<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDING JUNE 27, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO________
Commission File Number: 000-22237
PALEX, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0520673
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation) or organization)
6829 FLINTLOCK ROAD
HOUSTON, TEXAS 77040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-332-6145
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to filed such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of Common Stock of the Registrant, par value $.01 per
share, outstanding at August 9, 1999 was 19,578,609.
1
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PALEX, INC. FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1999
INDEX
Part I -- Financial Information
<TABLE>
<S> <C>
Item 1 -- Financial Statements
General Information................................................................................... 3
Consolidated Balance Sheets -- PalEx, Inc. and Subsidiaries as of December 27, 1998
and June 27, 1999.................................................................................... 5
Consolidated Statements of Income -- PalEx, Inc. and Subsidiaries for the Three and Six Month Periods
Ended June 28, 1998 and June 27, 1999................................................................ 6
Consolidated Statements of Comprehensive Income -- PalEx, Inc. and Subsidiaries for the Three and
Six Month Periods Ended June 28, 1998 and June 27, 1999.............................................. 7
Consolidated Statement of Changes in Stockholders' Equity -- PalEx, Inc. and Subsidiaries for the Six
Month Period Ended June 27, 1999..................................................................... 8
Consolidated Statements of Cash Flows -- PalEx, Inc. and Subsidiaries for the Six Month Periods Ended
June 28, 1998 and June 27, 1999...................................................................... 9
Notes to the Consolidated Financial Statements........................................................ 10
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................ 16
Part II -- Other Information
Item 6 -- Exhibits and Reports on Form 8-K............................................................ 23
Signature............................................................................................. 24
</TABLE>
2
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PALEX, INC. PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
General Information
PalEx, Inc. ("PalEx" or the "Company") was founded in January 1996 to create a
national provider of pallet products and related services. On March 25, 1997,
concurrently with the closing of the initial public offering (the "Offering") of
its Common Stock, par value $.01 per share (the "Common Stock"), PalEx acquired
the following three businesses in separate transactions (the "Acquisitions"):
Fraser Industries, Inc. ("Fraser"), Ridge Pallets, Inc. ("Ridge") and Interstate
Pallet Co., Inc. ("Interstate" and, together with Fraser and Ridge, 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.
Fraser has been identified as the accounting acquiror for financial statement
presentation purposes. The acquisitions of Ridge and Interstate were accounted
for using the purchase method of accounting.
Subsequent to the acquisition of the Founding Companies and the Offering and
during fiscal 1997, PalEx acquired five additional companies. Sheffield Lumber &
Pallet Company, Inc. ("Sheffield"), Sonoma Pacific Company ("Sonoma"), Bay Area
Pallet Company ("Bay Area") and New London Pallet, Inc. ("New London") were
accounted for as poolings-of-interests (the "Pooled Companies"). The fifth
acquisition, Summers Pallet Manufacturing, Inc. ("Summers"), was accounted for
as a purchase.
During fiscal 1998, the Company acquired 19 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 fifteen companies, Consolidated Drum Reconditioning, Inc.
("CDR"), American Pallet Recyclers ("APR"), Capital Pallet Company ("Capital"),
Pallet Outlet Company, Inc. ("POC"), Southern Pallet Company ("Southern"),
Shipshewana Pallet Co., Inc. ("Shipshewana"), Gilbert Lumber, Inc. ("Gilbert"),
Valley Pallets, Inc. ("Valley"), Duckert Pallet Co., Inc. ("Duckert"),
Continental Pallet Company ("Continental"), Isaacson Lumber Company
("Isaacson"), McCook Drum & Barrel Co., Inc. ("McCook"), Superior Management
Group Corporation ("SMG"), Charlotte Steel Drum Corporation ("CSD") and Atlas
Container Company, Inc. ("Atlas") were accounted for as purchases (the "1998
Purchased Companies" and, together with Summers, the "Purchased Companies").
Eight of the 19 companies acquired after fiscal 1997 are engaged in the
reconditioning and rebuilding of industrial steel containers. SMG is engaged in
the rental, sale, repair and retrieval of pallets in Canada.
The Company made no acquisitions during the six month period ended June 27,
1999.
On March 30, 1999, PalEx entered into a definitive merger agreement with
International Food Container Organization ("IFCO") to merge their businesses.
The combined entity, to be named IFCO Systems, will include IFCO's European,
U.S., Asian and Latin American returnable packaging operations and PalEx's North
American pallet and industrial container operations. Under the terms of the
agreement, PalEx will merge into a new subsidiary of IFCO Systems. The
outstanding shares of PalEx's common stock will be exchanged for common stock of
IFCO Systems representing between 32 percent and 35 percent of its outstanding
shares. At the time of the merger and immediately before the initial public
offering, the shares of IFCO Systems that are not owned by PalEx's shareholders
will be owned by Schoeller Packaging Systems. A subsidiary of General Electric
Company will own a debenture convertible into shares of IFCO Systems. The merger
will occur concurrently with an initial public offering of shares in IFCO
Systems. The closing of the merger is subject to the approval of shareholders,
completion of the initial public offering of IFCO Systems and other customary
conditions. The transaction is expected to be completed in the fourth quarter of
1999.
Unless the context otherwise requires, all references herein to the Company
include PalEx, the Founding Companies, the Pooled Companies, the 1998 Pooled
Companies and the Purchased Companies.
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Operating results for interim periods are not necessarily indicative of the
results for full years. The financial statements included herein should be read
in conjunction with the related notes thereto and management's discussion and
analysis and the Consolidated Financial Statements of PalEx, Inc. and
Subsidiaries as of December 27, 1998 and related notes thereto as filed with the
Securities and Exchange Commission with the Company's Form 10-K on March 29,
1999.
4
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PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 27, June 27,
1998 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 4,157 $ 5,496
Accounts receivable, net of allowance of $1,616 and $1,315............... 44,543 49,861
Inventories.............................................................. 29,986 25,809
Deferred income taxes.................................................... 2,105 2,105
Prepaid expenses and other current assets................................ 4,427 6,608
-------- --------
Total current assets................................................... 85,218 89,879
PROPERTY, PLANT AND EQUIPMENT, net....................................... 75,724 75,640
GOODWILL AND OTHER INTANGIBLE ASSETS, net of accumulated amortization
of $4,648 and $7,013.................................................... 128,568 127,057
OTHER ASSETS............................................................. 2,928 2,770
-------- --------
Total assets........................................................... $292,438 $295,346
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt..................................... $ 1,960 $134,509
Current maturities of convertible notes payable to related parties....... - 8,424
Bank overdraft........................................................... 8,407 8,854
Accounts payable......................................................... 9,004 10,325
Accrued expenses......................................................... 10,646 11,941
Income taxes payable..................................................... 529 1,182
-------- --------
Total current liabilities.............................................. 30,546 175,235
LONG-TERM DEBT, net of current maturities................................ 143,902 2,239
CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES, net of current maturities.. 9,910 1,588
DEFERRED INCOME TAXES.................................................... 5,350 6,298
FOREIGN DEFERRED INCOME TAXES............................................ 3,957 3,957
OTHER LONG-TERM LIABILITIES.............................................. 3,493 3,338
COMMITMENTS AND CONTINGENCIES............................................ - -
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value, 5,000,000 shares authorized, no shares
issued.................................................................. - -
Common stock, $.01 par value, 30,000,000 shares authorized, 20,289,091
and 20,299,341 outstanding.............................................. 203 203
Additional paid-in capital............................................... 79,030 79,107
Unearned compensation.................................................... (1,770) (1,770)
Accumulated other comprehensive (loss) income:
Foreign currency translation adjustment.............................. (623) 1,114
Retained earnings........................................................ 18,440 24,037
-------- --------
95,280 102,691
-------- --------
Total liabilities and stockholders' equity............................. $292,438 $295,346
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
------------------------------- ----------------------------
June 28, 1998 June 27, 1999 June 28, 1998 June 27, 1999
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES.......................................... $ 83,362 $ 100,926 $ 152,332 $ 197,314
COST OF GOODS SOLD................................ 67,093 78,522 123,463 155,914
INVENTORY VALUATION ADJUSTMENT.................... 2,183 -- 2,183 --
----------- ----------- ----------- -----------
Gross profit................................ 14,086 22,404 26,686 41,400
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 8,463 11,056 15,043 21,534
POOLING EXPENSES.................................. 190 -- 1,841 --
COMPENSATION DIFFERENTIAL......................... -- -- 1,062 --
AMORTIZATION OF GOODWILL AND OTHER
INTANGIBLE ASSETS................................ 785 1,182 1,222 2,357
