As filed with the Securities and Exchange Commission on February 14, 2000
Registration No. 333-96191
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
IFCO Systems N.V.
(Exact name of Registrant as Specified in its Charter)
---------------
The Netherlands 3089 98-0216429
(State or other (Primary Standard (I.R.S Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
---------------
"Rivierstaete", Amsteldijk 166
1079 LH
Amsterdam, The Netherlands
31-20-504-1772
(Address and telephone number of Registrant's principal executive office)
---------------
Silver Oak Acquisition Corp.
c/o Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
(Name, address and telephone number of agent for service)
---------------
Copies to:
John D. Wilson Stephen M. Wiseman
Shearman & Sterling King & Spalding
Broadgate West 1185 Avenue of the Americas
9 Appold Street New York, New York 10036-4003
London EC2A 2AP England
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Title of each class of
securities to be
registered Proposed maximum aggregate offering price (1) Amount of registration fee
- --------------------------------------------------------------------------------------------------
Ordinary shares of IFCO
Systems N.V., nominal
value two euros per
share................. $228,137,000 $60,228.17
- --------------------------------------------------------------------------------------------------
(1)Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c).
---------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+U.S. Securities and Exchange Commission is effective. This prospectus is not +
+an offer to sell these securities and we are not soliciting offers to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion dated February 14, 2000
PROSPECTUS
13,000,000 ordinary shares
IFCO Logo
- --------------------------------------------------------------------------------
The ordinary shares, nominal value two euros per share, are being offered by
IFCO Systems N.V. in an offering that is composed of a public offering in
Germany to retail and institutional investors, a public offering in the United
States, and a private placement outside of Germany and the United States.
There is currently no public market for the ordinary shares. IFCO Systems
expects that the public offering price will be between (Euro)12.50 and
(Euro)15.50, and between $12.31 and $15.26, per share. IFCO Systems has applied
to list the ordinary shares on the Official List of the Frankfurt Stock
Exchange under the symbol "IFE" and the ordinary shares have been approved for
listing, subject to official notice of issuance, on the Nasdaq National Market
under the symbol "IFCO."
Investing in the ordinary shares involves risks. See "Risk Factors" beginning
on page 15.
Per
Share Total
----- -----
Public Offering Price............................................... $ $
Underwriting Discount............................................... $ $
Proceeds to IFCO Systems............................................ $ $
IFCO Systems has granted Lehman Brothers a 30-day option to purchase up to
1,950,000 additional shares to cover overallotments, if any.
Neither the U.S. Securities and Exchange Commission nor any U.S. state
securities commission has approved or disapproved of these securities or
determined if this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 2000.
----------------------
Global Coordinator and Sole Bookrunner
Lehman Brothers
----------------------
Joint Lead Managers
Lehman Brothers Commerzbank
AKTIENGESELLSCHAFT
----------------------
Cazenove & Co. CIBC World Markets HSBC
Credit Agricole Indosuez
Fidelity Capital Markets
a division of National Financial Services Corporation
, 2000
[Diagram, of "THE IFCO ROUND-TRIP SYSTEM" depicting the flow of data, flow of
goods, deposit, and rent from IFCO to (and from) the grower or producer (with
the captioned language "Round-trip containers delivered to the grower or
producer just in time."), the flow of data, flow of goods, and deposit from the
grower or producer to (and from) the retailers (with the captioned language,
"The goods are shipped to the retailers, for use at the point of sale, with
improved product handling and increased protection."), and the flow of data,
flow of goods, and deposit from the retailers to (and from) IFCO (with the
captioned language "The round-trip containers are returned to IFCO, where they
are inspected and reconditioned, to be ready for the next use."). Pictures, in
the bottom left of the page, featuring, from left to right, an IFCO RTC
containing produce, an IFCO RTC containing loaves of bread, and an IFCO RTC
containing fish.]
TABLE OF CONTENTS
Presentation of Financial Information..................................... 4
Exchange Rate Information................................................. 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 15
Cautionary Note Regarding Forward-Looking Statements...................... 21
Concurrent Transactions................................................... 22
Use of Proceeds........................................................... 23
Capitalization............................................................ 24
Dividend Policy........................................................... 24
Dilution.................................................................. 25
Unaudited Pro Forma Combined Financial Statements......................... 26
Selected Financial Information ........................................... 37
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 41
Industry Overview......................................................... 62
Business.................................................................. 65
Management.................................................................. 84
Security Ownership of Principal Shareholders and Management................. 94
Certain Relationships and Related Transactions.............................. 96
Description of IFCO Systems Share Capital................................... 100
Share Certificates and Transfer............................................. 103
Exchange Controls and Other Limitations Affecting Security Holders.......... 103
Enforceability of Civil Liabilities......................................... 103
Taxation.................................................................... 104
Shares Eligible for Future Sale............................................. 107
Underwriting................................................................ 109
Legal Matters............................................................... 112
Experts..................................................................... 112
Where You Can Find More Information......................................... 112
Index to Financial Statements............................................... F-1
3
PRESENTATION OF FINANCIAL INFORMATION
In this prospectus, references to Deutsch marks or DM are to the currency of
Germany, references to U.S. dollars or $ are to the currency of the United
States, and references to euros or (Euro) are to the common currency for the 11
member states of the European Union. See "Exchange Rate Information" for
historical information regarding the noon buying rate for the Deutsch mark and
the euro as published by the Federal Reserve Bank of New York.
Various amounts and percentages set out in this prospectus have been rounded
and accordingly may not total.
EXCHANGE RATE INFORMATION
The table below sets forth, for the periods and dates indicated, information
concerning the noon buying rates for Deutsch marks, expressed in Deutsch marks
per $1.00, and for euros, expressed in U.S. dollars per (Euro)1.00. The
conversion rate between the euro and the Deutsch mark is fixed at (Euro)1.00 =
DM1.95583. No representation is made that the Deutsch mark or euro amounts, on
the one hand, or the U.S. dollar amounts, on the other hand, referred to in
this prospectus could be or could have been converted into U.S. dollars,
Deutsch marks, or euros, as the case may be, at any particular rate or at all.
Deutsch mark: Deutsch marks per $1.00
-------------------------------
Period Period
Calendar Year High Low Average(1) End
------------- ------ ------ ---------- ------
1995...................................... 1.5925 1.3565 1.4901 1.3835
1996...................................... 1.5477 1.3798 1.4655 1.5210
1997...................................... 1.7438 1.4725 1.6039 1.7438
1998...................................... 1.8810 1.7080 1.7978 1.8033
Euro: U.S. dollars per (Euro)1.00
-------------------------------
Period Period
Month High Low Average(2) End
----- ------ ------ ---------- ------
January 1999.............................. 1.1812 1.1371 1.1591 1.1371
February 1999............................. 1.1339 1.0972 1.1203 1.0995
March 1999................................ 1.1015 1.0716 1.0886 1.0808
April 1999................................ 1.0842 1.0564 1.0725 1.0564
May 1999.................................. 1.0787 1.0422 1.0630 1.0422
June 1999................................. 1.0516 1.0296 1.0377 1.0310
July 1999................................. 1.0719 1.0139 1.0370 1.0694
August 1999............................... 1.0793 1.0441 1.0612 1.0581
September 1999............................ 1.0689 1.0385 1.0522 1.0643
October 1999.............................. 1.0887 1.0518 1.0712 1.0518
November 1999............................. 1.0485 1.0176 1.0372 1.0176
December 1999............................. 1.0300 0.9986 1.0107 1.0041
January 2000.............................. 1.0335 0.9757 1.0131 0.9757
- --------
(1) The average of the noon buying rates on the last business day of each month
during the period.
(2) The average of the noon buying rates on the business days during the
period.
In this prospectus, approximate dollar amounts are provided for euro-
denominated amounts based on the noon buying rate on February 11, 2000, of
(Euro)1.00 = $0.9847. 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 0.5035 U.S. dollars for each
Deutsch mark. As of January 15, 1999, the Federal Reserve Bank of New York only
publishes noon buying rates for the euro and not for the individual member
states of the European Union.
4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding IFCO Systems N.V., PalEx, Inc., the shares being sold in
this offering, and the financial statements and related notes appearing in this
prospectus. This summary does not contain all of the information that may be
important to you. You should read this entire prospectus carefully. Unless
otherwise indicated, the information presented in this prospectus assumes that
the underwriters' overallotment option has not been exercised.
The Company
When the merger with PalEx is completed, IFCO Systems will combine the IFCO
Companies' round-trip container, or RTC, systems 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 IFCO Companies' operations are primarily in Europe, and
PalEx's operations are located in North America.
IFCO Systems believes it will be a leading provider of round-trip systems
internationally, serving over 9,000 customers in 17 countries. IFCO Systems
believes it will:
. own and manage the largest pool of RTCs in Europe based on 1997 market
information;
. own and manage 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;
. be the largest provider of new and recycled pallets in North America
based on PalEx's pallet industry experience and industry information;
and
. be the largest provider of industrial container reconditioning services
in North America based on PalEx's 1998 volume and its estimate of the
total number of industrial containers reconditioned in the United States
each year using information obtained from the Reusable Industrial
Packaging Association.
On a pro forma basis for the merger, IFCO Systems' revenues were
approximately $516.2 million for the year ended December 31, 1998, and
approximately $451.1 million for the ten months ended October 31, 1999.
IFCO Systems was formed for purposes of the merger and the other transactions
described in the merger agreement, including this offering. After the merger,
IFCO Systems refers to the combined IFCO Companies and PalEx and their
subsidiaries.
IFCO Systems is a newly formed holding company which owns all of the stock of
IFCO Europe Beteiligungs GmbH, MTS Okologistik GmbH, and Schoeller
International Logistics Beteiligungsgesellschaft mbH, which will be renamed
IFCO International Network Beteiligungsgesellschaft mbH, and their
subsidiaries. IFCO Europe, MTS, and IFCO International are referred to as the
IFCO Companies in this prospectus. Pursuant to the Amended and Restated
Agreement and Plan of Reorganization, dated as of October 6, 1999, and
effective as of March 29, 1999, as amended, PalEx, a public company which is
quoted on the Nasdaq National Market, will merge with and into a newly formed,
wholly owned subsidiary of IFCO Systems. Following the merger, IFCO Systems
will own all of the stock of the IFCO Companies and PalEx.
The IFCO Companies
The IFCO Companies provide RTCs and related services to growers or
manufacturers in order to distribute goods to retailers. Retailers benefit from
improved product handling and automation capabilities, in-store display in
RTCs, improved space efficiency, and reduction of the amount of packaging for
transport. The IFCO Companies contract third parties to collect empty RTCs from
retailers for inspection and reconditioning by the IFCO Companies as necessary.
The RTCs are then reintroduced into the round-trip system for reuse on a
5
just-in-time basis. The IFCO Companies' RTCs, which are based on patented
technology, are made of plastic and are collapsible. The RTCs are available in
many different standardized sizes and structures depending on the goods to be
moved. They are designed to be stacked interchangeably regardless of size.
The IFCO Companies started an RTC leasing pool in Europe in 1992. Currently
there are approximately 60 million IFCO RTCs in circulation. IFCO Europe's RTC
pool now serves over 4,000 growers supplying produce to approximately 15,000
supermarket outlets throughout Western Europe. Currently, approximately 75
retailer groups are using IFCO round-trip systems.
PalEx
PalEx manufactures, sells, leases, and recycles wooden pallets in a wide
variety of shapes and sizes for the movement of various types of goods. PalEx
currently conducts its pallet operations from 60 facilities throughout the
United States and Canada. PalEx also reconditions industrial container
products, which include steel closed top drums, steel drums with fully
removable heads, plastic drums, and industrial bulk containers. PalEx's
industrial container group operates from 12 facilities in the United States.
Company Strengths
IFCO Systems believes that following the merger the combined company will
have the following strengths:
. leading provider of round-trip systems;
. systems approach to product flow;
. innovative patented technology and economic efficiencies;
. well-established partnerships with retailers and growers;
. geographic diversity; and
. experienced management team and strong strategic relationships.
Business Strategy
IFCO Systems' objective is to be the preeminent international provider of
round-trip systems through the implementation of the following strategy:
. expand into the United States;
. cross sell among businesses in the United States;
. further development of markets;
. further logistics systems opportunities; and
. continue to pursue strategic acquisitions and alliances worldwide.
Concurrent Transactions
This offering is being made concurrently with the merger of PalEx into IFCO
Systems. PalEx will merge with and into Silver Oak Acquisition Corp., a newly
formed, wholly owned subsidiary of IFCO Systems. Following the merger, IFCO
Systems will own all of the stock of the IFCO Companies and PalEx. In the
merger, PalEx stockholders will receive merger consideration with a total value
of $9.00 per share consisting of cash and/or IFCO Systems ordinary shares for
each share of PalEx common stock. The total merger
6
consideration for all the shares of PalEx common stock is limited to not less
than 40% and not more than 49% in cash and not more than 60% and not less than
51% in IFCO Systems ordinary shares. The merger is subject to satisfaction of a
number of conditions including the approval of PalEx's stockholders. A meeting
of PalEx stockholders has been scheduled for March 2, 2000, to vote on the
merger.
At the same time as the closing of this offering and the merger, IFCO systems
intends to issue approximately (Euro)180.0 million, or approximately $177.2
million, of debt in the form of a high yield debt offering and enter into a new
senior credit facility. The completion of the high yield debt offering is
conditioned upon the completion of the merger, this offering with a least
$160.0 million in gross proceeds, a new senior credit facility of at least
$200.0 million, and the other concurrent transactions.
This offering is conditioned upon the completion of the merger and the high
yield debt offering and total proceeds to IFCO Systems from this offering and
the high yield debt offering of at least $250.0 million.
In connection with the merger, Schoeller Logistics Industries GmbH and
Gebruder Schoeller Beteiligungsverwaltungs GmbH have contributed to IFCO
Systems, directly or indirectly the outstanding capital shares of IFCO Europe,
MTS, and IFCO International owned by them.
In addition, IFCO Systems, together with Schoeller Industries, the
shareholders of Schoeller Industries, Schoeller Plast Industries GmbH, Gebruder
Schoeller, and Schoeller KG have entered into the Option Release and IPO-
Facilitation Agreement with GE Capital Corporation and General Electric Erste
Beteiligungs GmbH in connection with the proposed merger and this offering.
