SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999 and the quarter ended March 31, 2000
_______________
IFCO SYSTEMS N.V.
(Translation of registrant's name into English)
"RIVIERSTAETE" AMSTELDIJK 166
1079 LH AMSTERDAM, THE NETHERLANDS
(Address of principal executive offices)
______________
(Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.)
Form 20-F X Form 40-F
--------- --------
(Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes No X
------- -----
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- N/A.)
1. The registrant's 1999 Annual Report filed with the Frankfurt Stock Exchange
on May 31, 2000, is attached to this report as Appendix A.
2. The registrant's 2000 First Quarterly Report filed with the Frankfurt Stock
Exchange on May 31, 2000, is attached to this report as Appendix B.
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, thereunto duly authorized.
IFCO Systems N.V.
-----------------
(Registrant)
Date: May 31, 2000 By: /s/ EDWARD RHYNE
---------------------------
Edward Rhyne
Executive Vice President
and General Counsel
APPENDIX A
[IFCO SYSTEMS LOGO APPEARS HERE]
1999 Annual Report
TABLE OF CONTENTS
Page
----
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 1
Introduction........................................................... 1
Results of Operations.................................................. 2
Liquidity and Capital Resources........................................ 5
Impact of Inflation.................................................... 10
Unaudited Pro Forma Combined and Consolidated Statement of Operations
for 1999.............................................................. 10
Business Outlook....................................................... 12
Research and Development Activities.................................... 12
Employment Information................................................. 13
Seasonality............................................................ 13
Related Party Supplier................................................. 13
Foreign Currency Translation Effects................................... 13
Euro Currency.......................................................... 14
Quantitative and Qualitative Disclosures About Market Risk............. 14
Year 2000.............................................................. 14
Forward-looking Disclaimer............................................. 14
Management............................................................... 16
Security Ownership of Principal Shareholders and Management.............. 19
Signatures............................................................... 20
Index to Financial Statements............................................ F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the Combined
and Consolidated Financial Statements of IFCO Systems N.V. ("IFCO" or the
"Company") for, and as of the end of, each of the three years ended December
31, 1999 included elsewhere in this report. With respect to results of
operations for each of the two years ended December 31, 1998, and as of dates
before the contribution of the capital shares of the IFCO Companies to IFCO
Systems N.V. in November 1999, references to IFCO or the Company mean the IFCO
Companies. The IFCO Companies are IFCO Europe Beteiligungs GmbH, MTS
Okologistik GmbH, and IFCO International Network Beteiligungsgesellschaft mbH,
which prior to May 2000 was known as Schoeller International Logistics
Beteiligungsgesellschaft mbH, and their subsidiaries. See note 1 to the
Combined and Consolidated Financial Statements.
Introduction
The Company believes it owns and manages the leading plastic round-trip
container, or RTC, pool in Europe based on 1997 market information. It also has
RTC operations in the United States, Japan, and Argentina and currently has
over 63.5 million RTCs in circulation.
IFCO's European perishables operations accounted for 91.9% of total revenues
during 1998 and 91.8% of total revenues during 1999. These operations are
comprised of round-trip systems for the movement of fruit and vegetables. IFCO
delivers RTCs to growers for the transport of produce to retailers. Retailers
benefit from decreased product handling, in-store display in RTCs, reduced
storage requirements, and reduction of waste disposal costs. Retailers return
the RTCs to IFCO for inspection and cleaning, repair, or recycling as
necessary. The RTCs are then reintroduced into the round-trip system for
multiple reuse. The RTCs are primarily used by producers of fresh fruits and
vegetables in exchange, generally, for a one-time use fee and a deposit. The
deposit paid by customers is transferred between the customer, intermediate
parties, and the retailer, until the deposit is ultimately repaid to the
retailer upon IFCO's recollection of the RTC.
The RTCs can be folded into a small volume when empty, reducing
transportation costs. The RTCs are generally used between three and 12 times a
year, depending on the type of RTC, and are depreciated over periods ranging
from eight to 15 years. Most RTCs are supplied by Schoeller Plast AG, an
indirect, 80%-owned subsidiary of Schoeller Logistics Industries GmbH
("Schoeller Industries"), under a long-term supply agreement.
IFCO's non-European perishables operations are owned through IFCO
International. IFCO International owns interests in round-trip systems
operations in the United States, Japan, and Argentina. IFCO has a 33% minority
ownership interest in the Japanese operations and, as of December 31, 1999, a
51% economic interest and 50% voting interest in the U .S. operations. Both of
these investments are accounted for under the equity method. IFCO acquired the
remaining interest in the U.S. operations, IFCO-U.S., L.L.C., in connection
with its merger with PalEx, Inc., in March 2000. The non-European businesses
are still developing and are currently generating operating losses, although
the Company believes that this business segment has the potential to generate
profits as market share increases.
IFCO's dry good operations accounted for 7.3% of IFCO's total revenues
during 1998 and 6.5% of the total revenues during 1999. Through its dry good
operations, IFCO operates round-trip systems for dry goods sold by retailers
such as the major grocery and department stores. The RTCs for dry goods are
individually identifiable by bar code, which enables the Company to accurately
track their movements and invoice customers. The logistics of RTC movement in
the dry good operations are similar to the Company's European perishables
operations. The Company currently has three principal customers in this
business segment: two department stores, whose service agreements extend
through 2003; and the Deutsche Post AG, whose contract, which began in
September 1999, extends to September 30, 2004. Deutsche Post AG, the German
postal service, is one of the largest European transporters of parcels and
letters.
1
The Company is reporting its results in accordance with U.S. GAAP and U.S.
dollars. The Company previously reported results under German GAAP and in
Deutsch marks. As a significant portion of the Company's revenues will be
collected in currencies other than the U.S. dollar, the Company's results of
operations may be adversely affected by fluctuations in currency exchange
rates. For example, if the value of the Deutsch mark to the U.S. dollar goes
down, the portion of the Company's revenues collected in Deutsch marks would
appear smaller when converted into U.S. dollars for purposes of reporting under
U.S. GAAP.
Results of Operations
The following table sets forth selected financial data for the periods
presented for each of the Company's business segments and the same data as a
percentage of its total revenues. Functional currencies in the Company's
markets have been converted to U.S. dollars at the average exchange rate during
each period presented. The effect of these fluctuations in exchange rates can
affect comparison of the results of operations between periods.
Certain reclassifications have been made in the 1998 and 1997 financial data
to conform to the 1999 presentation and are discussed below where applicable.
For the Year Ended December 31,
-------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
(dollars in thousands)
Revenues:
- --European Perishables..... $108,674 91.7% $125,128 91.9% $141,984 91.8%
- --Non-European
Perishables............... 292 0.2 1,147 0.8 2,588 1.7
- --Dry Good................. 9,580 8.1 9,901 7.3 10,154 6.5
-------- ----- -------- ----- -------- -----
118,546 100.0 136,176 100.0 154,726 100.0
Cost of sales:
- --European Perishables..... 90,849 76.6 96,884 71.2 115,154 74.5
- --Non-European
Perishables............... 219 0.2 717 0.5 1,864 1.2
- --Dry Good................. 8,554 7.2 8,617 6.3 7,467 4.8
-------- ----- -------- ----- -------- -----
99,622 84.0 106,218 78.0 124,485 80.5
Total gross profit......... 18,924 16.0 29,958 22.0 30,241 19.5
Selling, general and
administrative expenses:
- --European Perishables..... 15,002 12.7 20,694 15.2 21,239 13.7
- --Non-European
Perishables............... 1,718 1.4 1,629 1.2 2,128 1.4
- --Dry Good................. 1,608 1.4 1,966 1.4 1,144 0.7
-------- ----- -------- ----- -------- -----
18,328 15.5 24,289 17.8 24,511 15.8
Merger and integration
costs..................... 0 0.0 0 0.0 3,519 2.3
Goodwill amortization...... 675 0.6 383 0.3 289 0.2
Other operating (income),
net....................... (840) (0.7) (864) (0.6) (639) (0.4)
Income (loss) from
operations:
- --European Perishables..... 2,988 2.5 8,048 5.9 1,698 1.1
- --Non-European
Perishables............... (1,645) (1.4) (1,216) (0.9) (965) (0.6)
- --Dry Good................. (582) (0.5) (682) (0.5) 1,828 1.2
-------- ----- -------- ----- -------- -----
761 0.6 6,150 4.5 2,561 1.7
Other expenses, net........ (12,554) (10.6) (13,491) (9.9) (15,004) (9.7)
Income tax (provision)
benefit................... (47) 0.0 (210) (0.2) (320) (0.2)
-------- ----- -------- ----- -------- -----
Net loss before minority
interest.................. (11,840) (10.0) (7,551) (5.6) (12,763) (8.2)
======== ===== ======== ===== ======== =====
Other Operating Data:
- --EBITDA................... $ 28,573 24.1 $ 34,313 25.2 $ 40,842 26.4
======== ===== ======== ===== ======== =====
2
Year Ended December 31, 1999, Compared to Year Ended December 31, 1998
Revenues. The Company's total revenues increased $18.5 million, or 13.6%, to
$154.7 million in 1999 from $136.2 million in 1998. Revenues for 1998 reflect
reclassification of sales of granulate from other operating income to revenues
to conform to the 1999 presentation.
European Perishables Operations. Revenues from the European perishables
operations increased $16.9 million, or 13.5%, to $142.0 million in 1999 from
$125.1 million in 1998. This increase was primarily attributable to an increase
of 14.0% in the number of RTCs used, in the round-trip systems for fresh
produce, and to a higher number of trips per RTC. This revenue increase was
partially offset by a decrease of 4.1% related to changes in currency exchange
rates relative to the previous period. The revenue increase was also a result
of IFCO's establishing new retail partners, favorable harvests of citrus fruit,
and increased business from existing customers. Revenues for 1999 reflect the
correction of an information systems error that created a one-day duplication
of revenues in Spain in the first month of 1999, resulting in a decrease of
revenues of $0.4 million. Revenues for European perishables operations for 1998
reflect reclassification of sales of granulate from other operating income to
revenues to conform to the 1999 presentation.
Non-European Perishables Operations. Revenues from the non-European
perishables operations increased $1.5 million, or 125.6%, to $2.6 million in
1999 from $1.1 million in 1998, as a result of increased volume in Argentina.
Dry Good Operations. Revenues from the dry good operations increased $0.3
million, or 2.6%, to $10.2 million in 1999 from $9.9 million in 1998, as a
result of increased business with a major customer and new business with
Deutsche Post AG as a result of the contract that began in September 1999. The
increase was offset by a decrease of 4.1% related to changes in currency
exchange rates relative to the previous period.
Cost of Sales and Gross Profit. Gross profit increased to $30.2 million year
in 1999 from $30.0 million in 1998, primarily due to increased sales volume.
Gross profit as a percentage of revenues decreased from 22.0% in 1998 to 19.5%
in 1999.
European Perishables Operations. The decrease in gross margin was primarily
due to additional freight costs incurred to transport crates over longer
distances in Europe and a non-recurring charge for RTC breakage in Europe.
Additional costs, net of a reimbursement from Schoeller Plast AG, were incurred
in 1999 as markets expanded in Europe. The cost reimbursement agreement with
Schoeller Plast AG expired as of December 31, 1999. Cost of sales for 1999
reflect accounting charges for the full year in the treatment of washing costs
in Denmark, an increased expense of $0.6 million, and an additional accrual for
deposits payable based on the actual number of RTCs outstanding to customers in
Spain, an increased expense of $0.7 million. In addition, cost of sales for
1999 reflect the correction of an information systems error that created an
underreporting of transportation costs, resulting in increased cost of sales of
$0.5 million.
Non-European Perishables Operations. Gross margin for non-European
perishables operations sales was slightly lower in 1999 compared to 1998 due to
additional start-up costs incurred in South American countries to expand market
share.
Dry Good Operations. Gross margin for sales of dry goods, as a percentage of
dry good sales, increased from 13.0% in 1998 to 26.5% in 1999, primarily due to
a reduction in internal crate handling costs.
Selling, General and Administrative Expenses and Other Operating Income
(Expenses), Net. Selling, general and administrative expenses and other
operating income (expenses), net increased $0.5 million, or 1.8%, to $23.9
million in 1999 from $23.4 million in 1998 and decreased as a percentage of
revenues to 15.4% in 1999 from 17.2% in 1998. Certain expenses increased in
1999 accompanying growth in sales volume. Selling, general and administrative
expenses and other operating income (expenses), net as a percentage of revenues
decreased due to expenditures made in 1998 to prepare for the increase in
business that IFCO anticipated in 1999. Thus, the dollar increase was at a
lower rate than the growth in revenues. Selling, general and administrative
expenses and other operating income (expense), net for 1998 reflects
reclassification of sales of granulate to revenues and reclassification of
factoring costs and expense to other income and expense to conform to the 1999
presentation.
3
Merger and Integration Costs. Merger and integration costs consist of $2.8
million for transaction costs incurred by PalEx, which the Company agreed to
reimburse, and $0.7 million for severance pay and other costs related to the
Company's initial public offering of its ordinary shares.
Other Income and Expense. Interest expense increased $0.4 million, or 3.6%,
to $12.5 million in 1999 from $12.1 million in 1998. Interest income decreased
$1.0 million, or 62.7%, to $0.6 million in 1999 from $1.6 million in 1998. The
decrease in interest income was primarily a result of the reduction of
receivables from related parties due to the requirements under the Company's
credit facilities. Other income and expense for 1998 reflects reclassification
of factoring costs and expense from other operating income to conform to the
1999 presentation.
Foreign currency losses increased $0.9 million, or 480.9%, to $1.1 million
in 1999 from $0.2 million in 1998, primarily due to changes in the U.S. dollar
and British pound exchange rates.
Losses from equity investments decreased $1.0 million, or 36.2%, to $1.7
million in 1999 from $2.7 million in 1998.
As a result of the foregoing, net loss before minority interest increased to
$12.8 million in 1999 from $7.6 million in 1998.
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Revenues. The Company's total revenues increased $17.7 million, or 14.9%, to
$136.2 million in 1998 from $118.5 million in 1997. Revenues for 1997 and 1998
reflect reclassification of sales of granulate from other operating income to
revenues to conform to the 1999 presentation.
European Perishables Operations. Revenues from the European perishables
operations increased $16.4 million, or 15.1%, to $125.1 million in 1998 from
$108.7 million in 1997. This increase was primarily attributable to an increase
of 20.6% in the number of RTCs used in the round-trip systems for fresh
produce, and the number of trips per RTC. This volume increase was offset by a
2.8% decline in average prices that was primarily caused by volume discounting
in the United Kingdom and a 1.6% decline related to changes in currency
exchange rates relative to the previous period. The increased use was primarily
a result of IFCO's establishing new retail partners, favorable harvests of
citrus fruit, and increased business from existing customers. Revenues for
European perishables operations for 1997 and 1998 reflect reclassification of
sales of granulate from other operating income to revenues to conform to the
1999 presentation.
Non-European Perishables Operations. Revenues from the non-European
perishables operations increased $0.8 million to $1.1 million in 1998 from $0.3
million in 1997, as a result of increased volume in Argentina.
Dry Good Operations. Revenues from the dry good operations increased $0.3
million, or 3.4%, to $9.9 million in 1998 from $9.6 million in 1997, as a
result of increased business with MTS's major customer.
Cost of Sales and Gross Profit. The Company's total cost of sales increased
$6.6 million, or 6.6%, to $106.2 million in 1998 from $99.6 million in 1997,
but gross profit as a percentage of revenues increased from 16.0% for 1997 to
22.0% for 1998. These margin gains are primarily a result of the following:
. increased utilization of the Company's reconditioning depots;
. the development of more internally operated cleaning facilities, as
opposed to contracting with third parties;
. decreased container breakage costs as a percentage of revenues, primarily
as a result of customer education initiatives; and
. decreased RTC trips between the various handling locations in the RTC
movement cycle.
4
European Perishables Operations. Cost of sales increased $6.1 million, or
6.6%, to $96.9 million in 1998 from $90.8 million in 1997. The percentage
increase in cost of sales was lower than the percentage increase in related
revenues for the same period primarily as a result of increasing economies of
scale.
Non-European Perishables Operations. Cost of sales increased $0.5 million,
or 227.4%, to $0.7 million in 1998 from $0.2 million in 1997. The percentage
increase in cost of sales was lower than the percentage increase in related
revenues for the same period due to increasing stabilization of the start-up
organization in Argentina and increasing economies of scale.
Dry Good Operations. Cost of sales was substantially unchanged, both in
absolute terms and as a percentage of revenues.
Selling, General and Administrative Expenses and Other Operating Income
(Expenses), Net. Selling, general and administrative expenses and other
operating income (expenses), net increased $5.9 million, or 33.9%, to $23.4
million in 1998 from $17.5 million in 1997 and increased as a percentage of
revenues to 17.2% in 1998 from 14.8% in 1997. The increase was due to
additional staff in electronic data processing, controlling, and logistic
management. Selling, general and administrative expenses and other operating
income (expense), net for 1997 and 1998 reflects reclassification of sales of
granulate to revenues and reclassification of factoring costs and expense to
other income and expense to conform to the 1999 presentation.
Other Income and Expense. Interest expense decreased $2.2 million, or 15.4%,
to $12.1 million in 1998 from $14.3 million in 1997. Interest income decreased
$2.3 million, or 58.7%, to $1.6 million in 1998 from $3.9 million in 1997. The
net reduction in interest costs was primarily a result of less average debt and
more favorable interest rates related to IFCO Europe's debt refinancing early
in 1998. Other income and expense for 1997 and 1998 reflects reclassification
of factoring costs and expense from other operating income to conform to the
1999 presentation.
Primarily as a result of the foregoing, net loss before minority interest
decreased to $7.6 million in 1998 from $11.8 million in 1997.
Liquidity and Capital Resources
The Company has historically financed its growth with bank financing, the
funds from which have been primarily used to purchase additional RTCs.
Cash Flows
Operating activities provided $36.3 million of cash in 1999 compared to
$59.9 million in 1998, which represents a decrease of $23.6 million, or 39.4%.
During 1998, the Company increased its factoring of accounts receivable, which
led to a one-time positive cash flow of $25.4 million. Accounts receivable, net
of factoring volume, increased $4.0 million in 1999 compared to a decrease of
$27.6 million in 1998 caused by the one-time factoring proceeds. During the
same period, accounts payable, accrued liabilities, and other liabilities
increased $15.8 million compared to an increase of $6.9 million in 1998. These
increases accompanied the higher sales volume in 1999 as compared to 1998.
Operating activities provided $59.9 million of cash in 1998 compared to
$29.5 million in 1997, which represents an increase of $30.4 million, or
102.9%. The net increase was due to several factors. In 1997, the Company
experienced an increase in accounts receivable of $11.6 million. In 1998, the
Company reduced accounts receivable through increased factoring activities,
which led to additional positive cash flow of $2.2 million. In 1997, the
Company decreased inventory by $7.4 million compared to a $1.6 million increase
in 1998. The Company obtained additional liquidity through factoring proceeds
of $25.4 million in 1998.
5
Accounts payable increased $2.1 million in 1997 and $10.9 million in 1998 due
to higher sales volume in each period. Accounts payable for 1997 related to
certain non-cash RTC purchases have been reclassified to conform to the 1999
presentation.
Cash used in investing activities in 1999 was $36.5 million compared to
$38.8 million in 1998, a decrease of $2.3 million, or 5.9%. The majority of
cash used in both periods was for the purchase of RTCs and property, plant, and
equipment. The purchase of RTCs decreased by $10.4 million to $27.7 million in
1999 from $38.1 million in 1998, mainly because of a lower average price for
purchased RTCs due to the product mix. Cash paid for merger costs and new
information technology was $5.1 million in 1999.
Cash used in investing activities in 1998 was $38.8 million compared to
$40.3 million in 1997, which represents a decrease of $1.5 million, or 3.8%.
The majority of cash used in both years was for the purchase of RTCs and other
property, plant, and equipment, which is the principal reason for the decrease
in cash used in investing activities. The investment in RTCs in 1998 was less
due to the decreased breakage of RTCs that the Company experienced in 1998.
Financial assets and property and equipment were also sold in 1998 and
contributed $2.9 million in cash. Certain non-cash RTC purchases for 1997 have
been reclassified to conform to the 1999 presentation.
Cash used in financing activities was $7.8 million in 1999 compared to cash
used in financing activities of $6.4 million in 1998. The payments on long-term
bank borrowings and capital lease obligations were partially offset by proceeds
from the revolving bank borrowings.
Cash used in financing activities was $6.4 million in 1998 compared to cash
provided by financing activities of $5.0 million in 1997. The principal cause
for this shift to cash used in financing activities was a significant
refinancing of substantially all bank debt by the Company in 1998, which
resulted in proceeds of $91.8 million from long-term bank borrowings and a more
significant decrease in short- and medium-term bank borrowings. In 1997, $24.9
million in proceeds were generated by the sale of redeemable convertible
preferred stock.
