retire treasury shares - - - - (876) 876 -
Capital contributions - - 231 - - - 231
Capital contributions equal to the current income
taxes of S corporations - - 1,209 - - - 1,209
Distributions to stockholders, net - - - - (12,382) - (12,382)
Net loss for the one-month transition period ended
December 31, 1996 - - - - (66) - (66)
Adjustment to conform year-end of pooled companies - - - - 467 - 467
Shares released under leveraged ESOP Plan - - - 210 - - 210
Net income, year ended December 28, 1997 - - - - 6,640 - 6,640
------ ---- ------- -------- ------- ----- -------
Balance December 28, 1997 17,644 $176 $54,107 $ (1,770) $14,924 $ - $67,437
====== ==== ======= ======== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements
29
<PAGE>
PALEX, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended November 30, One Month Period Year Ended
------------------------ Ended December 31, December 28,
1995 1996 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 4,134 $ 6,039 $ (66) $ 6,640
Net loss for Fraser for the one-month transition period - - - (66)
Adjustment to conform year-end of pooled companies - - - 467
Unearned compensation 280 280 - 210
Cash acquired from pooled company at inception - - - 51
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,609 3,432 99 5,558
Loss on sale of property, plant and equipment - 29 - 400
Capital contributions equal to the
current income taxes of S corporations 860 1,329 - 1,209
Deferred tax provision (benefit) 182 134 - (86)
Changes in operating assets and liabilities
Accounts receivable (1,471) (1,045) (387) (1,632)
Inventories 328 282 (486) (5,458)
Prepaids and other current assets (27) (404) 80 (1,478)
Other assets (482) (1,173) 1 1,370
Accounts payable 895 1,599 434 51
Accrued expenses (1,260) 1,626 (402) (2,155)
Income taxes payable 263 66 - 1,135
Deferred income 114 (78) (2) 147
-------- ------- ----- --------
Net cash provided by (used in) operating activities 7,425 12,116 (729) 6,363
-------- ------- ----- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,128) (7,355) (92) (9,149)
Cash paid for the Founding Companies and Purchased
Company, net of cash acquired - - - (4,607)
-------- ------- ----- --------
Net cash used in investing activities (4,128) (7,355) (92) (13,756)
-------- ------- ----- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net repayments on lines of credit (208) (3,535) - (365)
Net proceeds (payments) on notes
payable to related parties (323) 555 - (2,980)
Proceeds from debt 1,135 6,801 821 32,787
Payment on debt (1,433) (6,642) - (28,648)
Net proceeds from issuance of common stock - - - 23,564
Distributions to stockholders, net (2,042) (2,230) - (12,382)
Purchase of treasury shares (876) - - -
-------- ------- ----- --------
Net cash provided by (used in) financing activities (3,747) (5,051) 821 11,976
-------- ------- ----- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (450) (290) - 4,583
CASH AND CASH EQUIVALENTS, beginning of year 3,605 3,155 - 2,865
-------- ------- ----- --------
CASH AND CASH EQUIVALENTS, end of year $ 3,155 $2,865 $ - $ 7,448
======== ====== ===== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,795 $1,703 $ 25 $ 1,710
======== ====== ===== ========
Cash paid for income taxes $ 315 $1,008 $ - $ 1,835
======== ====== ===== ========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements
30
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
PalEx, Inc. ("PalEx" or the "Company") was founded in January 1996 to
create a nationwide provider of pallet products and related services. On March
25, 1997, concurrently with the closing of PalEx's initial public offering (the
"Offering") of its common stock, par value $.01 per share (the "Common Stock"),
PalEx and separate wholly owned subsidiaries of PalEx acquired, in separate
transactions (the "Acquisitions"), the following three businesses: Fraser
Industries, Inc. ("Fraser"), Ridge Pallets, Inc. ("Ridge"), and Interstate
Pallet Co., Inc. ("Interstate"), collectively referred to as the "Founding
Companies." The consideration for the acquisitions of the Founding Companies
consisted of a combination of cash and Common Stock.
Subsequent to the acquisition of the Founding Companies and the Offering
and during fiscal 1997, PalEx acquired five additional companies, four of which
were accounted for as poolings-of-interests (the "Pooled Companies").
After fiscal 1997, and through March 25, 1998, the Company acquired nine
additional companies, four of which, Acme Barrel Company, Inc. ("Acme"), Drum
Service Co. of Florida ("DSF"), Consolidated Container Corporation ("CCC") and
Western Container, LLC ("Western") were accounted for as poolings-of-interests
(the "1998 Pooled Companies"), and the remainder were accounted for as purchase
business transactions. Five of the nine companies are engaged in the
reconditioning and rebuilding of industrial steel containers.
The historical consolidated financial statements have been retroactively
restated for the acquisitions of the Pooled Companies and the 1998 Pooled
Companies.