Pursuant to that agreement, Schoeller Logistic Technologies Holding GmbH has
issued a DM45.0 million, or approximately $22.7 million, convertible debenture
to GE Erste in exchange for the contribution to IFCO Systems of the
preferential share of IFCO Europe owned by GE Erste. IFCO Systems also agreed
to pay GE Capital DM43.0 million, or approximately $21.7 million, out of the
net proceeds of this offering, the high yield debt offering, 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. As a result of these share contributions, IFCO Systems will
own all the capital stock of IFCO Europe, MTS, and IFCO International.
At the same time as, or within five days following, the completion of this
offering, IFCO Systems has agreed to purchase the interest of Intertape Polymer
Group Inc. in IFCO-U.S., L.L.C., for approximately $5.0 million in cash. In
addition, IFCO International will repay debt owed by IFCO U.S. to Intertape,
which as of October 31, 1999, was approximately $24.4 million. As a result of
this purchase, IFCO Systems will own all of the equity interest in IFCO U.S.
7
The following diagram illustrates the structure of IFCO Systems and its
subsidiaries after completion of the merger and the other transactions
described in the merger agreement, including this offering. This diagram is
only a summary and does not precisely reflect all the legal and corporate
entities or their relationships to one another.
POST-MERGER AND POST-IPO STRUCTURE
[POST-MERGER AND POST-IPO STRUCTURE DIAGRAM APPEARS HERE]
8
The Offering
The information presented in this prospectus assumes that the underwriters
overallotment option is not exercised.
Securities offered...................... 13,000,000 ordinary shares.
Overallotment option.................... IFCO Systems has granted an option to Lehman
Brothers to purchase up to 1,950,000 additional
shares to cover overallotments, if any.
Total number of shares to be outstanding
after this offering.................... 39,822,713 ordinary shares, assuming PalEx
stockholders elect to receive 49% of the total
merger consideration in cash.
Use of proceeds......................... IFCO Systems will use the net proceeds of the
offering, which are estimated to be
approximately $160.3 million, together with cash
on hand, borrowings under the new
senior credit facility, and the proceeds from
the high yield debt offering to refinance a
substantial portion of the debt of
the IFCO Companies and PalEx, to pay the cash
portion of the merger consideration to PalEx
stockholders, and to fund other concurrent
transactions. See "Use of Proceeds" section
of this prospectus.
Share allocation........................ In addition to the public offering in the United
States, a public offering will also be made in
Germany and a portion of the offering will also
be made through a private placement outside of
the United States and Germany.
Listing and trading..................... IFCO Systems has applied to have the shares
listed on the Official List of the Frankfurt
Stock Exchange under the symbol "IFE" and the
ordinary shares have been approved for listing,
subject to official notice of issuance, on the
Nasdaq National Market under the symbol "IFCO."
References in this prospectus to the ordinary shares to be issued in this
offering mean ordinary shares that will be listed on the Nasdaq National Market
and may only be traded in the United States in U.S. dollars. This type of
shares is often used for the trading of securities of Dutch corporations and is
commonly referred to as New York shares.
Risk Factors
For a description of risks that you should consider before you buy the
ordinary shares, see "Risk Factors" beginning on page 15.
----------------
IFCO Systems was organized on March 31, 1999, under the laws of the
Netherlands. IFCO Systems' corporate headquarters are located at
"Rivierstaete", Amsteldijk 166, 1079 LH, Amsterdam, The Netherlands. Its
telephone number at that address is 31-20-504-1772.
9
Summary Financial Information
The following tables show summary combined historical financial information
for the IFCO Companies, pro forma financial information for IFCO Systems, and
consolidated historical financial information for PalEx. The summary combined
historical statement of operations data and other operating data for the IFCO
Companies for the two years ended December 31, 1998, is derived from the IFCO
Companies audited combined financial statements, which were audited by PwC
Deutsche Revision AG, independent accountants. The summary consolidated
historical statement of operations data and other operating data for PalEx for
the three years ended December 27, 1998, is derived from PalEx's audited
consolidated financial statements, which were audited by Arthur Andersen LLP,
independent certified public accountants. All other historical financial
information for the IFCO Companies and PalEx is unaudited. You should read this
summary historical financial information along with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the combined
financial statements of the IFCO Companies and consolidated financial
statements of PalEx included in this prospectus. The IFCO Companies' financial
statements have been prepared in U.S. dollars and in accordance with U.S. GAAP.
The summary pro forma financial information for IFCO Systems shows you how
IFCO Systems might have looked if the pre-merger transactions described in the
merger agreement, the merger, and this offering and other concurrent
transactions had been completed as of January 1, 1998, for purposes of the
statement of operations data and other operating data, and as of October 31,
1999, for purposes of the balance sheet data. PalEx stockholders will receive
between 40% and 49% of the total merger consideration in cash. The pro forma
presentation below reflects the effect on IFCO Systems' net (loss) if the total
merger consideration is 49% cash. The actual number of IFCO Systems ordinary
shares that will be issued to PalEx stockholders will be determined based upon
the elections by PalEx stockholders. When reading the summary pro forma
financial information, you should also read the unaudited pro forma combined
financial statements included in this prospectus. The pro forma financial
statements were prepared using the purchase method of accounting, with the IFCO
Companies treated as the accounting acquiror. If IFCO Systems had actually
completed these transactions as of January 1, 1998, or as of October 31, 1999,
the combined company might have performed differently. You should not rely on
the pro forma financial information as an indication of the results that IFCO
Systems would have achieved if the transactions had taken place earlier or the
future results that IFCO Systems will experience after completion of these
transactions.
10
The IFCO Companies/IFCO Systems
IFCO Systems
IFCO Companies Historical Combined Pro Forma Combined
---------------------------------------------------------- ------------------------------
Year Ended Ten Months Ended
December 31, October 31, Year Ended
--------------------------------- ----------------------- December 31, Ten Months Ended
1996 1997 1998 1998 1999 1998 October 31, 1999
----------- -------- ----------- ----------- ----------- ------------ ----------------
(in thousands, except share and per share data)
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Statement of Operations
Data:
Revenues.................. $122,959 $116,735 $ 134,721 $106,021 $ 126,399 $ 516,232 $ 451,100
Gross profit.............. 4,605 17,113 28,503 20,147 26,069 101,526 89,095
Income (loss) from
operations............... (12,058) (1,726) 2,686 2,123 3,672 19,801 21,517
Net interest cost......... (7,751) (7,928) (7,030) (6,024) (6,881) (22,094) (20,473)
Net (loss) applicable to
ordinary shares.......... $(19,542) $(11,210) $ (8,913) $ (8,119) $ (7,542) $ (9,510) $ (4,895)
Pro forma net (loss) per
ordinary share--basic and
diluted.................. $ (.45) $ (.38) $ (.24) $ (.12)
Shares used in computing
pro forma net
(loss) per ordinary
share--basic and
diluted.................. 20,000,000 20,000,000 39,823,060 39,823,060
Other Operating Data:
EBITDA and non-recurring
charges(1)............... $ 27,953 $ 24,369 $ 27,197 $ 19,528 $ 27,989 $ 71,402 $ 67,185
EBIT(1)................... $(11,791) $ (3,235) $ (1,673) $ (1,922) $ (517) $ 19,777 $ 21,438
Cash flows from:
operating activities(2).. $ 32,490 $ 59,938 $ 40,497 $ 33,420 $ 73,534 $ 49,632
investing activities(2).. $(43,221) $ (38,766) $(35,895) $ (40,104) $ (139,585) $ (46,700)
financing activities(2).. $ 5,029 $ (6,442) $ (5,469) $ (5,155) $ 77,524 $ (13,669)
IFCO Companies IFCO Systems
Historical Pro Forma
Combined Combined
as of as of
October 31, October 31,
1999 1999
-------------- ------------
(in thousands)
(unaudited) (unaudited)
Balance Sheet Data:
Working capital (deficit).......................... $(89,154) $(34,778)
Total assets....................................... 273,646 706,646
Total debt, including capital lease obligations.... 106,646 241,548
Total stockholders' equity......................... (35,307) 245,463
(Footnotes on following page)
11
- --------
(1) EBIT and EBITDA and non-recurring charges are not presented as alternative
measures of operating results or cash flows from operations as determined
in accordance with generally accepted accounting principles, but because
they are accepted financial indicators of the ability to incur and service
debt. EBIT represents the IFCO Companies' combined net (loss) applicable to
ordinary shares and IFCO Systems' pro forma combined net (loss) applicable
to ordinary shares, in each case after exclusion of net interest costs and
income tax provisions. EBITDA and non-recurring charges represents the IFCO
Companies' EBIT and IFCO Systems' pro forma EBIT plus depreciation and
amortization charges and nonrecurring, one-time restructuring charges
related to the termination of PalEx's relationship with CHEP USA. EBIT and
EBITDA and non-recurring charges as presented are not necessarily
comparable with similarly titled measures presented by other companies. The
following table reflects the calculation of EBIT and EBITDA and non-
recurring charges:
IFCO Systems
Pro Forma
IFCO Companies Historical Combined Combined
------------------------------------------------------ ------------------------
Year Ended Ten Months Ended Ten Months
December 31, October 31, Year Ended Ended
----------------------------- ----------------------- December 31, October 31,
1996 1997 1998 1998 1999 1998 1999
----------- -------- ------- ----------- ----------- ------------ -----------
(in thousands)
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Net (loss) applicable to
ordinary shares........ $(19,542) $(11,210) $(8,913) $(8,119) $(7,542) $(9,510) $(4,895)
Income tax provision.... -- 47 210 173 144 7,193 5,860
Net interest cost....... 7,751 7,928 7,030 6,024 6,881 22,094 20,473
-------- -------- ------- ------- ------- ------- -------
EBIT.................. (11,791) (3,235) (1,673) (1,922) (517) 19,777 21,438
Depreciation and
amortization........... 39,744 27,604 28,870 21,450 28,506 48,072 45,747
Restructuring charges... -- -- -- -- -- 3,553 --
-------- -------- ------- ------- ------- ------- -------
EBITDA and non-
recurring charges.... $ 27,953 $ 24,369 $27,197 $19,528 $27,989 $71,402 $67,185
======== ======== ======= ======= ======= ======= =======
(2) The IFCO Companies' historical combined cash flow information is not
available for the year ended December 31, 1996. IFCO Systems' pro forma
combined cash flows from operating, investing, and financing activities for
the year ended December 31, 1998, and the ten months ended October 31,
1999, have been calculated by adding the amounts in these categories from
the historical financial statements of the IFCO Companies and PalEx and do
not reflect any pro forma adjustments.
12
PalEx
Ten-Month
Fiscal Year Ended Period Ended
-------------------------------------- ------------------------
November 30, December 28, December 27, October 25, October 24,
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
(in thousands, except share and per share data)
(unaudited)
Income Statement Data:
Revenues............... $ 145,030 $ 222,993 $ 319,691 $ 256,874 $ 320,433
Gross profit(1)........ 23,165 34,909 58,894 47,345 62,961
Income from
operations(1)......... 8,937 12,934 17,297 11,109 22,826
Net interest cost (2).. (1,065) (1,590) (8,206) (6,078) (10,660)
Net income............. $ 6,039 $ 6,640 $ 3,986 $ 2,355 $ 6,764
Net income per share--
basic................. $ .64 $ .43 $ .21 $ .13 $ .33
Net income per share--
diluted............... $ .64 $ .42 $ .21 $ .12 $ .33
Shares used in
computing net income
per share--basic...... 9,433,414 15,561,489 18,937,354 18,651,737 20,297,016
Shares used in
computing net income
per share--diluted.... 9,433,414 15,914,157 19,310,295 19,047,287 20,299,381
Other Operating Data:
EBITDA and non-
recurring charges(3).. $ 13,045 $ 19,933 $ 35,680 $ 27,677 $ 36,538
EBIT(3)................ $ 9,448 $ 13,066 $ 17,559 $ 11,348 $ 24,213
Cash flows from:
operating activities.. $ 12,116 $ 6,363 $ 13,596 $ 7,072 $ 16,212
investing activities.. $ (7,355) $ (13,756) $ (100,819) $ (91,383) $ (6,596)
financing activities.. $ (5,051) $ 11,976 $ 83,966 $ 78,942 $ (8,514)
October 24,
1999
--------------
(in thousands)
(unaudited)
Balance Sheet Data:
Working (deficit)............................................... $(84,797)
Total assets.................................................... 299,617
Total debt...................................................... 147,181
Stockholders' equity............................................ 103,613
- --------
(1) The results of operations for PalEx's year ended December 27, 1998, include
pre-tax charges of approximately $1.2 million for inventory revaluation
adjustment, approximately $0.9 million for restructuring costs and
expenses, and approximately $1.4 million for plant closure costs and asset
abandonment loss related to the termination of PalEx's customer
relationship with CHEP USA. The results of operations for PalEx's ten-month
period ended October 25, 1998, include pre-tax charges of approximately
$1.7 million for inventory valuation adjustment and approximately $2.4
million for restructuring costs and expenses related to the termination of
PalEx's customer relationship with CHEP USA.
(2) Includes interest expense and other income (expense), net.
(3) EBIT and EBITDA and non-recurring charges are not presented as alternative
measures of operating results or cash flows from operations as determined
in accordance with generally accepted accounting principles, but because
they are accepted financial indicators of the ability to incur and service
debt. EBIT represents PalEx's net income after exclusion of interest
expense and provision for income taxes. EBITDA and non-recurring charges
represents PalEx's EBIT plus depreciation and amortization charges, and
non-recurring, one-time restructuring charges related to the termination of
PalEx's relationship with CHEP USA, pooling expenses, and compensation
differential. EBIT and EBITDA and non-recurring charges as presented are
not necessarily comparable with similarly titled measures presented by
other companies. The following table reflects the calculation of EBIT and
EBITDA and non-recurring charges:
13
Ten-Month
Fiscal Year Ended Period Ended
-------------------------------------- -----------------------
November 30, December 28, December 27, October 25, October 24,
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
(in thousands)
(unaudited)
Net income.............. $ 6,039 $ 6,640 $ 3,986 $ 2,355 $ 6,764
Provision for income
taxes.................. 1,833 4,704 5,105 2,676 5,402
Interest expense........ 1,576 1,722 8,468 6,317 12,047
------- ------- ------- ------- -------
EBIT................... 9,448 13,066 17,559 11,348 24,213
Depreciation and
amortization........... 3,597 5,847 11,665 7,974 12,325
Restructuring charge.... -- -- 3,553 5,452 --
Pooling expenses and
compensation
differential(4)........ -- 1,020 2,903 2,903 --
------- ------- ------- ------- -------
EBITDA and non-
recurring charges..... $13,045 $19,933 $35,680 $27,677 $36,538
======= ======= ======= ======= =======
(4) Pooling expenses primarily represent financial advisory and legal fees
incurred by some of the pooled companies in connection with PalEx's
acquisition of those companies. Compensation differential is the difference
between previous owners' compensation before their companies were acquired
by PalEx and the amounts they contractually agreed to be paid afterward.