During 1997, General Electric Erste Beteiligungs GmbH ("GE Erste") acquired
a 24% interest in IFCO Europe, which is responsible for the European
perishables operations, by purchasing redeemable convertible preferred stock
for $24.9 million. The proceeds from this capital contribution were primarily
used to fund IFCO Europe's operations. In connection with this initial
investment in the European operations in 1997, GE Erste received options to
increase this investment to 49% and then up to 100% after specified dates had
passed and criteria had been met. GE Erste also received options to purchase up
to 100% of IFCO International after specified dates had passed and criteria had
been met. In connection with these transactions, GE Erste also received the
right to require Schoeller Industries to contribute 100% of its interests in
MTS, which is responsible for IFCO's dry good operations, to IFCO Europe. As
part of the transactions related to the merger, GE Capital Corporation and GE
Erste contributed all of their interests and released all of their rights to
IFCO.
The Merger and Initial Public Offering
In March 2000, IFCO completed the merger of PalEx, Inc., with and into
Silver Oak Acquisition Corp., IFCO's newly formed, wholly owned subsidiary,
which changed its name to "PalEx, Inc." As a result of the merger and related
transactions, IFCO owns all of the stock of the IFCO Companies and PalEx. In
the merger, PalEx stockholders received merger consideration with a total value
of $9.00 per share consisting of cash and/or the Company's ordinary shares for
each share of PalEx common stock. The total merger consideration for all the
shares of PalEx common stock was $71.4 million in cash and 7.4 million of
IFCO's ordinary shares based on elections by PalEx stockholders and adjustments
pursuant to the merger agreement. The total consideration for the merger was
$184.5 million for the PalEx common stock plus the assumption of debt of PalEx,
which was $153.5 million as of March 8, 2000.
In connection with the merger, IFCO also completed an initial public
offering of 13.0 million ordinary shares in March 2000 and subsequently issued
an additional 1.95 million ordinary shares upon the
6
underwriters' exercise of their overallotment option. The total net proceeds to
the Company from the IPO, including the exercise of the overallotment option,
were $210.0 million. The net proceeds from the IPO were used, along with cash
on hand, the net proceeds from of the offering of 10 5/8% Senior Subordinated
Notes Due 2010 ("Senior Subordinated Notes"), and borrowings from the Company's
new senior credit facility, to repay a substantial portion of the debt of the
IFCO Companies and PalEx, to pay the cash portion of the merger consideration
to PalEx stockholders, to fund the cash payment due to GE Capital described
below, and to fund IFCO's purchase of the remaining joint venture interest in
IFCO-U.S.
In connection with the merger, Schoeller Industries and Gebruder Schoeller
Beteiligungsverwaltungs GmbH contributed to IFCO, directly or indirectly, the
outstanding capital shares of IFCO Europe, MTS, and IFCO International owned by
them.
In addition, IFCO, together with Schoeller Industries, the shareholders of
Schoeller Industries, Schoeller Plast Industries GmbH, and Gebruder Schoeller
entered into the Option Release and IPO-Facilitation Agreement with GE Capital
and GE Erste, in connection with the merger and the IPO. Pursuant to that
agreement, Schoeller Logistic Technologies Holding GmbH issued a DM45.0
million, or approximately $20.9 million , convertible debenture to GE Erste in
exchange for the contribution of the preferential share of IFCO Europe owned by
GE Erste. The Company also paid GE Capital DM43.0 million, or approximately
$21.1 million (as of March 8, 2000), out of the net proceeds of the IPO, the
offering of the Senior Subordinated Notes, and the initial borrowings under the
new senior credit facility in consideration of the release of GE Capital's and
GE Erste's options and other rights to purchase shares of the IFCO Companies.
Credit Facilities
On the closing date of the IPO and the merger, IFCO and PalEx entered into a
new syndicated, secured senior credit facility, which was amended and restated
on March 31, 2000, to complete the syndication. The syndicate of banks,
financial institutions, and other entities includes Canadian Imperial Bank of
Commerce and Bank One, Texas, NA. PalEx is the borrower, and IFCO and IFCO's
other subsidiaries are guarantors. CIBC World Markets Corp. and Bank One
Capital Markets, Inc., are the co-arrangers, and Bank One, Texas, NA is also
the administrative agent. The new senior credit facility replaced the former
credit facilities of IFCO Europe discussed below and PalEx's senior credit
facility, the outstanding balances of all of which were repaid in March 2000
with cash on hand, the net proceeds of the IPO and the offering of the Senior
Subordinated Notes discussed below, and initial borrowings under the new senior
credit facility.
The new senior credit facility provides for borrowings of up to $235.0
million and consists of (1) a multi-draw term loan facility in an aggregate
principal amount of up to $108.75 million and (2) a revolving credit facility
providing for revolving loans to PalEx of up to $126.25 million. The term loan
may be borrowed in up to 20 drawings commencing on the closing date of the IPO
and the merger and ending on the third anniversary of the closing date. The
term loan facility may be used only to finance permitted acquisitions.
Permitted acquisitions include any acquisition in which the total consideration
we pay does not exceed $25.0 million. The aggregate amount of consideration
IFCO or its subsidiaries pay in connection with permitted acquisitions during
any consecutive 12-month period may not exceed $90.0 million.
IFCO is able to draw on the revolving credit facility from the closing date
of the IPO and the merger through the third anniversary of the closing date.
The revolving credit facility matures on the sixth anniversary of the closing
date. The revolving credit facility may be utilized to make capital
expenditures and to finance the working capital needs of IFCO and its
subsidiaries in the ordinary course of business and to pay fees and expenses
related to the transactions. The borrowing base under the revolving credit
facility is based on a percentage of IFCO's eligible accounts receivable,
eligible inventory, and eligible RTCs. Eligible inventory includes crates and
pallets that IFCO and its subsidiaries own for lease to third parties, and
eligible RTCs are those owned by IFCO-U.S.
7
The outstanding amounts under the term loan and the revolving credit
facility, as well as the swingline facility described below, bear interest at
interest rates determined based upon the Company's consolidated total leverage
ratio, which is defined in the new senior credit facility, and changes
quarterly commencing with September 30, 2000. The rates range from a high of
300 basis points over LIBOR and 200 basis points over prime rate, if the
Company's consolidated total leverage ratio is greater than 3.25, to a low of
200 basis points over LIBOR and 100 basis points over prime rate, if the
Company's consolidated total leverage ratio is less than 1.75. The new senior
credit facility establishes a 25 basis point increase if the consolidated total
leverage ratio is 1.75 to less than 2.25 and a similar increase for each .50
increase in the consolidated total leverage ratio. Generally the Company may
elect one-, two-, three- and six-month LIBOR.
The outstanding amounts under the term loan and the revolving credit
facility are repayable in 12 consecutive quarterly installments commencing 39
months after the closing date in an aggregate amount for each 12-month period
equal to 20% in the first period, 30% in the second period, and 50% in the
third period.
PalEx has available to it a multi-currency swingline facility for short-term
borrowings denominated in certain readily available and freely tradable
currencies in an amount not to exceed $50.0 million and a dollar swingline
facility in an amount not to exceed $25.0 million. Any multi-currency swingline
loan or dollar swingline loan reduces availability under the revolving facility
on a dollar-for-dollar basis. PalEx may obtain letters of credit, in an amount
not in excess of $25.0 million of the revolving facility, issued by Canadian
Imperial Bank of Commerce and Bank One, NA. Drawings under any letter of credit
will be reimbursed by PalEx on the same business day.
PalEx's obligations under the new senior credit facility are guaranteed by
IFCO and each of its existing and future direct and indirect subsidiaries,
other than subsidiaries deemed immaterial by the administrative agent. The new
senior credit facility and the guarantees are secured by a perfected first
priority security interest in all of the loan parties' substantial tangible and
intangible assets, except for those assets the co-lead arrangers determine in
their sole discretion that the cost of obtaining the security interest are
excessive in relation to the value of the security.
The new senior credit facility contains a number of covenants that, among
other things, limit IFCO's and its subsidiaries' ability to dispose of assets,
incur additional debt, merge or consolidate, pay dividends, create liens on
assets, enter into sale and leaseback transactions, make investments, loans, or
advances, make acquisitions, make capital expenditures, prepay debt, or engage
in certain transactions with affiliates, and otherwise restricts certain
corporate activities. In addition, the new senior credit facility requires that
IFCO and its subsidiaries comply with specified ratios and tests, including a
minimum net worth test, a fixed charge coverage ratio, an interest coverage
ratio, a leverage ratio, and a minimum EBITDA requirement.
The new senior credit facility contains customary events of default,
including non-payment of principal, interest, or fees, material inaccuracy of
representations and warranties, violation of covenants, cross-default to
certain other debt, certain events of bankruptcy and insolvency, certain events
under ERISA, material judgments, actual or asserted invalidity of any
guarantee, security document, subordination provision, or security interest,
and a change of control in certain circumstances.
On March 8, 2000, IFCO issued (Euro)200.0 million principal amount of Senior
Subordinated Notes, which translates to approximately $181.9 million, in a
private placement. The total net proceeds to the Company from the issuance of
the Senior Subordinated Notes were $184.7 million. The Senior Subordinated
Notes mature on March 15, 2010. Interest at the rate of 10 5/8% per year from
the date of issuance is payable semiannually in arrears on each March 15 and
September 15 commencing September 15, 2000. The Senior Subordinated Notes are
not secured, but are guaranteed by the Company's material subsidiaries. The
notes and the guarantees rank behind all of IFCO's existing and future senior
debt, including IFCO's obligations under the new senior credit facility. The
indenture governing the Senior Subordinated Notes contains a number of
significant covenants, which restrict IFCO's corporate and business activities,
including its ability to dispose of assets, incur additional debt, prepay other
debt, pay dividends, repurchase or redeem capital stock, enter into specified
8
investments or create new subsidiaries, enter in to sale and lease-back
transactions, make specific types of acquisitions, engage in mergers or
consolidations, create liens, or engage in certain transactions with
affiliates.
In 1998, IFCO Europe negotiated a new financing arrangement with a lending
syndicate for a total of DM181.0 million, or $84.2 million The amount of credit
available under the financing arrangement was reduced in 1999 to DM160.5
million, or $74.6 million. The credit facility consisted of DM125.5 million, or
$58.4 million, available under a Senior Facility Agreement and DM35.0 million,
or $16.3 million, available under a Senior Subordinated Facility Agreement.
The Senior Facility Agreement consisted of a DM64.0 million, or $29.8
million, fixed term loan and two revolving credit facilities totaling DM61.5
million, or $28.6 million. All borrowings under the Senior Facility Agreement,
DM100.5 or $51.5 million of which was outstanding as of December 31, 1999,
contained principal reduction provisions, matured in 2004, and accrued interest
at EURIBOR plus 1.75%, or 5.31% as of December 31, 1999. The amount available
for future borrowings under the Senior Facility Agreement as of December 31,
1999, was DM 25.0 million or $12.8 million.
Outstanding borrowings under the Senior Subordinated Agreement, which
totalled DM35.0 million, or $18.0 million, as of December 31, 1999, accrued
interest at a rate of EURIBOR plus 2.75%, or 6.31% as of December 31, 1999. The
Senior Subordinated Agreement did not have scheduled principal reductions until
a balloon payment in 2005.
As of December 31, 1999, IFCO Europe would not have been in compliance with
certain financial covenants in the Senior Facility Agreement and the Senior
Subordinated Agreement. IFCO Europe did not obtain waivers for these
violations, since these credit facilities were repaid in full in March 2000
upon completion of the IPO and related transactions.
The new senior credit facility permits, and the Senior Facility Agreement
and Senior Subordinated Agreement previously permitted, specified levels of
receivable factoring. During 1994, IFCO Europe had entered into a factoring
agreement under which IFCO Europe could offer all of its trade receivables to a
factoring agent. Under the factoring agreement, the sales price is the nominal
value of the receivable less a factoring fee of 0.6% of the nominal value of
the factored receivables. The factoring agent has the right to collect the
receivables and bears the collection risk. The factoring agent is required to
remit 75% of the factored receivables to IFCO Europe. The remainder, less the
factoring charge, is held in an escrow account and is remitted to IFCO Europe
following collection. The interest rate on cash advances relating to factored
receivables is based on the three-month EURIBOR rate plus 1.25%, or 4.59% as of
December 31,1999. IFCO Europe factored 50% of its revenues and incurred
factoring and interest charges under this agreement of $4.0 million in 1998.
During 1999, IFCO Europe factored 48% of its revenues and incurred factoring
and interest charges of $4.3 million.
At December 31, 1999, IFCO had entered into several capital lease agreements
resulting in total capital lease obligations of $34.5 million.
To reduce its variable rate interest risk, IFCO Europe entered into an
interest rate cap agreement. As of December 31, 1999, this interest rate cap
covered DM101.4 million or $52.0 million of its outstanding debt and limited
interest rates applicable to those borrowings to 6.75% for $41.2 million of
borrowings under the Senior Facility Agreement and to 7.75% for $10.8 million
of borrowings under the Senior Subordinated Agreement. The costs of this
agreement are included in interest expense rateably over the term of the
agreement.
Capital Expenditures
IFCO's aggregate capital expenditures were $30.8 million for 1999, $40.2
million for 1998, and $39.6 million for 1997. These capital expenditures were
principally for the purchase of RTCs. IFCO anticipates that a planned expansion
of the European perishables RTC pool will require investments of $50.3 million
in 2000 and
9
$55.7 million in 2001. For the planned expansion of the non-European
perishables RTC pool, IFCO projects capital expenditures of $26.3 million in
2000 and $37.1 million in 2001. The Company currently anticipates capital
expenditures for additional and replacement pallet and drum manufacturing
equipment and pallet pool expenditures of $27.0 million during 2000 and $24.2
million during 2001.
Future Liquidity Needs
IFCO believes it will be able to finance operations and scheduled debt
repayments from operating cash flow and additional borrowings under the new
senior credit facility for the foreseeable future. The planned capital
expenditures will be financed by the new senior credit facility. IFCO's ability
to make scheduled payments of principal or interest on, or to refinance, its
debt, or to fund planned capital expenditures, will depend on its future
performance. IFCO's ability to do so is subject to general economic, financial,
competitive, legislative, regulatory, and international and U.S. and European
domestic political factors and other factors that are beyond its control. IFCO
may not generate sufficient cash flow from operations, anticipated revenue
growth and operating improvements may not be realized or future capital may not
be available in an amount sufficient, or on acceptable terms, to enable it to
service its debt or to fund its other liquidity needs.
Impact of Inflation
The results of IFCO's operations for the periods discussed have not been
materially affected by inflation.
Unaudited Pro Forma Combined and Consolidated Statement of Operations for 1999
The following table presents pro forma results of the Company as if the
merger, IPO, and related transactions had occurred as of January 1, 1999. The
pro forma adjustments include:
. amortization of goodwill as a result of the acquisition of PalEx, the
purchase of the remaining interest in IFCO-U.S., and the acquisition of
options and rights of GE Capital and GE Erste
. interest expense reduction resulting from the payment of debt using
proceeds of the IPO and Senior Subordinated Notes
. additional interest expense due on the Senior Subordinated Notes
. the consolidation of revenues and expenses of IFCO-U.S. as a wholly owned
subsidiary, the elimination of the loss accounted for under the equity
method, and the elimination of previously recorded interest expense on
debt assumed to be paid off as of the beginning of the year
. amortization of new loan costs
. the pro forma tax effect of all other pro forma adjustments
10
IFCO Systems N.V.
Unaudited Pro Forma Combined and Consolidated Statement of Operations
For the Year Ended December 31, 1999
(In thousands, except for share and per share data)
IFCO IFCO
Systems Systems
Pro Forma Pro Forma
IFCO PalEx Combined Adjustments Combined
-------- -------- -------- ----------- -----------
REVENUES................ $154,726 $386,887 $541,613 $5,751 $ 547,364
COST OF GOODS SOLD...... 124,485 311,735 436,220 5,376 441,596
INVENTORY VALUATION
ADJUSTMENT............. -- -- -- -- --
-------- -------- -------- ------ -----------
Gross Profit.......... 30,241 75,152 105,393 375 105,768
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 24,511 44,249 68,760 2,144 70,904
MERGER AND INTEGRATION
COSTS.................. 3,519 -- 3,519 -- 3,519
AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE
ASSETS................. 289 4,774 5,063 4,208 9,271
RESTRUCTURING CHARGE.... -- -- -- -- --
OTHER OPERATING INCOME,
NET.................... (639) -- (639) -- (639)
-------- -------- -------- ------ -----------
Income from
operations........... 2,561 26,129 28,690 (5,977) 22,713
NET INTEREST COST....... (11,934) (14,996) (26,930) 5,707 (21,223)
OTHER INCOME (EXPENSE),
NET.................... (3,070) 1,397 (1,673) 1,702 29
-------- -------- -------- ------ -----------
(Loss) income before
provision (benefit) for
income taxes........... (12,443) 12,530 87 1,432 1,519
MINORITY INTEREST....... (1,291) (1,291) (1,291)
INCOME TAX PROVISION
(BENEFIT).............. 320 5,777 6,097 2,033 8,130
-------- -------- -------- ------ -----------
Net (loss) income..... $(14,054) $ 6,753 $ (7,301) $ (601) $ (7,902)
======== ======== ======== ====== ===========
Net loss per share--
basic and diluted...... $ (0.20)
===========
Shares used in computing
net loss per share--
basic and diluted...... 40,432,278
===========
11
The following table presents pro forma earnings before interest, taxes,
depreciation and amortization ("EBITDA") and non-recurring charges. Pro forma
EBITDA and non-recurring charges is not presented 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 an accepted
financial indicator of the ability to incur and service debt. Pro forma EBITDA
and non-recurring charges as presented is not necessarily comparable with
similarly titled measures presented by other companies.
Non-recurring items for 1999 include $1.3 million for minority interest,
$3.5 million of merger and integration costs, and $1.7 million for losses from
equity entities. Non-recurring items for 1998 include $1.3 million for minority
interest and $2.7 million for losses from equity entities.
IFCO 1999 IFCO
1998 1999 1999 1999 Pro Forma Pro Forma
IFCO IFCO PalEx Combined Adjustments Combined
------- -------- ------- -------- ----------- ---------
Net income (loss)....... $(8,825) $(14,054) $ 6,753 $(7,301) $(1,804) $(9,105)
Interest................ 10,494 11,934 14,996 26,930 (4,504) 22,426
Taxes................... 210 320 5,777 6,097 2,033 8,130
Depreciation and
amortization........... 28,434 36,094 14,669 50,763 5,975 56,738
Non-recurring items..... 4,000 6,548 -- 6,548 -- 6,548
------- -------- ------- ------- ------- -------
EBITDA.................. $34,313 $ 40,842 $42,195 $83,037 $ 1,700 $84,737
Business Outlook
The completion of the IPO and the merger, the sale of the Senior
Subordinated Notes, and the securing of a new senior credit facility position
the Company to invest in the expansion of existing markets, the entry into new
markets, new and improved products, maintenance of existing facilities, and
strategic expansion of profitable business segments. The Company's goal is to
create and perpetuate an identity as a one-stop materials management and
handling resource for its customers. IFCO will continue to develop its
infrastructure as a merged company, both in terms of physical locations as well
as with strong, managerially experienced, customer-oriented employees.
Research and Development Activities
Research and development at the Company is not a concept created by the
merger. The growth of the IFCO Companies reflects a history of devotion to
innovation and creativity, which has been adopted as a core value of IFCO. The
Company will continue to develop innovations in its products and in the way it
serves its customers. In doing so the Company expects to see the same success
and growth as the IFCO Companies enjoyed.
The Company views research and development activities as three-dimensional:
(1) new products and services for its current and prospective customers; (2)
expansion into new regions with its existing products and services; and (3)
addition of new services to its existing service offerings.
IFCO is focused on the creation, development, and implementation of e-
logistics, a concept designed to promote the paperless flow of goods throughout
the distribution chain. E-logistics uses IFCO's RTC systems to combine
information flow, to a great extent facilitated by the Internet, with the
physical flow of goods. The Company believes e-logistics enables customers and
retailers to achieve additional efficiencies throughout the distribution chain.
IFCO is also developing its business through geographic expansion of its RTC
system for European produce, primarily incurring developing expenses in North
America and, to a lesser extent, South America. In addition, the Company is
leveraging off of its expertise to develop new systems and services offerings.
IFCO is expending significant development efforts in this manner, primarily in
the area of pallet systems and services in North America and dry goods systems
in Europe.
IFCO regularly engages in research and development activities in all of its
existing lines of businesses with respect to product, service, and system
innovation.
12
Employment Information
As of December 31, 1999, 1998, and 1997, IFCO employed 630, 530, and 421
people, respectively, throughout its global operations.
Seasonality
IFCO's RTC revenues vary depending on the fruit and vegetable-harvesting
season in different countries. Historically, a higher portion of its sales and
operating income has been recognized in the fourth quarter than in the first
quarter, which has historically been its weakest quarter. Revenues in Germany
and France, for example, are highest in summer and fall, whereas revenues in
Southern Europe reach a peak late in fall and throughout winter. Seasonality
also has an influence on pricing, as transportation costs incurred during the
winter to transport IFCO's RTCs from warmer countries in Southern Europe are
higher than the costs to transport the RTCs from closer locations in Central
Europe. IFCO accordingly charges customers in these Southern European countries
higher usage fees.