The Company's headquarters are in Houston, Texas, with significant
manufacturing operations located in Texas, California, Florida, Illinois and
North Carolina. Sales are made throughout the United States with significant
concentrations in the southeastern, midwestern and western regions of the United
States serving primarily agricultural and industrial customers. Revenues
related to the agricultural customers are highly seasonal, occurring primarily
during the harvesting season.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements are labeled as "supplemental" as
they have been restated to include the results of the 1998 Pooled Companies
acquired subsequent to December 28, 1997, which were accounted for as poolings-
of-interests for which post-acquisition operating results have not yet been
published. These supplemental consolidated financial statements will represent
the restated historical consolidated financial statements of the Company once
post-acquisition operating results of the Company have been published. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Fraser has been identified as the accounting acquiror for financial
statement presentation purposes. The acquisitions of Ridge, Interstate and
Summers Pallet Manufacturing, Inc. ("Summers" or the "Purchased Company") were
accounted for using the purchase method of accounting. The allocations of the
purchase price to the assets acquired and liabilities assumed has been assigned
and recorded based on estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available. The accompanying supplemental consolidated financial statements
present Fraser combined with the Pooled Companies and the 1998 Pooled Companies
for all periods, and include Ridge and Interstate from March 31, 1997 and
Summers from November 20, 1997, their respective dates of acquisition. All
significant intercompany transactions and balances have been eliminated in
consolidation.
The Pooled Companies previously reported on a calendar year-end. DSF
historically reported on a year-end of October 31. CCC reported on a year-end of
November 30. As such, the accounts of these companies for their respective 1995
and 1996 year-ends have been consolidated with the accounts of PalEx as of and
for the years ended November 30, 1995 and 1996, and are reflected in the
Company's supplemental consolidated statement of operations for those periods.
Acme previously reported on a year-end of April 30, but has been conformed to
the Company's December year-end for 1997. Revenues and net loss for the four
month period ended April 30, 1997 were approximately $8,445,000 and $467,000,
respectively. Acme's loss from operations for the four-month transition period
is included as an adjustment in the Company's supplemental consolidated
statements of stockholder's equity and cash flows for the year ended December
28, 1997. Acme's results of operations for its years ended April 30, 1997 and
1996 have been included in the Company's supplemental consolidated statement of
operations for the years ended November 30, 1996 and 1995, respectively.
31
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Year
During 1997, PalEx changed its year-end to the last Sunday in the calendar
year from November 30. Accordingly, it maintains its accounting records using a
52/53-week year ending on the last Sunday in December. Each quarter contains 13
weeks, unless otherwise noted. The accompanying supplemental consolidated
financial statements include the statement of operations and cash flows for the
one month period ended December 31, 1996, representing the income and cash flows
of Fraser, the accounting acquiror, for this one month transition period.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or average cost or market, with
cost determined on a first-in, first-out basis or by specific identification.
The cost of finished goods inventory includes direct materials, direct labor and
overhead.
Property, Plant and Equipment
Property, plant, and equipment are carried at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
Company's capital leases are insignificant. The straight-line method of
depreciation is utilized for substantially all assets for financial reporting
purposes, but accelerated methods are used for tax purposes.
Expenditures for maintenance and repairs are charged to expense as
incurred. Additions and major replacements or betterments that increase
capacity or extend useful lives are added to the cost of the asset. Upon sales
or retirement of property, plant and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net.
In 1996 the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 establishes the recognition
and measurement standards related to the impairment of long-lived assets. The
Company periodically assesses the realizability of its long-term assets pursuant
to the provisions of SFAS No. 121. Based on the Company's analysis of the
undiscounted future cash flows for its long-term assets, no impairments would
have been recognized under SFAS No. 121.
Income Taxes
The Company uses the liability method of accounting for income taxes,
wherein, deferred tax assets and liabilities are recognized for future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The stockholders of Fraser and three of the four Pooled Companies elected
to be taxed under the provisions of Subchapter S of the Internal Revenue Code
prior to their acquisition by the Company. Under these provisions, these
companies did not pay federal and certain state income taxes. Instead, these
companies' respective stockholders paid income taxes on their proportionate
shares of the Companies' net earnings. The S Corporation status of Fraser and
the Pooled Companies was terminated effective with the combination with PalEx,
and the Company is now subject to federal income taxes. The Company recorded a
charge to income tax expense of approximately $488,000 on March 25, 1997,
representing deferred income taxes at that date which were not previously
recorded because of Fraser's status under Subchapter S.
For purposes of these supplemental consolidated financial statements,
federal and state income taxes have been provided for the net income of the
Pooled Companies as if these companies had filed C Corporation tax returns for
the preacquisition periods. The current income tax expense of the Pooled
Companies is reflected in the supplemental consolidated financial statements in
the provision for income taxes and as an increase to capital in excess of par
value.
32
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
The Company recognizes revenue upon delivery of the product to the
customer.
Fair Value of Financial Instruments
SFAS No, 107, "Disclosures About Fair Values of Financial Instruments," and
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair Value
of Financial Instruments," require the disclosure of the fair value of financial
instruments, both assets and liabilities recognized and not recognized on the
balance sheet, for which it is practicable to estimate fair value. The carrying
value of the Company's financial instruments approximates fair value.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenue and
expenses during the reporting period. The Company reviews all significant
estimates affecting its consolidated 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.
Earnings Per Share
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.
Net income per share was computed using 9,433,414 shares (the aggregate
number of shares attributable to Fraser and the shares issued in acquisitions
accounted for under the pooling-of-interests method) for the years ended
November 30, 1995 and 1996. Net income per share for the year ended December 28,
1997 was computed using, in addition to the aforementioned shares, 6,235,497
weighted average outstanding shares issued in consideration for the acquisition
of Ridge, Interstate and Summers, the shares issued pursuant to the Offering and
overallotment option, shares issued to Main Street Capital Partners, L.P. and to
PalEx management and shares issued to the profit sharing plans of the Founding
Companies. In addition, net income per share for the year ended December 28,
1997 includes 245,246 shares issued in the acquisition of one of the 1998 Pooled
Companies, deemed to have been acquired at its date of inception in 1997. Net
income per share - diluted differs from the net income per share computation due
to the inclusion of stock options that were dilutive.