14
RISK FACTORS
You should carefully consider all the information in this prospectus,
including the following risk factors, before making an investment decision
regarding the IFCO Systems ordinary shares. The risks described below are the
significant risks known to IFCO Systems, the IFCO Companies, and PalEx. The
business, financial conditions, or results of operations of IFCO Systems, the
IFCO Companies, or PalEx could be materially adversely affected by any of the
risks.
Risks Related to IFCO Systems or the IFCO Companies' Businesses
The operational and financial benefits expected from the merger may not be
realized and shareholder value may be impaired
Schoeller Logistics Industries GmbH and PalEx entered into the merger
agreement with the expectation that the merger would produce substantial
operational and financial benefits for both the IFCO Companies and PalEx,
including the use of PalEx's North American infrastructure to accelerate the
expansion of the IFCO Companies' business in the United States. The integration
of two large companies, incorporated in different countries, with
geographically dispersed operations, and with significant differences in
business plans, business cultures, and compensation structures, presents
significant challenges and will require substantial attention from management.
The diversion of management attention and any difficulties encountered in the
transition and integration process could reduce revenues, increase levels of
expenses, and impair operating results of the combined company. In addition,
IFCO Systems may not be successful in using the PalEx North American locations
in connection with the IFCO Companies' U.S. business.
The merger may not be tax-free to PalEx
PalEx is obligated to complete the merger only if it receives tax opinions
from its special U.S. tax counsel that provide, among other things, that the
merger should be treated as a reorganization for federal income tax purposes.
Assuming the merger is a reorganization, PalEx and IFCO Systems will not
recognize gain or loss upon the merger. Even with PalEx's receipt of the tax
opinions, the IRS could take the position that the merger is taxable, either
because it disagrees with the opinions or because one or more of the
assumptions upon which the opinions are based are incorrect. One key assumption
is that the total fair market value of the IFCO Systems ordinary shares
received by PalEx stockholders, based on the high and low sales prices of the
shares on the date of the merger, will be no less than 42% of the total merger
consideration paid to PalEx stockholders. This valuation, however, cannot be
determined until after completion of the merger and this offering. If the IRS
were to take the position that the merger is taxable and prevail, then PalEx
would recognize gain from the merger as if it had sold all of its assets in a
fully taxable transaction. This would increase the amount of taxes payable by
IFCO Systems and reduce IFCO Systems' net income.
IFCO Systems will be controlled by a limited number of shareholders, which
will limit the ability of the public shareholders to influence the affairs of
IFCO Systems
After completion of the merger and this offering, and assuming PalEx
stockholders elect to receive 49% of the total merger consideration in cash,
Christoph and Martin Schoeller, through Schoeller Industries and/or affiliates
and Schoeller Holding, will beneficially own, excluding options, approximately
50.2% of the outstanding IFCO Systems ordinary shares or 47.9% if the
underwriters' overallotment option is exercised. The Schoellers will be able to
influence the business, policies, and affairs of IFCO Systems and may be able
to block approval of any proposed merger, combination, or sale of substantially
all the assets. Because they will have the largest beneficial ownership, the
Schoellers may legitimately seek to preserve their control and may not have the
same interest as smaller shareholders in pursuing strategic investments or
business combinations if the result would be a decrease in control or would
cause IFCO Systems no longer to exist as a separate entity.
15
Christoph Schoeller will not be devoting his full time to IFCO Systems, which
may impair its business prospects
Under the terms of a management agreement with IFCO Europe, Schoeller
Industries provides administrative and management services, but Christoph
Schoeller, who will be Chairman of the board of directors of IFCO Systems, will
not devote his full working time to the IFCO Companies. Because of other
Schoeller family business interests, Christoph Schoeller will continue to be
unable to devote his undivided attention to the operations and management of
IFCO Systems. This may impede the management and operations of IFCO Systems and
limit the growth prospects for the business.
IFCO Systems' international operations may prove more difficult or costly than
its domestic operations
Since IFCO Systems will have significant operations outside of Germany and
the United States, it will be subject to the risks associated with cross-border
business transactions and activities. These risks principally relate to delayed
payments from customers in some countries or difficulties in the collection of
receivables generally. Political, legal, trade, or economic changes or
instability could limit or curtail IFCO Systems' business activities and
operations in Eastern Europe, Asia, and South America. Unexpected changes in
regulatory requirements, tariffs and other trade barriers, and price exchange
controls could limit operations and make the distribution of products
difficult. In addition, the uncertainty of the legal environment in these areas
could limit IFCO Systems' ability to effectively enforce its rights.
IFCO Systems will be dependent on extensive capital investment, which may not
be readily available
IFCO Systems' business plan calls for extensive capital investment. IFCO
Systems may be unable to obtain sufficient capital resources to finance its
operations. A lack of capital or an increase in the cost of capital may prevent
IFCO Systems from achieving its growth plans and its financial objectives.
IFCO Systems will be dependent on its relationships with a small number of
large retailers
IFCO Systems will be dependent on its relationships with a small number of
large retailers. The inability of IFCO Systems to maintain these relationships
or cultivate new relationships on similar terms will impair its ability to
remain competitive in the markets in which it will operate. The loss of one or
more of these relationships would have a negative impact on the revenues and
net income of IFCO Systems.
IFCO Systems' growth strategies may not be achieved
IFCO Systems expects to grow both internally and through acquisitions and
alliances. IFCO Systems expects to spend significant time and effort in
evaluating, completing, and integrating acquisitions. The systems, procedures,
and controls of IFCO Systems may not be adequate to support its operations as
it expands, including its expansion in the United States. Any future growth
also will impose significant additional responsibilities on its senior
management. To the extent IFCO Systems is unable to manage its growth
effectively, or is unable to attract and retain qualified management, IFCO
Systems' ability to grow or maintain its level of revenues and net income, or
to implement its business plan, could be materially limited.
The IFCO Companies' business models may not succeed in new markets
The IFCO Companies' business plans rely on duplicating their business models
in new markets, including the United States. The IFCO Companies' business
models may not be successfully duplicated in these new markets.
Weather conditions may reduce demand for IFCO Systems' services and products
IFCO Systems provides a significant portion of its services and products to
customers who ship agricultural products. Severe weather, particularly during
the harvesting seasons, may cause a reduction in
16
demand from agricultural customers, lowering IFCO Systems' revenues and net
income. For example, a heavy freeze that damages citrus or other produce crops
could have a significant negative impact on IFCO Systems' financial condition
and results of operations.
IFCO Systems' operating results may fluctuate significantly due to seasonal
factors
IFCO Systems' businesses, including the businesses of both the IFCO Companies
and PalEx, will be subject to seasonal variations in operations and demand.
IFCO Systems' operations experience the greatest demand for RTCs, new pallets,
and reconditioned industrial containers during the citrus and produce
harvesting seasons, generally October through May, with significantly lower
demand from the citrus and produce industries in the summer months. Moreover,
yearly results can also fluctuate significantly, particularly for PalEx in the
Southeast and Western regions of the United States. Fluctuations are the result
of the size of the citrus and produce harvests, which, in turn, largely depend
on the occurrence and severity of inclement weather. Accordingly, IFCO Systems'
performance, including the performance of both the IFCO Companies and PalEx, in
any particular quarter may not be indicative of the results that can be
expected for any other quarter or for the entire year.
IFCO Systems is in a highly competitive industry, which may limit its business
prospects
IFCO Systems faces competition in all geographic markets and each industry
sector in which it operates. IFCO Systems expects aggressive competition from
packaging industry companies, including CHEP, an international supplier of
pallets and other material handling products. The IFCO Companies also face
aggressive competition from the traditional packaging industry. In addition,
relatively few barriers prevent entry into the traditional packaging and pallet
industries. The effect of this competition could reduce IFCO Systems' revenues,
limit its ability to grow, increase pricing pressure on its products, and
otherwise affect its financial results.
IFCO Systems may incur increased costs due to fluctuations in interest rates
and foreign currency exchange rates
As a consequence of the global nature of the combined businesses of the IFCO
Companies and PalEx, IFCO Systems will be exposed to increases in interest
rates and changes in foreign currency exchange rates, which may result in
decreased net income. IFCO Systems will seek to minimize these risks through
regular operating and financing activities and, when appropriate, through the
use of currency and interest rate hedges and similar financial instruments,
although these measures may not be implemented or be effective. IFCO Systems
will also be exposed to risks from changes in foreign currency exchange rates
as a result of its financial reporting in U.S. dollars.
Fluctuations in the exchange rate between the U.S. dollar and the euro will
affect the U.S. dollar equivalent of the euro price of IFCO Systems ordinary
shares traded on the Frankfurt Stock Exchange and, as a result, are likely to
affect the market price of the New York shares traded on the Nasdaq National
Market. These fluctuations will also affect the U.S. dollar amounts received by
holders of IFCO Systems ordinary shares on the conversion into U.S. dollars of
cash dividends, if any, paid in euros on the IFCO Systems ordinary shares.
Protecting shareholder rights may prove more difficult and costly than in a
U.S. corporation
IFCO Systems' corporate affairs are governed by its articles of association
and by the laws of the Netherlands. The rights of shareholders of IFCO Systems
and the responsibilities of directors on its board of directors, its officers,
and the experts named in this prospectus, some of whom may reside outside of
the United States, are different than those established under the laws of
Delaware or other U.S. jurisdictions. Therefore, IFCO Systems' public
shareholders may have more difficulty and be subject to higher costs in
protecting their
17
interests in the face of actions by IFCO Systems' management, board of
directors, or controlling shareholders than they would as shareholders of a
corporation incorporated in Delaware or other U.S. jurisdictions. This may
include difficulty in effecting service of process within the United States
upon IFCO Systems or those persons, or enforcing, in courts outside of the
United States, judgments against IFCO Systems or those persons obtained in U.S.
courts and based upon the civil liability provisions of the federal securities
laws of the United States. Furthermore, since a substantial portion of the
assets of IFCO Systems will be located outside of the United States, any
judgment obtained in the United States against those persons or IFCO Systems
may not be collectible within the United States. Additionally, there may be
doubt as to the enforceability, in original actions in Dutch courts, of
liabilities based solely upon the federal securities laws of the United States.
Risks Related to PalEx's Business
PalEx's cost of goods sold may be subject to increases because of unmanageable
changes in the cost or availability of lumber, the largest raw material cost
for pallets
The largest component of PalEx's cost of goods sold is lumber, which is the
principal raw material used in the manufacture and repair of wooden pallets.
Any increase in the cost of lumber or decrease in the availability of lumber
will materially increase cost of goods sold resulting in decreased net income
unless there is a corresponding increase in the prices PalEx charges its
customers. PalEx, however, may be limited in how much of a cost increase, if
any, it is able to pass along to customers or how quickly it is able to pass
along a cost increase to customers. In addition, increases in prices may result
in a decrease in sales. The majority of the lumber used in the pallet industry
is hardwood, which is only grown in some regions of the United States.
If the demand for lumber is greater than the supply, the price will increase
and PalEx's cost for lumber will increase. The factors affecting supply and
demand are outside PalEx's control, including:
. competing demand from other pallet manufacturers and other industries
that use similar grades and types of lumber;
. governmental limits on logging on public lands or for environmental
reasons; and
.governmental agreements limiting lumber imports into the United States or
Canada.
Since lumber is difficult to harvest in adverse weather, adverse weather may
also decrease the supply, resulting in price increases. PalEx may not be able
to secure adequate lumber supplies in the future at prices it considers
reasonable.
PalEx has relied on acquisitions for growth and it may not be able to continue
to make acquisitions or successfully operate acquired businesses
One of PalEx's principal growth strategies has been to acquire additional
pallet manufacturing and recycling and drum reconditioning companies. PalEx may
not be able to identify or acquire additional businesses or integrate and
manage those additional businesses successfully. Acquisitions may involve a
number of operational risks, including:
. integration of acquisitions into PalEx may not be successful or may not
be possible without substantial costs, delays, or other problems, in
either case reducing any positive impact on PalEx's revenues and net
income or actually decreasing net income;
.adverse short-term effects on reported operating results, which will
result in lower net income;
. diversion of management's attention from operations, which could result
in decreased net income or limit internal growth;
. dependence on retention, hiring, and training of key personnel, which
may impair PalEx's ability to integrate acquisitions successfully or may
prevent PalEx from seizing future growth opportunities, both internally
and through acquisitions; and
18
. increased goodwill, which must be amortized, currently at the rate of
approximately $4.4 million per year, thus reducing PalEx's net income.
In addition, PalEx could experience increased competition for acquisitions of
desirable companies, which could increase the amounts paid for acquisitions or
reduce the number of acquisition candidates, resulting in reduced growth
opportunities.
PalEx's markets for pallet manufacturing and recycling services and industrial
container reconditioning services are highly competitive, which may limit
PalEx's ability to grow or maintain profit margins and net income
The markets for pallet manufacturing and recycling services and drum
reconditioning services are highly fragmented and competitive. As a result,
competition on pricing is often intense. Competition for customers and
competitive pricing pressure holding down prices may limit PalEx's ability to
grow or maintain profit margins and net income.
PalEx's pallet manufacturing operations may also be subject to competition
from lumber mills, which could decrease PalEx's profitability
PalEx often competes with lumber mills in the sale of new pallets. These mill
competitors typically view pallet manufacturing as an opportunity to use the
lower grade lumber that would otherwise be waste. As a result, they are able to
manufacture and sell low-cost pallets. This depresses pallet prices overall,
which could decrease PalEx's profitability.
PalEx's pallet manufacturing and recycling operations are subject to
competition from larger competitors, which may limit PalEx's ability to grow or
maintain revenues and net income
Other companies with significantly greater capital and other resources than
PalEx, including CHEP, may enter or expand their operations in the pallet
manufacturing and recycling businesses in the future, which could place PalEx
in direct competition with these larger companies in the markets for new and
recycled pallets. Increased competition from CHEP or other large competitors
could reduce PalEx's revenues through loss of customers or competitive pricing
pressures. Decreases in revenues could have a corresponding effect on net
income.