Related Party Supplier
In 1997, a subsidiary of IFCO Europe entered into a ten-year supply
agreement with Schoeller Plast Industries GmbH, a 100%-owned subsidiary of
Schoeller Industries, to provide the IFCO Companies with substantially all of
their new RTCs. The supply agreement was later assigned to Schoeller Plast AG,
an indirect 80%-owned subsidiary of Schoeller Plast Industries GmbH. Changes in
pricing may occur when Schoeller Plast AG's production costs vary by more that
15%. Under the terms of the supply agreement, IFCO receives a fixed price per
kilogram for broken containers, which are taken back by Schoeller Plast AG.
Foreign Currency Translation Effects
The functional currency of IFCO is the Deutsch mark. IFCO has elected the
U.S. dollar as its reporting currency and consequently, assets, liabilities,
revenues, and expenses are subject to exchange rate fluctuations between the
U.S. dollar and the Deutsch mark. For the translation of the Company's
financial statements into U.S. dollars, the exchange rate at the respective
balance sheet date is used for assets and liabilities and a weighted average
exchange rate for the period for revenues, expenses, gains, and losses. The
following exchange rates for the translation of the Deutsch mark into U.S.
dollars were used:
Weighted Rate at the
average balance
Period rate(1) sheet date(2)
------ -------- -------------
Year ended December 31, 1997.......................... 0.5757 0.5580
Year ended December 31, 1998.......................... 0.5685 0.6140
Year ended December 31, 1999.......................... 0.5454 0.5125
- --------
(1) The average of the buying rates for the Deutsch mark by the Federal Reserve
Bank of New York, expressed as U.S. dollars per DM1.00, on the last
business day of each full month during the indicated period.
(2) The buying rate, expressed as U.S. dollars per DM1.00, as of the indicated
balance sheet date.
In "Liquidity and Capital Resources" the balance sheet date rates above are
used to translate Deutsch-mark-denominated amounts into approximate U.S. dollar
amounts. Otherwise in this report, approximate dollar amounts are provided for
euro-denominated amounts based on the Federal Reserve Bank of New York noon
buying rate on the date indicated or on May 24, 2000, (Euro)1.00 = $0.9096, if
no date is indicated. Approximate dollar amounts are provided for Deutsch-mark-
denominated amounts based on this euro rate and the fixed conversion rate of
(Euro)1.00 = DM1.95583, resulting in a rate of DM1 = $0.4651. The exchange
rates as of March 8, 2000, the closing date for the merger and the IPO, were
(Euro)1.00 = $0.9576 and DM1 = $0.4896.
13
Euro Currency
On January 1, 1999, conversion rates of the national currencies of eleven
European Union members, including Germany, were fixed against a common
currency, called the euro. Each participating country's currency is legal
tender during a transition period from January 1, 1999, until January 1, 2002,
after which only the euro will be used. IFCO have assessed their internally
developed and purchased information technology applications to determine the
changes needed to process euro-denominated transactions. As a result, IFCO's
systems have been changed or will be changed to process euro-denominated
transactions. Additional costs associated with the transition period are
expected to be minimal and are not expected to have a material adverse effect
on IFCO's financial results. In the future, the Company will use the euro as
its functional currency in connection with its new information technology
systems.
Quantitative and Qualitative Disclosures About Market Risks
IFCO is exposed to two broad classes of risk: interest rate risk and
currency exchange rate fluctuations.
IFCO's exposure to interest rate risk relates primarily to its variable
rate debt. At December 31, 1999, the carrying value of its total variable rate
debt was $69.6 million. To help to reduce variable rate interest risk, the
IFCO Companies have entered into an interest rate cap agreement, which as of
December 31, 1999, covered $52.0 million of the outstanding debt and limits
interest rates related to these borrowings to 6.75% for $41.2 million of
borrowings under the Senior Facilities Agreement and to 7.75% for $10.8
million of borrowings under the Senior Subordinated Agreement. The following
table shows interest sensitivities of hypothetical changes in interest rates
on the debt as of December 31, 1999, net of any interest rate differential
received on the cap:
Change in interest rate in
percentage points from
December 31, 1999, borrowing
level.......................... -3% -1% +1% +3% +5% +1%
Increase (decrease) in net
interest expense (in
thousands)..................... $(2,217) $(739) $739 $1,354 $1,726 $2,656
IFCO is exposed to a degree of currency risk by virtue of conducting a
portion of its business in currencies other than the Deutsch mark. The
Company's currency risk arises from foreign currency receivables as well as
from firm commitments to purchase services and supplies in the future in
currencies other than the Deutsch mark. Foreign currency transaction gains and
losses have not been material to the results of operations during the past
three years. Currently, IFCO's policy is not to use derivative financial
instruments to manage its exposure to fluctuations in foreign currency
exchange rates. The introduction of the euro should further reduce IFCO's
exposure to exchange rate fluctuations from its European operations.
Year 2000
The Company is unaware of any material impact resulting from or that could
result from the year 2000 issue.
Forward-looking Disclaimer
Some of the statements contained in this report discuss future
expectations, contain projections of results of operations or financial
condition of IFCO, or state other forward-looking information. These
statements may include financial information and/or statements for periods
following the period covered by this report. You can find many of these
statements by looking for words like believes, expects, anticipates,
estimates, or similar expressions used in this report.
These forward-looking statements may be affected by known and unknown
risks, uncertainties, and other factors that could cause the actual results to
differ materially from those contemplated by the statements. The forward-
looking information is based on various factors and was derived using numerous
assumptions that we
14
believe to be reasonable. Risks and uncertainties include the following: (1)
IFCO's ability to effectively integrate its operations and achieve its
operational and growth objectives; (2) the competitive nature of the container
businesses, including RTCs, pallets, and industrial containers; (3) customer
demand and business and economic cycles; (4) the ability to finance capital
expenditures and growth; (5) conditions in lumber markets, (6) seasonality, (7)
weather conditions; (8) changes in national or international politics and
economics; (9) currency exchange rate fluctuations; and (10) changes in capital
and financial markets, including the performance of companies listed on the
Frankfurt Stock Exchange or the Nasdaq National Market.
Important factors that could cause IFCO's actual results to be materially
different from the forward-looking statements are also disclosed throughout
this report.
15
MANAGEMENT
Responsibility for the management of IFCO lies with its board of directors,
consisting of A members and B members. The maximum number of members of the
board of directors shall be nine, and the number shall be determined by the
general meeting of shareholders with the understanding that there shall be at
least one A member. The B members are responsible for the general course of
affairs of the Company and its enterprise. The A members are responsible for
the day-to-day management of the Company and its enterprise. The members of the
board of directors are appointed by the general meeting of shareholders. The A
members serve for an indefinite period of time. The B members must resign no
later than the close of the annual shareholders meeting held in the fourth year
after the year of their last appointment, but can be reappointed. IFCO can be
represented by the board of directors, by each A member individually, and by
each B member acting jointly with an A member. Executive officers are appointed
by the board of directors and constitute the equivalent of a management board
of a company with a supervisory board and management board management
structure.
IFCO's directors and executive officers are as follows:
Name Age Position
---- --- --------
Christoph Schoeller......... 42 Chairman and B Director
Martin A. Schoeller......... 44 Chief Executive Officer and A Director
Cornelius Geber............. 48 B Director
Sam W. Humphreys............ 40 B Director
Randall Onstead............. 44 B Director
Eckhard Pfeiffer............ 58 B Director
Dr. Frank Tofflinger........ 39 B Director
James Griffin............... 46 Chief Executive Officer, North America
David Lee................... 51 Chief Executive Officer, Europe and Global
Systems
Vance K. Maultsby, Jr....... 47 Executive Vice President, Strategy and Finance
and Chief Financial Officer
Edward E. Rhyne............. 40 Executive Vice President and General Counsel
Howe Q. Wallace............. 45 Executive Vice President, Human Resources
Christoph Schoeller became Chairman of the Board of Directors of IFCO in
January 2000 and a B director in March 2000. Christoph Schoeller has been a
Managing Director of IFCO Europe since November 1997. Christoph Schoeller
became a director of PalEx in March 2000 upon completion of the merger. In
1992, he co-founded IFCO GmbH and MTS with his brother, Martin Schoeller. Mr.
Schoeller is responsible for advancing both IFCO Europe's and MTS's market and
product development and logistics network. In 1982, Mr. Schoeller joined the
Schoeller group of companies, which are engaged in plastics manufacturing and
other activities, and presently serves as one of its Managing Directors. From
1982 through 1984, he was involved in international sales and licensing in the
Eastern hemisphere. From 1985 to 1988, Christoph Schoeller was focused on
product development and build-up of the sales organization. From 1988 until
1992, Mr. Schoeller developed Schoeller Industries' sales and marketing
organization. Mr. Schoeller is a member of the supervisory board of
Trans-o-flex Schnell-Lieferdienst AG, a logistics company, and was formerly a
member of the supervisory board of Danzas Holding AG, a logistics company,
until its merger with Deutsche Post AG.
Martin A. Schoeller became Chief Executive Officer and the A director of
IFCO in March 2000 and was designated an executive officer of the Company.
Martin Schoeller has been a Managing Director of IFCO Europe since November
1997 and the sole Managing Director of IFCO International since May 1995.
Martin Schoeller became a director of PalEx in March 2000 upon completion of
the merger. In 1992, Mr. Schoeller co-founded IFCO GmbH and MTS with his
brother, Christoph Schoeller. In 1980, Martin Schoeller joined the Schoeller
group of companies and presently serves as one of its Managing Directors.
Initially, he managed a plastics plant, from 1980 to 1982. From 1982 through
1984, he was involved in international sales and licensing. From 1985 to 1988,
Mr. Schoeller was focused on developing plant operations. From 1988 until
16
1992, Martin Schoeller developed several European production companies. Mr.
Schoeller presently serves as the Chairman of the European Association of
Dynamic Entrepreneurs, Europe's 500, in Germany.
Cornelius Geber became a B director of IFCO in March 2000. Mr. Geber has
been the CEO of Kuhne & Nagel AG & Co., a worldwide transport company, since
1996. From 1993 until 1998, Mr. Geber was a member of the holding board of
directors for Kuhne & Nagel International AG, a Swiss holding company of the
worldwide Kuhne & Nagel group. Mr. Geber has been a member of the board of
Friedrich Grohe AG, Hemer, a plumbing supply company, since October 1999. Mr.
Geber has been the Head of the Board of Paul Gunther Logistik AG, Hamburg, a
German transport and logistics company, since January 2000. Mr. Geber has been
a senior consultant to the board of directors of Deutsche Post AG, and a
consultant to BC Partner's Hamburg, the largest private equity investor group
in Europe, since April 1999.
Sam W. Humphreys became a B director of IFCO in March 2000. Mr. Humphreys is
engaged in private equity and venture capital investing. Until completion of
the merger in March 2000, he was a director of PalEx since January 1996 and
non-executive Chairman of the Board since March 1997. Through Main Street
Merchant Partners II, L.P., a merchant banking firm, and other investment
partnerships, Mr. Humphreys was involved in the creation and development of
numerous businesses during the 1990s and has served in executive management
positions and on the board of directors of several of these businesses,
including C\\2\\ Media, Inc., a digital media business; e-CommLink, Inc., which
provides Internet banking systems to commercial banks; U.S. Delivery Systems,
Inc., the largest same-day local delivery company in the U.S; and Envirofil,
Inc., a solid-waste management company.
Randall Onstead became a B director of IFCO in March 2000. Mr. Onstead
served as Chairman and Chief Executive Officer of Randall's Food Markets, Inc.
from 1998 until September 1999. From 1996 until 1998, Mr. Onstead was President
and Chief Executive Officer of Randall's. From 1986 until 1996, Mr. Onstead was
President and Chief Operating Officer of Randall's. Randall's is a retail
supermarket chain that had sales of over $2.7 billion in 1999.
Eckhard Pfeiffer became a B director of IFCO in March 2000. Mr. Pfeiffer is
Chairman of Intershop Communications AG and Chairman of Ricardo.de AG. From
1991 until 1999, Mr. Pfeiffer was the President and Chief Executive Officer of
Compaq Computer Corporation, the largest global computer systems manufacturer.
Mr. Pfeiffer is a member of the board of directors of General Motors
Corporation, Hughes Electronics Corporation, and Bell Atlantic Corporation and
serves on the advisory board of Deutsche Bank AG. Mr. Pfeiffer is a member of
the board of trustees of Southern Methodist University and serves on the
executive board of Southern Methodist University's Cox School of Business.
Dr. Frank Tofflinger became a B director of IFCO in March 2000. Dr.
Tofflinger has been Director of the Carlyle Group Europe, a private equity
group based in Washington DC, since January 2000. From July 1996 until December
1999, Dr. Tofflinger was Managing Director of Schoeller Industries. From
December 1993 until June 1996, Dr. Tofflinger was Managing Director of IMM
Office Systems, a large European independent copy and facsimile systems
distribution and service organization.
Jim Griffin became Chief Executive Officer, North America of IFCO in March
2000 and was designated an executive officer of the Company. From 1996 until
joining the Company, Mr. Griffin was President of Ryder Transportation
Services, managing operations in the United States, Canada, the United Kingdom,
and Germany. During this same period, he also managed global purchasing and
corporate brand management and served as a member of Ryder's Corporate
Strategy, Policy, and Operating Committees. From 1993 through 1996, he was
President of Ryder Automotive Carrier Services, where he was responsible for
6,000 employees in 75 locations throughout the United States and Canada. From
1990 through 1992, Mr. Griffin was Vice President and General Manager of the
Mid-South Area for Ryder Transportation Services. Mr. Griffin is a Certified
Public Accountant.
David Lee became Chief Executive Officer, Europe and Global Systems of IFCO
in May 2000 and was designated an executive officer of the Company. From April
1999 until joining the Company, Mr. Lee was the
17
European President and Chief Executive Officer of Transport International Pool
and Modular Space, two subsidiaries of GE Capital. From April 1998 to April
1999, he served as European President and Managing Director of Transport
International Pool. From May 1996 until January 1998, he served as Executive
Vice President CHEP Americas and President of CHEP Mexico, Brazil and Argentina
with commercial responsibility for sales, service, and operational strategy for
North and South America. During the same period, Mr. Lee was also Chairman of
the International Commercial Group that oversaw CHEP businesses around the
world. From 1990 through 1996, Mr. Lee was Senior Vice President of CHEP USA,
where he was responsible for sales, service, and operational strategy for the
Northeast United States.
Vance K. Maultsby, Jr. became Executive Vice President, Strategy and Finance
and Chief Financial Officer of IFCO in March 2000 and was designated an
executive officer of the Company. Mr. Maultsby also became a director of PalEx
in March 2000 upon completion of the merger. Mr. Maultsby has been Chief
Executive Officer of PalEx since December 1996. Mr. Maultsby served as PalEx's
President from November 1996 until November 1998. From 1993 to 1996, Mr.
Maultsby was a partner with Ernst & Young LLP, where he managed the Dallas,
Texas office of its Corporate Finance Group. From 1989 to 1992, Mr. Maultsby
was chief executive officer of Alemar Financial Company, later named Alemar
Cost Reduction, Inc., which provided financial advisory services to a variety
of industries. From 1985 to 1989, Mr. Maultsby was an officer in the Corporate
Finance Group for Stephens Inc., an investment banking firm. Prior to the
position with Stephens Inc., Mr. Maultsby was a partner with KPMG Peat Marwick,
served as the National Director of its Petroleum Industry Practice, was co-
director of its Southwest Area Mergers and Acquisitions Advisory Practice and
practiced public accounting for more than five years. Mr. Maultsby is a
Certified Public Accountant.
Edward E. Rhyne became Executive Vice President and General Counsel of IFCO
in March 2000 and was designated an executive officer of the Company. Mr. Rhyne
has been Vice President and General Counsel of PalEx since June 1997. Prior to
his employment with PalEx, Mr. Rhyne was a partner at Gardere & Wynne, L.L.P.,
where he was engaged in the private practice of law as a securities and mergers
and acquisitions lawyer for more than five years.
Howe Q. Wallace became Executive Vice President, Human Resources of IFCO in
March 2000 and was designated an executive officer of the Company. Mr. Wallace
has been the Chief Human Resource Officer of PalEx since its formation in 1997.
He served in that same capacity for Ridge Pallets, one of PalEx's founding
companies since 1983. Mr. Wallace served on the board of directors of the
National Wooden Pallet and Containers Association from February 1995 to
February 1998, and has been active in industry education efforts.
18
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth as of May 24, 2000, the beneficial ownership
of IFCO ordinary shares, by each person who, to IFCO's knowledge, beneficially
owned more than 10% of its ordinary shares and all of its directors and
executive officers as a group.
Except as indicated, beneficial ownership includes the sole power to vote
and dispose of IFCO ordinary shares. If a person has the right to acquire
beneficial ownership of any ordinary shares by exercise of options within 60
days after May 24, 2000, the ordinary shares are deemed beneficially owned by
that person and are deemed to be outstanding solely for the purpose of
determining the percentage of IFCO ordinary shares that person owns. These
ordinary shares are not included in the computations for any other person.
Beneficial Ownership
---------------------
Name of Beneficial Owner Shares Percentage
------------------------ ---------- ----------
Christoph Schoeller(1)............................. 20,771,500 48.0%
Martin A. Schoeller(1)............................. 20,771,500 48.0%
All directors and executive officers as a group (12
persons)(2)....................................... 22,310,952 50.3%
- --------
(1) The listed ordinary shares are owned directly by Schoeller Logistic
Technologies Holding GmbH, which is owned 75.95% by Schoeller Industries
and 24.05% by Gebruder Schoeller. Schoeller Industries and Gebruder
Schoeller are each beneficially owned by Christoph Schoeller, Martin
Schoeller, Andrea Schoeller, and Schoeller KG. Christoph Schoeller and
Martin Schoeller share voting and investment power with respect to the
capital shares of Schoeller Logistic Technologies Holding GmbH, Schoeller
Industries, Schoeller Holdings GmbH, which directly owns the shares of
Schoeller Industries, and Gebruder Schoeller. Includes (a) 1,900,000
ordinary shares beneficially owned by Andrea Schoeller, Christoph
Schoeller's wife, and (b) 2,000,000 ordinary shares beneficially owned by
Schoeller KG, which is beneficially owned by Alexander Schoeller and
Leopold Schoeller, the children of Martin Schoeller. Christoph Schoeller
and Martin Schoeller disclaim beneficial ownership of the ordinary shares
beneficially owned by Andrea Schoeller and by Schoeller KG. Each of
Christoph and Martin Schoeller have been granted options to purchase
771,500 IFCO ordinary shares that are fully exercisable.
(2) Includes (a) a total of 3,901,131 ordinary shares with respect to which the
director or executive officer disclaims beneficial ownership and (b)
options to purchase a total of 1,843,000 ordinary shares that are
exercisable within 60 days of May 24, 2000. Excludes options to purchase a
total of 1,396,805 ordinary shares that are not exercisable.
19
SIGNATURES
The Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 30, 2000.
IFCO SYSTEMS N.V.
/s/ Vance K. Maultsby, Jr.
By: _________________________________
Vance K. Maultsby, Jr.
Executive Vice President, Strategy
and Finance
and Chief Financial Officer
/s/ M. Ted Grubbs
By: _________________________________
M. Ted Grubbs
Corporate Controller
20
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants......................................... F-2
Combined and Consolidated Balance Sheets.................................. F-3
Combined and Consolidated Statement of Operations......................... F-4
Combined and Consolidated Statements of Comprehensive Income.............. F-5
Combined and Consolidated Statements of Changes in Shareholders' Equity... F-6
Combined and Consolidated Statements of Cash Flows........................ F-7
Notes to Combined and Consolidated Financial Statements................... F-9
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of IFCO Systems N.V.
Rivierstaete
Amsteldijk 166, 1079 LH
Amsterdam
In our opinion, the accompanying combined and consolidated balance sheets and
the related combined and consolidated statements of operations, comprehensive
income, changes in shareholders' equity and of cash flows present fairly, in
all material respects, the combined and consolidated financial position of IFCO
Systems N.V. and its subsidiaries (collectively "the Company") at December 31,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles in the United States on the basis
described in Note 1. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
combined and consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards in the United States and Germany, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PwC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
Dusseldorf, Germany
April 26, 2000
(Betz) (Hartmann)
Wirtschaftsprufer Wirtschaftsprufer
F-2
IFCO SYSTEMS N.V.
COMBINED AND CONSOLIDATED BALANCE SHEETS
(In thousands of US$)
December 31,
------------------
1998 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 23,642 $ 12,240
Receivables.............................................. 74,462 64,809
Other.................................................... 1,874 4,591
-------- --------
Total current assets................................... 99,978 81,640
PROPERTY, PLANT AND EQUIPMENT, net......................... 172,437 167,678
OTHER NON-CURRENT ASSETS................................... 12,038 17,303
-------- --------
Total assets........................................... $284,453 $266,621
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term loans......................................... $ 500 $ 795
Short-term related party loans........................... 2,618 2,280
Current maturities of long-term debt..................... 4,912 70,038
Current maturities of capital lease obligations.......... 9,340 10,329
Refundable deposits...................................... 70,875 66,436
Accounts payable......................................... 69,287 83,209
Accrued expenses and other current liabilities........... 7,303 7,918
Deferred income.......................................... 6,573 5,459
-------- --------
Total current liabilities.............................. 171,408 246,464
ACCUMULATED LOSSES IN EXCESS OF INVESTMENT IN EQUITY
ENTITIES.................................................. 4,472 5,623
LONG-TERM DEBT, net of current maturities.................. 77,874
CAPITAL LEASE OBLIGATIONS, net of current maturities....... 26,867 24,198
COMMITMENTS AND CONTINGENCIES..............................