RESTRUCTURING CHARGE.............................. 2,834 -- 2,834 --
----------- ----------- ----------- -----------
Income from operations...................... 1,814 10,166 4,684 17,509
INTEREST EXPENSE.................................. (1,960) (3,663) (2,897) (7,203)
OTHER INCOME, NET................................. 440 260 542 155
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES........................ 294 6,763 2,329 10,461
PROVISION FOR INCOME TAXES........................ 125 3,159 1,000 4,864
----------- ----------- ----------- -----------
NET INCOME........................................ $ 169 $ 3,604 $ 1,329 $ 5,597
=========== =========== =========== ===========
NET INCOME PER SHARE-BASIC........................ $ .01 $ .18 $ .07 $ .28
NET INCOME PER SHARE-DILUTED...................... $ .01 $ .18 $ .07 $ .28
Shares used in computing net income per share-
basic............................................ 18,463,796 20,299,341 18,192,330 20,295,494
Shares used in computing net income
per share-diluted................................ 18,813,758 20,301,097 18,603,916 20,302,884
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
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PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
---------------------------- ---------------------------
June 28, 1998 June 27, 1999 June 28, 1998 June 27,1999
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income........................................ $169 $3,604 $1,329 $5,597
Other comprehensive income:
Foreign currency translation adjustment........ - 1,016 - 1,737
---- ------ ------ ------
Comprehensive income.............................. $169 $4,620 $1,329 $7,334
==== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------ Capital in Other Total
Excess of Unearned Retained Comprehensive Stockholders'
Shares Amount Par Value Compensation Earnings (Loss) Income Equity
------------ ---------- --------- ------------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 27, 1998......... 20,289 $203 $79,030 $(1,770) $18,440 $ (623) $ 95,280
Exercise of stock options.......... 10 - 77 - - - 77
Foreign currency translation
adjustment........................ - - - - - 1,737 1,737
Net income......................... - - - - 5,597 - 5,597
------ ---- ------- ------- ------- ------ --------
BALANCE, June 27, 1999............. 20,299 $203 $79,107 $(1,770) $24,037 $1,114 $102,691
====== ==== ======= ======= ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
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PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Month Period Ended
------------------------------------
June 28, 1998 June 27, 1999
------------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 1,329 $ 5,597
Adjustment to conform fiscal year-end of Pooled Companies.................. (470) -
Adjustments to reconcile net income to net cash provided by operating
activities -
Depreciation and amortization............................................. 4,479 7,580
Deferred income taxes..................................................... (17) 927
(Gain) loss on sale of assets............................................. (25) 125
Changes in operating assets and liabilities --
Accounts receivable.................................................... (2,164) (5,017)
Inventories............................................................ 1,396 4,305
Prepaid expenses and other current assets.............................. (2,112) (2,171)
Accounts payable and accrued expenses.................................. 2,983 3,511
Other assets and liabilities........................................... (92) (416)
-------- --------
Net cash provided by operating activities................................. 5,307 14,441
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................. (5,680) (5,186)
Proceeds from sale of equipment............................................ 563 802
Adjustments to purchase price of certain Purchased Companies............... - 219
Cash paid for business acquisitions, net of cash acquired.................. (49,752) -
-------- --------
Net cash used in investing activities..................................... (54,869) (4,165)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit........................................... (1,150) -
Proceeds from long-term debt............................................... 117,275 19,065
Payments on long-term debt................................................. (59,554) (28,077)
Net proceeds from exercise of stock options................................ 22 77
Purchase of minority interest in pooled company............................ (751) -
-------- --------
Net cash provided by (used in) financing activities....................... 55,842 (8,935)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS................ - (2)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................... 6,280 1,339
CASH AND CASH EQUIVALENTS -- beginning of period............................ 7,448 4,157
-------- --------
CASH AND CASH EQUIVALENTS -- end of period.................................. $ 13,728 $ 5,496
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest.................................................................. $ 2,497 $ 6,181
Income taxes.............................................................. $ 1,683 $ 3,430
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
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PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1999
(Unaudited)
1. BASIS OF PRESENTATION
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"). The fifth
acquisition, Summers Pallet Manufacturing, Inc. ("Summers"), was accounted for
as a purchase.
During fiscal 1998, the Company acquired 19 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 remainder were accounted for as purchase accounting
transactions (the "1998 Purchased Companies"). Eight of the 19 companies are
engaged in the reconditioning and rebuilding of industrial steel containers.
One is engaged in the rental of pallets in Canada.
The Company operates from 69 locations in 23 states and seven Canadian
provinces. Its headquarters are in Houston, Texas, with significant
manufacturing operations located in Arkansas, California, Florida, Georgia,
Illinois, North Carolina, Ohio, Pennsylvania, Texas and Wisconsin and pallet
leasing operations in seven Canadian provinces. Sales are made throughout the
United States and Canada with significant concentrations in the southeastern,
midwestern and western regions of the United States. The Company primarily
serves agricultural and industrial customers. Revenues related to agricultural
customers are highly seasonal, occurring primarily during the harvesting season.
Fraser has been identified as the accounting acquiror for financial statement
presentation purposes. The acquisitions of Ridge, Interstate and Summers, and
the 1998 Purchased Companies were accounted for using the purchase method of
accounting. The purchase prices have been allocated based upon the estimated
fair value of the assets and liabilities acquired. The Company evaluates on a
regular basis whether events and circumstances have occurred that would warrant
changes in those estimates. The accompanying consolidated financial statements
present Fraser combined with the Pooled Companies and the 1998 Pooled Companies
for the periods presented, and those companies accounted for as purchases from
their respective dates of acquisition. All significant intercompany
transactions and balances have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements are prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and footnotes required by generally accepted accounting
principles for complete financial statements are not included herein. The
Company believes all adjustments necessary for a fair presentation of these
interim statements have been included and are of a normal and recurring nature.
The interim statements should be read in conjunction with the Consolidated
Financial Statements of PalEx, Inc. and Subsidiaries as of December 27, 1998 and
10
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related notes thereto as filed with the Securities and Exchange Commission on
the Company's Form 10-K on March 29, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company 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.
There has been no significant change in the accounting policies of the Company
during the periods presented. For a description of these policies, refer to Note
2 of Notes to Consolidated Financial Statements of PalEx, Inc. and Subsidiaries
as filed with the Company's Form 10-K on March 29, 1999.
3. LONG TERM DEBT
Amended Credit Facility
On March 25, 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A., which was amended on January 29, 1998, September 3, 1998, November
10, 1998, December 28, 1998, May 10, 1999 and June 27, 1999 (collectively, the
"Amended Credit Facility"). The Amended Credit Facility provides the Company
with a revolving line of credit of up to $150.0 million, which may be used for
general corporate purposes, including acquisitions, the repayment or refinancing
of indebtedness of all acquisitions including future acquisitions, capital
expenditures, letters of credit and working capital. The Amended Credit
Facility will terminate and all amounts outstanding thereunder, if any, will be
due and payable on the earlier of December 31, 1999 or a change of control.
Amounts outstanding under the Amended Credit Facility at June 27, 1999 are
classified as current liabilities in the accompanying balance sheet.
The Company is pursuing additional financing and a refinancing of the Amended
Credit Facility both independent of and in conjunction with the pending merger
with IFCO (see Note 9). However, there can be no assurance that the Company
will be able to obtain additional financing or refinance the Amended Credit
Facility or that any additional financing or refinancing will be on terms that
are as favorable to the Company as the Amended Credit Facility. The Company's
failure to obtain additional financing or refinance the Amended Credit Facility
before December 31, 1999, or any additional financing or new financing obtained
by the Company on terms that are materially less favorable than those of the
Amended Credit Facility, could have a material adverse effect on the Company's
results of operations and financial condition.
Advances under the Amended Credit Facility bear interest at Bank One's base
interest rate, as defined, plus a margin of 50 basis points through March 31,
1999 and increasing by 50 basis points on that date and each quarter until
maturity. At the Company's option, such advances may bear interest based on a
designated LIBOR plus a margin of 275 basis points through March 31, 1999 and
increasing by 50 basis points on that date and each quarter until maturity.