PalEx's pallet operations face competition from other pallet alternatives,
which could limit or decrease revenues
PalEx's new and recycled pallet operations face competition from pallet
leasing or other pallet systems providers, which are marketed as less expensive
or otherwise more favorable alternatives to new pallet purchasers. Pallet
leasing competes currently with new and recycled pallet sales to the grocery
and wholesale distribution industries and may expand into other industries in
the future. CHEP, with significantly greater resources than PalEx, is currently
the dominant pallet leasing company in the world. Other pallet systems may
include pallets fabricated from non-wooden components like plastic as cost-
effective, durable alternatives to wooden pallets. Increased competition from
pallet leasing companies or providers of other alternatives could make it more
difficult for PalEx to attract and retain customers or force PalEx to reduce
prices. As a result, revenue growth may be limited or may decrease with
corresponding effects on PalEx's net income.
PalEx has potential exposure to environmental liabilities, which may increase
costs and lower net income
PalEx's operations are subject to various environmental laws and regulations,
including those dealing with handling and disposal of waste products, fuel
storage, and air quality. As a result of past and future operations at PalEx's
subsidiaries' facilities, PalEx may be required to incur remediation costs and
other related expenses.
19
In addition, although PalEx intends to conduct appropriate due diligence with
respect to environmental matters in connection with future acquisitions, PalEx
may not be able to identify or be indemnified for all potential environmental
liabilities relating to any acquired business. A PalEx subsidiary currently has
potential exposure to environmental liabilities as a result of contaminations
at the Zellwood Groundwater Contamination Site in Orange County, Florida. For a
description of the potential exposure, see "Business--Regulation--Industrial
Containers." Environmental liabilities incurred by PalEx or its subsidiaries,
if not covered by adequate insurance or indemnification, will increase PalEx's
costs and have a negative impact on its net income.
PalEx may not be able to negotiate with union employees and may be subject to
work stoppages
Approximately 300 employees of PalEx's container group are members of various
labor unions. If PalEx is unable to negotiate acceptable contracts with these
unions as existing agreements expire, strikes or other work stoppages by the
affected workers could occur and increased operating costs due to higher wages
or benefits paid to union members may result. If the unionized employees engage
in a strike or other work stoppage, or other employees become unionized, PalEx
could experience a significant disruption of its operations and higher ongoing
labor costs. This could result in decreased revenues and/or lower net income
than otherwise could have been achieved.
Risks Related to the Offering
The market price of, and trading volumes in, the IFCO Systems ordinary shares
may be volatile
This offering constitutes the initial public offering of the IFCO Systems
ordinary shares, and no public market for IFCO Systems ordinary shares
currently exists. IFCO Systems cannot assure you that an active trading market
will develop or be sustained after the offering is completed. The initial
public offering price will be determined through negotiations between IFCO
Systems and the underwriters based on several factors and may not be indicative
of the market price for the ordinary shares after the offering. The market
price of the IFCO Systems ordinary shares may be significantly affected by,
among others, the following factors:
.IFCO Systems' actual or anticipated results of operations;
.new services or products offered, or new contracts entered into, by IFCO
Systems or its competitors;
.changes in, or IFCO Systems' failure to meet, securities analysts'
expectations;
.legislative and regulatory developments affecting the RTC industry;
.developments and technological innovations in the RTC industry;
.investor perceptions of investments relating to Europe; and
.general market conditions and other factors beyond IFCO Systems' control.
U.S. and non-U.S. stock markets have periodically experienced significant
price and volume fluctuations. These changes have often been unrelated to the
financial performance of particular companies. These broad market developments
may also adversely affect the market price of the IFCO Systems ordinary shares.
20
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus discuss future
expectations, contain projections of results of operations or financial
condition of IFCO Systems, the IFCO Companies, or PalEx, or state other
forward-looking information. These statements may include financial information
and/or statements for the period following the merger. You can find many of
these statements in the section entitled "Projections for PalEx and the IFCO
Companies" or by looking for words like believes, expects, anticipates,
estimates, or similar expressions used in this prospectus.
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 IFCO Systems, the IFCO Companies, and PalEx believe to be
reasonable.
Risks and uncertainties include the following:
. the timely completion of the merger, this offering, the high yield debt
offering, the new senior credit facility, and the other concurrent
transactions;
. the ability of the combined company to effectively integrate their
operations and achieve their operational and growth objectives;
. the competitive nature of the container businesses;
. customer demand and business and economic cycles;
. the ability to finance capital expenditures and growth;
. changes in national or international politics and economics;
. currency exchange rate fluctuations; and
. 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 actual results to be materially different
from the forward-looking statements are also disclosed in the "Risk Factors"
section and throughout this prospectus.
21
CONCURRENT TRANSACTIONS
This offering is being made concurrently with the merger of PalEx into IFCO
Systems. PalEx will merge with and into Silver Oak Acquisition Corp., a newly
formed, wholly owned subsidiary of IFCO Systems, which will change its name to
"PalEx, Inc." Following the merger, IFCO Systems will own all of the stock of
the IFCO Companies and PalEx. In the merger, PalEx stockholders will receive
merger consideration with a total value of $9.00 per share consisting of cash
and/or IFCO Systems ordinary shares for each share of PalEx common stock. The
total merger consideration for all the shares of PalEx common stock is limited
to not less than 40% and not more than 49% in cash and not more than 60% and
not less than 51% in IFCO Systems ordinary shares. The merger is subject to
satisfaction of a number of conditions including the approval of PalEx's
stockholders. A meeting of PalEx stockholders has been scheduled for March 2,
2000, to vote on the merger.
At the same time as the completion of the merger and this offering, IFCO
Systems plans to issue approximately (Euro)180.0 million, or approximately
$177.2 million, of debt in the form of a high yield debt offering and enter
into a new senior credit facility. The completion of the high yield debt
financing is conditioned on the completion of the merger, this offering with at
least $160.0 million in gross proceeds, a new senior credit facility of at
least $200.0 million, and the other concurrent transactions. Neither this
prospectus nor any information contained in this prospectus is, or should be
considered to be, an offer to sell, or an invitation to participate in, the
high yield debt offering or any future financings.
This offering is conditioned upon the completion of the merger and the high
yield financing and total proceeds to IFCO Systems from this offering and the
high yield debt offering of at least $250.0 million.
In connection with the merger, Schoeller Industries and Gebruder Schoeller
have contributed to IFCO Systems, directly or indirectly, the outstanding
capital shares of IFCO Europe, MTS, and IFCO International owned by them.
In addition, IFCO Systems, together with Schoeller Industries, the
shareholders of Schoeller Industries, Schoeller Plast Industries GmbH, Gebruder
Schoeller, and Schoeller KG have entered into the Option Release and IPO-
Facilitation Agreement with GE Capital and GE Erste in connection with the
proposed merger and the IPO. Pursuant to that agreement, Schoeller Holding has
issued a DM45.0 million, or approximately $22.7 million, convertible debenture
to GE Erste in exchange for contribution to IFCO Systems of the IFCO Europe
preferential share owned by GE Erste. IFCO Systems also agreed to pay GE
Capital DM43.0 million, or approximately $21.7 million, out of the net proceeds
of this offering, the high yield debt offering, 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. As a result of the share contributions, IFCO Systems will own
all the capital stock of IFCO Europe, MTS, and IFCO International.
At the same time as, or within five days following, the completion of this
offering, IFCO Systems has agreed to purchase the interest of Intertape Polymer
Group Inc. in IFCO U.S., for approximately $5.0 million in cash. In addition,
IFCO International will repay debt owed by IFCO U.S. to Intertape, which as of
October 31, 1999, was approximately $24.4 million. As a result of this
purchase, IFCO Systems will own all of the equity interest in IFCO U.S.
22
USE OF PROCEEDS
The proceeds of this offering, together with the initial borrowings under the
new senior credit facility and proceeds from the high yield debt offering, will
be used primarily to repay a substantial portion of the existing indebtedness
of the IFCO Companies and PalEx, to pay the merger consideration to PalEx's
stockholders, and to fund the other concurrent transactions. IFCO Systems has
summarized below the estimated sources and uses of funds, assuming that the
merger, this offering, the high yield debt offering, the other concurrent
transactions, and the debt repayments had occurred as of October 31, 1999. The
actual sources and uses of proceeds will vary from those summarized below,
depending on the actual date of the closing and the exchange rate on that date.
Amount
--------------
(in thousands)
Sources of Funds:
Cash on hand................................................... $ 14,421
New senior credit facility(1).................................. 16,759
Senior subordinated notes(2)................................... 189,324
Proceeds from this offering(3)................................. 179,270
--------------
Total........................................................ $ 399,774
==============
Uses of Funds:
Cash payment to PalEx stockholders(4).......................... $ 90,401
Repayment of PalEx debt and related party loans(5)............. 143,012
Repayment of IFCO Companies debt(6)............................ 75,350
Purchase remaining interest in IFCO U.S. and repayment of
debt(7)....................................................... 29,400
Payment to GE Capital(8)....................................... 23,095
Payment for participating rights and redeemable participating
rights(9)..................................................... 5,348
Fees and expenses(10).......................................... 33,168
--------------
Total........................................................ $ 399,774
==============
- --------
(1) IFCO Systems anticipates that it will have available borrowings under the
new senior credit facility of up to an additional $283.2 million. IFCO
Systems currently expects to use a portion of this amount to finance its
working capital needs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--IFCO Companies--Liquidity
and Capital Resources."
(2) Based upon the exchange rate for U.S. dollars per one euro as of February
11, 2000, the total dollar amount of the notes would be approximately
$177.2 million. IFCO Systems plans to increase the initial borrowings
under the new senior credit facility to account for this difference.
(3) Assumes that the initial public offering price is $13.79 per ordinary
share and 13.0 million shares are issued in this offering. IFCO Systems
has granted the underwriters in this offering an overallotment option to
purchase up to 1.95 million additional shares. Assumes that the
overallotment option has not been exercised. To the extent that the
overallotment option is exercised, IFCO Systems would receive additional
proceeds of approximately $25.5 million, net of underwriting discounts and
commissions of approximately $1.3 million.
(4) Assumes PalEx stockholders elect to receive 49% of the merger
consideration in cash.
(5) Reflects the repayment of (a) approximately $133.0 million outstanding
under PalEx's senior credit facility, which bore interest at a weighted
average rate of approximately 9.5% in 1999 and matures on June 30, 2000,
and (b) approximately $10.0 million outstanding under various convertible
notes issued by PalEx to sellers in connection with acquisitions, which
bear interest at rates ranging from 6.0% to 8.0% and have maturity dates
from March 18, 2000, to July 14, 2000. Since October 24, 1999,
approximately $1.6 million outstanding under these notes has been paid. On
November 10, 1999, PalEx issued $25.0 million of unsecured Senior
Subordinated Notes due September 30, 2000, the proceeds of which were used
to reduce the amount outstanding under PalEx's senior credit facility.
These Senior Subordinated Notes, which will also be repaid, bear interest
at the greater of LIBOR plus 600 basis points and the rate on PalEx's
senior credit facility plus 200 basis points, which was 12.125% at
February 10, 2000,
(6) Reflects the repayment of (a) approximately $53.2 million outstanding
under IFCO Europe's Senior Facility Agreement, which bears interest at the
rate of EURIBOR plus 1.75%, or 4.61%, and matures on September 30, 2004,
(b) approximately $18.8 million outstanding under IFCO Europe's Senior
Subordinated Agreement, which bears interest at the rate of EURIBOR plus
2.75%, or 5.61%, and matures on September 30, 2005, (c) approximately $0.5
million outstanding under short-term loans, which bear interest at
variable rates and mature on May 31, 2000, (d) approximately $2.3 million
outstanding under short-term related party loans, which bear interest at
rates ranging from 2.5% to 5.0% and have maturity dates from the closing
of the merger to December 31, 2000, and (e) approximately $0.6 million
outstanding under other long-term debt.
(7) Reflects the purchase from Intertape of its 49% equity interest in IFCO
U.S. for $5.0 million and the payment of approximately $24.4 million to
retire IFCO U.S.'s indebtedness to Intertape.
(8) Reflects the payment to GE Capital in exchange for release of GE Capital's
and GE Erste's options and rights to purchase shares in the IFCO
Companies. Based upon the exchange rate for U.S. dollars per one Deutsch
mark as of February 11, 2000, the dollar amount of the payment would be
approximately $21.7 million.
(9) Reflects the payments to retire the participating rights and redeemable
participating rights of the IFCO Companies, which are held by related
parties of the IFCO Companies.
(10) Represents fees and expenses of this offering and the concurrent
transactions, including, principally, underwriting discounts and
commissions, accounting, advisor, and legal fees, printing expenses, and
costs of refinancing the credit facilities of the IFCO Companies and
PalEx.
23
CAPITALIZATION
The following table sets forth the IFCO Companies' historical combined
capitalization as of October 31, 1999, and IFCO Systems' capitalization on a
pro forma combined basis as of October 31, 1999, after giving effect to the
merger, this offering, the high yield debt offering, borrowings under the new
senior credit facility, and the other concurrent transactions. You should read
this table along with "Unaudited Pro Forma Combined Financial Statements" and
the IFCO Companies' financial statements included in this prospectus.
As of October 31, 1999
---------------------------
IFCO Companies IFCO Systems
Historical Pro Forma
Combined Combined
-------------- ------------
(in thousands)
(unaudited) (unaudited)
Cash and cash equivalents........................... $ 9,134 $ --
======== ========
Long-term debt (including current maturities):
Long-term debt (including related party loans).... $ 75,350 $ 4,169
New senior credit facility........................ -- 16,759
Senior subordinated notes(1)...................... -- 189,324
Capital lease obligations......................... 31,296 31,296
-------- --------
Total long-term debt............................ 106,646 241,548
-------- --------
Participating rights................................ 3,871 --
Redeemable participating rights..................... 1,477 --
Redeemable convertible preferred stock.............. 26,335 --
Stockholders' equity:
Common stock/paid-in capital...................... -- 290,787
Contributed share capital......................... 10,017 --
Retained (deficit)................................ (46,400) (46,400)
Other stockholders' equity........................ 1,076 1,076
-------- --------
Total stockholders' equity...................... (35,307) 245,463
-------- --------
Total capitalization............................ $103,022 $487,011
======== ========
- --------
(1) Based upon the exchange rate for U.S. dollars per one euro as of February
11, 2000, the total dollar amount of the notes would be approximately
$177.2 million. IFCO Systems plans to increase the initial borrowings under
the new senior credit facility to account for this difference.