MINORITY INTEREST.......................................... 28,887 25,316
PARTICIPATING RIGHTS....................................... 4,274 3,259
REDEEMABLE PARTICIPATING RIGHTS............................ 1,544 1,433
SHAREHOLDERS' EQUITY:
Contributed capital of predecessor companies............. 10,017
Common stock, (Euro)10 par value, authorized 5,000,000
shares; issued 1999--5,000 shares, issued 1998--
0 shares................................................ 54
Paid-in capital.......................................... 10,339
Accumulated deficit...................................... (38,858) (52,737)
Accumulated other comprehensive income (loss)............ (2,032) 2,672
-------- --------
Total shareholders' equity............................. (30,873) (39,672)
-------- --------
Total liabilities and shareholders' equity............. $284,453 $266,621
======== ========
The accompanying notes are an integral part of these combined and consolidated
financial statements.
F-3
IFCO SYSTEMS N.V.
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of US$)
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
REVENUES......................................... $118,546 $136,176 $154,726
COST OF SALES:
Depreciation and amortization expense and crate
breakage...................................... 26,929 28,051 35,805
Other costs of sales........................... 72,693 78,167 88,680
-------- -------- --------
99,622 106,218 124,485
-------- -------- --------
Gross profit................................. 18,924 29,958 30,241
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 18,328 24,289 24,511
MERGER AND INTEGRATION COSTS..................... 3,519
AMORTIZATION OF GOODWILL......................... 675 383 289
OTHER OPERATING (INCOME) EXPENSES, NET........... (840) (864) (639)
-------- -------- --------
Income (loss) from operations................ 761 6,150 2,561
INTEREST EXPENSE................................. (14,302) (12,101) (12,534)
INTEREST INCOME.................................. 3,887 1,607 600
FOREIGN CURRENCY (LOSSES) GAINS.................. 25 (188) (1,092)
LOSSES FROM EQUITY ENTITIES...................... (2,347) (2,726) (1,738)
OTHER INCOME (EXPENSE), net...................... 183 (83) (240)
-------- -------- --------
Loss before income taxes and minority
interest.................................... (11,793) (7,341) (12,443)
INCOME TAX PROVISION............................. (47) (210) (320)
MINORITY INTEREST................................ (1,274) (1,291)
-------- -------- --------
Net loss..................................... (11,840) (8,825) (14,054)
PARTICIPATING RIGHTS............................. 630 (88) 175
-------- -------- --------
Net loss applicable to common stock.......... $(11,210) $ (8,913) $(13,879)
======== ======== ========
Basic loss per share (in US$).................... ($0.56) ($0.45) ($0.69)
The accompanying notes are an integral part of these combined and consolidated
financial statements.
F-4
IFCO SYSTEMS N.V.
COMBINED AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands of US$)
1997 1998 1999
-------- -------- --------
Net loss.......................................... $(11,840) $ (8,825) $(14,054)
Other comprehensive income (loss):
Foreign currency translation adjustment......... 317 (1,970) 4,704
-------- -------- --------
Comprehensive loss................................ $(11,523) $(10,795) $ (9,350)
======== ======== ========
The accompanying notes are an integral part of these combined and consolidated
financial statements.
F-5
IFCO SYSTEMS N.V.
COMBINED AND CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of US$)
Contributed Accumulated
Capital of Other
Predecessor Common Paid-In Accumulated Comprehensive Shareholders'
Companies Stock Capital Deficit Income (Loss) Equity
----------- ------ ------- ----------- ------------- -------------
BALANCE January 1,
1997................... $ 10,017 -- -- $(10,100) $ (379) $ (462)
Capital distribution,
net of tax............. -- -- -- (8,635) -- (8,635)
Participating rights,
net of tax............. -- -- -- 774 -- 774
Redeemable cumulative
participating rights,
net of tax............. -- -- -- (144) -- (144)
Foreign currency
adjustment............. -- -- -- -- 317 317
Net loss................ -- -- -- (11,840) -- (11,840)
-------- --- ------- -------- ------- --------
BALANCE December 31,
1997................... 10,017 (29,945) (62) (19,990)
Participating rights,
net of tax............. -- -- -- 61 -- 61
Redeemable cumulative
participating rights,
net of tax............. -- -- -- (149) -- (149)
Foreign currency
adjustment............. -- -- -- -- (1,970) (1,970)
Net loss................ -- -- -- (8,825) -- (8,825)
-------- --- ------- -------- ------- --------
BALANCE December 31,
1998................... 10,017 (38,858) (2,032) (30,873)
Original cash
contribution on March
31, 1999............... -- 54 -- -- -- 54
Participating rights,
net of tax............. -- -- -- 328 -- 328
Contribution from
shareholder, net of
tax.................... 322 -- -- -- -- 322
Contribution of shares
from SLT............... (10,339) -- 10,339 -- -- --
Redeemable cumulative
participating rights,
net of tax............. -- -- -- (153) -- (153)
Foreign currency
adjustment............. -- -- -- -- 4,704 4,704
Net loss................ -- -- -- (14,054) -- (14,054)
-------- --- ------- -------- ------- --------
BALANCE December 31,
1999................... $ -- $54 $10,339 $(52,737) $ 2,672 $(39,672)
======== === ======= ======== ======= ========
The accompanying notes are an integral part of these combined and consolidated
financial statements.
F-6
IFCO SYSTEMS N.V.
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US$)
Year Ended December 31,
---------------------------
1997 1998 1999
-------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(11,840) $(8,825) $(14,054)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization expense and crate
breakage........................................ 26,929 28,051 35,805
Amortization of goodwill......................... 675 383 289
Amortization of intangible assets and debt
issuance costs.................................. -- 1,036 1,311
Foreign currency (gains) losses.................. (25) 188 1,092
Loss applicable to minority interests............ 1,274 1,291
(Profit)/loss on sale of property, plant and
equipment....................................... (2) -- 2
Losses from equity entities...................... 2,347 2,726 1,738
Changes in operating assets and liabilities--
Proceed from factoring arrangement.............. -- 25,435 32,887
Receivables..................................... (11,588) 2,160 (36,851)
Other assets, long term......................... 243 176 202
Inventory....................................... 7,414 (1,621) (2,742)
Prepaid expenses and other current accounts..... 107 673 (443)
Accounts payable................................ 2,133 10,933 6,429
Other current liabilities....................... 3,515 (7,791) (1,683)
Accrued liabilities............................. 8,722 3,803 11,073
Deferred income................................. 917 1,337 (28)
-------- ------- --------
Net cash provided by operating activities...... 29,547 59,938 36,318
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of crates............................... (39,007) (38,098) (27,691)
Purchase of property, plant and equipment........ (562) (2,097) (3,076)
Purchase of other intangible assets.............. (243) (33) (3,097)
Merger costs..................................... -- -- (2,039)
Investment in equity entities.................... (478) (1,390) (587)
Proceeds from sale of property and equipment..... 448 106 --
Sale(purchase) of investments carried at cost.... (436) 2,746 --
-------- ------- --------
Net cash used in investing activities.......... (40,278) (38,766) (36,490)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from original issuance of shares........ 54
Proceeds from sale of redeemable convertible
preferred stock................................. 24,949 -- --
Proceeds from shareholder contribution........... -- -- 322
Payments on short-term bank borrowings........... -- (51,254) --
Payments on long-term bank borrowings............ (3,502) (15,351) (13,634)
Payments on short-term related party loans....... -- (25,779) (196)
Payments on capital lease obligations............ (14,214) (5,331) (9,401)
Proceeds from short term bank borrowings......... 8,591 -- 314
Proceeds from long term bank borrowings.......... -- 91,756 14,453
Proceeds from related party loans................ 3,997 1,850 276
Payment for interest rate cap.................... -- (202) --
Debt issuance costs.............................. (6,621) (2,131) --
Capital distribution to shareholders............. (8,635) -- --
Other............................................ 464 -- --
-------- ------- --------
Net cash provided by (used in) financing
activities.................................... 5,029 (6,442) (7,812)
-------- ------- --------
The accompanying notes are an integral part of these combined and consolidated
financial statements.
F-7
IFCO SYSTEMS N.V.
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands of US$)
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS...................................... $ (549) $ 920 $ (3,418)
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (6,251) 15,650 (11,402)
CASH AND CASH EQUIVALENTS, beginning of the
period........................................... 14,243 7,992 23,642
------- ------- --------
CASH AND CASH EQUIVALENTS, end of period.......... $ 7,992 $23,642 $ 12,240
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................... $ 6,772 $ 6,959 $ 12,143
Cash paid for income taxes....................... $ 47 $ 64 $ 92
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Accretion of redeemable convertible preferred
stock........................................... -- $ 1,274 $ 1,077
Redeemable cumulative participating rights....... $ 144 $ 149 $ (153)
Participating rights............................. $ (774) $ (61) $ (328)
Purchase of containers on capital leases......... $ 8,465 $ 9,382 $ 13,984
Merger costs included in accounts payable........ -- -- $ 4,100
Container purchases included in accounts
payable......................................... $ 2,943 -- $ 16,484
The accompanying notes are an integral part of these combined and consolidated
financial statements.
F-8
NOTES TO THE FINANCIAL STATEMENTS OF IFCO SYSTEMS N.V.
(In thousands of US$ unless otherwise stated)
1. BUSINESS AND ORGANIZATION:
IFCO Systems N.V. ("the Company" or "IFCO"), which was incorporated under
the laws of the Netherlands on March 31, 1999, is a holding company for IFCO
Europe Beteiligungs GmbH ("IFCO Europe"), MTS Okologistik GmbH ("MTS"), and
Schoeller International Logistics Beteiligungsgesellschaft ("SIL").
On March 8, 2000, the Company completed a merger with PalEx, Inc. ("PalEx")
upon the approval of the shareholders of PalEx, in addition to an initial
public offering. See Note 13.
IFCO Europe was established in 1997 and is the holding company of IFCO
International Food Container Organisation GmbH ("IFCO GmbH"), a German company,
which was established in 1992. IFCO Europe is involved in the organization and
administration of the purchase, distribution and leasing of round-trip
container ("RTC") systems in Germany and other European countries. The RTCs are
leased primarily to producers of fresh fruit and vegetables in exchange for a
one-time usage fee. The producers' goods are transported in the RTCs to various
intermediaries and ultimately retailers for sale to consumers. IFCO Europe
delivers the empty RTCs to customers' bulk warehouses and collects the empty
crates from regional service points, where the RTCs are transported to the
Company's depots and cleaned for reuse. IFCO Europe is 76% owned by IFCO
Systems N.V., with a subsidiary of General Electric Capital Corporation
("GECC") holding a minority interest of 24%. In connection with its initial
investment of $24,949 in IFCO Europe in 1997, GECC received options to increase
its investment in IFCO Europe to 49% and then up to 100% after certain dates
have passed and criteria have been met. GECC also received options to purchase
100% of MTS and up to 100% of SIL after certain dates have passed and criteria
have been met.
MTS, a German company that is 100% owned by IFCO Systems N.V. was
established in 1992 and offers a reusable packing system for dry goods sold
primarily by retailers. MTS's business processes are generally similar to those
of IFCO Europe.
SIL, a German company that is 100% owned by IFCO Systems N.V. was
established in 1994 to hold ownership interests in RTC systems in the United
States, Argentina and Japan. The operation in Argentina is wholly owned and is
consolidated within SIL. SIL has a 50% voting interest in the operations in the
United States and a 33% ownership investment in the Japanese operations. SIL
has agreed to fund its proportionate share of losses of the operations in the
United States and Japan in excess of its capital investment. Both of these
operations are accounted for under the equity method. SIL's business processes
are generally similar to those of IFCO Europe.
Prior to November 3, 1999, IFCO Europe and MTS were subsidiaries of
Schoeller Packaging Systems GmbH ("SPS"). In December 1999, SPS changed its
name to Schoeller Logistics Industries GmbH ("SLI"). SIL was a subsidiary of
Gebruder Schoeller Beteilungsverwaltungs GmbH, Munich ("GSB"). SLI and GSB are
wholly owned by the same group of shareholders, the Schoeller family. Effective
November 3, 1999, SLI indirectly contributed its shares of IFCO Europe and MTS
to IFCO Systems N.V. In addition, GSB contributed its shares of SIL to IFCO
Systems N.V. effective November 22, 1999. IFCO Systems N.V. is 100% owned by
Schoeller Logistic Technologies Holding GmbH, Pullach ("SLT"). SLT is 24% owned
by GSB and 76% owned by SLI. The transfer of shares was accounted for as a
transfer between entities of common control using the historical basis of
assets and liabilities transferred.
Periods prior to the contribution of shares to IFCO Systems N.V. described
above represent the combined financial statements of IFCO Europe, MTS and SIL.
Periods subsequent to the contribution represent the combined and consolidated
results of IFCO Systems N.V. The contribution of shares to IFCO Systems N.V.
has been reflected as a transfer from combined contributed share capital of
IFCO Europe, MTS and SIL to paid-in capital of IFCO Systems N.V. within the
combined and consolidated statement of shareholders' equity.
F-9
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
IFCO Europe and MTS previously reported separately to SLI. SIL previously
reported to GSB. All costs relating to each entity were historically billed
through management charges. These costs include all general corporate
overhead, consisting of accounting, legal and technical services and other
general and administrative costs, and interest expense related to the
operations of IFCO Europe, MTS, and SIL. Subsequent to the transfer of shares
to IFCO Systems N.V., SLI continues to provide management services to the
Company. See Note 9. All significant inter-company transactions and balances
between the combined and consolidated companies have been eliminated. Income
taxes have been calculated on a separate return basis.
On February 29, 2000 a debenture in the amount of DM 45 million ($22,151)
was issued to GECC by SLT in exchange for the contribution of GECC's preferred
share in IFCO Europe to SLT. On March 1, 2000 SLT contributed this
preferential share to IFCO Systems N.V., making IFCO Systems N.V. the 100%
shareholder of IFCO Europe. This debenture has a 30 year term and bears
interest at 5% per year. The debenture is convertible to IFCO Systems N.V.
ordinary shares that are held by SLT after a mandatory holding period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Principles
The accompanying combined and consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles.
Reclassifications
Certain reclassifications have been made in the 1998 and 1997 financial
statements to conform to the 1999 presentation.
Fiscal Year
All combined and consolidated entities maintain their accounting records
using a December 31 year-end.
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.
Inventory
Inventories are stated at the lower of cost or net realizable value. The
cost of inventories is determined using a weighted average cost method.
Property, Plant and Equipment
Property, plant, and equipment is 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
straight-line method of depreciation is utilized for financial reporting
purposes.
Included in property, plant and equipment is the Company's RTC rental pool,
which is being depreciated to estimated salvage value using the straight line
method over lives ranging from 8 to 15 years. The Company periodically reviews
its RTC rental pool to ensure that all unusable RTCs are reduced to net
realizable value in
F-10
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
accordance with the Company's RTC supply contract. These charges are considered
breakage by the Company and are included in cost of sales in the accompanying
combined and consolidated statements of operations.
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 sale 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 the accompanying combined and
consolidated statements of operations.
The Company follows the reporting requirements of 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").
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-lived assets pursuant to the provisions of SFAS No.
121. See Note 3.
The Company follows the reporting requirements of SFAS No. 13 "Accounting
for Leases". Leases classified as capital leases are recognized as assets and
liabilities in the balance sheet at amounts equal at the inception of the lease
to the fair value of the leased property or, if lower, at the present value of
the minimum lease payments. Lease payments are apportioned between imputed
finance charge and the reduction of the outstanding liability. The lease asset
is depreciated during the period of expected used on a systematic basis
consistent with the depreciation policy for depreciable assets that are owned.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of acquisition cost over the fair
market value of identified net assets acquired in business combinations
accounted for as purchases, is amortized using the straight-line method over 15
years. The Company capitalizes certain internal software development costs
which are amortized by the straight-line method over the estimated useful
economic lives of the software, not to exceed 4 years. At December 31, 1998 and
1999, unamortized software costs were $2,974 and $896, respectively.
Amortization of capitalized internal software development costs totalled $261,
$186 and $168, in 1997, 1998 and 1999, respectively.
The Company evaluates on a regular basis whether events and circumstances
have occurred that indicate that the carrying amount of goodwill and other
intangible assets may warrant revision. Management believes that there has been
no impairment of the goodwill and other intangible assets as reflected in the
Company's combined and consolidated financial statements as of December 31,
1999.
Advertising Costs
All advertising costs are expensed when incurred. Total advertising costs
were $1,215, $833, and $1,502 for the years ended December 31, 1997, 1998, and
1999, respectively.
Investment in Equity Entities
Entities over which IFCO has between 20% and 50% of the voting rights, and
over which IFCO exercises significant influence, are accounted for using the
equity method.
SIL's share of operating losses in the Japanese operations ("IFCO-Japan")
has exceeded its capital investment, and accordingly the investment in IFCO-
Japan has been reduced to zero. In 1999, SIL agreed to fund the losses of IFCO-
Japan and accordingly has recorded its proportionate share of the losses in
IFCO-Japan in excess of its investment as accumulated losses in excess of
investment in equity entities in the combined and
F-11
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
consolidated balance sheet. IFCO-Japan's losses that have been recorded are
included in losses from equity entities on the combined and consolidated
statement of operations.
SIL's share of the operating losses in the operations in the United States
("IFCO-US") has exceeded its initial capital investment. SIL has recorded its
proportionate share of the losses in IFCO-US in excess of its investment as
accumulated losses in excess of investment in equity entities in the combined
and consolidated balance sheet as SIL has agreed to fund its proportionate
share of the losses. The loss that has been recognized by SIL in respect of
IFCO-US is recorded in losses from equity entities on the combined and
consolidated statement of operations.
Participating Rights
The participating rights were originally issued to Schoeller Plast
Industries GmbH, Pullach, ("SPI"), a company wholly owned by SLI, in respect of
IFCO GmbH with a nominal value of DM 10.0 million. The rights have no voting
rights and are issued for an unlimited period and may be terminated by IFCO
upon repayment of the nominal value. In the event of IFCO GmbH's liquidation,
it is repayable after all other creditors and ranks equally with the share
capital. The participating rights share in IFCO GmbH's profits up to a maximum
of DM1.6 million ($0.8 million) per year, before any other distribution may be
made, and in IFCO GmbH's losses in the amount of 10% per year until the balance
is exhausted. In the event that the participating rights has been reduced from
its nominal value by its share of losses, future profits must first be used to
restore it to its nominal value before any other distributions may be made.
On March 8, 2000, in connection with the IPO and the refinancing of IFCO,
the Company made a payment of DM 8.0 million ($3,915) to SPI for the
termination of the participating rights. This payment is an estimate of the
amount required to terminate the participating rights. SPI will reimburse the
Company for approximately DM 1.7 million ($838) as the Company made an over-
payment to SPI.
Redeemable Participating Rights
In 1996 SIL received DM 2.0 million ($1,228) from Alexander Schoeller & Co.
Management Holding GmbH ("ASMH"), a company which is wholly owned by the
Schoellers. Each year that SIL recognizes a profit under German GAAP, ASMH is
entitled to DM 250,000 ($128) per annum. This amount is cumulative, and any
unpaid balance due to SIL's lack of profit bears interest at 6.0% per annum.
ASMH does not participate in SIL's losses, and has no voting rights in SIL. The
agreement is for an unlimited duration, and may be terminated by either party
with a six month notice period.
On March 8, 2000, the Company paid DM 2.8 million ($1,370) to ASMH to
terminate these redeemable participating rights.
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 of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date. Deferred tax assets are reduced by a
valuation allowance if, based on the weight of the available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. As changes in tax laws or rate are enacted, deferred tax
assets and liabilities are adjusted through income tax expense.
F-12
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The majority of the Company's combined and consolidated revenues are
generated from RTC usage fees and are recognized over the Company's service
obligation period, which is complete when the customer's product is removed
from the RTCs and the RTC is returned to the Company.
In December 1999, the United States Securities and Exchange Commission
("SEC") issued SAB 101, "Revenue Recognition", which summarizes certain of the
SEC staff views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted SAB 101 in these
financial statements. Such adoption had no impact on the Company's financial
statements.
The Company also generates revenues from the lease of RTCs for specified
periods of time, which are recognized on a straight-line basis over the lease
term. Additionally, the Company generates revenues from the sale of broken
RTCs.
Refundable Deposits
The Company receives a deposit from its customers upon RTC delivery that is
classified as a refundable deposit in the accompanying combined and
consolidated balance sheets. This deposit is refunded by the Company when the
RTC is recollected.