Concentrations of Risk
Materials
Pallet prices are closely related to the changing costs and availability of
lumber, the principal raw material used in the manufacture and repair of wooden
pallets. Lumber supplies and costs are affected by many factors including
weather, governmental regulation of logging on public lands, lumber agreements
between Canada and the United States and competition from other industries that
use similar grades and types of lumber.
33
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Markets
Markets for pallet manufacturing and repair services are highly fragmented
and competitive. Pallet manufacturing and recycling operations are not capital-
intensive and barriers to entry in such businesses are minimal.
Markets for steel drum reconditioning are highly fragmented and
competitive. There are three significant barriers to entry in the steel drum
reconditioning industry.
a. Regulatory permits for facilities and ongoing compliance requirements.
b. Significant distribution barriers as a result of high transportation
costs for containers.
c. Capital-intensive nature of the business.
Customers
The Company sells to customers with local, regional and national operations
in many different industries and geographical locations. Of such customers, one
customer accounted for approximately 10 percent, 21 percent and 26 percent of
the Company's supplemental consolidated revenues in 1995, 1996 and 1997,
respectively.
Recent Accounting Pronouncements
In June 1997, SFAS No. 131, "Disclosures About Segments Of An Enterprise
and Related Information," was issued, establishing standards for public
enterprises to disclose certain information about operating segments and related
disclosures about products and services, geographic areas and significant
customers. The Company will adopt this pronouncement in 1998 in accordance with
the implementation requirements. Management believes the adoption will not have
a material impact on the Company's financial statements.
3. BUSINESS COMBINATIONS
Poolings
In the third and fourth quarters of 1997 and through March 25, 1998, the
Company acquired all of the outstanding stock of the Pooled Companies and the
1998 Pooled Companies in exchange for 6,784,957 shares of Common Stock. These
companies produce and repair wooden pallets and recondition and rebuild
industrial steel containers. These acquisitions have been accounted for under
the pooling-of-interests method of accounting.
34
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the restated consolidated revenues, net
income and per share data of the Company after giving effect to the 1998 Pooled
Company acquisitions (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended November 30, Year Ended
------------------------------------------------------- December 28,
1995 1996 1997
--------------------------- ------------------------ ----------------------
Net Net Net
Revenues Income Revenues Income Revenues Income
------------ ------------ ----------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income -
As previously reported $ 77,256 $3,590 $ 96,047 $5,676 $162,848 $ 7,152
1998 Pooled Companies 48,451 544 48,983 363 60,145 (512)
-------- ------ --------- ------ -------- -------
As restated
$125,707 $4,134 $ 145,030 $6,039 $222,993 $ 6,640
======== ====== ========= ====== ======== =======
Net income per share - diluted
As previously reported $ .59 $ .94 $ .58
1998 Pooled Companies (.15) (.30) (.16)
------ ------ -------
As restated
$ .44 $ .64 $ .42
====== ====== =======
</TABLE>
The dilutive effect of the 1998 Pooled Companies on net income per share is
primarily the result of higher owners' compensation expense of the 1998 Pooled
Companies prior to their acquisition by the Company.
Purchases
The acquisitions of Ridge, Interstate and Summers (the "Purchased
Companies") were accounted for as purchases and have been reflected in the
Company's supplemental consolidated financial statements from March 31, 1997 for
Ridge and Interstate and from November 20, 1997 for Summers. The aggregate
consideration paid in these transactions was $4.6 million in cash and 3,301,971
shares of common stock with an estimated fair value of $21.7 million. The
accompanying consolidated balance sheet as of December 28, 1997 includes
allocations of the respective purchase prices. The allocations resulted in
goodwill recognized of $25.2 million, representing the excess of purchase price
over fair value of the net assets acquired, as follows (in thousands):
<TABLE>
<S> <C>
Goodwill.................................. $ 25,241
Fair value of assets acquired............. 20,503
Liabilities assumed....................... (19,408)
Fair value of common stock................ (21,729)
--------
Cash paid, net of cash acquired........... $ 4,607
========
</TABLE>
Goodwill is amortized over the estimated useful life of thirty years using
the straight-line method.
35
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth unaudited pro forma income statement
data of the Company which reflects adjustments to the supplemental consolidated
financial statements to present the effect of the acquisitions of Ridge,
Interstate and Summers as if the acquisitions were effective December 1, 1995
(dollar amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------
November 30, December 28,
------------------- -------------------
1996 1997
---- ----
<S> <C> <C>
(unaudited)
Revenues $195,882 $243,706
======== ========
Net Income $ 7,936 $ 8,304
======== ========
Net Income per share - diluted $ .62 $ .58
======== ========
</TABLE>
Pro forma adjustments included in the amounts above primarily relate
to adjustments to selling, general and administrative expenses for changes in
the compensation level of the owners of the acquired businesses, adjustments to
interest expense attributed to incremental borrowings, amortization of goodwill,
retirement of debt obligations and adjustment to the federal and state income
tax provisions based on pro forma operating results. Net income per share -
diluted assumes all shares had been outstanding for the periods presented,
except for shares issued pursuant to the over-allotment option, which are
included only from their date of issuance.