DIVIDEND POLICY
IFCO Systems is a newly formed company and has never declared or paid any
cash dividends. IFCO Systems currently anticipates that any future earnings
will be retained for development and expansion of its business and do not
anticipate paying any cash dividends in the foreseeable future. IFCO Systems
also anticipates that the new senior credit facility will include restrictions
on its ability to pay dividends without the consent of the lenders. IFCO
Systems' board of directors has sole discretion to pay cash dividends based on
IFCO Systems' financial condition, results of operations, capital requirements,
obligations, and other relevant factors.
If IFCO Systems declares dividends in the future, it may do so either in
Dutch guilders, euros, or U.S. dollars. If we declare dividends in Dutch
guilders or euros, the amount of U.S. dollars realized by shareholders will
vary depending on the rate of exchange between U.S. dollars and Dutch guilders
or euros, as the case may be.
24
DILUTION
IFCO Systems' pro forma net tangible deficit as of October 31, 1999, was
approximately $4.3 million, or approximately $0.11 per ordinary share, after
giving effect to the merger, this offering, the high yield debt offering,
borrowings under the new senior credit facility, and the other concurrent
transactions. Pro forma net tangible deficit per share represents total
tangible assets, less total liabilities, divided by the pro forma number of
ordinary shares outstanding.
This offering results in an immediate increase in net tangible book value of
$2.34 per share to IFCO Systems' existing shareholders, which assumes the
merger has occurred, but does not take into account any of the other concurrent
transactions, and an immediate dilution in net tangible book value of $13.90
per share to new investors of ordinary shares in this offering. Dilution to net
tangible book value per share represents the difference between the historical
net tangible deficit per share of the existing shareholders and the pro forma
net tangible deficit per share immediately after the completion of this
offering. The following table illustrates this per share dilution:
Assumed initial public offering price per share........... $13.79
Net tangible deficit per share after the merger, but
before the other concurrent transactions................. (2.45)
Increase per share attributable to this offering ......... 2.34
-----
Pro forma net tangible deficit per share after this
offering and the other concurrent transactions........... (0.11)
------
Dilution per share to new investors....................... $13.90
======
If the underwriters' overallotment option is exercised in full, IFCO Systems'
pro forma net tangible book value as of October 31, 1999, would have been
approximately $0.50 per share, representing an immediate increase in net
tangible book value of $2.96 per share to existing shareholders and an
immediate dilution in net tangible book value of $13.29 per share to new
investors.
The following table sets forth, on a pro forma basis as of October 31, 1999,
after giving effect to
. the issuance of ordinary shares in the merger in exchange for, at
historical book value, the equity of the IFCO Companies and PalEx and
. the sale of ordinary shares to investors in this offering,
the number of ordinary shares purchased from IFCO Systems, the total price
paid, and the average price per share paid by the existing shareholders and new
investors, before deducting underwriting discounts and commissions and
estimated offering expenses to be paid by IFCO Systems, at the assumed initial
public offering price of $13.79 per share (in thousands except percentage and
per share data):
Shares Total Average
Purchased Consideration Price
-------------- ---------------- Per
Number Percent Amount Percent Share
------ ------- -------- ------- -------
Existing shareholders................... 26,823 67.4% $ 68,306 27.6% $ 2.55
New investors........................... 13,000 32.6% 179,270 72.4% 13.79
------ ------ -------- ------
Total................................. 39,823 100.0% $247,576 100.0%
====== ====== ======== ======
The above discussion assumes no exercise of outstanding options or warrants.
Investors in this offering will experience additional dilution if any options
or warrants are exercised.
25
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation
The following unaudited pro forma combined financial statements give effect
to:
. the contribution to IFCO Systems of the outstanding capital stock of the
IFCO Companies;
. the merger;
. this offering, the high yield debt offering, and borrowings under the new
senior credit facility; and
. other concurrent transactions, including IFCO Systems' acquisition of the
minority interest in IFCO U.S.
The acquisition of PalEx will be accounted for using the purchase method of
accounting. The IFCO Companies have been identified as the accounting acquiror
for financial statement presentation purposes as their former shareholders will
represent the largest voting interest within IFCO Systems.
The unaudited pro forma combined balance sheet gives effect to the
contribution of the IFCO Companies' capital stock, the merger, this offering,
the high yield debt offering, and the other concurrent transactions as if they
had occurred on October 31, 1999. The unaudited pro forma combined statements
of operations give effect to these transactions as if they had occurred on
January 1, 1998.
IFCO Systems expects that the combination of the IFCO Companies and PalEx
will allow the companies to take advantage of synergies among their businesses,
including the use of PalEx's infrastructure in North America to expand the
rental pools of RTCs and pallets in North America. IFCO Systems cannot quantify
any advantages or additional costs of the combinations until completion of the
acquisitions. No estimates of any advantages or additional costs have been
included in the pro forma financial information.
The pro forma adjustments are based on preliminary estimates, available
information, and assumptions that IFCO Systems' management deems appropriate
and may be revised as additional information becomes available. IFCO Systems'
management, however, does not believe that there are any other material
identifiable intangible assets to which purchase price can be allocated. The
pro forma financial data do not represent what IFCO Systems' financial position
or results of operations would actually have been if the transactions in fact
had occurred on those dates and are not necessarily representative of IFCO
Systems' financial position or results of operations for any future periods.
The pro forma combined financial statements should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes of the IFCO
Companies and PalEx included in this prospectus.
26
IFCO Systems N.V.
Unaudited Pro Forma Combined Balance Sheet
As of October 31, 1999
(In thousands)
IFCO IFCO
Systems Systems
IFCO Pro Forma Pro Forma
Companies PalEx Adjustments Combined
--------- -------- ----------- ---------
CURRENT ASSETS:
Cash and cash $ 9,134 $ 5,255 $ --
equivalents............. $ (14,389)b,c,d,
e,f,g,h,i
Accounts receivable, 81,509 51,068 138,691
net..................... 6,114 e
Inventories.............. 3,838 27,535 -- 31,373
Other current assets..... -- 11,457 29 e 11,486
-------- -------- --------- --------
Total current assets.... 94,481 95,315 (8,246) 181,550
PROPERTY, PLANT AND 162,772 75,239 249,698
EQUIPMENT, net........... 11,687 e
GOODWILL AND OTHER
INTANGIBLE
ASSETS, net.............. 8,698 125,406 115,699 b,e,h 249,803
OTHER ASSETS.............. 7,695 3,657 14,243 a,d 25,595
-------- -------- --------- --------
Total assets............ $273,646 $299,617 $ 133,383 $706,646
======== ======== ========= ========
CURRENT LIABILITIES:
Current maturities of $ 8,167 $145,030 $ --
long-term debt.......... $(153,197)e,f,g
Current maturities of 10,528 -- 10,528
capital lease
obligations............. --
Refundable deposits...... 70,820 -- 3,439 e 74,259
Accounts payable......... 76,533 11,232 1,117 e,g 88,882
Other current 17,587 23,850 42,659
liabilities............. 1,222 e
-------- -------- --------- --------
Total current 183,635 180,112 216,328
liabilities............ (147,419)
ACCUMULATED LOSSES IN
EXCESS OF INVESTMENT IN
EQUITY ENTITIES.......... 5,684 -- (5,590)e 94
LONG-TERM DEBT AND RELATED
PARTY LOANS, net of
current maturities....... 67,183 2,151 (48,406)f 20,928
SENIOR SUBORDINATED -- -- 189,324
NOTES.................... 189,324 d
CAPITAL LEASE OBLIGATIONS,
net of current
maturities............... 20,768 -- -- 20,768
OTHER LIABILITIES......... -- 13,741 -- 13,741
PARTICIPATING RIGHTS...... 3,871 -- (3,871)i --
REDEEMABLE PARTICIPATING 1,477 -- --
RIGHTS................... (1,477)i
REDEEMABLE CONVERTIBLE
PREFERRED STOCK.......... 26,335 -- (26,335)b --
STOCKHOLDERS' EQUITY:
Ordinary shares.......... -- 203 (203)a,b --
Paid-in capital.......... 10,017 79,107 201,663 b,c 290,787
Other stockholders' 1,076 (901) 1,076
equity.................. 901 b
Retained earnings (46,400) 25,204 (46,400)
(deficit)............... (25,204)b
-------- -------- --------- --------
Total stockholders' (35,307) 103,613 245,463
equity................. 177,157
-------- -------- --------- --------
Total liabilities and $273,646 $299,617 $706,646
stockholders' equity... $ 133,383
======== ======== ========= ========
See accompanying notes to unaudited pro forma combined financial statements.
27
IFCO Systems N.V.
Unaudited Pro Forma Combined Statement of Operations
For the year ended December 31, 1998
(In thousands, except for share and per share data)
PalEx
----------------------------------------------- IFCO
Total Systems IFCO Systems
IFCO As Previously Purchase Pro Forma Pro Pro Forma Pro Forma
Companies Reported Acquisitions Adjustments Forma Adjustments Combined
--------- ------------- ------------ ----------- -------- ----------- ------------
REVENUES................ $134,721 $319,691 $60,163 $ -- $379,854 $ 1,657 h $ 516,232
COST OF GOODS SOLD...... 106,218 259,562 45,389 (349)a 304,602 2,651 h 413,471
INVENTORY VALUATION
ADJUSTMENT............. -- 1,235 -- -- 1,235 -- 1,235
-------- -------- ------- ------- -------- ------- -----------
Gross profit........... 28,503 58,894 14,774 349 74,017 (994) 101,526
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 28,515 33,042 11,375 (1,239)a 43,178 1,719 h 73,412
AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE
ASSETS................. 383 3,334 -- 1,273b 4,607 4,086 e 9,076
POOLING EXPENSES........ -- 1,841 -- (1,841)a -- -- --
COMPENSATION
DIFFERENTIAL........... -- 1,062 -- (1,062)a -- -- --
RESTRUCTURING CHARGE.... -- 949 -- -- 949 -- 949
PLANT CLOSURE COSTS AND
ASSET ABANDONMENT
LOSS................... -- 1,369 -- -- 1,369 -- 1,369
OTHER OPERATING
(INCOME), net.......... (3,081) -- -- -- -- -- (3,081)
-------- -------- ------- ------- -------- ------- -----------
Income (loss)
from operations....... 2,686 17,297 3,399 3,218 23,914 (6,799) 19,801
NET INTEREST COST....... (7,030) (8,468) -- (2,925)c (11,393) (3,671)f,g,i (22,094)
OTHER INCOME (EXPENSE),
net.................... (2,997) 262 751 -- 1,013 1,960 h (24)
-------- -------- ------- ------- -------- ------- -----------
(Loss) income before
provision for income
taxes ................ (7,341) 9,091 4,150 293 13,534 (8,510) (2,317)
INCOME TAX PROVISION ... 210 5,105 -- 1,917d 7,022 (39) j 7,193
-------- -------- ------- ------- -------- ------- -----------
Net (loss) income...... $ (7,551) $ 3,986 $ 4,150 $(1,624) $ 6,512 $(8,471) $ (9,510)
======== ======== ======= ======= ======== ======= ===========
Net loss per share--
basic and diluted...... $ (.24) k,l
===========
Shares used in computing
net loss per share--
basic and diluted...... 39,823,060 l
===========
Calculation of EBITDA
and non-recurring
charges (m):
Net loss................ $ (9,510)
Provision for income
taxes.................. 7,193
Net interest cost....... 22,094
-----------
EBIT................... 19,777
Depreciation and
amortization........... 48,072
Restructuring charges... 3,553
-----------
EBITDA and non-
recurring charges..... $ 71,402
===========
See accompanying notes to unaudited pro forma combined financial statements.
28
IFCO Systems N.V.
Unaudited Pro Forma Combined Statement of Operations
For the ten months ended October 31, 1999
(In thousands, except for share and per share data)
IFCO
Systems IFCO Systems
IFCO Pro Forma Pro Forma
Companies PalEx Adjustments Combined
--------- -------- ----------- ------------
REVENUES.................. $126,399 $320,433 $ 4,268 h $ 451,100
COST OF GOODS SOLD........ 100,330 257,472 4,203 h 362,005
-------- -------- ------- -----------
Gross profit............. 26,069 62,961 65 89,095
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.. 24,029 36,142 1,641 h 61,812
AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE
ASSETS................... 344 3,993 3,405 e 7,742
OTHER OPERATING (INCOME),
net...................... (1,976) -- -- (1,976)
-------- -------- ------- -----------
Income (loss)
from operations......... 3,672 22,826 (4,981) 21,517
NET INTEREST COST......... (6,881) (12,047) (1,545)f,g,i (20,473)
OTHER INCOME (EXPENSE),
net...................... (2,933) 1,387 1,467 h (79)
-------- -------- ------- -----------
(Loss) income before
provision for income
taxes .................. (6,142) 12,166 (5,059) 965
INCOME TAX PROVISION ..... 144 5,402 314 j 5,860
-------- -------- ------- -----------
Net (loss) income........ $ (6,286) $ 6,764 $(5,373) $ (4,895)
======== ======== ======= ===========
Net loss per share--basic
and diluted.............. $ (.12)k,l
===========
Shares used in computing
net loss per share--basic
and diluted.............. 39,823,060 l
===========
Calculation of EBITDA and
non-recurring charges
(m):
Net loss ................. $ (4,895)
Provision for income
taxes.................... 5,860
Net interest cost......... 20,473
-----------
EBIT..................... 21,438
Depreciation and
amortization............. 45,747
-----------
EBITDA and non-recurring
charges................. $ 67,185
===========
See accompanying notes to unaudited pro forma combined financial statements.
29
IFCO Systems N.V.
Notes to Unaudited Pro Forma Combined Financial Statements
1.GENERAL
The historical financial statements reflect the financial position and
results of operations of the IFCO Companies and PalEx and were derived from
their respective financial statements. The periods included in these financial
statements for the IFCO Companies and PalEx are as of October 31, 1999, and for
the year ended December 31, 1998, and the ten months ended October 31, 1999,
for the IFCO Companies and as of October 24, 1999, and for the year ended
December 27, 1998, and the ten-month period ended October 24 1999, for PalEx.