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 long-term debt approximates fair
value due to variable interest rates. The carrying value of the Company's other
financial instruments also approximates fair value, except for the interest
rate cap of the Senior Facility Agreement. The cap uses a derivative financial
instrument, and as it is an integral part of the Senior Facility Agreement, it
cannot be reliably segregated and measured. There are no published price
quotations in active public securities markets and even though there are well-
established valuation models, the data inputs to these models does not come
from active markets.
Foreign Currency Transactions and Translation
Sales and purchases in foreign currency are measured using the exchange rate
at the day of the transaction. Foreign currency transaction gains and losses
are included in the combined and consolidated statement of operations.
The functional currency is the local currency of each subsidiary. The
Company has selected the United States dollar ("US$") as its reporting
currency. The financial statements of the Company's operations which are not
denominated in United States dollars are translated using the exchange rate as
of the balance sheet date for assets and liabilities and a weighted average
exchange rate for the reported amount of revenues, expenses, gains and losses
during the reporting period. The cumulative translation adjustment is recorded
as a separate component of shareholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets
F-13
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Although the Company reviews all
significant estimates affecting its combined and consolidated financial
statements on a recurring basis and records the estimated effect of any
necessary adjustments prior to their publication, actual results could differ
from these estimates.
Basic Loss Per Share
Basic loss per share has been computed using the actual number of ordinary
shares that were issued to the shareholders of IFCO in connection with the IPO
of IFCO Systems N.V. and the merger with PalEx. This amount has been calculated
as 20.0 million. The numerator used in the calculation of proforma basic loss
per share has been calculated using the net loss for the year plus the
redeemable cumulative participating rights and the participating rights. The
number of shares used in calculating basic and diluted loss per share is the
same, as the conversion of the preferred stock would result in anti-dilution.
Recent Accounting Pronouncements
On May 19, 1999, the Financial Accounting Standards Board decided to delay
the effective date of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," to all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS 133 requires that all derivative financial instruments be
recognized as either assets or liabilities on the balance sheet at their fair
values and that accounting for the changes in their fair values is dependent
upon the intended use of the derivatives and their resulting designations. The
new standard will supersede or amend existing standards that deal with hedge
accounting and derivatives. The Company has not determined the effect that
adopting this standard will have on its combined and consolidated financial
statements.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
Estimated
Useful December 31,
Lives in ------------------
Years 1998 1999
--------- -------- --------
Crates....................................... 8-15 $188,848 $189,964
Machinery and equipment...................... 4-10 7,631 6,641
Furniture and fixtures....................... 4-10 4,213 3,910
-------- --------
$200,692 $200,515
Less: Accumulated depreciation and
amortization................................ (28,255) (32,837)
-------- --------
$172,437 $167,678
======== ========
Depreciation expense for the years ended December 31, 1997, 1998, and 1999,
was $8,579, $10,414, and $12,757 respectively. Of the total assets above, costs
of $14,388, $38,288, and $37,159, and accumulated depreciation of $651, $981,
and $2,876 are held under capital leases at December 31, 1997, 1998, and 1999,
respectively.
F-14
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts Receivable
The major components of accounts receivable are as follows:
At December 31,
----------------
1998 1999
------- -------
Trade (gross).............................................. $63,292 $61,723
Less: Allowance for doubtful accounts...................... (6,079) (4,706)
Related Party.............................................. 11,738 4,071
Other...................................................... 5,511 3,721
------- -------
$74,462 $64,809
======= =======
Activity in the Company's allowance for doubtful accounts consists of the
following:
Year ended
December 31,
--------------
1998 1999
------ ------
Balance, beginning of year................................... $5,886 $6,079
Write-offs................................................... (887) (1,996)
Additional provisions........................................ 540 1,277
Increase (decrease) due to foreign exchange translation...... 540 (654)
------ ------
$6,079 $4,706
====== ======
Other Non-current Assets
The major components of other non-current assets are as follows:
At December 31,
----------------
1998 1999
------- -------
Debt issuance costs........................................ $ 9,364 $ 7,974
Merger costs............................................... -- 5,051
Goodwill................................................... 4,187 3,496
Software................................................... 896 2,974
Other intangible assets.................................... 66 1,215
------- -------
14,513 20,710
Less: accumulated amortization............................. (2,475) (3,407)
------- -------
$12,038 $17,303
======= =======
Merger costs represent the direct costs of the acquisition of PalEx during
1999. Included in other intangible assets at December 31, 1999 are deferred IPO
and deferred high yield debt issuance costs of $857 and $231, respectively. The
deferred IPO costs relate to costs of issuing equity securities in early 2000,
and will be accounted for as a reduction of the proceeds of the equity
offering. Accordingly, these costs will not be amortized over future periods.
The deferred high yield debt issuance costs relate to debt issued in early 2000
and will be amortized over the life of the new debt issue.
F-15
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Accounts payable
The major components of accounts payable are as follows:
At December 31,
---------------
1998 1999
------- -------
Trade........................................................ $65,525 $72,013
Related party................................................ 3,762 11,196
------- -------
$69,287 $83,209
======= =======
5. DEBT:
Long-Term Debt
During 1998, the Company negotiated a new financing arrangement through a
lending syndicate under a Deutsche Mark ("DM") 146 million ($89.6 million)
Senior Facility Agreement (SFA) and a DM35 million ($21.5 million) Senior
Subordinated Agreement (SSA). The proceeds from the SFA and SSA were primarily
used to reduce the Company's outstanding short-term borrowings.
During 1999, the amount of credit available to the Company was reduced to DM
160.5 million ($82.3 million). The credit facility consists of DM 125.5 million
($64.3 million) available under the SFA and DM35.0 million ($18.0 million)
available under the SSA.
The SFA consists of a DM64.0 million ($32.8 million) fixed term loan and two
revolving credit facilities totaling DM61.5 million ($31.5 million). All
borrowings under the SFA, approximately DM100.5 million ($51.5 million)
outstanding as of December 31, 1999, contain principal reduction provisions,
mature in 2004, and accrue interest at EURIBOR plus 1.75% (5.31% as of December
31, 1999). The amount available for future borrowings under the SFA as of
December 31, 1999 was approximately DM25.0 million ($12.8 million). The SSA
does not have scheduled principal reductions until a balloon payment in 2005.
Outstanding borrowings under the SSA, which totaled DM35.0 million ($18.0
million) accrue interest at a rate of EURIBOR plus 2.75% (6.31% as of December
31, 1999).
Substantially all of the Company's receivables and long-lived assets are
pledged as security against all outstanding borrowings under the SFA and SSA,
which also prohibit any dilution of GECC's capital investment. The SFA and SSA
prohibit the payment of dividends by the Company as long as any outstanding
borrowings exist under the SFA or SSA, restrict the Company's incurrence or
assumption of other indebtedness and require the Company to comply with non-
financial and financial covenants, including certain funded debt and interest
expense to earnings before taxes, depreciation, interest and amortization
ratios and certain cash flow ratios. The Company was in compliance with, or had
obtained waivers for, each of the covenants as of December 31, 1998. At
December 31, 1999, the Company was in violation of certain covenants under the
SSA and SFA. The Company did not obtain waivers for these violations as the SSA
and SFA were paid in full in March 2000 upon completion of the IPO. See Note
13. The outstanding balances on the SFA and SSA have been classified as current
liabilities at December 31, 1999.
To hedge its variable rate interest risk, the Company has entered into an
interest rate cap agreement, which as of December 31, 1999, covers DM101.4
million ($52.0 million) of the Company's outstanding debt and limits interest
rates applicable to the SFA and SSA borrowings to 6.75%, and 7.75%,
respectively. The costs of this agreement are included in interest expense
ratably over the agreement's life. The unamortized cost of the agreement is
included in other assets in the accompanying combined and consolidated balance
sheets.
F-16
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Long-term debt consists of the following:
At December 31,
----------------
1998 1999
------- -------
SFA term loan.............................................. $44,208 $32,840
SFA credit facilities...................................... 16,578 18,706
SSA term loan.............................................. 21,490 18,045
Other...................................................... 510 447
------- -------
82,786 70,038
Less: current maturities................................... (4,912) (70,038)
------- -------
$77,874 $ --
======= =======
The maturities of long-term debt are as follows for the year ending December
31, 1999:
Amount
-------
2000................................................................. $70,038
2001................................................................. --
2002................................................................. --
2003................................................................. --
2004................................................................. --
Thereafter........................................................... --
-------
$70,038
=======
Short-Term Loans
Short-term loans at December 31, 1998 and 1999 relate to a renewable short-
term note with a bank.
Short-Term Related Party Loans
SLI and GSB, SLI's subsidiaries and SLI's direct owners have historically
provided working capital financing to the Company. Outstanding balances accrue
interest at rates ranging from 5.0% to 8.0%.
Receivable Factoring
Prior to May 1998, IFCO Europe had an agreement whereby the trade accounts
receivable balances were used as collateral against borrowings from third
parties. Both the receivables and the funding were recorded on IFCO Europe's
books. The administrative processes related to collecting the receivables was
performed by the third party acting as an agent for IFCO Europe, for which IFCO
Europe paid a fee.
In May 1998 the arrangement was altered to allow IFCO Europe to factor up to
85% of accounts receivable balances that meet certain requirements as set forth
in the agreement. For the receivables accepted for factoring, the factoring
agent is required to remit between 60% and 80% of the unpaid amounts of
factored receivables to IFCO Europe. The remainder, less a factoring charge, is
held in an escrow account and is remitted to IFCO Europe following collection.
There is no risk of loss associated with the funds initially received by IFCO
Europe, and these funds have been netted off against receivables. The risk of
loss on the balance held in the escrow account remains with the factoring agent
who performs the administrative collection process for all factored
receivables. The balance held in the escrow account is included in receivables
on the combined and consolidated balance sheet and at December 31, 1999 and
1998 was $9,485 and $7,279, respectively. The interest rate on cash advances
relating to uncollected factored receivables is based on the
F-17
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
three-month EURIBOR rate plus 1.25% (4.59% as of December 31, 1999). IFCO
Europe factored approximately $32,887 and $25,435 of its combined and
consolidated receivables in 1999 and 1998, respectively. IFCO Europe incurred
approximately $4,270 and $3,966 in 1999 and 1998, respectively, in factoring
and interest charges relating to this agreement.
Capital Lease Obligations
The Company has entered into leases with third parties principally for
plastic RTCs that are accounted for as capital leases. The future minimum lease
payments for assets under capital leases, together with the present value of
minimum lease payments, were as follows as of December 31, 1999:
2000................................................................ $12,131
2001................................................................ 9,427
2002................................................................ 8,214
2003................................................................ 8,205
2004................................................................ 162
Thereafter.......................................................... 760
-------
Total future minimum lease payments................................. 38,899
Less amounts representing interest.................................. (4,372)
-------
Present value of future minimum lease payments...................... $34,527
=======
Current............................................................. $10,329
Non-current......................................................... 24,198
-------
Total............................................................... $34,527
=======
6. MINORITY INTEREST:
IFCO Europe has outstanding, one share of preferred stock held by a
subsidiary of GECC. The holder of the preferred share shall be entitled to 16%
of the vote on all matters of which common stockholders are entitled to vote.
The other 84% of votes are held by the common stockholders. The holder of the
preferred share participates in 24% of the profits of IFCO Europe. However, the
preferred share has preference over the first DM 2,250 ($1,153) of profits
before any profits are distributed to the common shareholders.
The preferred share is convertible into common stock of IFCO Europe at any
time prior to September 30, 2004. The preferred stock is redeemable beginning
September 30, 2002, at the option of the holder for the original investment
amount. In addition to the original investment amount, the holder is entitled
to 5% annual interest on the purchase price minus any capital repaid to the
holder for the period starting at the day of the original investment and ending
on the date of redemption election, such interest amount being compounded at an
interest rate of 5% per year and being reduced by any dividends paid out to the
holder. The redemption amount outstanding on the redemption date is payable in
12 monthly installments, plus 5% interest beginning two years after the
redemption election date. In addition, the preferred stock is redeemable
subject to certain conditions at the option of the issuer in year 2003 at the
earliest. The redemption amount is calculated under similar terms as above.
In the event of liquidation or dissolution of the Company, the holder of the
preferred share shall have priority entitlement before distribution to other
shareholders to proceeds which are available for distribution to the
shareholders up to an amount of DM 45,000 ($23,062), plus preferential
dividends which have not been distributed, less any eventual distribution of
profits in excess of the preferential dividends.
F-18
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
In connection with the investment in the preferred share, GECC received
options to increase its investment in IFCO Europe to 49% and then up to 100%
after certain dates have passed and criteria have been met. In addition, GECC
received options to purchase 100% of MTS and up to 100% of SIL after certain
dates have passed and criteria have been met. Also in connection with the
investment, SLI has a put option to sell its interest in IFCO Europe to GECC
after certain dates have passed and criteria have been met.
Effective November 3, 1999, upon transfer of the shares of IFCO Europe to
IFCO Systems N.V. by SLI, the preferred share in IFCO Europe still held by GECC
is shown as minority interest on the balance sheet of IFCO Systems N.V. as of
December 31, 1999. The interest attributable to the preferred share from
November 3, 1999 to December 31, 1999 is reflected as minority interest in the
statement of operations for the year ended December 31, 1999. Reclassifications
have been made to the balance sheet and the statement of operations in order to
be consistent with the 1999 presentation of the preferred share in IFCO Europe
still held by GECC.
7. INCOME TAXES:
Year ended
December 31,
------------------------
1997 1998 1999
------- ------ -------
Loss before income taxes
Germany............................................. $ 8,576 $3,802 $ 3,532
Foreign............................................. 3,217 3,539 8,911
------- ------ -------
Total................................................. $11,793 $7,341 $12,443
======= ====== =======
Income tax provision
Current
Germany............................................. $ -- $ -- $ (106)
Foreign............................................. (47) (210) (214)
------- ------ -------
Total current......................................... $ (47) $ (210) (320)
------- ------ -------
Deferred
Germany............................................. $ -- $ -- $ --
Foreign............................................. $ -- $ -- $ --
------- ------ -------
Total deferred........................................ $ -- $ -- $ --
------- ------ -------
Total provision....................................... $ (47) $ (210) $ (320)
======= ====== =======
The differences in income taxes provided and the amounts determined by
applying appropriate statutory tax rates to loss before income taxes result
from the following:
Year ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
Tax benefit at statutory rate (48.8%)............... $ 5,755 $ 3,582 $ 6,072
Increase (decrease) resulting from:
Movement in valuation allowance................... (3,693) (3,605) (6,133)
Participating rights.............................. (378) (30) (160)
Non deductible finance charges.................... (464) (348) (304)
Goodwill amortisation............................. (131) (118) (141)
Other............................................. (1,136) 309 346
------- ------- -------
$ (47) $ (210) $ (320)
======= ======= =======
F-19
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Deferred taxes result from temporary differences in the recognition of
income and expenses for financial reporting purposes and for tax purposes.
Components of the Company's net deferred tax liability are as follows:
At December 31,
------------------
1998 1999
-------- --------
Deferred income tax liabilities:
Accelerated depreciation.................................. $ 81,114 $ 75,323
Other..................................................... 3,467 7,674
-------- --------
Total deferred income tax liabilities....................... 84,581 82,997
Deferred income tax assets:
Carryforward losses....................................... 73,891 78,222
Interest on accretion..................................... 622 526
Capitalized crate cost.................................... 17,679 16,240
Patent.................................................... 3,596 2,626
Other..................................................... 6,164 4,974
-------- --------
Total deferred income tax assets............................ 101,952 102,588
-------- --------
Valuation allowance......................................... (17,371) (19,591)
-------- --------
Net deferred income tax assets.............................. 84,581 82,997
-------- --------
Deferred income tax assets, net............................. $ -- $ --
======== ========
Income tax payable at December 31, 1998 and 1999 was approximately $146 and
$207, respectively, and is included in accrued liabilities in the accompanying
combined and consolidated balance sheets.
As certain RTC leases are capitalized for book purposes but are treated as
operating leases for tax purposes, the amount of expense recognized for book
and tax purposes differs, resulting in a deferred tax asset. Such asset will
reverse over the life of the lease.
At December 31, 1998 and 1999, the Company has net operating loss
carryforwards in Germany of approximately $135,275 and $ 132,801, respectively.
The loss carryforwards attributable to German operations do not expire. The
loss carryforwards attributable to foreign operations at December 31, 1998 and
1999 are $18,648 and $ 27,489, respectively. These operating loss carryforwards
expire in 2005 and 2006, respectively. These carryforwards are available to
offset future taxable income. A valuation allowance has been made by the
Company to provide for all deferred tax assets. The valuation allowance is
necessary as the specific subsidiaries for which it is attributable have not
made profits consistently, thereby making it more likely than not that the
asset will not be realized. The amount of the valuation allowance is reviewed
periodically and will be released in the future if it becomes more likely than
not that these carryforward losses can be realized.
Activity in the Company's valuation allowance for deferred tax assets
consists of the following:
Year ended December 31,
------------------------
1997 1998 1999
------- ------- -------
Balance, beginning of year.......................... $ 5,497 $11,719 $17,371
Increase (decrease) due to foreign exchange
translation........................................ (958) 1,485 (3,120)
Additions during the year........................... 7,180 4,167 5,340
------- ------- -------
Balance, end of year................................ $11,719 $17,371 $19,591
======= ======= =======
F-20
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The valuation allowance allocated by tax jurisdiction is as follows:
Year ended December 31,
-----------------------
1997 1998 1999
------- ------- -------
Germany:
Current............................................... $ 300 $ 800 $ 420
Long-term............................................. 7,192 10,451 7,848
------- ------- -------
$ 7,492 $11,251 $ 8,268
Other:
Long-term............................................. $ 4,227 $ 6,120 $11,323
------- ------- -------
Total............................................... $11,719 $17,371 $19,591
======= ======= =======
At December 31, 1999 the recognition of any future tax benefits resulting
from the reduction of $2,910 of the valuation allowance will result in a credit
to accumulated deficit.
8. COMMITMENTS AND CONTINGENCIES:
Litigation
In 1998, one of the Company's subsidiaries was assessed a charge related to
value added tax by the Swiss government in the amount of approximately $2.0
million, resulting from differing interpretations of the Company's RTC activity
in Switzerland. The Company objects to the charge and is currently negotiating
with the tax authorities. The Company has accrued an amount that it believes to
be a probable liability.
In 1999, another of the Company's subsidiaries has been assessed a charge
related to value added tax by the Spanish government for the years 1995 through
1998. Negotiations between tax authorities and IFCO have given rise to a
potential settlement of approximately $1.2 million, which IFCO has included in
accrued liabilities at December 31, 1999.
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.
Leasing Arrangements
The Company also leases certain facilities and machinery under
noncancellable operating leases. Lease payments are expensed on a straight-line
basis over the term of the lease. Minimum future rental payments under these
leases as of December 31, 1999 are as follows:
Amount
-------
2000.............................................................. 4,180
2001.............................................................. 3,469
2002.............................................................. 2,511
2003.............................................................. 2,358
2004.............................................................. 1,457
Thereafter........................................................ 1,263
-------
$15,238
=======
Rent expense under operating leases was approximately $2,335, $4,442 and
$3,928 for the years ending December 31, 1997, 1998, and 1999, respectively.
F-21
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
9. RELATED PARTY TRANSACTIONS:
RTC Supply Contracts
IFCO Europe has historically purchased the majority of its RTCs through
single-year supply contracts with SPI. During 1997, the Company entered into a
ten-year supply agreement with SPI to provide all of the Company's plastic
RTCs. SPI will not provide plastic crates to other third party crate rental or
leasing companies. SPI unit prices are a function of their weight, the price
for granulate and the actual quantity purchased by the Company. There is not a
minimum purchase requirement. Changes in pricing may occur when SPI's
production costs vary by more that 15%, as defined in the agreement. This
supply agreement also states that the Company is to receive a fixed price per
kilogram for broken RTCs that are recollected from the Company by SPI. During
1997, 1998, and 1999, the Company paid SPI $45,472, $46,397, and $34,959,
respectively, for RTCs. Sale of broken RTCs from the Company to SPI totaled
$8,750, $9,438, and $9,475 in 1997, 1998, and 1999, respectively, and are
included within revenues.
Management Fee
The Company has entered into a management contract expiring in December 2000
with SLI to provide management and administrative services to the Company. The
Company has recorded $769, $576, and $954, in costs under this contract during
fiscal years 1997, 1998, and 1999, respectively, which are included in selling,
general and administrative costs in the accompanying combined and consolidated
statement of operations. The current contract expires on December 31, 2000, and
the Company is obligated to pay an additional $954 for management services
during 2000.
Related Party Working Capital Financing
The Company has generated payables to and receivables from SPI, primarily as
a result of the purchase of RTCs from SPI and the subsequent sale of broken
RTCs to SPI. Additionally, the Company has recorded receivables and payables
from other related parties. The Company receives interest on its receivables
and accrues interest on its payables at 7.5%.
The Company has recorded net interest income (expense) from related parties
which principally consist of SLI and SPI of approximately ($1,266), $215, and
$72, during fiscal years' 1997, 1998, and 1999, respectively.