The unaudited pro forma data presented above is not necessarily
indicative of actual results that might have occurred had the operations and
management teams of the Company, the Founding Companies, the Pooled Companies,
the 1998 Pooled Companies and Summers been combined at the beginning of each
period presented.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful Lives November 30, December 28,
In Years 1996 1997
---------------------- ------------------ ------------------
<S> <C> <C> <C>
Land $ 1,748 $ 3,273
Machinery and equipment 3-15 38,357 48,089
Buildings 5-40 8,538 12,977
Furniture and fixtures 3-8 878 1,706
Tractors and trailers 3-6 7,586 10,636
-------- --------
57,107 76,681
Less: accumulated
depreciation (31,350) (38,831)
-------- --------
$ 25,757 $ 37,850
======== ========
</TABLE>
36
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of
the following (in thousands):
<TABLE>
<CAPTION>
November 30, December 28,
1996 1997
------------ ------------
<S> <C> <C>
Balance at beginning of year $ 262 $ 253
Additional charges to costs and expenses 4 227
Additional allowances from Purchased
Companies and Pooled Companies at inception -- 165
Deductions for uncollectible accounts
written off (13) (28)
----- -----
Balance at end of year $ 253 $ 617
===== =====
</TABLE>
The major components of inventories are as follows (in
thousands):
<TABLE>
<CAPTION>
November 30, December 28,
1996 1997
------------ ------------
<S> <C> <C>
Raw Materials $6,675 $16,555
Work-in-process 39 102
Finished Goods 2,570 3,726
------ -------
$9,284 $20,383
====== =======
</TABLE>
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
November 30, December 28,
1996 1997
------------ ------------
<S> <C> <C>
Accrued compensation and benefits $3,272 $2,132
Accrued taxes 422 756
Other accrued expenses 1,772 2,206
------ ------
$5,466 $5,094
====== ======
</TABLE>
6. DEBT
On March 25, 1997, the Company entered into a credit agreement with
Bank One, Texas, N.A. (the "Credit Facility"). The Credit Facility provides the
Company with an unsecured revolving line of credit of up to $35,000,000, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding and Pooled Companies, future
acquisitions, capital expenditures, letters of credit and working capital.
Advances under the Credit Facility bear interest at designated variable rates
plus margins ranging from 0 to 25 basis points, depending on the ratio of the
Company's interest bearing debt to its pro forma trailing earnings before
interest, taxes, depreciation and amortization for the previous four quarters.
At the Company's option, the loans may bear interest based on a designated
London Interbank Offering Rate ("LIBOR") plus a margin ranging from 75 to 175
basis points, depending on the ratio noted above. Commitment fees of 17.5 to 30
basis points are payable on the unused portion of the line of credit. The
Credit Facility contains a limit for standby letters of credit up to $10
million. There were letter of credit commitments of approximately $1.1 million
outstanding under the Credit Facility at December 28, 1997. The Credit Facility
prohibits the payment of dividends by the Company, restricts the Company's
incurring or assuming other indebtedness and requires the Company to comply with
certain financial covenants, including fixed charge coverage, funded debt to
earnings before taxes, depreciation and amortization and net worth to
37
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
tangible asset ratios. The Company was in compliance with the covenants at
December 28, 1997. The Credit Facility will terminate and all amounts
outstanding thereunder, if any, will be due and payable January 29, 2003. The
approximate level of borrowings available under the Credit Facility at December
28, 1997 was $10,000,000. The Company's subsidiaries have guaranteed the
repayment of all amounts due under the Credit Facility. On January 29, 1998, the
Credit Facility was increased to $125,000,000.
Fraser and the Pooled Companies had balances outstanding under lines
of credit at November 30, 1996 of $865,000. These lines bore interest at rates
ranging from LIBOR plus 1.75% to prime (8.25% at November 30, 1996) and were
secured by certain assets of the Company.
Fraser and the Pooled Companies had balances due to related parties at
November 30, 1996 of $2,980,000, which were retired in 1997. This indebtedness
bore interest at rates ranging from 7.00% to 9.50% and was unsecured.
The personal guarantees and security referred to herein with respect
to outstanding indebtedness as of November 30, 1996 were at the time when
Fraser and the Pooled Companies were not owned by PalEx. In connection with the
acquisition of these companies by PalEx, the indebtedness was retired.
38
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
November 30, December 28,
Long-term debt consists of the following (in thousands): 1996 1997
------------ ------------
<S> <C> <C>
Amount due under the revolving
credit facility, bearing interest
at 8.50%, due on January 29,
2003, secured by guarantees
of the subsidiaries of the Company $ -- $ 5,000
Amount due under the revolving credit
facility, bearing interest at LIBOR
rates ranging from 6.7187% to 6.75%,
due on January 29, 2003, secured by
guarantees of the subsidiaries of the
Company -- 19,000
Industrial development revenue bonds, bearing
interest at approximately 80% of prime (6.80%
at December 28, 1997), payable in annual
installments of $50,000 through maturity in
2008, secured by certain company assets -- 550
Variable rate note issued by the ESOP to fund the purchase of
3,400 shares of Acme common stock, guaranteed by the Company,
payable in 28 quarterly installments of $70 plus interest, with a
final payment in 2002, effective interest rate of 6.21% in 1997 1,980 1,770
Various notes payable of the 1998 Pooled Companies, to banks
and others, bearing interest at rates ranging from 5.02%
to 8.30% with monthly installments totaling $95 and due dates
ranging from 1998 until 2006; either unsecured or secured by
certain Company assets. 4,796 5,387
Other notes payable of Pooled and Purchased Companies 7,367 --
Other 10 23
------- -------
14,153 31,730
Less-current maturities (2,500) (1,057)
------- -------
$11,653 $30,673
======= =======
</TABLE>
The various notes payable of the 1998 Pooled Companies were refinanced at the
date of their respective acquisitions with proceeds of the Company's revolving
credit facility. Accordingly, all liens previously attached thereto were
released.