The financial statements of PalEx reflect adjustments to the year ended
December 27, 1998, to present the effect of acquisitions accounted for under
the purchase method, under the caption "Total Purchase Acquisitions," as if the
acquisitions were effective January 1, 1998.
2.THE MERGER AND CONCURRENT TRANSACTIONS
IFCO Systems will issue its ordinary shares in exchange for all the
outstanding capital stock of the IFCO Companies and between 51% and 60% of the
outstanding capital stock of PalEx. The following pro forma adjustments assume
that PalEx stockholders elect to receive 49% of the merger consideration in
cash. If PalEx stockholders were to elect to receive 40% of the merger
consideration in cash, rather than 49%, pro forma net (loss) would be
approximately $(8.5) million and pro forma net (loss) per share would be $(.21)
during the year ended December 31, 1998. Pro forma net (loss) would be
approximately $(3.8) million and pro forma net (loss) per share would be $(.10)
during the ten months ended October 31, 1999. The IFCO Companies have been
identified as the accounting acquiror and are the predecessors to IFCO Systems.
The acquisition of PalEx is accounted for using the purchase method of
accounting.
3.UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
a. Reflects the issuance of 200,000 shares of PalEx common stock to PalEx's
financial advisor immediately prior to this offering and the
corresponding reduction of paid-in capital as a transaction cost.
b. Reflects:
. the acquisition of PalEx for approximately $184.5 million consisting
of approximately 6.8 million IFCO Systems ordinary shares and
approximately $90.4 million in cash issued to PalEx stockholders;
. the contribution to IFCO Systems of the redeemable convertible
preferred stock of IFCO Europe previously held by GE Erste; and
. approximately 20.0 million IFCO Systems ordinary shares to the
shareholders of the IFCO Companies, which will be recorded at book
value. The acquisition price of PalEx is $9.00 per share under the
terms of the merger agreement. This adjustment reflects the election
of the PalEx shareholders to receive 49% of the value of their
common stock in cash, which represents the maximum percentage of
cash PalEx stockholders will receive. The number of IFCO Systems
ordinary shares issued to shareholders of the IFCO Companies and to
PalEx stockholders assumes a valuation of approximately $13.79 per
ordinary share in this offering and makes assumptions regarding the
valuation of IFCO Systems before this offering and before the
distribution of 49% of the value of PalEx in cash to PalEx's
stockholders. These assumptions are not necessarily indicative of
the actual pre-offering valuation, the size of this offering, or the
price per share in this offering.
c. Reflects the cash proceeds of approximately $160.3 million from the
issuance of 13.0 million IFCO Systems ordinary shares, net of estimated
offering costs of approximately $18.9 million. Offering costs consist
principally of underwriting discounts and commissions, accounting,
advisory, and legal fees and printing expenses.
30
d. Reflects issuance of (Euro)180.0 million of senior subordinated notes,
translated to approximately $189.3 million using the exchange rate as of
October 29, 1999, of (Euro)1.00 = $1.0518, with interest payable at 10%
per year, net of related financing costs of approximately $14.2 million,
including the costs of refinancing the credit facilities of PalEx and
the IFCO Companies. Based on the exchange rate as of February 11, 2000,
of (Euro)1.00=$0.9847, the amount of the senior subordinated notes would
be translated to approximately $177.2 million.
e. Reflects the purchase of the remaining interest in IFCO U.S., a
subsidiary of IFCO International, for $5.0 million, and the
consolidation of the now wholly owned subsidiary.
f. Reflects the reduction of existing debt with the proceeds of this
offering and the issuance of senior subordinated notes.
g. Reflects the payment of approximately $24.4 million to the remaining
interest holder of IFCO U.S. in payment of that subsidiary's various
indebtedness to the remaining interest holder.
h. Reflects payment of approximately $23.1 million to GE Capital in
exchange for the release of the options and other rights in connection
with GE Capital's investment in IFCO Europe. The allocation of the
purchase price for the options and rights to the assets and liabilities
of IFCO Systems has not yet been completed. As a result, the purchase
price has been preliminarily allocated to goodwill.
i Reflects the payment of approximately $5.3 million to retire, at book
value, the participating rights and the redeemable participating rights
of the IFCO Companies, which are held by related parties of the IFCO
Companies.
31
The following table summarizes the unaudited pro forma combined balance sheet
adjustments (in thousands):
Pro Forma
a b c d e f g h i Adjustments
---- -------- -------- -------- ------- --------- -------- -------- ------- -----------
CURRENT ASSETS:
Cash and cash
equivalents.......... $-- $(90,401) $160,345 $175,081 $(4,968) $(201,603) $(24,400) $(23,095) $(5,348) $ (14,389)
Accounts receivable,
net.................. -- -- -- -- 6,114 -- -- -- -- 6,114
Inventories........... -- -- -- -- -- -- -- -- -- --
Other current assets.. -- -- -- -- 29 -- -- -- -- 29
---- -------- -------- -------- ------- --------- -------- -------- ------- ---------
Total current assets.. -- (90,401) 160,345 175,081 1,175 (201,603) (24,400) (23,095) (5,348) (8,246)
PROPERTY, PLANT AND
EQUIPMENT, net........ -- -- -- -- 11,687 -- -- -- -- 11,687
GOODWILL AND OTHER
INTANGIBLE ASSETS,
net................... -- 80,878 -- -- 11,726 -- -- 23,095 -- 115,699
OTHER ASSETS........... -- -- -- 14,243 -- -- -- -- -- 14,243
---- -------- -------- -------- ------- --------- -------- -------- ------- ---------
Total assets.......... $-- $ (9,523) $160,345 $189,324 $24,588 $(201,603) $(24,400) $ -- $(5,348) $ 133,383
==== ======== ======== ======== ======= ========= ======== ======== ======= =========
CURRENT LIABILITIES:
Current maturities of
long-term debt....... $-- $ -- $ -- $ -- $21,102 $(153,197) $(21,102) $ -- $ -- $(153,197)
Current maturities of
capital lease
obligations.......... -- -- -- -- -- -- -- -- -- --
Refundable deposits... -- -- -- -- 3,439 -- -- -- -- 3,439
Accounts payable...... -- -- -- -- 4,415 -- (3,298) -- -- 1,117
Other current
liabilities.......... -- -- -- -- 1,222 -- -- -- -- 1,222
---- -------- -------- -------- ------- --------- -------- -------- ------- ---------
Total current
liabilities.......... -- -- -- -- 30,178 (153,197) (24,400) -- -- (147,419)
ACCUMULATED LOSSES IN
EXCESS OF INVESTMENT
IN EQUITY ENTITIES.... -- -- -- -- (5,590) -- -- -- -- (5,590)
LONG-TERM DEBT AND
RELATED PARTY LOANS,
net of current
maturities............ -- -- -- -- -- (48,406) -- -- -- (48,406)
SENIOR SUBORDINATED
NOTES................. -- -- -- 189,324 -- -- -- -- -- 189,324
CAPITAL LEASE
OBLIGATIONS, net of
current maturities.... -- -- -- -- -- -- -- -- -- --
OTHER LIABILITIES...... -- -- -- -- -- -- -- -- -- --
PARTICIPATING RIGHTS... -- -- -- -- -- -- -- -- (3,871) (3,871)
REDEEMABLE
PARTICIPATING RIGHTS.. -- -- -- -- -- -- -- -- (1,477) (1,477)
REDEEMABLE CONVERTIBLE
PREFERRED STOCK....... -- (26,335) -- -- -- -- -- -- -- (26,335)
STOCKHOLDERS' EQUITY:
Ordinary shares....... 2 (205) -- -- -- -- -- -- -- (203)
Paid-in capital....... (2) 41,320 160,345 -- -- -- -- -- -- 201,663
Other stockholders'
equity............... -- 901 -- -- -- -- -- -- -- 901
Retained earnings..... -- (25,204) -- -- -- -- -- -- -- (25,204)
---- -------- -------- -------- ------- --------- -------- -------- ------- ---------
Total stockholders'
equity............... -- 16,812 160,345 -- -- -- -- -- -- 177,157
---- -------- -------- -------- ------- --------- -------- -------- ------- ---------
Total liabilities and
stockholders'
equity............... $-- $ (9,523) $160,345 $189,324 $24,488 $(201,603) $(24,400) $ -- $(5,348) $ 133,383
==== ======== ======== ======== ======= ========= ======== ======== ======= =========
32
4.UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
PalEx
a. Adjusts the allocation of purchase price to inventory as it affects cost
of goods sold, adjusts compensation to the level the former owners of
companies acquired by PalEx agreed to receive as a result of the
acquisitions, reflects revisions of lease agreements with stockholders
of PalEx as a result of the purchase of some companies by PalEx, and
reflects pooling expenses incurred in conjunction with companies
acquired by PalEx.
b. Reflects additional amortization of goodwill resulting from PalEx's 1998
acquisitions accounted for as purchases, using a 30-year estimated life.
c. Reflects the net increase in interest expense attributed to incremental
borrowings resulting from PalEx's 1998 acquisitions accounted for as
purchases.
d. Reflects the incremental provision for federal and state income taxes
relating to the other PalEx income statement adjustments and for income
taxes on some of PalEx's 1998 purchase acquisitions that were previously
taxed as S Corporations.
IFCO Systems
e. Reflects the amortization of goodwill of approximately $4.1 million
during the year ended December 31, 1998, and approximately $3.4 million
during the ten months ended October 31, 1999, 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. Goodwill will be amortized on the straight-line basis over a 30-
year estimated life.
f. Reflects interest expense reduction of approximately $17.2 million
during the year ended December 31, 1998, and approximately $15.9 million
during the ten months ended October 31, 1999, on approximately $224.1
million of historical debt assumed to be repaid using available cash on
hand and proceeds from this offering and the senior subordinated notes,
reduced by cash payments required under the terms of the merger
agreement and other concurrent transactions. The interest expense
reduction is calculated using a weighted average effective interest rate
of approximately 7.7% per year for the year ended December 31, 1998, and
approximately 8.5% per year for the ten months ended October 31, 1999.
g. Reflects additional interest expense incurred of approximately $18.9
million during the year ended December 31, 1998, and approximately $15.8
million during the ten months ended October 31, 1999, in conjunction
with the issuance of (Euro)180.0 million of senior subordinated notes,
translated to approximately $189.3 million using the exchange rate as of
October 29, 1999, of (Euro)1.00 = $1.0518, at an assumed interest rate
of 10% per year. The principal borrowing level and the interest rate
under this arrangement are based on management's current estimates.
Based on the exchange rate as of February 11, 2000, of (Euro)1.00 euro
to $0.9847, the amount of the senior subordinated notes would be
translated to approximately $177.2 million.
h. Reflects the consolidation of the revenues and expenses of IFCO U.S. as
a wholly owned subsidiary, which occurs as a consequence of the purchase
of the remaining interest, the elimination of the previously recorded
loss accounted for under the equity method, and the elimination of
previously recorded interest expense as a result of IFCO Systems'
assumed repayment of all interest-bearing debt of IFCO U.S.
i. Reflects the amortization of loan costs associated with the issuance of
long-term debt and the refinancing of the credit facilities of PalEx and
the IFCO Companies.
j. Reflects the effect of income tax adjustments related to the pro forma
adjustments and considers the allocation of both reduced and additional
interest based on currently available tax planning
33
information, the assumption that goodwill amortization resulting from
these transactions is non-deductible, and limited recognition of any tax
benefits that result from additional net operating loss carryforwards
created by pro forma adjustments.
k. Reflects the elimination of the accretion attributable to the redeemable
convertible preferred stock of IFCO Europe as a result of its
contribution by GE Erste to IFCO Systems, as well as the elimination of
the accretion attributable to the participating rights and the
redeemable participating rights of the IFCO Companies as a result of
their assumed retirement by IFCO Systems at their book values.
l. The shares used in calculating net (loss) per share--basic include
approximately 20.0 million ordinary shares issued by IFCO Systems in
exchange for the outstanding shares of the IFCO Companies, approximately
6.8 million ordinary shares issued in exchange for the outstanding
shares of PalEx and approximately 13.0 million ordinary shares issued in
the IPO. Net (loss) per share--diluted considers the equivalent shares
for unexercised stock options issued to PalEx employees and contemplated
to be issued to IFCO Systems employees and conversion of convertible
debt.
m. EBIT and EBITDA and non-recurring charges are not presented as
alternative measure of operating results or cash flows from operations
as determined in accordance with generally accepted accounting
principles, but because they are accepted financial indicators of the
ability to incur and service debt on a pro forma combined basis. EBIT
represents IFCO Systems' pro forma combined net (loss) after exclusion
of net interest costs and income tax provisions. EBITDA and non-
recurring charges represents IFCO Systems' EBIT plus depreciation and
amortization charges, and non-recurring, one-time restructuring charges
related to the termination of PalEx's relationship with CHEP USA. EBIT
and EBITDA and non-recurring charges as presented are not necessarily
comparable with similarly titled measures presented by other companies.