Capital Distribution
During 1997, IFCO Europe purchased a patent for a type of plastic RTC from
SPI for $8,635. The patent had been internally developed by another related
party and had a nominal carrying value. As this represented a transfer of
assets under common control, the amount paid for the patent has been treated as
a capital distribution, and IFCO Europe is carrying the patent at the nominal
carrying value.
Cost Reimbursement Agreement
In January 1999, the Company entered into an additional agreement with
Schoeller Plast AG, an indirect 80%-owned subsidiary of SLI, in which Schoeller
Plast AG agreed to share higher initial costs related to the strategic growth
of the RTC leasing and supply business up to a maximum amount of DM 6.0 million
($3,272) for the year ended 1999. For the year ended December 31, 1999,
Schoeller Plast AG has reimbursed the Company DM 6.0 million ($3,272) which has
been recorded as a reduction of cost of goods sold. The agreement terminated at
the end of 1999 and subsequent to December 31, 1999, no further costs related
to the agreement will be reimbursed.
F-22
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
10. MERGER AND INTEGRATION COSTS:
The major components of merger and integration costs are as follows:
1999
------
PalEx transaction costs........................................... $2,800
Restructuring costs............................................... 564
Other............................................................. 155
------
$3,519
======
In connection with the merger between the Company and PalEx on March 8,
2000, the Company agreed to reimburse PalEx for their transaction costs
incurred during 1999 of approximately $2,800. These costs are expensed as they
are not direct costs of acquisition for the Company. In connection with the
restructuring of IFCO Systems N.V. due to the PalEx merger, four operational
employees were terminated during 1999. Costs incurred during 1999 relating to
this restructuring total $564, and are included in "merger and integration
costs" in the statement of operations. At December 31, 1999, the remaining
accrual balance is $500 and is included in accrued expenses and other current
liabilities on the balance sheet.
11. BUSINESS SEGMENTS:
The Company has three business segments, the European plastic RTC operations
("European perishables"), the dry good RTC operations ("Dry goods"), and the
non-European plastic RTC operations ("Non-European perishables"). The European
perishables and Non-European perishables segments sell, repair/wash, lease and
retrieve plastic RTCs primarily for use in agricultural markets. The Dry goods
segment has a reusable packing system for dry goods, primarily for use in
industrial markets.
The accounting policies for the segments are the same as those described in
Note 2, Summary of Significant Accounting Policies. The Company evaluates the
performance of its reportable segments and allocates resources based on
operating profit.
As discussed in Note 2, Summary of Significant Accounting Policies,
accumulated loss in excess of investments in equity entities relates to the
amount shown in the combined and consolidated balance sheet of a portion of
IFCO-US's and IFCO-Japan's losses recognized in excess of the carrying value of
the investments in IFCO-US and IFCO-Japan. Losses from equity entities
represents the portion of IFCO-US and IFCO Japan's losses that the Company has
recognized in the combined and consolidated statements of operations.
Year ended December 31, 1997
-----------------------------------------------------------
European Dry Non-European Combined and
perishables goods perishables Eliminations consolidated
----------- ------- ------------ ------------ ------------
Revenues................ $108,674 $ 9,580 $ 292 $ -- $118,546
Profit (loss) before
taxes.................. (7,338) (424) (4,031) (11,793)
Interest revenue........ 4,031 240 71 (455) 3,887
Interest expense........ (14,236) (244) (277) 455 (14,302)
Depreciation and RTC
breakage............... (25,009) (1,783) (137) -- (26,929)
Amortization of
goodwill............... (675) -- -- -- (675)
Total assets............ 237,629 15,242 2,411 (5,725) 249,557
Accumulated loss in
excess of investments
in equity entities..... -- -- (3,136) -- (3,136)
Losses from equity
entities............... -- -- (2,347) -- (2,347)
Capital expenditures.... (37,713) (1,783) (73) -- (39,569)
F-23
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Year ended December 31, 1998
-----------------------------------------------------------
European Dry Non-European Combined and
perishables goods perishables Eliminations consolidated
----------- ------- ------------ ------------ ------------
Revenues................ $125,128 $ 9,901 $ 1,147 $ -- $136,176
Profit (loss) before
taxes.................. (2,644) (470) (4,227) -- (7,341)
Interest revenue........ 1,660 238 7 (298) 1,607
Interest expense........ (11,910) (133) (356) 298 (12,101)
Depreciation and RTC
breakage............... (25,927) (1,917) (207) -- (28,051)
Amortization of
goodwill............... (383) -- -- -- (383)
Total assets............ 267,866 17,954 2,777 (4,144) 284,453
Accumulated loss in
excess of investments
in equity entities..... -- -- (4,472) -- (4,472)
Losses from equity
entities............... -- -- (2,726) -- (2,726)
Capital expenditures.... (37,690) (2,122) (383) -- (40,195)
Year ended December 31, 1999
-----------------------------------------------------------
European Dry Non-European Combined and
perishables goods perishables Eliminations consolidated
----------- ------- ------------ ------------ ------------
Revenues................ $141,984 $10,154 $ 2,588 $ -- $154,726
Profit (loss) before
taxes.................. (9,464) 900 (3,879) -- (12,443)
Interest income......... 834 76 8 (318) 600
Interest expense........ (11,217) (998) (634) 315 (12,534)
Depreciation and RTC
breakage............... (33,517) (1,474) (814) -- (35,805)
Amortization of
goodwill............... (289) -- -- -- (289)
Total assets............ 255,381 13,527 6,696 (8,983) 266,621
Accumulated loss in
excess of investments
in equity entities..... -- -- (5,623) -- (5,623)
Losses from equity
entities............... -- -- (1,738) -- (1,738)
Capital expenditures.... (29,256) (1,390) (121) -- (30,767)
Eliminations for revenue and expense items above are made to eliminate
intercompany sales and expenses. Eliminations for total asset are made for
total assets are made for intercompany receivables and investments in other
affiliated entities.
The Company's revenue by country, based on the location of the customer, is
as follows:
Year ended December 31,
--------------------------
1997 1998 1999
-------- -------- --------
Germany.......................................... $ 44,616 $ 49,838 $ 60,189
Spain............................................ 20,914 23,727 22,091
Italy............................................ 14,746 18,369 19,305
France........................................... 10,043 11,208 11,998
Other............................................ 28,227 33,034 41,143
-------- -------- --------
Combined and consolidated........................ $118,546 $136,176 $154,726
======== ======== ========
The Company's long-lived assets by country are as follows:
1998 1999
-------- --------
Germany................................................... $182,274 $179,023
Other..................................................... 2,201 5,958
-------- --------
Combined and consolidated................................. $184,475 $184,981
======== ========
F-24
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
12. EQUITY ENTITIES:
Summarized combined financial data of IFCO-US and IFCO-Japan, entities
accounted for under the equity method by the Company, is as follows:
At December 31,
----------------------------
1997 1998 1999
-------- -------- --------
Total assets................................... $ 20,058 $ 22,186 $ 38,682
Total liabilities.............................. $(27,437) $(32,783) $(52,727)
Members' deficit............................... $ (7,379) $(10,597) $(14,045)
Summarized income information for IFCO-US and IFCO-Japan is as follows:
At December 31,
-------------------------
1997 1998 1999
------- ------- -------
Revenue........................................... $ 3,709 $ 6,252 $12,447
Gross margin (loss)............................... (1,132) 213 4,478
Loss from operations.............................. (3,405) (3,213) (1,420)
Net Loss.......................................... (4,641) (5,303) (3,440)
13. SUBSEQUENT EVENTS:
Merger and IPO
On March 8, 2000, the Company completed the merger with PalEx upon the
approval of the shareholders of PalEx, in addition to an initial public
offering. Under the terms of the merger agreement, 7.4 million shares of IFCO
Systems N.V. common stock was issued to PalEx share holders. Also,
approximately $71.4 million was paid to former PalEx shareholders in exchange
for approximately 8.2 million shares of PalEx common stock. The merger will be
accounted for under purchase accounting, with the purchase price allocated to
the acquired assets and assumed liabilities based on fair market value. The
gross proceeds received by the Company from the IPO was $222.2 million.
Issuance of Shares to SLT
Effective March 1, 2000, the Company issued to SLT a total of 995,000 common
shares in connection with the contribution of IFCO Europe, MTS, and SIL.
Debt Offering
Effective March 3, 2000, the Company issued 10 5/8% Senior Subordinated
Notes ("SSN") in the amount of (Euro)200,000,000 ($192,349). The Company has
agreed to register similar notes with the SEC.
Debt Extinguishment
On March 8, 2000, the Company repaid the remaining outstanding balance under
the Senior Facility Agreement in the amount of DM 119 million ($58.4 million)
and repaid the remaining balance under the Senior Subordinated Agreement in the
amount of DM 35 million ($17.2 million).
Release of GECC's Options and Purchase of GECC's Interest in IFCO-Europe
On March 8, 2000, the Company made a payment of DM 43 million ($21.0
million) to GECC in exchange for the release of options and rights to purchase
shares in the IFCO Companies. The Company received a 4.5% discount on the
original contractual amount of DM 45 million payable to GECC.
F-25
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
On February 29, 2000 a debenture in the amount of DM 45 million ($22,151)
has been issued to GECC by SLT in exchange for the contribution of GECC's
preferred share in IFCO Europe to SLT. On March 1, 2000 SLT contributed this
preferential share to IFCO Systems N.V., effectively making IFCO Systems N.V.
the 100% shareholder of IFCO Europe. This debenture has a 30 year term and
bears interest at 5% per year. The debenture is convertible to IFCO Systems
N.V. ordinary shares that are held by SLT after a mandatory holding period.
Purchase of IFCO-US
On March 10, 2000, the Company paid $5.0 million to Intertape for its 49%
interest in IFCO-US, giving the Company 100% ownership of IFCO-US.
Payment of Participating Rights
On March 8, 2000, in connection with the IPO and the refinancing of IFCO,
the Company made a payment of DM 8.0 million ($3,915) to SPI for the
termination of the participating rights. This payment is an estimate of the
amount required to terminate the participating rights. SPI will reimburse the
Company for approximately DM 1.7 million ($838) as the Company made an over-
payment to SPI.
On March 8, 2000, the Company paid DM 2.8 million ($1,370) to ASMH to
terminate their redeemable participating rights held in SIL.
Repayment of Related Party Loans
On March 8, 2000, the Company repaid all short-term related party loans,
which are not included in accounts payable as of December 31, 1999.
F-26
APPENDIX B
[IFCO SYSTEMS LOGO APPEARS HERE]
First Quarterly Report
2000
IFCO SYSTEMS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2000
INDEX
Page
----
General Information....................................................... 2
Condensed Consolidated Balance Sheets--IFCO Systems N.V. and Subsidiaries
as of December 31, 1999 and March 31, 2000............................... 3
Condensed Consolidated Statements of Operations--IFCO Systems N.V. and
Subsidiaries for the Three Months Ended March 31, 1999 and March 31,
2000..................................................................... 4
Condensed Consolidated Statements of Cash Flows--IFCO Systems N.V. and
Subsidiaries for the Three Months Ended March 31, 1999 and March 31,
2000..................................................................... 5
Notes to the Condensed Consolidated Financial Statements.................. 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 14
1
GENERAL INFORMATION
IFCO Systems N.V. ("IFCO" or the "Company") was founded for the purpose of
merging the IFCO Companies, which consist of IFCO Europe Beteiligungs GmbH, MTS
Okologistik GmbH, and IFCO International Network Beteiligungsgesellschaft mbH,
and their subsidiaries, with PalEx, Inc. and its subsidiaries ("PalEx").
With the completion of the merger on March 8, 2000, the IFCO Companies'
round-trip container ("RTC") systems have been combined with PalEx's pallet and
industrial container operations. Round trip means that a container is used for
the flow of products through one whole distribution cycle and then is reused
multiple times. The Company's RTC operations are primarily in Europe and its
pallet and industrial container operations are in North America.
The Company is a leading provider of round-trip systems internationally,
serving over 9,000 customers in 17 countries. IFCO believes it owns the largest
pool of RTCs in Europe and it owns and manages a rental pool of over 1.5
million pallets in Canada, making it the second largest pallet rental pool
owner and manager in North America. In addition, the Company is the largest
provider of new and recycled pallets in North America and is the largest
provider of industrial container services in North America.
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 audited Combined and Consolidated Financial Statements of IFCO
Systems N.V. and Subsidiaries for each of the three years ended December 31,
1999, and as of December 31, 1998 and 1999, and related notes thereto, as filed
with the Frankfurt Stock Exchange on May 31, 2000, in the Company's 1999 Annual
Report (the "Audited Financial Statements").
2
IFCO SYSTEMS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
December 31, March 31,
1999 2000
------------ ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 12,240 $ 36,172
Accounts receivable................................... 64,809 139,035
Inventories........................................... -- 35,884
Other current assets.................................. 4,591 22,480
-------- --------
Total current assets................................ 81,640 233,571
PROPERTY, PLANT AND EQUIPMENT, net...................... 167,678 250,345
GOODWILL AND OTHER INTANGIBLE ASSETS.................... -- 280,121
OTHER ASSETS............................................ 17,303 39,265
-------- --------
Total assets........................................ $266,621 $803,302
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term loans...................................... $ 795 $ --
Current maturities of long-term debt and related party
loans................................................ 72,318 899
Current maturities of capital lease obligations....... 10,329 9,365
Refundable deposits................................... 66,436 71,608
Accounts payable, accrued expenses and other current
liabilities.......................................... 96,586 141,901
-------- --------
Total current liabilities........................... 246,464 223,773
ACCUMULATED LOSSES IN EXCESS OF INVESTMENT IN EQUITY
ENTITIES............................................... 5,623 --
LONG-TERM DEBT AND RELATED PARTY LOANS, net of current
maturities............................................. -- 247,268
CAPITAL LEASE OBLIGATIONS, net of current maturities.... 24,198 21,063
MINORITY INTEREST, PARTICIPATING AND REDEEMABLE
PARTICIPATING RIGHTS................................... 30,008 --
OTHER LONG-TERM LIABILITIES............................. -- 18,376
COMMITMENTS AND CONTINGENCIES...........................
STOCKHOLDERS' EQUITY:
Ordinary shares, (Euro)2 nominal value, 25,000,000 and
100,000,000 authorized shares, respectively; 25,000
and 42,538,672 issued and outstanding, respectively.. 54 87,102
Additional paid-in capital............................ 10,339 275,421
Accumulated other comprehensive income:
Foreign currency translation adjustment............. 2,672 5,672
Accumulated deficit................................... (52,737) (75,373)
-------- --------
Total stockholders' equity.............................. (39,672) 292,822
-------- --------
Total liabilities and stockholders' equity.......... $266,621 $803,302
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
IFCO SYSTEMS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
Three Months Ended
-----------------------
March 31, March 31,
1999 2000
---------- ----------
REVENUES.............................................. $ 38,799 $ 57,263
COST OF GOODS SOLD.................................... 31,289 47,319
---------- ----------
Gross profit...................................... 7,510 9,944
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 6,137 6,865
MERGER TRANSACTION EXPENSES........................... 582 1,283
GOODWILL AMORTIZATION................................. 72 642
OTHER OPERATING INCOME, NET........................... (234) (147)
---------- ----------
Income from operations............................ 953 1,301
INTEREST EXPENSE, NET................................. (3,081) (4,303)
FOREIGN CURRENCY LOSSES............................... (185) (152)
LOSS FROM EQUITY ENTITY............................... (521) (417)
OTHER EXPENSE, NET.................................... (404) (110)
---------- ----------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST........ (3,238) (3,681)
INCOME TAX PROVISION (BENEFIT)........................ 34 (707)
MINORITY INTEREST..................................... (65) --
---------- ----------
LOSS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE.................... (3,337) (2,974)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT.... -- (5,600)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE... -- 770
---------- ----------
NET LOSS.............................................. $ (3,337) $ (7,804)
========== ==========
LOSS PER SHARE (pro forma for 1999)--basic and
diluted, before extraordinary item and cumulative
effect of change in accounting principle............. $ (.17) $ (.12)
Extraordinary item--loss on early extinguishments of
debt................................................. -- (.22)
Cumulative effect of change in accounting principle... -- .03
---------- ----------
NET LOSS PER SHARE (pro forma for 1999)--basic and
diluted.............................................. $ (.17) $ (.30)
========== ==========
Weighted average shares used in computing net loss per
share (pro forma for 1999)--basic and diluted........ 20,000,000 25,603,018
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
IFCO SYSTEMS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
--------------------
March 31, March 31,
1999 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ (3,337) $ (7,804)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities--
Depreciation and amortization.......................... 10,060 14,993
Foreign currency exchange loss......................... 185 153
(Gain) loss on sale of assets.......................... 6
Losses from equity entities............................ (521) (417)
Changes in operating assets and liabilities--
Accounts receivable.................................. (20,135) (8,357)
Inventories.......................................... (1,077) (663)
Other current assets................................. (293) (1,832)
Accounts payable and accrued expenses................ 16,512 (14,523)
Other assets and liabilities......................... (155) (141)
-------- --------
Net cash (used in) provided by operating activities.... 1,239 (18,585)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of RTCs........................................ (16,789) (6,623)
Purchases of property, plant and equipment............... (46) (2,381)
Proceeds from sale of equipment.......................... 570 39
Purchase of intangible assets............................ (207) (40,134)
Purchase of investments carried at cost.................. (826) (566)
Cash paid for business acquisitions, net of cash
acquired................................................ -- (77,052)
-------- --------
Net cash used in investing activities.................. (17,298) (126,717)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and related party loans..... 1,755 251,747
Payments on long-term debt and related party loans....... (3,387) (251,988)
Payments of acquired indebtedness of purchased
companies............................................... -- (34,888)
Payments on capital lease obligations.................... (1,836) (2,072)
Payments for termination of participating rights......... -- (3,135)
Net proceeds from factoring.............................. 1,185 --
Net proceeds from issuance of common stock............... -- 207,532
Net proceeds from exercise of stock options.............. -- 2,034
Distributions to stockholders............................ (128) --
-------- --------
Net cash provided by financing activities.............. (2,411) 169,230
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... -- 4
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... (18,470) 23,932
CASH AND CASH EQUIVALENTS--beginning of period........... 23,642 12,240
CASH AND CASH EQUIVALENTS--end of period................. $ 5,172 $ 36,172
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for--
Interest............................................... $ 3,098 $ 5,394
Income taxes........................................... $ 11 $ 22
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
IFCO SYSTEMS N.V. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
1. BASIS OF PRESENTATION
IFCO Systems N.V. (the "Company" or "IFCO"), which was incorporated under
the laws of the Netherlands on March 31, 1999, is a holding company for IFCO
Europe Beteiligungs GmbH ("IFCO Europe"), MTS Okologistik GmbH ("MTS"), IFCO
International Network Beteiligungsgesellschaft mbH (formerly known as
Schoeller International Logistics Beteiligungsgesellschaft mbH) ("IFCO
International", and together with IFCO Europe and MTS, the "IFCO Companies"),
and PalEx, Inc. and its subsidiaries ("PalEx"), which was acquired by merger
(the "Merger") on March 8, 2000 concurrently with the Company's initial public
offering and related transactions. As such, PalEx's financial position and
results of operations for the period from March 8, 2000 through March 31, 2000
are included in the accompanying condensed consolidated financial statements.
The accompanying financial statements have been prepared in accordance with
U.S. generally accepted accounting principles. Unless otherwise noted, all
amounts are shown in U.S. dollars, which IFCO has elected as its reporting
currency. The Company's assets, liabilities, revenues, and expenses are
subject to exchange rate fluctuations between the U.S. dollar and the Deutsch
mark, since the Deutsch mark is the functional currency of the Company's
European operations.
The IFCO Companies have been identified as the accounting acquiror for
financial reporting purposes.
The Company
IFCO Europe, a German company that is 100% owned by the Company, is
involved in the organization and administration of the purchase, distribution
and leasing of round-trip container ("RTC") systems in Germany and other
European countries. The RTCs are leased primarily to producers of fresh fruit
and vegetables in exchange for a one-time usage fee. The producers' goods are
transported in the RTCs to various intermediaries and ultimately retailers for
sale to consumers. IFCO Europe delivers the empty RTCs to customers' bulk
warehouses and collects the empty RTCs from regional service points, where the
RTCs are transported to the Company's depots and cleaned for reuse.
MTS, a German company that is 100% owned by the Company, was established in
1992 and offers a reusable packing system for dry goods sold primarily by
retailers. MTS's business processes are generally similar to those of IFCO
Europe.
IFCO International, a German company that is 100% owned by the Company, was
established in 1994 to hold ownership interests in RTC systems in the United
States, Argentina and Japan. The operation in Argentina is wholly owned and is
consolidated within IFCO International. IFCO International owns a 33%
ownership investment in the Japanese operations. The operation in Japan is
accounted for under the equity method. The Company's share of losses in the
Japanese operation has exceeded its initial capital investment. The Company
has not recorded its proportionate shares of the Japanese operation's losses
as the Company is under no obligation, and has no intention, to fund the
Japanese operation's losses. Effective with the date of the Merger, the
Company now owns 100% of IFCO-U.S. L.L.C. ("IFCO-U.S"), which operates the
Company's RTC system in the United States. IFCO International's business
processes are generally similar to those of IFCO Europe.