39
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Future maturities of long-term debt of December 28, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $ 1,057
1999 1,048
2000 977
2001 1,970
2002 792
Thereafter 25,886
------
$31,730
======
</TABLE>
7. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
----------
November 30, December 28,
------------ ------------
1995 1996 1997
--------- ------------- ------------
<S> <C> <C> <C>
Federal
Current $1,170 $1,207 $3,944
Deferred 160 143 (71)
--------- ------------- ------------
1,330 1,350 3,873
--------- ------------- ------------
State
Current 242 492 846
Deferred 22 (9) (15)
--------- ------------- ------------
$ 264 $ 483 $ 831
--------- ------------- ------------
Total $1,594 $1,833 $4,704
========= ============= ============
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
----------
November 30, December 28,
------------ ------------
1995 1996 1997
--------------- --------
<S> <C> <C> <C>
Tax at federal statutory rate of 35% $2,005 $2,755 $3,970
Increase (decrease) resulting from:
State income taxes, net of
federal benefit 236 353 547
Income taxed to Fraser Stockholders (685) (1,381) (172)
Other 38 106 359
------ ------ ------
$1,594 $1,833 $4,704
====== ====== ======
</TABLE>
Deferred income tax provisions (benefits) result from temporary differences in
the recognition of income and expenses for financial reporting purposes and for
tax purposes. The tax effects of these temporary differences for the periods
ended November 30, 1996 and December 28, 1997 result principally from the
following (in thousands):
40
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
November 30, December 28,
1996 1997
---- ----
<S> <C> <C>
Deferred income tax liabilities
Property and equipment $ (844) $(2,547)
Other (257) ( 620)
---------- -----------
Total deferred income tax liabilities (1,101) (3,167)
Deferred income tax assets
Allowance for doubtful accounts 145 111
Accruals and reserves 367 834
------- -------
Total deferred income tax assets 512 945
------- -------
Net deferred income tax liabilities $ (589) $(2,222)
======= =======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various legal proceedings that have arisen
in the ordinary course of business. While it is not possible to predict the
outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are adequately covered by insurance or, if not
so covered, should not materially result in any liability which would have a
material adverse effect on the financial position, liquidity or results of
operations of the Company.
Insurance
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy.
The Company is self-insured for certain medical claims up to $50,000 per
person per year. Provisions for expected future payments are accrued based on
the Company's estimate of its aggregate liability for all open and unreported
claims. Management believes the amount currently accrued is adequate to cover
all known and unreported claims as of December 28, 1997.
Potential Environmental Liability
In February 1998, the Company acquired DSF, a steel drum
reconditioning company with a facility in Florida. DSF is a wholly owned
subsidiary of the Company. In 1982 DSF was notified by the U.S. Environmental
Protection Agency (the "EPA") and the Florida Department of Environmental
Regulation (the "DER") that they believed that DSF might be a potentially
responsible party ("PRP") regarding the Zellwood Groundwater Contamination Site
in Orange County, Florida (the "Zellwood Site"). The Zellwood Site was
designated a "Superfund" environmental clean-up site after the DER discovered
arsenic contamination in a shallow monitoring well adjacent to it. The DSF
facility is a portion of the 57 acres constituting the Zellwood Site. The
Company believes that DSF and its former sole shareholder were among
approximately 25 entities and individuals identified as PRPs by the EPA.
Between March 1990 and July 1996, the EPA issued various unilateral
administrative orders and notices to DSF and various other PRPs. Those orders
and notices demanded reimbursement from PRPs of approximately $2 million of the
EPA's costs regarding the Zellwood Site and requested the PRPs to accept
financial responsibility for additional clean-up efforts. During that time, the
EPA estimated that the cost of the selected remedy for soil at the Zellwood Site
would be approximately $1 million and the cost of the selected remedy for
groundwater at the Zellwood Site would be approximately $5.1 million. DSF and
the other PRPs did not agree to the EPA's demands or agree to fund any
additional clean-up. In April 1997, the EPA issued an order unilaterally
withdrawing its previous orders. Since that withdrawal order, the EPA has not
taken any formal administrative or civil action against DSF or its former
shareholder.
41
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DSF has maintained comprehensive general liability insurance coverage
for over 25 years and has notified various insurers of the EPA's claims
regarding the Zellwood Site. A number of those insurers' policies did not
contain an exclusion for pollution. In 1992 DSF settled a claim with an insurer
for an amount that covered a substantial portion of the costs Drum Service had
incurred in dealing with the EPA and the DER. DSF has identified other umbrella
liability policies for which coverage may also be available and has been
approached by the insurer under two of those policies seeking a settlement. The
Company does not know when, if ever, the EPA may make a claim against DSF
regarding the Zellwood Site. Further, the Company cannot estimate the amount of
any such claim or, in light of the existence of other PRPs, the extent of any
liability of DSF. The Company and DSF will continue to determine the
availability of additional insurance coverage for this matter.