Commitment fees of 50 basis points are payable on the unused portion of the line
of credit through March 31, 1999 and increase by 50 basis points on that date
and each quarter until maturity. The Amended Credit Facility contains a limit
for standby letters of credit of up to $10.0 million. There were letter of
credit commitments of approximately $3.9 million outstanding under the Amended
Credit Facility as of June 27, 1999. The Amended Credit Facility prohibits the
payment of dividends by the Company, restricts the Company's incurrence or
assumption of other indebtedness and requires the Company to comply with certain
financial covenants including consolidated net worth, fixed charge coverage, and
funded debt and senior debt to earnings before interest, taxes, depreciation and
amortization ratios. The approximate level of borrowings available under the
Amended Credit Facility as of June 27, 1999 was $13.6 million. The Amended
Credit Facility is secured by a lien on the real and tangible personal property
of the Company, as defined, a pledge of the outstanding stock of each of the
Company's U.S. subsidiaries and 65% of the outstanding stock of the Company's
Canadian
11
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subsidiary. The amounts due under the Amended Credit Facility are also
guaranteed by the Company's U.S. subsidiaries.
Convertible Notes Payable to Related Parties
The Company issued approximately $10.0 million in subordinated convertible
notes payable (the "Convertible Notes") to certain former owners of the 1998
Purchased Companies. The Convertible Notes, which bear interest at rates ranging
from six to eight percent, include provisions that allow conversion into shares
of the Company's Common Stock beginning on the first anniversary date of the
Convertible Notes (the "Conversion Date") at conversion prices ranging from
$10.78 to $15.86 per share. If the Convertible Notes are not converted they
become due and payable on their second anniversary. At the Company's option, the
Convertible Notes may be prepaid at any time following the Conversion Date.
4. CAPITAL STOCK
On March 25, 1997, PalEx completed the Offering, which involved the sale by
PalEx of 3,000,000 shares of Common Stock at a price to the public of $7.50 per
share. The net proceeds to PalEx from the Offering (after deducting underwriting
discounts, commissions and offering expenses) were approximately $20.1 million.
Of this amount, $3.4 million was used to pay the cash portion of the purchase
prices relating to the acquisitions of the Founding Companies with the remainder
being used to pay certain indebtedness of the Founding Companies. On April 22,
1997, the Company sold an additional 450,000 shares of Common Stock at a price
to the public of $7.50 per share (generating net proceeds to the Company of
approximately $3.1 million after underwriting discounts and commissions)
pursuant to an over-allotment option granted by the Company to the underwriters
in connection with the Offering. The net proceeds from the sale of the
additional shares were used to pay certain indebtedness of the Company.
The shares outstanding as of December 27, 1998 and June 27, 1999 include as
common stock equivalents those shares of the Company's Canadian subsidiary which
are convertible on a share for share basis into the common stock of the Company.
On September 30, 1998, the Company issued a warrant for the purchase of up to
250,000 shares of its Common Stock for professional advisory services at an
exercise price of $11.375 per share. The warrant may be exercised in whole or in
part upon the consummation of certain defined transactions, including, without
limitation, the merger of PalEx with IFCO (see Note 9) and expires in May 2005.
During 1999, this agreement was modified to also provide for the issuance of
200,000 shares of the Company's common stock if certain criteria are met upon
the closing of the merger between PalEx and IFCO. None of the defined
transactions had occurred as of June 27, 1999.
5. EARNINGS PER SHARE
Net income per share - basic for the three and six month periods ended June
28, 1998 was computed using 18,463,796 and 18,192,330 shares, respectively (the
shares attributable to the Founding Companies, the Pooled and the 1998 Pooled
Companies, the shares issued pursuant to the Offering and the over-allotment
option, the shares issued to Main Street Capital Partners, L.P. and PalEx
management, the shares issued to the profit sharing plans of the Founding
Companies, the shares of the Company's Canadian subsidiary convertible on a
share for share basis into the common stock of the Company and the weighted
average shares issued for those companies acquired as purchases). Net income per
share -basic for the three and six month periods ended June 27, 1999 was
computed using 20,299,341 shares and 20,295,494 shares, respectively (the shares
attributable to the Founding Companies, the Pooled Companies, the 1998 Purchased
Companies and the 1998 Pooled Companies, the shares issued pursuant to the
Offering and the over-allotment option, the shares issued to Main Street Capital
Partners, L.P. and PalEx management, the shares issued to the profit sharing
plans of the Founding Companies, and the weighted average shares issued in
connection with the exercise of stock options). The shares used in computing net
income per share - diluted also include the effect of unexercised stock options
under the treasury method and considered the dilutive effect of subordinated
convertible notes.
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6. INCOME TAXES
Prior to the Acquisitions, the stockholders of Fraser elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, Fraser did not pay federal and certain state income taxes because
their stockholders paid income taxes on their proportionate share of Fraser's
earnings. Commencing with the Acquisitions and the Offering, the Company began
to be taxed at applicable federal and state income tax rates.
The Company files a consolidated federal income tax return which includes the
operations of the Founding, Pooled, 1998 Pooled, and Purchased Companies for
periods subsequent to their respective acquisitions. Each of the Companies has
or will file a "short period" federal income tax return through their respective
acquisition dates.
7. COMMITMENTS AND CONTINGENCIES
Contingent Purchase Price
The Company is obligated under the terms of an agreement with the former
owners of one of the 1998 Purchased Companies to pay, in either cash or equal
amounts of cash and the Company's Common Stock, up to $6,000,000 based on the
subsidiary's post-acquisition earnings, as defined. Amounts due under this
contingency, if any, will be accrued as part of the purchase price when the
contingency is resolved in 1999 and 2000.
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 and is self-insured for workers compensation claims up to
$250,000 per person per year. Provisions for expected future payments are
accrued and are based on the Company's estimate of its aggregate liability for
all open and unreported claims.
Operating Lease Agreements
The Company conducts a portion of its operations and warehouses certain of its
products in leased facilities under leases accounted for as operating leases.
The leases provide for payment of taxes and other expenses by the Company.
Rent expense for operating leases was approximately $1.3 million and $2.6
million for the six-month periods ended June 28, 1998 and June 27, 1999,
respectively.
13
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8. BUSINESS SEGMENTS
The Company has two business segments, one operating in the pallet industry
and the other in the steel drum reconditioning industry. The pallet segment
produces, recycles, sells, repairs, leases and retrieves wooden pallets in the
United States and Canada primarily for use in agricultural and industrial
markets. The drum segment reconditions steel drums in the United States
primarily for use in agricultural and industrial markets. There were no
significant intercompany sales between the two segments for the six month
periods ended June 28, 1998 and June 27, 1999.
The Company's business segments are managed separately because they require
different technology and marketing strategies. The accounting policies for the
segments are the same as those described in Note 2 of Notes to Consolidated
Financial Statements of PalEx, Inc. and Subsidiaries as filed with the
Securities and Exchange Commission with the Company's Form 10-K on March 29,
1999.
The Company evaluates the performance of its reportable segments based on
income before corporate overhead charges, interest expense, non-recurring
expenses, goodwill amortization and income taxes.
<TABLE>
<CAPTION>
Three Month Period Ended
------------------------
June 28, 1998 June 27, 1999
----------------- -----------------
Pallet Drum Consolidated Pallet Drum Consolidated
------ ---- ------------ ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $60,489 $22,873 $83,362 $73,237 $27,689 $100,926
======= ======= ======= ======== ======== ========
Earnings contribution $ 3,084 $ 3,656 $ 6,740 $ 8,639 $ 4,429 $ 13,068
======= ======= ======== ========
Corporate expenses (1,307) (1,720)
Interest expense (1,960) (3,663)
Amortization of goodwill and other
intangible assets (785) (1,182)
Restructuring charge (2,834) -
Other income 440 260
------- --------
Income before income taxes $ 294 $ 6,763
======= ========
</TABLE>
<TABLE>
<CAPTION>
Six Month Period Ended
----------------------
June 28, 1998 June 27, 1999
---------------- -----------------
Pallet Drum Consolidated Pallet Drum Consolidated
------ ---- ------------ ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $112,442 $39,890 $152,332 $145,165 $52,149 $197,314
======== ======= ======== ======== ======== ========
Earnings contribution $ 7,617 $ 3,180 $ 10,797 $ 16,019 $ 7,131 $ 23,150
======== ======= ======== ========
Corporate expenses (2,057) (3,284)
Interest expense (2,897) (7,203)
Amortization of goodwill and other
intangible assets (1,222) (2,357)
Restructuring charge (2,834) -
Other income 542 155
-------- --------
Income before income taxes $ 2,329 $ 10,461
======== ========
</TABLE>
14
<PAGE>
Earnings contribution for the Drum segment for the six month period ended June
28, 1998 includes charges of approximately $1.8 million for investment advisory
fees related to the acquisition of one of the 1998 Pooled Companies and
compensation differential (the difference between previous owners' and officers'
compensation before the acquisitions and the amounts to which they have
contractually agreed) of approximately $1.1 million incurred in conjunction with
the acquisition of Acme and Western. There were no pooling expenses for the
three and six month periods ended June 27, 1999. Pooling expenses for the three
month period ended June 28, 1998 were approximately $190,000.