PalEx, a U.S. company that is 100% owned by the Company, was founded in
January 1996 to create a nationwide provider of pallet products and related
services. Between the time of its founding and October, 1998, PalEx acquired,
either directly or through other subsidiaries, 27 companies, three of which
were its
6
IFCO SYSTEMS N.V. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
founding companies and eight of which are engaged in the reconditioning and
rebuilding of industrial steel containers. One is engaged in the rental of
pallets in Canada.
The Company's headquarters are located in Amsterdam, the Netherlands. Its
European subsidiaries' headquarters are in Pullach, Germany, and its North
American subsidiaries' headquarters are in Houston, Texas. There are operations
in approximately 60 locations in Europe, 11 locations in Japan, 6 locations in
Argentina and approximately 80 locations in North America.
The accompanying unaudited condensed consolidated financial statements are
prepared pursuant to the rules and regulations for reporting interim results
for companies listed on the SMAX segment of the Frankfurt Stock Exchange.
Accordingly, certain information and footnotes required by United States
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 Audited Financial Statements.
The Merger and Initial Public Offering
In March 2000, IFCO completed the merger of PalEx with and into Silver Oak
Acquisition Corp., IFCO's newly formed, wholly owned subsidiary, which changed
its name to "PalEx, Inc." As a result of the merger and related transactions,
IFCO owns all of the stock of the IFCO Companies and PalEx. In the merger,
PalEx stockholders received merger consideration with a total value of $9.00
per share consisting of cash and/or the Company's ordinary shares for each
share of PalEx common stock. The total merger consideration for all the shares
of PalEx common stock was $71.4 million in cash and 7.4 million of IFCO's
ordinary shares based on elections by PalEx stockholders and adjustments
pursuant to the merger agreement. The total consideration for the merger was
$184.5 million for the PalEx common stock plus the assumption of debt of PalEx,
which was $153.5 million as of March 8, 2000.
In connection with the merger, IFCO also completed an initial public
offering of 13.0 million ordinary shares in March 2000 and subsequently issued
an additional 1.95 million ordinary shares upon the underwriters' exercise of
their overallotment option (collectively, the "IPO"). The total net proceeds to
the Company from the IPO, including the exercise of the overallotment option,
were $210.0 million. Effective March 8, 2000, the Company issued 10 5/8% Senior
Subordinated Notes Due 2010 ("Senior Subordinated Notes") in the principal
amount of (Euro)200.0 million ($181.9 million, based on current exchange
rates). The net proceeds from the IPO, the net proceeds from the Senior
Subordinated Notes, borrowings from the Company's new senior credit facility,
along with cash on hand, were used to repay a substantial portion of the debt
of the IFCO Companies and PalEx, to pay the cash portion of the merger
consideration to PalEx stockholders in the amount of $71.4 million, to fund the
cash payment due to GE Capital Corporation ("GE Capital") described below, and
to fund IFCO's purchase of the remaining joint venture interest in IFCO-U.S.
In addition, IFCO, together with Schoeller Logistics Industries GmbH
("Schoeller Industries"), the shareholders of Schoeller Industries, Schoeller
Plast Industries GmbH, and Gebruder Schoeller Beteiligungsverwaltungs GmbH
entered into the Option Release and IPO-Facilitation Agreement with GE Capital
and General Electric Erste Beteiligungs GmbH ("GE Erste"), in connection with
the merger and the IPO. Pursuant to that agreement, Schoeller Logistic
Technologies Holding GmbH ("SLT") issued a DM45.0 million, or approximately
$20.9 million, convertible debenture to GE Erste in exchange for the
contribution of the preferential share of IFCO Europe owned by GE Erste. The
Company also paid GE Capital DM43.0 million, or approximately $21.0 million,
out of the net proceeds of the IPO, the offering of the Senior Subordinated
Notes, and the initial borrowings under the new senior credit facility in
consideration of the release of GE Capital's and GE Erste's options and other
rights to purchase shares of the IFCO Companies.
7
IFCO SYSTEMS N.V. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective March 1, 2000, the Company issued a total of 995,000 (4,975,000
split effected) common shares in connection with the contribution of IFCO
Europe, MTS, and IFCO International to IFCO.
On March 8, 2000, the Company repaid the remaining outstanding balance under
its previous senior facility agreement in the amount of DM119 million
($58.4 million) and repaid the remaining balance under the previous senior
subordinated agreement in the amount of DM35 million ($17.2 million).
On March 8, 2000, in connection with the IPO and the refinancing of IFCO,
the Company made a payment of DM8.0 million ($3.9 million) to Schoeller Plast
Industries GmbH for the termination of participating rights. This payment was
an estimate of the amount required to terminate the participating rights. The
Company will be reimbursed by the participating rights holder for an
overpayment of approximately DM1.7 million ($0.8 million).
On March 8, 2000, the Company paid DM2.8 million ($1.4 million) to terminate
the redeemable participating rights held in IFCO International.
On March 8, 2000, the Company repaid all short-term related party loans.
Prior to the merger, during the three months ended March 31, 2000, the
Company declared a five-for-one ordinary share split. Ordinary shares
authorized, issued and outstanding have been restated on the accompanying
condensed consolidated balance sheets to reflect the split. Nominal value was
changed from (Euro)10 to (Euro)2.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company maintains its accounting records using a calendar year, except
for PalEx, which uses a 52/53 week year ending on the last Sunday in December.
Except as discussed in the following paragraph, 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 the
Audited Financial Statements.
The Company undertook a comprehensive review of its RTC refurbishment cost
capitalization policies. The results of this review led the Company to conclude
that it should adopt the accounting method that it believes most fairly matches
the cost of refurbishing RTCs with the revenue cycle of RTCs. Previously, the
Company charged cost of sales for refurbishing costs at the end of the RTC trip
cycle. The Company now charges costs of sales for refurbishing expenses when
the RTC begins the trip cycle. The reasoning underlying this change in
accounting policy is that refurbishing the RTC prepares it for the next trip
cycle. While the accounting policy for refurbishing costs previously followed
by the Company was in accordance with generally accepted accounting principles,
the changed policy is preferable. The effect of this change in accounting for
the three months ended March 31, 2000 was a credit of $0.8 million ($.03 per
share).
3. GOODWILL RELATED TO THE MERGER
The acquisition of PalEx and the remaining interest in IFCO-U.S were
accounted for as purchases and have been reflected in the Company's financial
statements as of March 8, 2000. The aggregate consideration paid in these
transactions was $77.1 million in cash and 7.4 million of the Company's
ordinary shares with a fair value of approximately $110.7 million based on the
initial public offering price of the ordinary shares. The accompanying balance
sheet as of March 31, 2000 includes allocations of the purchase price. The
allocations resulted in approximately $74.7 million in goodwill. The goodwill
from the purchase of PalEx and remaining interest in IFCO-U.S. is being
amortized over 30 years.
8
IFCO SYSTEMS N.V. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. LONG-TERM DEBT
On the closing date of the IPO and the merger, IFCO and PalEx entered into a
new syndicated, secured senior credit facility, which was amended and restated
on March 31, 2000, to complete the syndication. The syndicate of banks,
financial institutions, and other entities includes Canadian Imperial Bank of
Commerce and Bank One, Texas, NA. PalEx is the borrower, and IFCO and IFCO's
other subsidiaries are guarantors. CIBC World Markets Corp. and Bank One
Capital Markets, Inc., are the co-arrangers, and Bank One, Texas, NA is also
the administrative agent. The new senior credit facility replaced the former
credit facilities of IFCO Europe discussed below and PalEx's senior credit
facility, the outstanding balances of all of which were repaid in March 2000
with cash on hand, the net proceeds of the IPO and the offering of the Senior
Subordinated Notes discussed below, and initial borrowings under the new senior
credit facility.
The results of operations for the three months ended March 31, 2000 include
an extraordinary loss on the extinguishment of debt of $5.6 million. The loss
occurred as a result of the write-off of unamortized portions of deferred bank
fees and other charges related to credit facilities that were paid off in
conjunction with the merger and related transactions.
The new senior credit facility provides for borrowings of up to $235.0
million and consists of (1) a multi-draw term loan facility in an aggregate
principal amount of up to $108.75 million and (2) a revolving credit facility
providing for revolving loans to PalEx of up to $126.25 million. The term loan
may be borrowed in up to 20 drawings commencing on the closing date of the IPO
and the merger and ending on the third anniversary of the closing date. The
term loan facility may be used only to finance permitted acquisitions.
Permitted acquisitions include any acquisition in which the total consideration
paid does not exceed $25.0 million. The aggregate amount of consideration IFCO
or its subsidiaries pay in connection with permitted acquisitions during any
consecutive 12-month period may not exceed $90.0 million. There was $28.0
million outstanding under the new senior credit facility as of March 31, 2000.
PalEx is able to draw on the revolving credit facility from the closing date
of the IPO and the Merger through the third anniversary of the closing date.
The revolving credit facility matures on the sixth anniversary of the closing
date. The revolving credit facility may be utilized to make capital
expenditures and to finance the working capital needs of IFCO and its
subsidiaries in the ordinary course of business and to pay fees and expenses
related to the transactions. The borrowing base under the revolving credit
facility is based on a percentage of IFCO's eligible accounts receivable,
eligible inventory, and eligible RTCs. Eligible inventory includes RTCs and
pallets that IFCO and its subsidiaries own for lease to third parties, and
eligible RTCs are those owned by IFCO-U.S.
The outstanding amounts under the term loan and the revolving credit
facility, as well as the swingline facility described below, bear interest at
interest rates determined based upon the Company's consolidated total leverage
ratio, which is defined in the new senior credit facility, and changes
quarterly commencing with September 30, 2000. The rates range from a high of
300 basis points over LIBOR and 200 basis points over prime rate, if the
Company's consolidated total leverage ratio is greater than 3.25, to a low of
200 basis points over LIBOR and 100 basis points over prime rate, if the
Company's consolidated total leverage ratio is less than 1.75. The new senior
credit facility establishes a 25 basis point increase if the consolidated total
leverage ratio is 1.75 to less than 2.25 and a similar increase for each .50
increase in the consolidated total leverage ratio. Generally the Company may
elect one-, two-, three- and six-month LIBOR.
The outstanding amounts under the term loan and the revolving credit
facility are repayable in 12 consecutive quarterly installments commencing 39
months after the closing date in an aggregate amount for each 12-month period
equal to 20% in the first period, 30% in the second period, and 50% in the
third period.
9
IFCO SYSTEMS N.V. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PalEx has available to it a multi-currency swingline facility for short-term
borrowings denominated in certain readily available and freely tradable
currencies in an amount not to exceed $50.0 million and a dollar swingline
facility in an amount not to exceed $25.0 million. Any multi-currency swingline
loan or dollar swingline loan reduces availability under the revolving facility
on a dollar-for-dollar basis. PalEx may obtain letters of credit, in an
aggregate amount not in excess of $25.0 million of the revolving facility,
issued by Canadian Imperial Bank of Commerce and Bank One, NA. Drawings under
any letter of credit will be reimbursed by PalEx on the same business day.
PalEx's obligations under the new senior credit facility are guaranteed by
IFCO and each of its existing and future direct and indirect subsidiaries,
other than subsidiaries deemed immaterial by the administrative agent. The new
senior credit facility and the guarantees are secured by a perfected first
priority security interest in all of the loan parties' substantial tangible and
intangible assets, except for those assets the co-lead arrangers determine in
their sole discretion that the cost of obtaining the security interest are
excessive in relation to the value of the security.
The new senior credit facility contains a number of covenants that, among
other things, limit IFCO's and its subsidiaries' ability to dispose of assets,
incur additional debt, merge or consolidate, pay dividends, create liens on
assets, enter into sale and leaseback transactions, make investments, loans, or
advances, make acquisitions, make capital expenditures, prepay debt, or engage
in certain transactions with affiliates, and otherwise restricts certain
corporate activities. In addition, the new senior credit facility requires that
IFCO and its subsidiaries comply with specified ratios and tests, including a
minimum net worth test, a fixed charge coverage ratio, an interest coverage
ratio, a leverage ratio, and a minimum EBITDA requirement. At March 31, 2000,
the Company was in compliance with all covenants of the new senior credit
facility.
The new senior credit facility contains customary events of default,
including non-payment of principal, interest, or fees, material inaccuracy of
representations and warranties, violation of covenants, cross-default to
certain other debt, certain events of bankruptcy and insolvency, certain events
under ERISA, material judgments, actual or asserted invalidity of any
guarantee, security document, subordination provision, or security interest,
and a change of control in certain circumstances.
On March 8, 2000, IFCO issued (Euro)200.0 million principal amount of Senior
Subordinated Notes, which translates to approximately $181.9 million, based on
current exchange rates, in a private placement. The total net proceeds to the
Company from the issuance of the Senior Subordinated Notes were $184.7 million.
The Senior Subordinated Notes mature on March 15, 2010. Interest at the rate of
10 5/8% per year from the date of issuance is payable semiannually in arrears
on each March 15 and September 15 commencing September 15, 2000. The Senior
Subordinated Notes are not secured, but are guaranteed by the Company's
material subsidiaries. The notes and the guarantees rank behind all of IFCO's
existing and future senior debt, including IFCO's obligations under the new
senior credit facility. The indenture governing the Senior Subordinated Notes
contains a number of significant covenants, which restrict IFCO's corporate and
business activities, including its ability to dispose of assets, incur
additional debt, prepay other debt, pay dividends, repurchase or redeem capital
stock, enter into specified investments or create new subsidiaries, enter in to
sale and lease-back transactions, make specific types of acquisitions, engage
in mergers or consolidations, create liens, or engage in certain transactions
with affiliates.
The new senior credit facility permits specified levels of receivable
factoring. During 1994, IFCO Europe had entered into a factoring agreement
under which IFCO Europe could offer all of its trade receivables to a factoring
agent. Under the factoring agreement, the sales price is the nominal value of
the receivable less a factoring fee of 0.6% of the nominal value of the
factored receivables. The factoring agent has the right to collect the
receivables and bears the collection risk. The factoring agent is required to
remit 75% of the
10
IFCO SYSTEMS N.V. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
factored receivables to IFCO Europe. The remainder, less the factoring charge,
is held in an escrow account and is remitted to IFCO Europe following
collection. The interest rate on cash advances relating to factored receivables
is based on the three-month EURIBOR rate plus 1.25%, or 5.1% as of March 31,
2000. For the three months ended March 31, 2000, IFCO Europe factored 48% of
its revenues and incurred factoring and interest charges of $1.0 million.
At March 31, 2000, IFCO had entered into several capital lease agreements
resulting in total capital lease obligations of $30.4 million.
5. NET LOSS PER SHARE
Net loss per share--basic for the three months ended March 31, 2000 was
computed using 25,603,018 weighted average shares (the shares attributable to
the IPO, the shares issued to the stockholders of PalEx, the shares allocated
for future transfers to shareholders of the Company's Canadian subsidiary, the
shares issued to the former shareholders of IFCO Europe, MTS and IFCO
International, and the shares issued through March 31, 2000 pursuant to the
exercise of stock options). Unaudited pro forma net loss per share--basic for
the three months ended March 31, 1999 was computed using the 20,000,000
outstanding ordinary shares, which were issued to the existing IFCO Companies'
shareholders prior to the merger and reflects the five-for-one ordinary share
split. The effect of unexercised stock options determined under the treasury
method was anti-dilutive for the three months ended March 31, 2000 and
March 31, 1999.
In conjunction with the merger, each option to purchase PalEx common stock
that was outstanding on the date of the merger was converted into an option to
purchase a certain number of ordinary shares of IFCO, as determined by the
merger agreement. The PalEx options became immediately vested upon completion
of the merger and conversion to IFCO options.
6. COMMITMENTS AND CONTINGENCIES
Litigation
In 1998, one of the Company's subsidiaries was assessed a charge related to
value added tax by the Swiss government in the amount of approximately $2.0
million, resulting from differing interpretations of the Company's RTC activity
in Switzerland. The Company objects to the charge and is currently negotiating
with the tax authorities. The Company accrued an amount during 1999 that it
believes to be a probable liability.
Potential Environmental Liabilities
In February 1998, PalEx acquired Drum Service of Florida ("DSF"), a steel
drum reconditioning company with a facility in Zellwood, Florida. DSF is a
wholly-owned subsidiary of PalEx Container Systems, Inc., a wholly owned
subsidiary of PalEx ("PCS"). 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 shareholders 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
11
IFCO SYSTEMS N.V. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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.
On June 12, 1998 a suit was filed in the United States District Court for
the Middle District of Florida (Orlando Division) against DSF and certain other
PRPs with respect to the Zellwood Site (United States of America v. Drum
Service Co. of Florida, John Michael Murphy, Douglass Fertilizer & Chemical,
Inc., et, al., Civil No. 98-687-Civ-Orl-22C) (the "Zellwood Suit"). In this
lawsuit, the EPA is seeking reimbursement of costs incurred at the Zellwood
Site during the past 17 years and a declaratory judgment for future response
costs.
DSF has maintained comprehensive general liability insurance coverage for
over 25 years, and a number of the policies providing such coverage did not
contain exclusions for environmental contamination. DSF has notified the
insurers that issued such policies of the EPA's claims regarding the Zellwood
Site and the commencement of the Zellwood Suit. The insurer has now agreed to
pay DSF's legal fees and expenses in defending the EPA lawsuit and to reimburse
DSF for past legal fees and expenses. In addition, the former shareholders of
DSF have agreed with DSF and PalEx to bear liabilities and expenses with
respect to the Zellwood Site, to the extent such liabilities exceed DSF's and
PalEx's insurance recoveries.
DSF and several other PRPs are currently negotiating with the EPA to settle
the Zellwood Suit. DSF intends to vigorously defend the Zellwood Suit and
pursue its insurance coverage with respect to losses and expenses incurred in
connection with the Zellwood Site. Although there can be no assurance as to any
ultimate liability of DSF under the Zellwood Suit, the amount of recoveries
from other PRPs or the insurance coverage, or the amount of insurance
recoveries, the Company's management believes that DSF's insurance coverage,
recoveries from other PRPs and the obligations of DSF's former shareholders
will be adequate to cover any liability or expenses of DSF arising from the
Zellwood Suit. The accompanying consolidated balance sheet as of March 31, 2000
includes a $2.0 million receivable from a former shareholder of DSF and a
corresponding amount in other long-term liabilities.
7. BUSINESS SEGMENTS
As a result of the merger, the Company now has two business segments, one
operating in the materials handling services industry ("Systems and Services")
and the other in the pallet manufacturing industry ("Manufacturing"). The
Systems and Services segment leases RTCs in Europe, North and South America and
Japan, recycles, sells, repairs, leases and retrieves wooden pallets in the
United States and Canada primarily for use in agricultural and industrial
markets and reconditions and sells steel drums in the United States primarily
for use in agricultural and industrial markets. The Manufacturing segment
manufactures wooden pallets and crates in the United States primarily for use
in industrial and agricultural markets. There were no significant intercompany
sales between the two segments for the three month periods ended March 31, 1999
and March 31, 2000.
The Company's business segments are managed separately because they require
different technology and marketing strategies.
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.
12
IFCO SYSTEMS N.V. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999
-----------------------------------
Systems
and
Services Manufacturing Consolidated
-------- ------------- ------------
Revenues................................... $38,799 $ -- $38,799
Earnings contribution...................... 881 -- 881
Corporate expenses......................... --
Interest expense........................... (3,081)
Amortization of goodwill................... 72
Other income (expense)..................... (1,110)
Income before provision for income taxes... $(3,238)
Three Months Ended March 31, 2000
-----------------------------------
Systems
and
Services Manufacturing Consolidated
-------- ------------- ------------
Revenues................................... $45,042 $12,221 $57,263
Earnings contribution...................... 1,339 927 2,266
Corporate expenses......................... (1,607)
Interest expense........................... (4,303)
Amortization of goodwill................... 642
Other income (expense)..................... (679)
Income before provision for income taxes... $(3,681)
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the Audited
Financial Statements of IFCO.
IFCO, which was incorporated under the laws of the Netherlands on March 31,
1999, is a holding company for IFCO Europe, MTS, IFCO International, and PalEx
and their subsidiaries. PalEx and its subsidiaries were acquired by the Merger
on March 8, 2000 concurrently with the Company's IPO and related transactions.
Results Of Operations
The results of operations for the periods presented include IFCO and its
wholly owned subsidiaries, IFCO Europe, IFCO International, and MTS, and the
results of operations of PalEx, Inc. and IFCO U.S. from the date of their
acquisitions effective March 8, 2000.