Operating Lease Agreements
The Company conducts a portion of its operations and warehouses
certain of its products in leased facilities classified as operating leases.
Minimum future rental payments under noncancelable operating leases as of
December 28, 1997 are as follows (in thousands):
Year ending December,
1998 $1,368
1999 1,305
2000 1,185
2001 1,132
2002 1,096
Thereafter 3,338
------
$9,424
======
Certain leases provide for payment of taxes and other expenses by the
Company. Rent expense for operating leases was approximately $1,776,000,
$1,109,000 and $2,405,000 for fiscal years 1995, 1996 and 1997, respectively.
Rent expense paid to related parties and included in the foregoing amounts was
approximately $670,000, $564,000 and $544,000 for fiscal years 1995, 1996 and
1997, respectively.
9. STOCK OPTION PLAN
On June 1, 1996, the Board of Directors and the stockholders of the
Company approved the 1996 Stock Option Plan, as amended (the "Plan"). The Plan
provides for the granting of stock options ("Options") to directors, executive
officers, other employees and certain non-employee consultants of the Company.
The Company accounts for the Plan under APB Opinion No. 25, and no compensation
expense has been recognized. The Plan, which permits an amount equal to no more
than 15% of the outstanding shares of PalEx Common Stock to be issued as
optioned shares, terminates in June 2006. In general, the terms of the option
awards (including vesting schedules) will be established by the Compensation
Committee of the Company's Board of Directors. As of December 28, 1997, the
Company has granted options covering an aggregate of 1,321,500 shares of Common
Stock.
42
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity under the Plan for the year
ended December 28, 1997:
<TABLE>
<CAPTION>
Shares Exercise Price
Outstanding at November 30, 1996
<S> <C> <C>
Granted 1,328,500 $7.50 - $14.75
Exercised -- --
Forfeited and canceled (7,000) 7.50
----------
Outstanding at December 28, 1997 1,321,500 $ 7.50 - 14.75
==========
Weighted average fair value of options granted during 1997
$ 5.38
Weighted average remaining contractual life 9.33 years
</TABLE>
At December 28, 1997, options exercisable into 75,000 shares of Common
Stock were exercisable. Unexercised options expire ten years from the issue
date.
The following pro forma summary of the Company's supplemental consolidated
results of operations have been prepared as if the fair value based method of
accounting for stock based compensation as required by SFAS No. 123 had been
applied:
<TABLE>
<CAPTION>
Year ended December 28, 1997
<S> <C>
Net income attributable to common stockholders............ $ 6,640,000
Pro forma adjustment...................................... (2,934,000)
-----------
Pro forma net income attributable to common stockholders.. 3,706,000
Net income per share ("EPS")
Basic EPS as reported..................................... .43
Basic EPS pro forma....................................... .24
Diluted EPS as reported................................... .42
Diluted EPS pro forma..................................... .23
</TABLE>
Fair value of the options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions for
1997.
<TABLE>
<S> <C>
Risk free interest rate...................................... 6.66%
Dividend yield............................................... 0.00%
Volatility factor............................................ 35.77%
Weighted average expected life............................... 10 years
</TABLE>
10. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution profit-sharing plan (the "Plan")
which qualifies under Section 401(k) of the Internal Revenue Code. Participation
in the Plan is available to substantially all employees. Eligible employees may
contribute up to the lesser of 15% of their annual compensation or the maximum
amount permitted under Internal Revenue Service regulations to their 401(k)
account. The Company matches the contributions of participating employees on the
basis of the percentages specified in the Plan. Company matching contributions
to the Plan were approximately $169,000 in 1997. The employee and Company
matching contributions are invested at the direction of the individual employee.
Each of the Founding Companies and Sonoma and Sheffield had profit-sharing
plans at the time of their acquisition by PalEx. The Ridge Plan was adopted as
the PalEx plan and now functions as the Company's 401(k) Plan. The other plans
have been or will be merged into the PalEx plan. The total supplemental
consolidated employee benefit plan expense was $1,080,000 (including $169,000
paid to the PalEx 401K plan), $2,137,000 and $1,017,000 for 1997, 1996 and 1995.
Acme has a qualified defined contribution profit-sharing plan covering all full-
time employees not subject to collective bargaining with a specified period of
service. The plan may be amended or terminated at any time. There were no
contributions for Acme's year ended December 31, 1997. In connection with its
collective bargaining agreement with a union, Acme participates in an areawide
union retirement plan covering employees who are members of such union.
In May 1985, Acme established an employee stock ownership plan (ESOP) to enable
Acme's eligible employees, as defined, to share in the growth and prosperity of
Acme and to provide participants with an opportunity to accumulate
43
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
capital for their future economic security. The ESOP is a qualified plan exempt
from taxes under Internal Revenue Section 401(a). Upon completion of the
acquisition of Acme by PalEx, the shares of Acme stock in the ESOP were replaced
with shares of PalEx stock of equal value.
In May 1994, the ESOP purchased 3,400 shares of Acme common stock (34 percent of
outstanding common shares) from a stockholder for $2,601,000 ($765 per share).
The ESOP funded the purchase by issuing a variable rate note to a commercial
bank that was guaranteed by Acme. Upon completion of the acquisition of Acme by
PalEx, the guaranty by Acme was replaced by a letter of credit issued under the
Company's revolving line of credit.