Earnings contribution for the Pallet segment for the three and six month
periods ended June 28, 1998 include an inventory valuation adjustment of
$2,183,000, resulting from the termination of the business relationship with
CHEP.
9. PENDING MERGER
On March 30, 1999, PalEx entered into a definitive merger agreement with
International Food Container Organization ("IFCO") to merge their businesses.
The combined entity, to be named IFCO Systems, will include IFCO's European,
U.S., Asian and Latin American returnable packaging operations and PalEx's North
American pallet and industrial container operations. Under the terms of the
agreement, PalEx will merge into a new subsidiary of IFCO Systems. The
outstanding shares of PalEx's common stock will be exchanged for common stock of
IFCO Systems representing between 32 percent and 35 percent of its outstanding
shares. A subsidiary of General Electric Company will own a note convertible
into shares of IFCO Systems. The merger will occur concurrently with an initial
public offering of shares in IFCO Systems. At the time of the merger and
immediately before the initial public offering, the shares of IFCO Systems that
are not owned by PalEx's shareholders will be owned by Schoeller Packaging
Systems. The closing of the merger is subject to the approval of shareholders,
completion of the initial public offering of IFCO Systems and other customary
conditions. The transaction is expected to be completed in the fourth quarter of
1999.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and related notes thereto which are included
in the Company's Form 10-K. Statements contained in this discussion, and
elsewhere herein, regarding future financial performance and results and other
statements that are not historical facts are forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties to
the Company, including but not limited to the availability of attractive
acquisition opportunities, the ability to consummate transactions on favorable
terms, the successful integration and profitable management of acquired
businesses, improvement of operating efficiencies, the availability of working
capital and financing for future acquisitions and business expansion, the
Company's ability to grow internally through expansion of services and customer
base and reduction of overhead, conditions in lumber markets, seasonality,
weather conditions and other risk factors discussed in the Company's Annual
Report on Form 10-K.
Results Of Operations
The results of operations for the periods presented include Fraser, the Pooled
Companies and the 1998 Pooled Companies. In addition, those companies acquired
as purchases are included from their respective dates of acquisition.
Quarterly results may be materially affected by the timing and magnitude of
acquisitions, assimilation costs, costs of opening new facilities, gain or loss
of a material customer, variation in product mix and weather conditions.
Accordingly, the operating results for any interim period are not necessarily
indicative of the results that may be achieved for any subsequent interim period
or for a full fiscal year.
Three Month Periods Ended June 28, 1998 and June 27, 1999
The following table sets forth certain selected financial data as a percentage
of revenues for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Three Month Period Ended
------------------------
June 28, 1998 June 27, 1999
------------- -------------
<S> <C> <C> <C> <C>
Revenues................................................ $83,362 100.0% $100,926 100.0%
Cost of goods sold...................................... 67,093 80.5 78,522 77.8
Inventory valuation adjustment.......................... 2,183 2.6 - -
------- ----- -------- -----
Gross profit............................................ 14,086 16.9 22,404 22.2
Selling, general and administrative expenses............ 8,463 10.2 11,056 11.0
Amortization of goodwill and other intangible assets.... 785 .9 1,182 1.1
Pooling expenses........................................ 190 .2 - -
Restructuring charge.................................... 2,834 3.4 - -
------- ----- -------- -----
Income from operations.................................. 1,814 2.2 10,166 10.1
Interest expense........................................ (1,960) (2.4) (3,663) (3.7)
Other income, net....................................... 440 .5 260 .3
------- ----- -------- -----
Income before income taxes.............................. 294 .3 6,763 6.7
Provision for income taxes.............................. 125 .1 3,159 3.1
------- ----- -------- -----
Net income.............................................. $ 169 .2% $ 3,604 3.6%
======= ===== ======== =====
</TABLE>
Revenues increased 21.1% from approximately $83.4 million in the three month
period ended June 28, 1998 to approximately $100.9 million in the three month
period ended June 27, 1999. On April 29, 1998, the Company notified its largest
customer, CHEP USA ("CHEP"), that PalEx was terminating all existing agreements
with CHEP. Effective that date, the Company ceased supplying CHEP with new
pallets and
16
<PAGE>
provided advance notice (generally, ten to sixty days) under contractual
arrangements to discontinue repair and depot services to CHEP. The termination
of the Company's relationship affected certain of the Company's facilities in
the southeastern and western United States. Revenues related to CHEP sales for
the three month period ended June 28, 1998 were approximately $10.0 million. The
increase in revenues for the three month period ended June 27, 1999 compared to
the three month period ended June 28, 1998 is primarily attributable to the
companies acquired as purchases and sales to new customers that replaced sales
previously made to CHEP.
Gross profit increased from approximately $14.1 million for the three month
period ended June 28, 1998 to approximately $22.4 million for the three month
period ended June 27, 1999, primarily as a result of increased volumes due to
the acquisition of the Purchased Companies. Gross profit as a percentage of
revenues increased from 19.5% (excluding the inventory valuation allowance
resulting from the termination of the business relationship with CHEP) for the
three-month period ended June 28, 1998 to 22.2% for the three month period ended
June 27, 1999, primarily due to improved margins and increased efficiency in new
pallet manufacturing. The Company's gross profit as a percentage of revenues may
fluctuate as a result of competitive pricing in different market areas in which
it operates, continued changes to product mix and changes in raw material costs.
Selling, general and administrative expenses increased from approximately $8.5
million, or 10.2% of revenues, in the three month period ended June 28, 1998 to
$11.1 million, or 11.0% of revenues, in the three month period ended June 27,
1999. This increase is generally attributable to the Purchased Companies
acquired subsequent to June 28, 1998 and to the Company's continued efforts of
organizing and building its regional operating structure.
Amortization of goodwill and other intangible assets increased from
approximately $0.8 million for the three-month period ended June 28, 1998 to
approximately $1.2 million for the three-month period ended June 27, 1999. This
increase was due to the additional companies acquired as purchases.
Interest expense increased from approximately $2.0 million for the three month
period ended June 28, 1998 to approximately $3.7 million for the three month
period ended June 27, 1999, primarily as a result of the additional borrowings
related to the acquisitions of the 1998 Purchased Companies and higher interest
rates.
As a result of the foregoing, net income increased from approximately $0.2
million for the three month period ended June 28, 1998 to approximately $3.6
million for the three month period ended June 27, 1999.