34
The following table summarizes the unaudited pro forma combined statement of
operations adjustments for the year ended December 31, 1998 (in thousands):
Total Total
Pro Forma Pro Forma
Adjustments Adjustments
a b c d PalEx e f g h i j IFCO Systems
------- ------- ------- ------- ----------- ------- ------- -------- ------ ------- ---- ------------
REVENUES......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $1,657 $ -- $-- $ 1,657
COST OF GOODS
SOLD............. (349) -- -- -- (349) -- -- -- 2,651 -- -- 2,651
INVENTORY
VALUATION
ADJUSTMENT....... -- -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------- ------ ------- ---- --------
Gross profit.... 349 -- -- -- 349 -- -- -- (994) -- -- (994)
SELLING, GENERAL
AND
ADMINISTRATIVE
EXPENSES......... (1,239) -- -- -- (1,239) -- -- -- 1,719 -- -- 1,719
AMORTIZATION OF
GOODWILL AND
OTHER INTANGIBLE
ASSETS........... -- 1,273 -- -- 1,273 4,086 -- -- -- -- -- 4,086
POOLING
EXPENSES......... (1,841) -- -- -- (1,841) -- -- -- -- -- -- --
COMPENSATION
DIFFERENTIAL..... (1,062) -- -- -- (1,062) -- -- -- -- -- -- --
RESTRUCTURING
CHARGE........... -- -- -- -- -- -- -- -- -- -- -- --
PLANT CLOSURE
COSTS AND ASSET
ABANDONMENT
LOSS............. -- -- -- -- -- -- -- -- -- -- -- --
OTHER OPERATING
INCOME, net...... -- -- -- -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------- ------ ------- ---- --------
Income (loss)
from
operations...... 4,491 (1,273) -- -- 3,218 (4,086) -- -- (2,713) -- -- (6,799)
NET INTEREST
COST............. -- -- (2,925) -- (2,925) -- 17,210 (18,932) -- (1,949) -- (3,671)
OTHER INCOME
(EXPENSE), net... -- -- -- -- -- -- -- -- 1,960 -- -- 1,960
------- ------- ------- ------- ------- ------- ------- -------- ------ ------- ---- --------
(Loss) income
before provision
for income
taxes........... 4,491 (1,273) (2,925) -- 293 (4,086) 17,210 (18,932) (753) (1,949) -- (8,510)
INCOME TAX
PROVISION........ -- -- -- 1,917 1,917 -- -- -- -- -- (39) (39)
------- ------- ------- ------- ------- ------- ------- -------- ------ ------- ---- --------
Net (loss)
income ......... $ 4,491 $(1,273) $(2,925) $(1,917) $(1,624) $(4,086) $17,210 $(18,932) $ (753) $(1,949) $ 39 $ (8,471)
======= ======= ======= ======= ======= ======= ======= ======== ====== ======= ==== ========
35
The following table summarizes the unaudited pro forma combined statement of
operations adjustments for the ten months ended October 31, 1999 (in
thousands):
Total
Pro Forma
Adjustments
e f g h i j IFCO Systems
------- ------- -------- ------- ------- ------ ------------
REVENUES................ $ -- $ -- $ -- $ 4,268 $ -- $ -- $ 4,268
COST OF GOODS SOLD...... -- -- -- 4,203 -- -- 4,203
------- ------- -------- ------- ------- ------ -------
Gross profit........... -- -- -- 65 -- -- 65
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... -- -- -- 1,641 -- -- 1,641
AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE
ASSETS................. 3,405 -- -- -- -- -- 3,405
OTHER OPERATING INCOME,
net.................... -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------ -------
Income (loss) from
operations............ (3,405) -- -- (1,576) -- -- (4,981)
NET INTEREST COST....... -- 15,856 (15,777) -- (1,624) -- (1,545)
OTHER INCOME (EXPENSE),
net.................... -- -- -- 1,467 -- -- 1,467
------- ------- -------- ------- ------- ------ -------
(Loss) income before
provision for income
taxes................. (3,405) 15,856 (15,777) (109) (1,624) -- (5,059)
INCOME TAX PROVISION.... -- -- -- -- -- 314 314
------- ------- -------- ------- ------- ------ -------
Net (loss) income...... $(3,405) $15,856 $(15,777) $ (109) $(1,624) $ (314) $(5,373)
======= ======= ======== ======= ======= ====== =======
36
SELECTED FINANCIAL INFORMATION
IFCO Companies
The selected historical financial information presented below for, and as of
the end of, each of the years in the two years ended December 31, 1998, is
derived from the IFCO Companies' audited combined financial statements, which
were audited by PwC Deutsche Revision AG, independent accountants. The selected
historical financial information for, and as of the end of, the year ended
December 31, 1996, and for the ten months ended October 31, 1998 and 1999, is
derived from the IFCO Companies' unaudited combined financial statements. No
selected financial information has been presented as of and for the years ended
December 31, 1994 and 1995. Financial information for these years is
unavailable since no consolidated financial information for IFCO Europe was
prepared for these years. Further, financial information for these years has
been prepared for the individual entities in accordance with German GAAP, which
differs significantly from U.S. GAAP. In the IFCO Companies' opinion, the
historical financial information for the interim periods includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of this information. The results of operations for the
interim periods are not necessarily indicative of the results of operations
that may be expected for the full fiscal year. The selected historical
financial information is not necessarily indicative of the future results of
operations of the IFCO Companies or IFCO Systems. The IFCO Companies' financial
statements have been prepared in U.S. dollars and in accordance with U.S. GAAP.
You should read this selected historical financial information along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--IFCO Companies" and the financial statements of the IFCO Companies
included in this prospectus.
Ten Months Ended
Year Ended December 31, October 31,
------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- --------- -------- ----------- -----------
(in thousands)
(unaudited) (unaudited) (unaudited)
Statement of Operations
Data:
Revenues............... $122,959 $116,735 $134,721 $106,021 $126,399
Cost of sales.......... 118,354 99,622 106,218 85,874 100,330
-------- --------- -------- -------- --------
Gross profit........... 4,605 17,113 28,503 20,147 26,069
Selling, general and
administrative
expenses.............. 21,798 22,263 28,515 20,729 24,029
Amortization of
goodwill.............. 236 675 383 274 344
Other operating
(income), net......... (5,371) (4,099) (3,081) (2,979) (1,976)
-------- --------- -------- -------- --------
Income (loss) from
operations............ (12,058) (1,726) 2,686 2,123 3,672
Net interest cost...... (7,751) (7,928) (7,030) (6,024) (6,881)
Other income (expense),
net................... 267 (2,139) (2,997) (2,922) (2,933)
Income tax
(provision)........... -- (47) (210) (173) (144)
-------- --------- -------- -------- --------
Net (loss)............. $(19,542) $ (11,840) $ (7,551) $ (6,996) $ (6,286)
======== ========= ======== ======== ========
Net (loss) applicable
to ordinary
shares(1)............. $(19,542) $ (11,210) $ (8,913) $ (8,119) $ (7,542)
======== ========= ======== ======== ========
Other Operating Data:
EBITDA and non-
recurring charges(2).. $ 27,953 $ 24,369 $ 27,197 $ 19,528 $ 27,989
EBIT(2)................ $(11,791) $ (3,235) $ (1,673) $ (1,992) $ (517)
Cash flows from:
operating
activities(3)......... $ 32,490 $ 59,938 $ 40,497 $ 33,420
investing
activities(3)......... $ (43,221) $(38,766) $(35,895) $(40,104)
financing
activities(3)......... $ 5,209 $ (6,442) $ (5,469) $ (5,155)
(Table continued on following page)
37
As of December 31, As of
------------------------------ October 31,
1996 1997 1998 1999
----------- -------- -------- -----------
(in thousands)
(unaudited) (unaudited)
Balance Sheet Data:
Cash and cash equivalents..... $ 14,231 $ 7,992 $ 23,642 $ 9,134
Receivables................... 95,970 93,397 74,462 81,509
Other current assets.......... 9,296 775 1,874 3,838
-------- -------- -------- --------
Total current assets......... 119,497 102,164 99,978 94,481
Property, plant and equipment,
net.......................... 128,661 134,776 172,437 162,772
Other long term assets........ 6,735 12,617 12,038 16,393
-------- -------- -------- --------
Total assets................. $254,893 $249,557 $284,453 $273,646
======== ======== ======== ========
Short-term loans.............. $ 48,943 $ 53,440 $ 500 $ 500
Short-term related party
loans........................ 26,612 23,298 2,618 2,254
Current maturities of long-
term debt.................... -- -- 4,912 5,413
Current maturities of capital
lease obligations............ 15,135 4,738 9,340 10,528
Refundable deposits........... 50,029 64,323 70,875 70,820
Accounts payable.............. 71,054 65,010 69,287 76,533
Accrued expenses and other
current liabilities.......... 21,661 12,294 7,303 11,591
Deferred income............... 4,347 4,660 6,573 5,996
Accumulated losses in excess
of investment in equity
entities..................... 1,267 3,136 4,472 5,684
Long-term debt, net of current
maturities................... 4,975 464 77,874 67,183
Capital lease obligations, net
of current maturities........ 5,913 7,971 26,867 20,768
-------- -------- -------- --------
Total liabilities............ 249,936 239,334 280,621 277,270
Participating rights.......... 5,419 3,956 4,274 3,871
Redeemable participating
rights....................... -- 1,256 1,544 1,477
Redeemable convertible
preferred stock.............. -- 25,001 28,887 26,335
Total stockholders' equity
(deficit).................... (462) (19,990) (30,873) (35,307)
-------- -------- -------- --------
Total liabilities and
stockholder's equity........ $254,893 $249,557 $284,453 $273,646
======== ======== ======== ========
- --------
(1) Net (loss) applicable to ordinary shares is net loss plus accretion on
redeemable convertible preferred stock, redeemable cumulative
participating rights, and participating rights.
(2) EBIT and EBITDA and non-recurring charges are not presented as alternative
measures of operating results or cash flows from operations as determined
in accordance with generally accepted accounting principles, but because
they are accepted financial indicators of the ability to incur and service
debt. EBIT represents the IFCO Companies' combined net (loss) applicable
to ordinary shares after exclusion of net interest costs and income tax
provisions (benefits). EBITDA and non-recurring charges represents the
IFCO Companies' EBIT plus depreciation and amortization charges and non-
recurring, one-time restructuring charges, if any. EBIT and EBITDA and
non-recurring charges as presented are not necessarily comparable with
similarly titled measures presented by other companies. The following
table reflects the calculation of EBIT and EBITDA and non-recurring
charges:
Ten Months Ended
Year Ended December 31, October 31,
----------------------------- -----------------------
1996 1997 1998 1998 1999
----------- -------- ------- ----------- -----------
(in thousands)
(unaudited) (unaudited) (unaudited)
Net (loss) applicable to
ordinary shares........ $(19,542) $(11,210) $(8,913) $(8,119) $(7,542)
Income tax provision.... -- 47 210 173 144
Net interest cost....... 7,751 7,928 7,030 6,024 6,881
-------- -------- ------- ------- -------
EBIT................... (11,791) (3,235) (1,673) (1,922) (517)
Depreciation and
amortization........... 39,744 27,604 28,870 21,450 28,506
-------- -------- ------- ------- -------
EBITDA and non-
recurring charges..... $ 27,953 $ 24,369 $27,197 $19,528 $27,989
======== ======== ======= ======= =======
(3) The IFCO Companies' historical combined cash flow information is not
available for the year ended December 31, 1996.
38
PalEx
The selected historical financial information presented below for, and as of
the end of, each of the years in the five-year period ended December 27, 1998,
for, and as of the end of, each of the ten-month periods ended October 25,
1998, and October 24, 1999, and October 24, 1999, is derived from PalEx's
consolidated financial statements. In PalEx's opinion, the historical financial
information for the interim periods includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of this
information. The results of operations for the interim periods are not
necessarily indicative of the results of operations that may be expected for
the full fiscal year. The selected historical financial information is not
necessarily indicative of the future results of operations of PalEx or IFCO
Systems. You should read this selected historical financial information along
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations--PalEx" and the financial statements of PalEx included in this
prospectus.
Ten-Month
Fiscal Year Ended Period Ended
Fiscal Year Ended November 30, -------------------------- ------------------------
----------------------------------- December 28, December 27, October 25, October 24,
1994 1995 1996 1997 1998 1998 1999
----------- ---------- ---------- ------------ ------------ ----------- -----------
(in thousands, except share and per share data)
(unaudited) (unaudited)
Income Statement Data:
Revenues............... $ 116,942 $ 125,707 $ 145,030 $ 222,993 $ 319,691 $ 256,874 $ 320,433
Cost of goods sold..... 99,207 105,195 121,865 188,084 259,562 207,850 257,472
Inventory valuation
adjustment(1) -- -- -- -- 1,235 1,679 --
---------- ---------- ---------- ----------- ----------- ----------- -----------
Gross profit........... 17,735 20,512 23,165 34,909 58,894 47,345 62,961
Selling, general and
administrative
expenses.............. 12,350 13,333 14,063 20,135 33,042 27,374 36,142
Amortization of
goodwill and other
intangible assets 76 76 165 820 3,334 2,186 3,993
Pooling expenses....... -- -- -- -- 1,841 1,841 --
Compensation
differential.......... -- -- -- 1,020 1,062 1,062 --
Restructuring
charge(1)............. -- -- -- -- 949 2,404 --
Plant closure costs and
asset abandonment
loss(1)............... -- -- -- -- 1,369 1,369 --
---------- ---------- ---------- ----------- ----------- ----------- -----------
Income from
operations............ 5,309 7,103 8,937 12,934 17,297 11,109 22,826
Net interest cost(2)... (854) (1,375) (1,065) (1,590) (8,206) (6,078) (10,660)
Provision for income
taxes................. 1,476 1,594 1,833 4,704 5,105 2,676 5,402
---------- ---------- ---------- ----------- ----------- ----------- -----------
Net income ............ $ 2,979 $ 4,134 $ 6,039 $ 6,640 $ 3,986 $ 2,355 $ 6,764
========== ========== ========== =========== =========== =========== ===========
Net income per share--
basic................. $ .32 $ .44 $ .64 $ .43 $ .21 $ .13 $ .33
Net income per share--
diluted............... $ .32 $ .44 $ .64 $ .42 $ .21 $ .12 $ .33
Shares used in
computing net income
per share-- basic..... 9,433,414 9,433,414 9,433,414 15,561,489 18,937,354 18,651,737 20,297,016
Shares used in
computing net income
per share--diluted.... 9,433,414 9,433,414 9,433,414 15,914,157 19,310,295 19,047,287 20,299,381
Other Financial Data:
EBITDA and non-recurring
charges(3)............. $ 7,480 $ 11,258 $ 13,045 $ 19,933 $ 35,680 $ 27,677 $ 36,538
EBIT(3)................. $ 5,309 $ 7,573 $ 9,448 $ 13,066 $ 17,559 $ 11,348 $ 24,213
Cash flows from:
operating activities... $ 5,824 $ 7,425 $ 12,116 $ 6,363 $ 13,596 $ 7,072 $ 16,212
investing activities... $ (9,240) $ (4,128) $ (7,355) $ (13,756) $ (100,819) $ (91,383) $ (6,596)
financing activities... $ 3,532 $ (3,747) $ (5,051) $ 11,976 $ 83,966 $ 78,942 $ (8,514)
39
November 30,
--------------------------- December 28, December 27, October 24,
1994 1995 1996 1997 1998 1999
----------- ------- ------- ------------ ------------ -----------
(in thousands)
(unaudited) (unaudited)
Balance Sheet Data:
Working capital
(deficit).............. $ 3,004 $ 6,613 $ 7,630 $ 35,705 $ 54,672 $(84,797)
Total assets............ 48,933 50,857 57,868 120,005 292,438 299,617
Total debt.............. 21,770 21,212 18,648 32,880 155,772 147,181
Stockholders' equity.... 16,956 19,400 24,443 67,437 95,280 103,613
- --------
(1) The results of operations for PalEx's year ended December 27, 1998, include
pre-tax charges of approximately $1.2 million for inventory revaluation
adjustment, approximately $0.9 million for restructuring costs and expenses
and approximately $1.4 million for plant closure costs and asset
abandonment loss related to the termination of PalEx's customer
relationship with CHEP USA. The results of operations for PalEx's ten-month
period ended October 25, 1998, include pre-tax charges of approximately
$1.7 million for inventory valuation adjustment and approximately $2.4
million for restructuring costs and expenses related to the termination of
PalEx's customer relationship with CHEP USA.