The Company accounts for the ESOP in accordance with Statement of Position 93-6
(SOP 93-6), "Employers' Accounting for Employee Stock Ownership Plan."
Accordingly, the debt of the ESOP is recorded as long-term debt and the shares
pledged as collateral are reported as unearned compensation (see Note 6). As
shares are released from collateral, the Company reports compensation expense
equal to the current estimated market price of the shares.
Contributions to the ESOP amounted to approximately $727,000 for the year ended
December 28, 1997. These contributions include interest paid of approximately
$122,000 for the year ended December 28, 1997, on the loan used to purchase the
ESOP shares. Since the Obligation is secured by the shares purchased and the
note is guaranteed by the Company's guarantee, all amounts relating to this
transaction are considered unearned compensation of the employees until such
time as the note is deemed paid and the corresponding shares are released to the
individual participants of the plan. The balance in unearned compensation at
December 28, 1997 of $1,770,000 results from the leveraged ESOP stock purchase
less the deemed release of shares at cost.
44
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The activity relating to the ESOP shares was as follows: Year Ended
December 28,
<TABLE>
<CAPTION>
1997
----
<S> <C>
Allocated shares at beginning of year.................... 896,026
Shares deemed released for the current period 88,063
Unallocated share 603,928
---------
Total ESOP Shares 1,588,017
</TABLE>
In accordance with SOP 93-6, additional paid-in capital is adjusted whenever the
market value of the shares released is more or less than the cost of the shares
released.
In 1995, Acme adopted a nonqualified funded retirement plan for a management
employee. Such funds are available to settle creditor's claims should they
arise. Acme records the fund balance as an asset with a corresponding
liability. The annual contribution to the plan is recorded as an expense. Such
expense amounted to approximately $60,000 for the year ended December 28, 1997.
CCC has two qualified contributory retirement savings plan under Section 401(k)
of the Internal Revenue Code for all eligible full-time employees. One covers
employees not covered under a collective bargaining agreement and a second plan
covers employees covered under a collective bargaining agreement. Voluntary
contributions under the plans are made by the employees. Discretionary matching
contributions made by CCC were $54,000, $47,000 and $44,000 for 1997, 1996 and
1995, respectively.
11. INDUSTRY SEGMENT REPORTING
The company has two divisions, one operating in the wooden pallet industry and
the other in the steel drum reconditioning industry. The Pallet Division
produces and sells wooden pallets in the United States primarily for use in
agricultural and industrial markets. The Drum Division reconditions steel drums
in the United States primarily for use in industrial markets. There were no
significant intercompany sales between the two divisions for the year ended
December 28, 1997.
<TABLE>
<CAPTION>
For the year ended
------------------
November 30, 1995 November 30, 1996 December 28, 1997
----------------- ----------------- -----------------
Pallet Drum Consolidated Pallet Drum Consolidated Pallet Drum Consolidated
------ ---- ------------ ------ ---- ------------ ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 77,256 $ 48,451 $ 125,707 $ 96,047 $ 48,983 $ 145,030 $ 162,848 $ 60,145 $ 222,993
======== =========== ============= ============ ========== ========== ========= ========== ==========
Earnings contribution $ 6,242 $ 937 $ 7,179 $ 8,409 $ 693 $ 9,102 $ 16,334 $ (6) $ 16,328
======== ========== ========= ========== ========= ==========
Corporate expenses - - (2,574)
Interest expense (1,845) (1,576) (1,722)
Amortization of - - (593)
goodwill
Other income (expenses) 394 346 (95)
--------- --------- ----------
Income (loss) before
provision for
income taxes $ 5,728 $ 7,872 $ 11,344
========= ========= ==========
Depreciation and
amortization $ 2,650 $ 959 $ 3,609 $ 2,165 $ 1,267 $ 3,432 $ 4,607 $ 951 $ 5,558
======= ============ ============= ============ ========== ========== ========= ========== ==========
Capital expenditures $ 3,330 $ 798 $ 4,128 $ 4,063 $ 3,292 $ 7,355 $ 7,683 $ 1,466 $ 9,149
======= ============ ============= ============ ========== ========== ========= ========== ==========
Operating assets -
Accounts receivable $ 7,314 $ 5,281 $ 12,595 $ 6,666 $ 6,924 $ 13,590 $ 13,158 $ 8,434 $ 21,592
Inventories $ 7,592 $ 1,860 9,452 $ 7,378 $ 1,906 9,284 $ 18,156 $ 2,227 20,383
======== =========== ========= ========== ========= =========
Property and
equipment, net $18,159 $ 3,667 21,826 $ 20,057 $ 5,700 25,757 $ 30,882 $ 6,968 37,850
======== =========== ========= ========== ========= =========
Other assets 7,456 9,237 40,180
----------- --------- ----------
Total assets $ 51,329 $ 57,868 $ 120,005
=========== ========= ==========
</TABLE>
45
<PAGE>
PALEX, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma consolidated balance sheet and statement
of income include the supplemental consolidated financial statements included
elsewhere herein 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
After fiscal 1997, and through March 25, 1998, the Company acquired nine
additional companies, four of which, Acme Barrel Company, Inc. ("Acme"), Drum
Service Co. of Florida ("DSF"), Consolidated Container Corporation ("CCC") and
Western Container, LLC ("Western") were accounted for as poolings-of-interests
(the "1998 Pooled Companies"). The other five companies, Consolidated Drum
Reconditioning, Inc. ("CDR"), American Pallet Recyclers ("APR"), Capital Pallet
Company ("Capital"), Pallet Outlet Company, Inc. ("POC") and Southern Pallet
Company ("Southern") were accounted for as purchases (the "1998 Purchased
Companies"). Five of the nine companies acquired through March 25, 1998 are
engaged in the reconditioning and rebuilding of industrial steel containers.