17
<PAGE>
Six Month Periods Ended June 28, 1998 and June 27, 1999
The following table sets forth certain selected financial data as a percentage
of revenues for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Six Month Period Ended
----------------------
June 28, 1998 June 27, 1999
------------- -------------
<S> <C> <C> <C> <C>
Revenues................................................ $152,332 100.0% $197,314 100.0%
Cost of goods sold...................................... 123,463 81.0 155,914 79.0
Inventory valuation adjustment.......................... 2,183 1.5 - -
-------- ----- -------- -----
Gross profit............................................ 26,686 17.5 41,400 21.0
Selling, general and administrative expenses............ 15,043 9.9 21,534 10.9
Amortization of goodwill and other intangible assets.... 1,222 .8 2,357 1.2
Compensation differential............................... 1,062 .7 - -
Pooling expenses........................................ 1,841 1.2 - -
Restructuring charge.................................... 2,834 1.8 - -
-------- ----- -------- -----
Income from operations.................................. 4,684 3.1 17,509 8.9
Interest expense........................................ (2,897) (1.9) (7,203) (3.7)
Other income, net....................................... 542 .3 155 .1
-------- ----- -------- -----
Income before income taxes.............................. 2,329 1.5 10,461 5.3
Provision for income taxes.............................. 1,000 .6 4,864 2.5
-------- ----- -------- -----
Net income.............................................. $ 1,329 .9% $ 5,597 2.8%
======== ===== ======== =====
</TABLE>
Revenues increased 29.5% from approximately $152.3 million in the six month
period ended June 28, 1998 to approximately $197.3 million in the six month
period ended June 27, 1999. On April 29, 1998, the Company notified its largest
customer, CHEP USA ("CHEP"), that PalEx was terminating all existing agreements
with CHEP. Effective that date, the Company ceased supplying CHEP with new
pallets and provided advance notice (generally, ten to sixty days) under
contractual arrangements to discontinue repair and depot services to CHEP. The
termination of the Company's relationship affected certain of the Company's
facilities in the southeastern and western United States. Revenues related to
CHEP sales for the six month period ended June 28, 1998 were approximately $24.3
million. The increase in revenues for the six month period ended June 27, 1999
compared to the six month period ended June 28, 1998 is primarily attributable
to the companies acquired as purchases and sales to new customers that replaced
sales previously made to CHEP.
Gross profit increased from approximately $26.7 million for the six month
period ended June 28, 1998 to approximately $41.4 million for the six month
period ended June 27, 1999, primarily as a result of increased volumes due to
the acquisition of the Purchased Companies. Gross profit as a percentage of
revenues increased from 19.0% (excluding the inventory valuation adjustment
resulting from the termination of the business relationship with CHEP) for the
six-month period ended June 28, 1998 to 21.0% for the six month period ended
June 27, 1999, primarily due to higher
18
<PAGE>
margins from both recycled pallet sales and new pallet manufacturing. The
Company's gross profit as a percentage of revenues may fluctuate as a result of
competitive pricing in different market areas in which it operates, continued
changes to product mix and changes in raw material costs.
Selling, general and administrative expenses increased from approximately
$15.0 million, or 9.9% of revenues, in the six month period ended June 28, 1998
to $21.5 million, or 10.9% of revenues, in the six month period ended June 27,
1999. This increase is generally attributable to the Purchased Companies
acquired subsequent to June 28, 1998 and to the Company's continued efforts in
organizing and building its regional operating structure.
The results of operations for the six month period ended June 28, 1998 include
approximately $1.8 million and $1.1 million for pooling expenses and
compensation differential, respectively, related to the acquisition of Acme and
Western. Restructuring charges relating to the Company's termination of its
relationship with CHEP were approximately $2.8 million during the six months
ended June 28, 1999.
Amortization of goodwill and other intangible assets increased from
approximately $1.2 million for the six-month period ended June 28, 1998 to
approximately $2.4 million for the six-month period ended June 27, 1999. This
increase was due to the additional companies acquired as purchases.
Interest expense increased from approximately $2.9 million for the six month
period ended June 28, 1998 to approximately $7.2 million for the six month
period ended June 27, 1999, primarily as a result of the additional borrowings
related to the acquisitions of the 1998 Purchased Companies and higher interest
rates.
As a result of the foregoing, net income increased from approximately $1.3
million for the six month period ended June 28, 1998 to approximately $5.6
million for the six month period ended June 27, 1999.
Other Data
EBITDA
EBITDA, which is presented not as an alternative measure of operating results or
cash flow from operations (as determined in accordance with generally accepted
accounting principles) but because it is a widely accepted financial indicator
of the ability to incur and service debt, is calculated by the Company as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
------------------------ ----------------------
June 28, 1998 June 27, 1999 June 28, 1998 June 27, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before income taxes........................ $ 169 $ 3,604 $ 1,329 $ 5,597
Provision for income taxes........................ 125 3,159 1,000 4,864
Inventory valuation adjustment.................... 2,183 -- 2,183 --
Pooling expenses.................................. 190 -- 1,841 --
Compensation differential......................... -- -- 1,062 --
Depreciation and amortization..................... 2,107 3,801 4,479 7,580
Restructuring charge.............................. 2,834 -- 2,834 --
Interest expense.................................. 1,960 3,663 2,897 7,203
------ ------- ------- -------
EBITDA............................................ $9,568 $14,227 $17,625 $25,244
====== ======= ======= =======
</TABLE>
EBITDA as calculated by the Company is not necessarily comparable with
similarly-titled measures presented by other companies.
UNIT SALES
Pro forma unit sales of new pallets increased 17.3% from approximately 4.0
million units for the three month period ended June 28, 1998 to approximately
4.7 million units for the three month period ended June 27, 1999. The increase
in pro forma unit sales of new pallets was a result of replacing CHEP sales and
the existence of a national contract. Pro forma unit sales of repaired and used
pallets increased from approximately 2.9 million units for the three month
period ended June 28, 1998 to approximately 4.1 million units for the three
month period ended June 27, 1999. The increase in pro forma unit sales of
repaired and used pallets resulted from the replacement of CHEP sales. Pro forma
unit sales of new and used pallets exclude products sold to CHEP in all periods.
Pro forma unit sales of agricultural harvesting boxes and specialty bins were
approximately 315,000 units for the three month period ended June 28, 1998 and
approximately 223,000 units for the three month period ended June 27, 1999. The
decrease in pro forma unit sales of harvesting boxes and specialty bins is
attributed to lower demand for specialty bins in the Southeast and on the West
Coast. Pro forma unit sales of reconditioned drums were approximately 1.5
million units for the three month period ended June 28, 1998 and approximately
1.4 million units for the three month period ended June 27, 1999. The decrease
in pro forma drum unit sales is due primarily to a reduction in lower unit
margin business and less demand in the Midwest markets.
Pro forma unit sales of new pallets increased 19.5% from approximately 7.6
million units for the six month period ended June 28, 1998 to approximately 9.1
million units for the six month period ended June 27, 1999. The increase in pro
forma unit sales of new pallets was due to the replacement of CHEP sales and the
existence of a national contract. Pro forma unit sales of repaired and used
pallets increased from approximately 5.4 million units for the six month period
ended June 28, 1998 to approximately 7.5 million units for the six month period
ended June 27, 1999. The increase in pro forma unit sales of repaired and used
pallets resulted from the replacement of CHEP sales. Pro forma unit sales of new
and used pallets exclude products sold to CHEP in all periods. Pro forma unit
sales of agricultural harvesting boxes and specialty bins were approximately
657,000 units for the six month period ended June 28, 1998 and approximately
454,000 units for the six month period ended June 27, 1999. The decrease in pro
forma unit sales of harvesting boxes and specialty bins is attributed to lower
demand for specialty bins in the Southeast and on the West Coast. Pro forma unit
sales of reconditioned drums were approximately 2.7 million units for the six
month period ended June 28, 1998 and approximately 2.5 million units for the six
month period ended June 27, 1999. The decrease in pro forma drum unit sales is
due primarily to a reduction in lower unit margin business and less demand in
the Midwest markets.
Liquidity and Capital Resources
On March 25, 1997, PalEx completed the Offering, which involved the sale of
3,000,000 shares of Common Stock at a price to the public of $7.50 per share.
The net proceeds to PalEx from the Offering (after deducting underwriting
discounts, commissions and offering expenses) were approximately $20.1
19
<PAGE>
million. Of this amount, $3.4 million was used to pay the cash portion of the
purchase prices relating to the Acquisitions with the remainder being used to
repay certain indebtedness of the Founding Companies.
On April 22, 1997, the Company sold an additional 450,000 shares of Common
Stock at a price to the public of $7.50 per share (generating net proceeds to
the Company of $3.1 million after underwriting discounts and commissions)
pursuant to an over-allotment option granted by the Company to the underwriters
in connection with the Offering. The net proceeds were used to repay debt
borrowed under the Credit Facility.
On March 25, 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A., which was amended on January 29, 1998, September 3, 1998, November
10, 1998, December 28, 1998, May 10, 1999 and June 27, 1999 (the "Amended Credit
Facility"). The Amended Credit Facility provides the Company with a revolving
line of credit of up to $150.0 million, which may be used for general corporate
purposes, including acquisitions, the repayment or refinancing of indebtedness
of all acquisitions including future acquisitions, capital expenditures, letters
of credit and working capital. The Amended Credit Facility will terminate and
all amounts outstanding thereunder, if any, will be due and payable on the
earlier of December 31, 1999 or a change in control, which will occur upon
consummation of the pending merger with IFCO, which is expected to close in the
fourth quarter of 1999 and which is described below.