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 Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated (dollars in thousands):
Three Months Ended
-------------------------------
March 31, March 31,
1999 2000
-------------- --------------
Revenues.................................... $38,799 100.0% $57,263 100.0%
Cost of goods sold.......................... 31,289 80.6 47,319 82.6
------- ----- ------- -----
Gross profit................................ 7,510 19.4 9,944 17.4
Selling, general and administrative
expenses................................... 6,137 15.8 6,865 12.0
Merger transaction expenses................. 582 1.5 1,283 2.2
Goodwill amortization....................... 72 .2 642 1.1
Other operating income...................... (234) (.6) (147) (.2)
------- ----- ------- -----
Income from operations...................... 953 2.5 1,301 2.3
Interest expense............................ (3,081) (7.9) (4,303) (7.5)
Foreign currency losses..................... (185) (.6) (152) (.3)
Loss from equity entity..................... (521) (1.3) (417) (.7)
Other expense, net.......................... (404) (1.0) (110) (.2)
------- ----- ------- -----
Loss before income taxes and minority
interest................................... (3,238) (8.3) (3,681) (6.4)
Provision (benefit) for income taxes........ 34 .1 (707) (1.2)
Minority interest........................... (65) (.2) -- --
------- ----- ------- -----
Loss before extraordinary loss and
cumulative effect of change in accounting
principle.................................. (3,337) (8.6) (2,974) (5.2)
Extraordinary loss on early extinguishments
of debt.................................... -- -- (5,600) (9.8)
Cumulative effect of change in accounting
principle.................................. -- -- 770 1.4
------- ----- ------- -----
Net loss.................................... $(3,337) (8.6)% $(7,804) (13.6)%
======= ===== ======= =====
14
The functional currency is the local currency of each subsidiary. The
Company has selected the U.S. dollar (US$) as its reporting currency. The
financial statements of the Company's operations which are not denominated in
US$ are translated using the exchange rate as of the balance sheet date for
assets and liabilities and a weighted average exchange rate for the reported
amount of revenues, expenses, gains, and losses during the reporting period.
The US$ generally strengthened against the Deutsch mark during the three
months ended March 31, 1999 and 2000 and strengthened between 2000 and 1999.
During the three months ended March 31, 1999, the period average rate of
Deutsch marks per US$ was 1.74. During the three months ended March 31, 2000,
the period average rate of Deutsch marks per US$ was 1.98, resulting in a
period average increase of 13.8%.
Revenues increased 47.6% to 57.3 million in the three months ended March 31,
2000 from $38.8 million in the three months ended March 31, 1999. The increase
in revenues for the three months ended March 31, 2000 over the same period in
1999 attributable to the acquisition of PalEx was approximately $20.8 million.
DM Revenues for RTC operations in Europe for the three months ended March 31,
2000 increased 5.5% from the three months ended March 31, 1999; however, due to
the currency effects noted above, US$ revenues decreased $2.3 million, or 5.9%,
between the periods.
Gross profit increased to $9.9 million for the three months ended March 31,
2000 from $7.5 million for the three months ended March 31, 1999. Gross profit
as a percentage of revenues decreased from 19.4% for the three-month period
ended March 31, 1999 to 17.4% for the three month period ended March 31, 2000,
primarily due to increased costs for RTC operations in Europe. 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 and transportation costs.
Selling, general and administrative expenses increased to $6.9 million, or
12.0% of revenues, in the three months ended March 31, 2000 from $6.1 million,
or 15.8% of revenues, in the three months ended March 31, 1999.
The results of operations for the three months ended March 31, 2000 and
March 31, 1999 include merger transaction expenses of $1.3 million and $0.6
million, respectively. The transaction expenses for the three months ended
March 31, 1999 were primarily for non-capitalizable legal and accounting fees.
The transactions expenses for the three months ended March 31, 2000 were
primarily for success bonuses paid upon completion of the merger and retention
bonuses for key executives.
Goodwill amortization increased to $0.6 million for the three months ended
March 31, 2000 from $0.1 million for the three months ended March 31, 1999 and
is the result of the acquisition of PalEx under purchase accounting.
Interest expense increased to $4.3 million for the three months ended
March 31, 2000 from $3.1 million for the three months ended March 31, 1999,
primarily as a result of increased borrowings for the Company's European
operations.
The results of operations for the three months ended March 31, 2000 include
an extraordinary loss on the extinguishment of debt of $5.6 million. The loss
occurred as a result of the write-off of unamortized portions of deferred bank
fees and other charges related to credit facilities that were paid off in
conjunction with the merger and related transactions.
The results of operations for the three months ended March 31, 2000 includes
the cumulative effect of an accounting change related to the method used to
record RTC refurbishment costs in the amount of a credit of $0.7 million. The
Company undertook a comprehensive review of its RTC refurbishment cost
capitalization policies. The results of this review led the Company to conclude
that it should adopt the accounting method that it believes most fairly matches
the cost of refurbishing RTCs with the revenue cycle of RTCs. Previously,
15
the Company charged cost of sales for refurbishing costs at the end of the RTC
trip cycle. The Company now charges costs of sales for refurbishing expenses
when the RTC begins the trip cycle. The reasoning underlying this change in
accounting policy is that refurbishing the RTC prepares it for the next trip
cycle. While the accounting policy for refurbishment costs previously followed
by the Company was in accordance with generally accepted accounting principles,
the changed policy is preferable.
Other operating income, foreign currency losses, loss from equity entity,
and other income expense totaled $0.8 million in expense for the three months
ended March 31, 2000 and $1.3 million for the three months ended March 31,
1999.
As a result of the foregoing, net loss increased to $7.8 million for the
three months ended March 31, 2000 from $3.3 million for the three months ended
March 31, 1999.
Liquidity and Capital Resources
In March 2000, IFCO completed the Merger of PalEx with and into Silver Oak
Acquisition Corp., IFCO's newly formed, wholly owned subsidiary, which changed
its name to "PalEx, Inc." As a result of the Merger and related transactions,
IFCO owns all of the stock of the IFCO Companies and PalEx. In the Merger,
PalEx's stockholders received merger consideration with a total value of $9.00
per share consisting of cash and/or the Company's ordinary shares for each
share of PalEx common stock. The total merger consideration for all the shares
of PalEx common stock was $71.4 million in cash and 7.4 million of IFCO's
ordinary shares based on elections by PalEx stockholders and adjustments
pursuant to the merger agreement. The total consideration for the Merger was
$184.5 million for the PalEx common stock plus the assumption of $153.5
million, as of March 8, 2000, of PalEx's debt.
In connection with the Merger, in March 2000 IFCO completed an IPO of 13.0
million ordinary shares and subsequently issued an additional 1.95 million
ordinary shares upon the underwriters' exercise of their overallotment option.
The total net proceeds to the Company from the IPO, including the exercise of
the overallotment option, were $210.0 million. The net proceeds from the IPO
were used, along with cash on hand, the net proceeds from of the offering of
the Senior Subordinated Notes, and borrowings from the Company's new senior
credit facility, to repay a substantial portion of the debt of the IFCO
Companies and PalEx, to pay the cash portion of the merger consideration to
PalEx stockholders, to fund the cash payment due to GE Capital discussed above
and to fund IFCO's purchase of the remaining joint venture interest in IFCO-
U.S.
On the closing date of the IPO and the Merger, IFCO and PalEx entered into a
new syndicated, secured senior credit facility, which was amended and restated
on March 31, 2000, to complete the syndication. The syndicate of banks,
financial institutions, and other entities includes Canadian Imperial Bank of
Commerce and Bank One, Texas, NA. PalEx is the borrower, and IFCO and IFCO's
other subsidiaries are guarantors. CIBC World Markets Corp. and Bank One
Capital Markets, Inc., are the co-arrangers, and Bank One, Texas, NA is also
the administrative agent. The new senior credit facility replaced the former
credit facilities of IFCO Europe and PalEx's former senior credit facility, the
outstanding balances of all of which were repaid in March 2000 with cash on
hand, the net proceeds of the Offering and the offering of the Senior
Subordinated Notes discussed below, and initial borrowings under the new senior
credit facility.
The new senior credit facility provides for borrowings of up to $235.0
million and consists of (1) a multi-draw term loan facility in an aggregate
principal amount of up to $108.75 million and (2) a revolving credit facility
providing for revolving loans to PalEx of up to $126.25 million. The term loan
may be borrowed in up to 20 drawings commencing on the closing date of the IPO
and the merger and ending on the third anniversary of the closing date. The
term loan facility may be used only to finance permitted acquisitions.
Permitted acquisitions include any acquisition in which the total consideration
paid does not exceed $25.0 million. The aggregate amount of consideration IFCO
or its subsidiaries pay in connection with permitted acquisitions during any
consecutive 12-month period may not exceed $90.0 million.
16
IFCO is able to draw on the revolving credit facility from the closing date
of the IPO and the Merger through the third anniversary of the closing date.
The revolving credit facility matures on the sixth anniversary of the closing
date. The revolving credit facility may be utilized to make capital
expenditures and to finance the working capital needs of IFCO and its
subsidiaries in the ordinary course of business and to pay fees and expenses
related to the transactions. The borrowing base under the revolving credit
facility is based on a percentage of IFCO's eligible accounts receivable,
eligible inventory, and eligible RTCs. Eligible inventory includes RTCs and
pallets that IFCO and its subsidiaries own for lease to third parties, and
eligible RTCs are those owned by IFCO-U.S.
The outstanding amounts under the term loan and the revolving credit
facility, as well as the swingline facility described below, bear interest at
interest rates determined based upon the Company's consolidated total leverage
ratio, which is defined in the new senior credit facility, and changes
quarterly commencing with September 30, 2000. The rates range from a high of
300 basis points over LIBOR and 200 basis points over prime rate, if the
Company's consolidated total leverage ratio is greater than 3.25, to a low of
200 basis points over LIBOR and 100 basis points over prime rate, if the
Company's consolidated total leverage ratio is less than 1.75. The new senior
credit facility establishes a 25 basis point increase if the consolidated total
leverage ratio is 1.75 to less than 2.25 and a similar increase for each .50
increase in the consolidated total leverage ratio. Generally the Company may
elect one-, two-, three- and six-month LIBOR.
The outstanding amounts under the term loan and the revolving credit
facility are repayable in 12 consecutive quarterly installments commencing 39
months after the closing date in an aggregate amount for each 12-month period
equal to 20% in the first period, 30% in the second period, and 50% in the
third period.
PalEx has available to it a multi-currency swingline facility for short-term
borrowings denominated in certain readily available and freely tradable
currencies in an amount not to exceed $50.0 million and a dollar swingline
facility in an amount not to exceed $25.0 million. Any multi-currency swingline
loan or dollar swingline loan reduces availability under the revolving facility
on a dollar-for-dollar basis. PalEx may obtain letters of credit, in an
aggregate amount not in excess of $25.0 million of the revolving facility,
issued by Canadian Imperial Bank of Commerce and Bank One, NA. Drawings under
any letter of credit will be reimbursed by PalEx on the same business day.
PalEx's obligations under the new senior credit facility are guaranteed by
IFCO and each of its existing and future direct and indirect subsidiaries,
other than subsidiaries deemed immaterial by the administrative agent. The new
senior credit facility and the guarantees are secured by a perfected first
priority security interest in all of the loan parties' substantial tangible and
intangible assets, except for those assets the co-lead arrangers determine in
their sole discretion that the cost of obtaining the security interest are
excessive in relation to the value of the security.
The new senior credit facility contains a number of covenants that, among
other things, limit IFCO's and its subsidiaries' ability to dispose of assets,
incur additional debt, merge or consolidate, pay dividends, create liens on
assets, enter into sale and leaseback transactions, make investments, loans, or
advances, make acquisitions, make capital expenditures, prepay debt, or engage
in certain transactions with affiliates, and otherwise restricts certain
corporate activities. In addition, the new senior credit facility requires that
IFCO and its subsidiaries comply with specified ratios and tests, including a
minimum net worth test, a fixed charge coverage ratio, an interest coverage
ratio, a leverage ratio, and a minimum EBITDA requirement.
The new senior credit facility contains customary events of default,
including non-payment of principal, interest, or fees, material inaccuracy of
representations and warranties, violation of covenants, cross-default to
certain other debt, certain events of bankruptcy and insolvency, certain events
under ERISA, material judgments, actual or asserted invalidity of any
guarantee, security document, subordination provision, or security interest,
and a change of control in certain circumstances.
17
On March 8, 2000, IFCO issued (Euro)200.0 million principal amount of Senior
Subordinated Notes, which translates to approximately $181.9 million, based on
current exchange rates, in a private placement. The total net proceeds to the
Company from the issuance of the Senior Subordinated Notes were $184.7 million.
The Senior Subordinated Notes mature on March 15, 2010. Interest at the rate of
10 5/8% per year from the date of issuance is payable semiannually in arrears
on each March 15 and September 15 commencing September 15, 2000. The Senior
Subordinated Notes are not secured, but are guaranteed by the Company's
material subsidiaries. The notes and the guarantees rank behind all of IFCO's
existing and future senior debt, including IFCO's obligations under the new
senior credit facility. The indenture governing the Senior Subordinated Notes
contains a number of significant covenants, which restrict IFCO's corporate and
business activities, including its ability to dispose of assets, incur
additional debt, prepay other debt, pay dividends, repurchase or redeem capital
stock, enter into specified investments or create new subsidiaries, enter in to
sale and lease-back transactions, make specific types of acquisitions, engage
in mergers or consolidations, create liens, or engage in certain transactions
with affiliates.
Unaudited Condensed Consolidated Pro Forma Statement of Operations
The following tables present pro forma results of the Company as if the
merger, IPO, and related transactions had occurred as of January 1, 1999. The
pro forma adjustments include:
For the three months ended March 31, 1999:
. the results of operations for PalEx for the three-month period ended
March 31, 1999
. the consolidation of revenues and expenses of IFCO-U.S. as a wholly owned
subsidiary for the three months ended March 31, 1999, the elimination of
the loss accounted for under the equity method, and the elimination of
previously recorded interest expense on debt assumed to be paid off as
of the beginning of the year
For the three months ended March 31, 2000:
. the results of operations for PalEx for the period from January 1 through
the date of the Merger on March 8, 2000
. the consolidation of revenues and expenses of IFCO-U.S. as a wholly owned
subsidiary for the three months ended March 31, 2000 and the elimination
of the loss accounted for under the equity method for the period up to
the date of the purchase of the remaining minority interest, and the
elimination of previously recorded interest expense on debt assumed to
be paid off as of the beginning of the year
For both periods:
. amortization of goodwill as a result of the acquisition of PalEx, the
purchase of the remaining interest in IFCO-U.S., and the acquisition of
options and rights of GE Capital and GE Erste (see Note 1 to Condensed
Consolidated Financial Statements).
. interest expense reduction resulting from the payment of debt using
proceeds of the IPO and Senior Subordinated Notes.
. additional interest expense due on the Senior Subordinated Notes
. amortization of new loan costs
. the pro forma tax effect of all other pro forma adjustments
18
IFCO SYSTEMS N.V.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
(In thousands, Except Share and Per Share Data)
IFCO Systems
Pro Forma Combined
----------------------
Three Months Ended
March 31,
----------------------
1999 2000
---------- ----------
REVENUES............................................... $ 136,025 $ 133,283
COST OF GOODS SOLD..................................... 109,535 110,804
---------- ----------
Gross Profit......................................... 26,490 22,479
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 17,136 17,571
MERGER TRANSACTION EXPENSES............................ 582 1,283
GOODWILL AMORTIZATION.................................. 2,326 2,442
OTHER OPERATING INCOME, NET............................ (234) (147)
---------- ----------
Income from operations............................... 6,680 1,330
INTEREST EXPENSE, NET.................................. (5,361) (6,207)
OTHER INCOME (EXPENSE), NET............................ (883) 33
---------- ----------
Income (loss), before income taxes and minority
interest............................................ 436 (4,844)
INCOME TAX PROVISION................................... 2,488 236
MINORITY INTEREST...................................... (65) --
---------- ----------
Income (loss) before extraordinary loss and
cumulative effect of accounting change.............. (2,117) (5,080)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT... -- (5,600)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.. -- 770
---------- ----------
NET LOSS............................................... $ (2,117) $ (9,910)
Net loss per share--basic and diluted.................. $ (0.05) $ (0.24)
========== ==========
Shares used in computing net loss per share--basic and
diluted............................................... 40,432,278 40,646,564
========== ==========
19
The following table presents pro forma earnings before interest, taxes,
depreciation and amortization ("EBITDA") and non-recurring charges. Proforma
EBITDA and non-recurring charges is not presented 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 an accepted
financial indicator of the ability to incur and service debt. Pro forma EBITDA
and non-recurring charges as presented is not necessarily comparable with
similarly titled measures presented by other companies.
IFCO Systems
Pro Forma Combined
--------------------
Three Months Ended
March 31,
--------------------
1999 2000
--------- ---------
Net loss................................................. $ (2,117) $ (9,910)
Interest................................................. 5,361 6,207
Taxes.................................................... 2,488 236
Depreciation and amortization............................ 15,059 19,205
Non-recurring charges.................................... 582 6,530
--------- ---------
EBITDA................................................... $ 21,373 $ 22,268
========= =========
Business Outlook
The completion of the IPO and the Merger, the sale of the Senior
Subordinates Notes, and the securing of a new senior credit facility positions
the Company to invest in the expansion of existing markets, the entry into new
markets, new and improved products, maintenance of existing facilities, and
strategic expansion of profitable business segments. The Company's goal is to
create and perpetuate an identity as a one-stop materials management and
handling resource for its customers. IFCO will continue to develop its
infrastructure as a merged company, both in terms of physical locations as well
as with strong, managerially experienced, customer-oriented employees.
Research and Development Activities
Research and development at the Company is not a concept created by the
Merger. The growth of the IFCO Companies reflects a history of devotion to
innovation and creativity, which has been adopted as a core value of IFCO. The
Company will continue to develop innovations in its products and in the way it
serves its customers. In doing so, the Company expects to see the same success
and growth as the IFCO Companies.
The Company views research and development activities as three-dimensional:
(1) new products and services for its current and prospective customers; (2)
expansion into new regions with its existing products and services; and (3)
addition of new services to its existing service offerings.
IFCO is focused on the creation, development and implementation of
e-logistics, a concept designed to promote the paperless flow of goods
throughout the distribution chain. E-logistics uses IFCOs RTC systems to combine
information flow, to a great extent facilitated by the Internet, with the
physical flow of goods. The Company believes e-logistics enables customers and
retailers to achieve additional efficiencies throughout the distribution chain.
IFCO expended approximately $1.2 million on e-logistics in the three months
ended March 31, 2000.
IFCO is also developing its business through geographic expansion of its RTC
system for European produce, primarily incurring developing expenses in North
America and, to a lesser extent, South America. In addition, the Company is
leveraging off of its expertise to develop new systems and services offerings.
IFCO is expending significant development efforts in this manner, primarily in
the area of pallet systems and services in North America and dry goods systems
in Europe.
20
IFCO regularly engages in research and development activities in all of its
existing lines of businesses with respect to product, service, and system
innovation.
Employment Information
As of March 31, 2000 and 1999, IFCO employed 4,233 and 552 people,
respectively. The increase was primarily due to the merger with PalEx in March
2000.
Seasonality
IFCO's RTC revenues vary depending on the fruit and vegetable-harvesting
season in different countries. Historically, a higher portion of its sales and
operating income has been recognized in the fourth quarter than in the first
quarter, which has historically been its weakest quarter. Revenues in Germany
and France, for example, are highest in summer and fall, whereas revenues in
Southern Europe reach a peak late in fall and throughout winter. Seasonality
also has an influence on pricing, as transportation costs incurred during the
winter to transport IFCO's RTCs from warmer countries in Southern Europe are
higher than the costs to transport the RTCs from closer locations in Central
Europe. IFCO accordingly charges customers in these Southern European countries
higher usage fees.
The pallet manufacturing, recycling, and crating business in North America
is subject to seasonal variations in operations and demand. The third quarter
is traditionally the quarter with the lowest demand for this business. IFCO has
a significant number of agricultural customers for this business 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 IFCO's North American locations serving
predominantly manufacturing and industrial customers experience less
seasonality. IFCO'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.
Year 2000 Issues
The Company is unaware of any material impact resulting from or that could
result from the year 2000 issue.
Forward-looking Disclaimer
Some of the statements contained in this report discuss future expectations,
contain projections of results of operations or financial condition of IFCO, or
state other forward-looking information. These statements may include financial
information and/or statements for periods following the period covered by this
report. You can find many of these statements by looking for words like
believes, expects, anticipates, estimates, or similar expressions used in this
report.
These forward-looking statements may be affected by known and unknown risks,
uncertainties, and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions that we believe to be reasonable. Risks and uncertainties include
the following: (1) IFCO's ability to effectively integrate its operations and
achieve its operational and growth objectives; (2) the competitive nature of the
container businesses, including RTCs, pallets, and industrial containers;
(3) customer demand and business and economic cycles; (4) the ability to finance
capital expenditures and growth; (5) conditions in lumber markets,
(6) seasonality, (7) weather conditions; (8) changes in national or
international politics and economics; (9) currency exchange rate fluctuations;
and (10) changes in capital and financial markets, including the performance of
companies listed on the Frankfurt Stock Exchange or the Nasdaq National Market.
Important factors that could cause IFCO's actual results to be materially
different from the forward-looking statements are also disclosed throughout
this report.
21
SIGNATURE
The Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 31, 2000.
IFCO SYSTEMS N.V.
/s/ M. Ted Grubbs
By: _________________________________
M. Ted Grubbs
Corporate Controller
/s/ Vance K. Maultsby, Jr.
By: _________________________________
Vance K. Maultsby, Jr.
Executive Vice President, Strategy
and Finance
and Chief Financial Officer
22