The accompanying unaudited pro forma consolidated balance sheet and statement of
income present Fraser and the other Founding Companies combined with the Pooled
Companies, Summers, the 1998 Pooled Companies and the 1998 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.
46
<PAGE>
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 1998 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.
47
<PAGE>
PALEX, INC AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Balance Sheet
December 28, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
Supplemental 1998
Financial Purchase Pro Forma
Statements Acquisitions Adjustments Pro Forma
(Note 1)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,448 $ 1,975 $ - $ 9,423
Accounts receivable, net 21,592 6,406 - 27,998
Inventories 20,383 3,120 - 23,503
Deferred income taxes 945 - - 945
Prepaid expenses and other current
assets 3,387 493 - 3,880
-------- -------- -------- --------
Total current assets 53,755 11,994 - 65,749
PROPERTY, PLANT AND EQUIPMENT, net 37,850 8,796 626 47,272
GOODWILL, net 26,262 6,713 44,894 77,869
OTHER ASSETS 2,138 1,262 - 3,400
-------- -------- -------- --------
Total assets $120,005 $28,765 $45,520 $194,290
=========================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Line of credit $ 1,150 $ 1,245 $(1,245) $ 1,150
Current maturities of long-term debt 1,057 1,812 (1,812) 1,057
Notes payable to related parties - - - -
Accounts payable 9,342 2,462 - 11,804
Accrued expenses 5,094 1,302 1,000 7,396
Income taxes payable 1,407 87 - 1,494
Deferred income taxes - 91 - 91
-------- -------- -------- --------
Total current liabilities 18,050 6,999 (2,057) 22,992
LONG-TERM DEBT, net of current
maturities 30,673 11,183 49,177 91,033
DEFERRED REVENUE 568 - - 568
DEFERRED INCOME TAXES 3,167 - - 3,167
OTHER LONG-TERM LIABILITIES 110 - - 110
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock 176 166 (160) 182
Capital in excess of par 54,107 1,260 7,717 63,084
Unearned compensation (1,770) - - (1,770)
Retained earnings 14,924 9,157 (9,157) 14,924
-------- -------- -------- --------
Total stockholders' equity 67,437 10,583 (1,600) 76,420
-------- -------- -------- --------
Total liabilities and stockholders'
equity $120,005 $28,765 $45,520 $194,290
=========================================================
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
consolidated financial statements
48
<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 data)
<TABLE>
<CAPTION>
Supplemental Total
Financial Purchase Pro Forma
Statements Acquisitions Adjustments Pro Forma
<S> <C> <C> <C> <C>
REVENUES $ 222,993 $ 84,643 $ - $ 307,636
COST OF GOODS SOLD 188,084 60,781 - 248,865
---------- --------- ---------- -----------
Gross Profit 34,909 23,862 - 58,771
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,155 12,363 (3,119)(a) 30,399
GOODWILL AMORTIZATION 593 536 2,078 (b) 3,207
---------- --------- ---------- -----------
Income from operations 13,161 10,963 1,041 25,165
INTEREST EXPENSE (1,722) (2,028) (3,228)(c) (6,497)
481 (d)
OTHER INCOME (EXPENSE), NET (95) (853) - (948)
---------- --------- ---------- -----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES 11,344 8,082 (1,706) 17,720
PROVISION FOR INCOME
TAXES 4,704 - 2,384 (e) 7,088
---------- --------- ---------- -----------
NET INCOME (LOSS) $ 6,640 $ 8,082 $(4,090) $ 10,632
========== ========= ========== ===========
Net income per share - diluted $ 0.57 (f)
===========
Shares used in computing net
income per share - diluted 18,571,548 (g)
===========
</TABLE>
The accompanying notes are an integral part of these unandited pro forma
consolidated financial statements
49
<PAGE>
PALEX, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
1. UNAUDITED PRO FORMA CONSOLIDATED
BALANCE SHEET ADJUSTMENTS:
Reflects the proforma increase in long-term debt and payment of the
indebtedness of the 1998 Purchased Companies with borrowings from the Company's
revolving line of credit, the recording of goodwill related to the acquisitions
of the 1998 Purchased Companies and the allocation of the purchase price to
property, plant and equipment, and the elimination of the equity accounts of the
1998 Purchased Companies, net of the PalEx stock issued in conjunction with
their acquisition.
2. UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF INCOME ADJUSTMENTS:
a. Adjusts compensation to the level the owners of the Founding, Pooled and
1998 Pooled and Purchased Companies have agreed to receive as a result of the
acquisitions and revisions of certain lease agreements between certain
stockholders and the Company as a result of the purchase by the Company of the
related assets.
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 27, 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,
50
<PAGE>
PALEX, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
(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
in to the stockholders of the 1998 Pooled Companies, (viii) 714,057 shares
issued in connection with the purchase of the 1998 Purchased Companies, (ix) the
weighted average portion of 450,000 shares sold pursuant to the overallotment
option and (x) the effect, using the treasury stock method, of options for
1,049,500 shares granted to management, directors and key employees.
51