The Company is pursuing additional debt financing and a refinancing of the
Amended Credit Facility both independent of and in conjunction with the pending
merger with IFCO. However, there can be no assurance that the Company will be
able to obtain additional financing or refinance the Amended Credit Facility or
that any additional financing or refinancing will be on terms that are as
favorable to the Company as the Amended Credit Facility. The Company's failure
to obtain additional financing or refinance the Amended Credit Facility before
December 31, 1999, or any additional financing or new financing obtained by the
Company on terms that are materially less favorable than those of the Amended
Credit Facility, could have a material adverse effect on the Company's results
of operations and financial condition.
Advances under the Amended Credit Facility bear interest at Bank One's base
interest rate, as defined, plus a margin of 50 basis points through March 31,
1999 and increasing by 50 basis points on that date and each quarter until
maturity. At the Company's option, such advances may bear interest based on a
designated LIBOR plus a margin of 275 basis points through March 31, 1999 and
increasing by 50 basis points on that date and each quarter until maturity.
Commitment fees of 50 basis points are payable on the unused portion of the line
of credit through March 31, 1999 and increase by 50 basis points on that date
and each quarter until maturity. The Amended Credit Facility contains a limit
for standby letters of credit of up to $10.0 million. There were letter of
credit commitments of approximately $3.9 million outstanding under the Amended
Credit Facility as of June 27, 1999.
The Amended Credit Facility prohibits the payment of dividends by the Company,
restricts the Company's incurrence or assumption of other indebtedness and
requires the Company to comply with certain financial covenants including
consolidated net worth, fixed charge coverage, and funded debt and senior debt
to earnings before interest, taxes, depreciation and amortization ratios. The
approximate level of borrowings available under the Amended Credit Facility as
of June 27, 1999 was $13.6 million. The Amended Credit Facility is secured by a
lien on the real and tangible personal property of the Company, as defined, a
pledge of the outstanding stock of each of the Company's U.S. subsidiaries and
65% of the outstanding stock of the Company's Canadian subsidiary. The amounts
due under the Amended Credit Facility are also guaranteed by the Company's U.S.
subsidiaries.
The Company issued approximately $10.0 million in subordinated convertible
notes payable (the "Convertible Notes") to certain former owners of the 1998
Purchased Companies. The Convertible Notes, which bear interest at rates ranging
from six to eight percent, include provisions that allow conversion into shares
of the Company's Common Stock beginning on the first anniversary date of the
Convertible Notes (the "Conversion Date") at conversion prices ranging from
$10.78 to $15.86 per share. If the Convertible
20
<PAGE>
Notes are not converted they become due and payable on their second anniversary.
At the Company's option, the Convertible Notes may be prepaid at any time
following the Conversion Date.
Pending Merger
On March 30, 1999, PalEx entered into a definitive merger agreement with
International Food Container Organization ("IFCO") to merge their businesses.
The combined entity, to be named IFCO Systems, will include IFCO's European,
U.S., Asian and Latin American returnable packaging operations and PalEx's North
American pallet and industrial container operations. Under the terms of the
agreement, PalEx will merge into a new subsidiary of IFCO Systems. The
outstanding shares of PalEx's common stock will be exchanged for common stock of
IFCO Systems representing between 32 percent and 35 percent of its outstanding
shares. The merger will occur concurrently with an initial public offering of
shares in IFCO Systems. At the time of the merger and immediately before the
initial public offering, the shares of IFCO Systems that are not owned by
PalEx's shareholders will be owned by Schoeller Packaging Systems. The closing
of the merger is subject to the approval of shareholders, completion of the
initial public offering of IFCO Systems and other customary conditions. The
transaction is expected to be completed in the fourth quarter of 1999.
Seasonality
The pallet manufacturing and crating business is subject to seasonal
variations in operations and demand. The Company's third quarter is
traditionally the quarter with the lowest demand. The Company has a significant
number of agricultural customers and typically experiences the greatest demand
for new pallets from these customers during the citrus and produce harvesting
seasons (generally October through May). Yearly results can fluctuate
significantly in this region depending on the size of the citrus and produce
harvests, which, in turn, largely depend on the occurrence and severity of
freezing weather and changes in rainfall. Adverse weather conditions may also
affect the Company's ability to obtain adequate supplies of lumber at a
reasonable cost. The Company's locations serving predominantly manufacturing and
industrial customers experience less seasonality.
The Company's drum reconditioning segment is seasonally impacted in the
southeastern and western United States by the agricultural industries.
Reconditioned drum sales are strongest during a period generally beginning in
April and extending through September, with preseason production for this period
running from January through March.
Management believes that the effect of seasonality will diminish as the
Company grows and expands its customer base both internally and through
acquisition. However, management believes the third quarter currently represents
the seasonally slow quarter of the Company's fiscal year.
Year 2000 Issues
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define a specific year. Absent corrective actions, a
computer program that has date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruptions to various activities and
operations.
The Company has conducted an evaluation of the actions necessary in order to
ensure that its computer systems will be able to function without disruption
with respect to the application of dating systems in the year 2000. The majority
of the Company's information technology software with potential year 2000
concerns was licensed from vendors that have either changed their product to
remove the effects of the Year 2000 Issue or have committed to have the
necessary changes made during 1999. Reviews and inquiries concerning software
used in the operation of the Company's manufacturing equipment have been
conducted as well. The Company's operating businesses do not require extensive
systems-oriented applications. The pallet manufacturing business consists of
harvesting, transporting, cutting, assembling and delivering finished wood
products. The drum reconditioning business consists of collecting,
reconditioning and delivering empty steel containers. Isolated microprocessor-
driven manufacturing equipment involved in the pallet manufacturing and drum
reconditioning processes have either been conformed to year 2000 standards or
are scheduled for conformity by the vendor in 1999. The Company is
21
<PAGE>
unaware of any material disruptions to its manufacturing operations that could
occur because of year 2000 problems. The Company is also unaware of any exposure
to contingencies related to the Year 2000 Issue for the products it has sold in
the past. The Company does not anticipate the loss of any revenues due to the
Year 2000 Issue.
As a result of its evaluations of the Year 2000 Issue, the Company is
engaged in the process of upgrading and replacing certain information and other
computer systems in order to be able to operate without disruption after 1999.
Based upon information currently available, the Company does not anticipate that
the costs of these actions will exceed $250,000. Although the Company is
assessing the reliability of its year 2000 compliance, disruptions of the
computer systems of banks, vendors, customers or other third parties, whose
systems are outside the Company's control, could impair the Company's ability to
obtain necessary raw materials or to sell to or service its customers.
Disruption of the Company's computer systems, or the computer systems of its
banks, vendors or customers, as well as the cost of avoiding such disruption,
could have a material adverse effect upon the Company's financial condition and
results of operations.
The Company, as part of its contingency plan, has initiated a formal
communication program with significant vendors to evaluate their Year 2000
compliance, and is assessing their responses to the Company's Year 2000
readiness questionnaire. Approximately 46% of those vendors surveyed have
responded to our inquiry regarding their own Year 2000 readiness. Of those
vendors that have replied, all have stated that their ability to supply the
Company will not be affected by Year 2000 issues. However, if a significant
vendor becomes unable to deliver materials or services, the Company has
identified replacement vendors which can provide substitute materials and
services for many of the goods the Company sells and substitutes for many of the
services it receives can be obtained from other vendors. No single supplier
accounts for more than approximately 3% of the Company's purchases, and the
Company does not currently foresee any significant impairment in its ability to
procure materials due to operational failures of vendors. However, the Company
cannot assure timely compliance of vendors and may be adversely affected by
failures of significant vendors to supply products or services due to Year 2000
compliance failures.
22
<PAGE>
PALEX, INC.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No.
-----------
10.1 Credit Facility Amendment
27.0 Financial Data Schedule
(b) Reports on Form 8-K
On April 7, 1999, the Company filed a Current Report on Form 8-K to report
the execution of a definitive agreement to merge the Company with International
Food Container Organization.
23
<PAGE>
SIGNATURE
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 thereunto duly authorized.
PALEX, INC.
Date: August 11, 1999 By: /s/ Casey A. Fletcher
------------------------------
Casey A. Fletcher
Chief Accounting Officer
24
<PAGE>
THIRD AMENDMENT TO SECURED CREDIT AGREEMENT
THIS THIRD AMENDMENT TO SECURED CREDIT AGREEMENT (this "Amendment") dated
as of May 10, 1999, is by and between Palex, Inc., a Delaware corporation (the
"Borrower"), Ridge Pallets, Inc., a Florida corporation (a "Borrower" for
purposes of Section 2.2(c) of the Credit Agreement, as defined hereinafter),
Bank One, Texas, National Association ("Bank One"), National City Bank f/k/a
National City Bank of Columbus, Wells Fargo Bank, Comerica Bank, Paribas (f/k/a
Banque Paribas) and the other lenders from time to time parties hereto (each a
"Lender" and collectively, the "Lenders"), and Bank One as administrative agent
for the Lenders (in such capacity, the "Agent").
WITNESSETH:
WHEREAS, the Borrower, the Lenders and the Agent have entered into that
certain Secured Credit Agreement dated as of January 29, 1998, as amended by the
First Amendment dated July 27, 1998 and the Second Amendment dated December 28,
1998, pursuant to which the Lenders have agreed to make Loans to the Borrower
and to issue Letters of Credit for the account of the Borrower pursuant to the
terms thereof ( as amended, the "Credit Agreement"); and
WHEREAS, the Borrower, the Lenders and the Agent desire to amend the Credit
Agreement as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Borrower , the Lenders and the Agent hereby agree as
follows:
1. Amendments to Credit Agreement.
------------------------------
(a) Section 1.1 is amended as follows:
The definition of Maturity Date is hereby amended and restated in its
entirety as follows:
"Maturity Date" shall mean the earlier of (i) September 30, 1999
and (ii) the occurrence of any merger or change of control of
Borrower.
2. Waiver. The Lenders hereby waive any Default or Event of Default
-------
that exists as of March 28, 1999 as a result of Borrower's non-compliance with
the requirements of Sections 6.21, 6.22 and/or 6.23. This waiver is expressly
limited to the covenants expressly enumerated herein for the period ending March
28, 1999 and shall not constitute a waiver of any other breach of
1
<PAGE>
the terms of the Credit Agreement and shall not constitute the waiver of non-
compliance with the provisions of Sections 6.21, 6.22 and/or 6.23 at the end of
any subsequent fiscal period.
3. Reaffirmation of Representations and Warranties. To induce the
-----------------------------------------------
Lenders and the Agent to enter into this Amendment, the Borrower hereby
reaffirms, as of the date hereof, its representations and warranties in their
entirety contained in the Credit Agreement and in all other documents executed
pursuant thereto (except to the extent such representations and warranties
relate solely to an earlier date) and additionally represents and warrants as
follows:
(a) The execution and delivery of this Amendment and the performance
by the Borrower of its obligations under this Amendment and the Credit Agreement
as amended hereby are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action, have received all necessary
governmental and other approvals (if any shall be required), and do not and will
not contravene or conflict with the governance documents of the Borrower or any
provision of law, any presently existing requirement or restriction imposed by
any judicial, arbitral, regulatory or governmental instrumentality or constitute
a default under, or result in the creation or imposition of any Lien other than
a Permitted Lien upon any property or assets of the Borrower or any Guarantor
under, any agreement, instrument or indenture by which the Borrower or any
Guarantor is bound;
(b) This Amendment has been duly executed and delivered on behalf of
the Borrower and this Amendment and the Credit Agreement as amended hereby are
the legal, valid and binding obligations of the Borrower, enforceable in
accordance with its terms subject as to enforcement only to bankruptcy,
insolvency, reorganization, moratorium or other similar laws and equitable
principles affecting the enforcement of creditors' rights generally; and
(c) No Default or Event of Default has occurred and is continuing.
4. Conditions Precedent. The effectiveness of this Amendment is subject
--------------------
to the following conditions precedent:
2
<PAGE>
(a) The Borrower shall deliver to the Agent resolutions of its Board
of Directors authorizing the execution, delivery and performance of this
Amendment, certified by its Secretary or Assistant Secretary, such certificate
to contain incumbencies of any officer executing this Amendment and any changes
to its Certificate of Incorporation or Bylaws since January 29, 1998; and
(b) The Borrower shall pay to each Lender a modification fee of 0.05%
of the amount of its Commitment.
5. Reaffirmation of Credit Agreement. This Amendment shall be deemed to
---------------------------------
be an amendment to the Credit Agreement, and the Credit Agreement, as amended
hereby, is hereby ratified, approved and confirmed in each and every respect.
All references to the Credit Agreement herein and in any other document,
instrument, agreement or writing shall hereafter be deemed to refer to the
Credit Agreement as amended hereby.
6. Defined Terms. Except as amended hereby, terms used herein when
-------------
defined in the Credit Agreement shall have the same meanings herein unless the
context otherwise requires.
7. Governing Law; Arbitration; Submission to Jurisdiction; Waiver of Jury
----------------------------------------------------------------------
Trial.
-----
(a) The Credit Agreement, as amended hereby, and the other Credit
Documents, and the rights and duties of the parties thereto, shall be construed
in accordance with and governed by the internal laws of the State of Texas.
(B) THE AGENT, EACH LENDER AND THE BORROWER HEREBY WAIVES ITS RIGHT TO
RESOLVE DISPUTES, CLAIMS, AND CONTROVERSIES ARISING FROM THE CREDIT AGREEMENT,
AS AMENDED HEREBY, ANY OTHER CREDIT DOCUMENT OR ANY MATTER IN CONNECTION
THEREWITH, INCLUDING, WITHOUT LIMITATION, CONTRACT DISPUTES AND TORT CLAIMS,
THROUGH ANY COURT PROCEEDING OR LITIGATION AND ACKNOWLEDGES THAT ALL SUCH
DISPUTES, CLAIMS AND CONTROVERSIES SHALL BE RESOLVED PURSUANT TO THIS SECTION,
EXCEPT THAT EQUITABLE RELIEF AND CERTAIN OTHER RIGHTS AND REMEDIES SET FORTH
BELOW MAY BE SOUGHT FROM ANY COURT OF COMPETENT JURISDICTION. EACH PARTY
REPRESENTS TO THE OTHER PARTIES THAT THIS WAIVER IS MADE KNOWINGLY AND
VOLUNTARILY AFTER CONSULTATION WITH AND UPON ADVICE OF ITS COUNSEL AND IS A
MATERIAL PART OF THIS AGREEMENT. ALL SUCH DISPUTES, CLAIMS AND
3
<PAGE>
CONTROVERSIES SHALL BE RESOLVED BY BINDING ARBITRATION PURSUANT TO THE
COMMERCIAL RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"). Any
arbitration proceeding held pursuant to this arbitration provision shall be
conducted in Houston, Texas or at any other place selected by mutual agreement
of the parties. No act to take or dispose of any collateral shall constitute a
waiver of this arbitration agreement or be prohibited by this arbitration
agreement. This arbitration provision shall not limit the right of any party
during any dispute, claim or controversy to seek, use, and employ ancillary, or
preliminary rights and/or remedies, judicial or otherwise, for the purposes of
realizing upon, preserving, protecting, foreclosing upon or proceeding under
forcible entry and detainer for possession of, any real or personal property,
and any such action shall not be deemed an election of remedies. Such remedies
include, without limitation, obtaining injunctive relief or a temporary
restraining order, invoking a power of sale under any deed of trust or mortgage,
obtaining a writ of attachment or imposition of a receivership, or exercising
any rights relating to personal property, including exercising the right of set-
off, or taking or disposing of such property with or without judicial process
pursuant to the Uniform Commercial Code. Any disputes, claims or controversies
concerning the lawfulness or reasonableness of an act, or exercise of any right
or remedy concerning any collateral, including any claim to rescind, reform, or
otherwise modify any agreement relating to the collateral, shall also be
arbitrated; provided, however that no arbitrator shall have the right or the
power to enjoin or restrain any act of either party. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction. The
statute of limitations, estoppel, waiver, laches and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of any action for these purposes.
The federal arbitration act (Title 9 of the United States Code) shall apply to
the construction, interpretation, and enforcement of this arbitration provision.
(c) To the fullest extent permitted by applicable law, each party
hereto agrees that any court proceeding or litigation permitted by Section 6(b)
may be brought and maintained in the courts of the State of Texas sitting in
Harris County or the United States District Court for the Southern District of
Texas. To the fullest extent permitted by applicable law, the Borrower hereby
4
<PAGE>
expressly and irrevocably submits to the jurisdiction of the courts of the State
of Texas and the United States District Court for the Southern District of Texas
for the purpose of any such litigation as set forth above and irrevocably agrees
to be bound by any judgment rendered thereby in connection with such litigation.
To the fullest extent permitted by applicable law, the Borrower further
irrevocably consents to the service of process, by registered mail, postage
prepaid, or by personal service within or without the state of Texas. To the
fullest extent permitted by applicable law, the Borrower hereby expressly and
irrevocably waives any objection which it may have or hereafter may have to the
laying of venue of any such litigation brought in any such court referred to
above and any claim that any such litigation has been brought in an inconvenient
forum. To the extent that the Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service of notice, attachment prior to judgment, attachment in aid of
execution or otherwise) with respect to itself or its property, the Borrower
hereby irrevocably waives to the fullest extent permitted by applicable law,
such immunity in respect of its obligations under the Credit Agreement, as
amended hereby, and the other Credit Documents.
(D) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY
HERETO VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY (BY ITS
ACCEPTANCE HEREOF) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING PERMITTED BY SECTION 6(B) AND WAIVES ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF THE CREDIT AGREEMENT, AS AMENDED HEREBY, ANY OTHER
CREDIT DOCUMENT, ANY OTHER RELATED DOCUMENT OR ANY RELATIONSHIP BETWEEN THE
AGENT, ANY LENDER, THE BORROWER AND/OR ANY GUARANTOR, AND AGREES THAT ANY SUCH
ACTION, PROCEEDING OR DISPUTE SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A
JURY. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE LENDERS TO PROVIDE THE
LOANS AND THE LETTERS OF CREDIT.
8. Counterparts. This Amendment may be executed in any number of
------------
counterparts, and by the different parties on different counterpart signature
pages, each of which when executed shall be deemed an original but all such
counterparts taken together shall constitute one and the same Amendment.
5
<PAGE>
9. Severability. Any provision of this Amendment that is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
10. Headings. Section headings used in this Amendment are for reference
--------
only and shall not affect the construction of this Amendment.
11. Notice of Entire Agreement. This Amendment, together with the other
--------------------------
Credit Documents, constitute the entire understanding among the Borrower, the
Agent and the Lenders and supersedes all earlier or contemporaneous agreements,
whether written or oral, concerning the subject matter of the Amendment and the
other Credit Documents. THIS WRITTEN THIRD AMENDMENT TOGETHER WITH THE OTHER
CREDIT DOCUMENTS REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be duly executed and delivered by their duly authorized officers as of the day
and year first written above.
BORROWER:
--------
PALEX, INC.
By: /S/ Casey A. Fletcher
--------------------------------------------------------------------------
Name: Casey A. Fletcher
--------------------------------------------------------------------------
Title:
--------------------------------------------------------------------------
RIDGE PALLETS, INC.
By: /S/ Casey A. Fletcher
--------------------------------------------------------------------------
Name: Casey A. Fletcher
--------------------------------------------------------------------------
Title:
--------------------------------------------------------------------------
6
<PAGE>
LENDERS:
-------
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By: /S/ Kathy Turner
--------------------------------------------------------------------------
Name: Kathy Turner
--------------------------------------------------------------------------
Title: Vice President
--------------------------------------------------------------------------
NATIONAL CITY BANK F/K/A NATIONAL CITY BANK OF COLUMBUS
By: /S/ Michael J. Durbin
--------------------------------------------------------------------------
Name: Michael J. Durbin
--------------------------------------------------------------------------
Title: Michael J. Durbin
--------------------------------------------------------------------------
WELLS FARGO BANK
By: /S/ Matt Jurgens
--------------------------------------------------------------------------
Name: Matt Jurgens
--------------------------------------------------------------------------
Title: Vice President
--------------------------------------------------------------------------
COMERICA BANK
By: /S/ Mark B. Grover
--------------------------------------------------------------------------
Name: Mark B. Grover
--------------------------------------------------------------------------
Title: Vice President
--------------------------------------------------------------------------
PARIBAS (F/K/A BANQUE PARIBAS)
By: /S/ Larry Robinson & Rosine K. Matthews
--------------------------------------------------------------------------
Name: Larry Robinson Rosine K. Matthews
--------------------------------------------------------------------------
Title: Vice President Vice President
--------------------------------------------------------------------------
[SIGNATURE PAGE TO THIRD AMENDMENT]
7
<PAGE>
CONSENT AND ACKNOWLEDGMENT
Each of the undersigned Guarantors, by its signature hereto, acknowledges
and agrees to the terms and conditions of that certain Third Amendment to
Secured Credit Agreement (the "Amendment") dated as of May 10, 1999, by and
between Palex, Inc., a Delaware corporation (the "Borrower"), Ridge Pallets,
Inc., a Florida corporation, Bank One, Texas, National Association, National
City Bank f/k/a National City Bank of Columbus, Wells Fargo Bank, Comerica Bank,
Banque Paribas, The Sumitomo Bank, Limited, and the other lenders from time to
time parties hereto (collectively, the "Lenders"). Each of the undersigned
acknowledges and reaffirms its obligations under its Guaranty (collectively, the
"Guaranties"), and agrees that the Guaranties shall remain in full force and
effect. Although the undersigned Guarantors have been informed by the Borrower
of the matters set forth in the Amendment, and the undersigned have acknowledged
and agreed to same, the undersigned understand and agree that neither the Agent
nor the Lenders have any duty to notify the Guarantors or to seek any of the
Guarantors acknowledgment or agreement, and nothing contained herein shall
create such a duty as to any transactions hereafter.
Dated as of May 10, 1999.
ACME BARREL COMPANY, INC.
AMERICAN PALLET RECYCLERS, INC.
BAY AREA PALLET COMPANY
CONTAINER SERVICES COMPANY NW ACQUISITION, INC.
CAPITAL PALLET CO. INC.
CONTAINER SERVICES COMPANY SW ACQUISITION, INC.
DUCKERT PALLET CO., INC.
GILBERT LUMBER INCORPORATED
FRASER INDUSTRIES, INC.
RIDGE PALLETS, INC.
INTERSTATE PALLET CO., INC.
NLD, INC.
NLP TRANSPORT, INC.
NEW LONDON PALLET, INC.
PALLET OUTLET COMPANY, INC.
SHEFFIELD LUMBER AND PALLET COMPANY, INC.
SHIPSHEWANA PALLET CO., INC.
SONOMA PACIFIC COMPANY
SOUTHERN PALLET, INC.
SUMMERS PALLET MANUFACTURING, INC.
VALLEY CRATING AND PACKAGING, INC.
WESTERN CONTAINER CORPORATION
WESTERN CONTAINER LIMITED LIABILITY COMPANY
<PAGE>
By: /S/ Edward Rhyne, Vice President
--------------------------------------------------------------------------
Name: Edward Rhyne
--------------------------------------------------------------------------
Title: Vice President
--------------------------------------------------------------------------
By: /S/ Barry Slavin, Vice President
--------------------------------------------------------------------------
Name: Barry Slavin
--------------------------------------------------------------------------
Title: Vice President
--------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> JUN-27-1999
<CASH> 5,496
<SECURITIES> 0
<RECEIVABLES> 51,176
<ALLOWANCES> 1,315
<INVENTORY> 28,809
<CURRENT-ASSETS> 89,879
<PP&E> 127,376
<DEPRECIATION> 51,736
<TOTAL-ASSETS> 295,346
<CURRENT-LIABILITIES> 175,235
<BONDS> 0
0
0
<COMMON> 203
<OTHER-SE> 102,691
<TOTAL-LIABILITY-AND-EQUITY> 295,346
<SALES> 197,314
<TOTAL-REVENUES> 197,314
<CGS> 155,914
<TOTAL-COSTS> 177,448
<OTHER-EXPENSES> 2,202
<LOSS-PROVISION> 106
<INTEREST-EXPENSE> 7,203
<INCOME-PRETAX> 10,461
<INCOME-TAX> 4,864
<INCOME-CONTINUING> 5,597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,597
<EPS-BASIC> .28
<EPS-DILUTED> .28
</TABLE>