(2) Includes interest expense and other income (expense), net.
(3) EBIT and EBITDA and non-recurring charges are not presented as alternative
measures of operating results or cash flows from operations as determined
in accordance with generally accepted accounting principles, but because
they are accepted financial indicators of the ability to incur and service
debt. EBIT represents PalEx's net income after exclusion of interest
expense and provision for income taxes. EBITDA and non-recurring charges
represents PalEx's EBIT plus depreciation and amortization charges, and
non-recurring, one-time restructuring charges related to the termination of
PalEx's relationship with CHEP USA, pooling expenses, and compensation
differential. EBIT and EBITDA and non-recurring charges as presented are
not necessarily comparable with similarly titled measures presented by
other companies. The following table reflects the calculation of EBIT and
EBITDA and non-recurring charges:
Ten-Month
Fiscal Year Ended Fiscal Year Ended Period Ended
November 30, --------------------------- -----------------------
--------------------------- December 28, December 27, October 25, October 24,
1994 1995 1996 1997 1998 1998 1999
----------- ------- ------- -------------- ------------ ----------- -----------
(in thousands)
(unaudited) (unaudited)
Net income.............. $2,979 $ 4,134 $ 6,039 $ 6,640 $ 3,986 $ 2,355 $ 6,764
Provision for income
taxes.................. 1,476 1,594 1,833 4,704 5,105 2,676 5,402
Interest expense........ 854 1,845 1,576 1,722 8,468 6,317 12,047
------ ------- ------- ------- ------- ------- -------
EBIT................... 5,309 7,573 9,448 13,066 17,559 11,348 24,213
Depreciation and
amortization........... 2,171 3,685 3,597 5,847 11,665 7,974 12,325
Restructuring charge.... -- -- -- -- 3,553 5,452 --
Pooling expenses and
compensation
differential(4)........ -- -- -- 1,020 2,903 2,903 --
------ ------- ------- ------- ------- ------- -------
EBITDA and non-
recurring charges..... $7,480 $11,258 $13,045 $19,933 $35,680 $27,677 $36,538
====== ======= ======= ======= ======= ======= =======
(4) Pooling expenses primarily represent financial advisory and legal fees
incurred by some of the pooled companies in connection with PalEx's
acquisition of those companies. Compensation differential is the difference
between previous owners' compensation before their companies were acquired
by PalEx and the amounts they contractually agreed to be paid afterward.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IFCO Companies
You should read the following discussion in conjunction with the IFCO
Companies' combined financial statements included in this prospectus. In
addition, you should read "Business" for more information about the IFCO
Companies.
Introduction
The IFCO Companies believe they own and manage the leading plastic RTC pool
in Europe based on 1997 market information. They also have RTC operations in
the United States, Japan, and Argentina. The IFCO Companies currently have
approximately 60 million RTCs in circulation.
The IFCO Companies' European perishables operations, which are owned by IFCO
Europe, accounted for 91.9% of the IFCO Companies' combined revenues during the
first ten months of 1998 and 92.2% of the IFCO Companies' combined revenues
during the first ten months of 1999. These operations are comprised of round-
trip systems for the movement of fruit and vegetables. The IFCO Companies
deliver RTCs to growers in order to transport 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 the IFCO Companies 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,
intermediary parties, and the retailer until the deposit is ultimately repaid
to the retailer upon the IFCO Companies' 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.
The IFCO Companies' RTCs are supplied by Schoeller Plast AG, an indirect 80%-
owned subsidiary of Schoeller Industries, under a long-term supply agreement.
The IFCO Companies' 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. The IFCO Companies have
a 33% minority ownership interest in the Japanese operations and 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 Systems has an
agreement to acquire the remaining interest in the U.S. operations in
connection with the merger. These businesses are still developing and are
currently generating operating losses, although the IFCO Companies believe that
this business segment has the potential to generate profits once additional
market share is attained.
The IFCO Companies' dry good operations, which are owned by MTS, accounted
for 7.3% of the IFCO Companies' combined revenues during the first ten months
of 1998 and 6.2% of the IFCO Companies' combined revenues during the first ten
months of 1999. MTS 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 IFCO Companies to
accurately track their movements and invoice customers. The logistics of RTC
movement in the dry good operations are similar to the IFCO Companies' European
perishables operations. The IFCO Companies currently have three principal
customers in this business segment, two department stores, whose service
agreements extend through 2003, and the Deutsche Post AG, whose contract
extends to September 30, 2004. Deutsche Post AG, the German postal service, is
one of the largest European transporters of parcels and letters.
IFCO Systems intends to report its results in accordance with U.S. GAAP. The
IFCO Companies, whose operations are located primarily in Europe, previously
reported their results under German GAAP. As a
41
significant portion of its revenues will be collected in currencies other than
the U.S. dollar, IFCO Systems' 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 IFCO Systems 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 IFCO Companies' business segments and the same data
as a percentage of its combined revenues. Functional currencies in the IFCO
Companies' 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.
For the Ten Months Ended
For the Year Ended December 31, October 31,
--------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- -------------- ---------------
(dollars in thousands)
(unaudited) (unaudited) (unaudited)
Revenues:
European perishables.... $115,059 93.6% $106,863 91.5% $123,673 91.8% $97,420 91.9% $116,562 92.2%
Non-European
perishables............ 1,617 1.3 292 0.3 1,147 0.9 873 0.8 1,968 1.6
Dry good................ 6,711 5.5 9,580 8.2 9,901 7.3 7,728 7.3 7,869 6.2
Eliminations............ (428) (0.4) -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
122,959 100.0 116,735 100.0 134,721 100.0 106,021 100.0 126,399 100.0
Cost of sales:
European perishables.... 110,770 90.1 90,849 77.8 96,884 71.9 78,965 74.4 93,281 73.8
Non-European
perishables............ 1,360 1.1 219 0.1 717 0.5 482 0.5 1,437 1.1
Dry good................ 6,652 5.4 8,554 7.4 8,617 6.4 6,427 6.1 5,911 4.7
Eliminations............ (428) (0.3) -- -- -- -- -- -- (299) (0.2)
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
118,354 96.3 99,622 85.3 106,218 78.8 85,874 81.0 100,330 79.4
Total gross profit...... 4,605 3.7 17,113 14.7 28,503 21.2 20,147 19.0 26,069 20.6
Selling, general and
administrative
expenses:
European perishables.... 16,462 13.4 18,937 16.2 24,920 18.5 18,700 17.6 21,188 16.8
Non-European
perishables............ 2,362 1.9 1,718 1.5 1,629 1.2 832 0.8 2,194 1.7
Dry good................ 2,974 2.4 1,608 1.4 1,966 1.5 1,434 1.4 958 0.7
Eliminations............ -- -- -- -- -- -- (237) (0.2) (311) (0.2)
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
21,798 17.7 22,263 19.1 28,515 21.2 20,729 19.6 24,029 19.0
Goodwill amortization... 236 0.2 675 0.6 383 0.3 274 0.3 344 0.3
Other operating
(income), net.......... (5,371) (4.4) (4,099) (3.5) (3,081) (2.3) (2,979) (2.8) (1,976) (1.6)
Operating (loss) income:
European perishables.... (7,038) (5.7) 501 0.4 4,584 3.4 2,595 2.4 3,814 3.0
Non-European
perishables............ (2,105) (1.7) (1,645) (1.4) (1,216) (0.9) (431) (0.4) (1,420) (1.1)
Dry good................ (2,915) (2.4) (582) (0.5) (682) (0.5) (41) -- 1,278 1.0
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
(12,058) (9.8) (1,726) (1.5) 2,686 2.0 2,123 2.0 3,672 2.9
Other expenses, net..... (7,484) (6.1) (10,067) (8.6) (10,027) (7.4) (8,946) (8.4) (9,814) (7.8)
Income tax (provision)
benefit................ -- -- (47) -- (210) (0.2) (173) (0.2) (144) (0.1)
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Net loss................ $(19,542) (15.9)% $(11,840) (10.1)% $ (7,551) (5.6)% $(6,996) (6.6)% $ (6,286) (5.0)%
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
Ten Months Ended October 31, 1999, Compared to Ten Months Ended October 31,
1998
Revenues. The IFCO Companies' combined revenues increased $20.4 million, or
19.2%, to $126.4 million in the first ten months of 1999 from $106.0 million in
the first ten months of 1998.
European Perishables Operations. Revenues from the European perishables
operations increased $19.2 million, or 19.6%, to $116.6 million in the first
ten months of 1999 from $97.4 million in the first ten months
42
of 1998. This increase was primarily attributable to an increase of 9.4% 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 offset by a decrease
of 2.4% related to changes in currency exchange rates relative to the previous
period. The increased use was also a result of the IFCO Companies' establishing
new retail partners, favorable harvests of citrus fruit, and increased business
from existing customers.
Non-European Perishables Operations. Revenues from the non-European
perishables operations increased $1.1 million, or 125.4%, to $2.0 million in
the first ten months of 1999 from $0.9 million in the first ten months of 1998,
as a result of increased volume in Argentina.
Dry Good Operations. Revenues from the dry good operations increased $0.2
million, or 1.8%, to $7.9 million in the first ten months of 1999 from $7.7
million in the first ten months of 1998, as a result of increased business with
MTS's major customer.
Cost of Sales and Gross Profit. The IFCO Companies' combined cost of sales
increased $14.4 million, or 16.8%, to $100.3 million in the first ten months of
1999 from $85.9 million in the first ten months of 1998. Gross profit as a
percentage of revenues increased 1.6% for the first ten months of 1999 compared
to the first ten months of 1998 primarily as a result of more favorable pricing
from transportation and washing vendors in the first ten months of 1999 as
compared to the first ten months of 1998.
European Perishables Operations. Cost of sales increased $14.3 million, or
18.1%, to $93.3 million in the first ten months of 1999 from $79.0 million in
the first ten months of 1998. 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 more favorable pricing from transportation and washing
vendors in the first ten months of 1999 as compared to the first ten months of
1998. This was partially offset by increased costs incurred to expand the
business in Europe. The expansion costs were reduced by a $2.8 million
reimbursement from Schoeller Plast AG in accordance with a cost-sharing
agreement between the companies.
Non-European Perishables Operations. Cost of sales increased $0.9 million, or
198.1%, to $1.4 million in the first ten months of 1999 from $0.5 million in
the first ten months of 1998. The percentage increase in cost of sales was
higher than the percentage increase in related revenues for the same period due
to start-up activities in South American countries other than Argentina.
Dry Good Operations. Cost of sales decreased by $0.5 million, or 8.0%, to
$5.9 million in the first ten months of 1999 from $6.4 million in the first ten
months of 1998. Revenues increased slightly in the same period. The primary
reason for the decrease in cost of sales was a reduction of internal handling
costs by a change in operations.
Selling, General and Administrative Expenses and Other Operating Income
(Expenses), Net. Selling, general and administrative expenses and other
operating income (expenses), net increased $4.3 million, or 24.2%, to $22.1
million in the first ten months of 1999 from $17.8 million in the first ten
months of 1998 and increased as a percentage of revenues to 17.4% in the first
ten months of 1999 from 16.7% in the first ten months of 1998. The increase as
a percentage of revenues was the result of costs of $2.8 million related to the
merger. This consists of $2.1 million, which the company has agreed to
reimburse PalEx for its transaction costs, and $0.7 million for professional
advisory services. Without these costs, selling, general and administrative
expenses and other operating income (expenses), net as a percentage of revenues
would have decreased due to expenditures made in the first ten months of 1998
to prepare for the increase in business that the IFCO Companies anticipated in
1999.
Other Income and Expense. Interest expense decreased $0.1 million, or 0.1%,
to $7.3 million in the first ten months of 1999 from $7.4 million in the first
ten months of 1998. Interest income decreased $0.8 million, or 65.0%, to $0.5
million in the first ten months of 1999 from $1.3 million in the first ten
months of 1998. The net increase in interest costs was primarily a result of
the further reduction of receivables from related parties due to the
requirements under the IFCO Companies' credit facilities.
43
Primarily as a result of the foregoing, net loss decreased to $6.3 million in
the first ten months of 1999 from $7.0 million in the first ten months of 1998.
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Revenues. The IFCO Companies' combined revenues increased $18.0 million, or
15.4%, to $134.7 million in 1998 from $116.7 million in 1997.
European Perishables Operations. Revenues from the European perishables
operations increased $16.8 million, or 15.7%, to $123.7 million in 1998 from
$106.9 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 attributable to 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 the IFCO Companies' establishing new retail partners,
favorable harvests of citrus fruit, and increased business from existing
customers.
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 IFCO Companies' combined 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 14.7% for
1997 to 21.2% for 1998. These margin gains are primarily a result of the
following:
. increased utilization of the IFCO Companies' 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.
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 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 $7.2 million, or 40.0%, to $25.4
million in 1998 from $18.2 million in 1997 and increased as a percentage of
revenues to 18.9% in 1998 from 15.6% in 1997. The increase was due to
additional staff in electronic data processing, controlling, and logistic
management.
44
Other Income and Expense. Interest expense decreased $3.2 million, or 26.9%,
to $8.6 million in 1998 from $11.8 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.
Primarily as a result of the foregoing, net loss decreased to $7.6 million in
1998 from $11.8 million in 1997.
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Revenues. The IFCO Companies' combined revenues decreased $6.3 million, or
5.1%, to $116.7 million in 1997 from $123.0 million in 1996. The decrease
resulted primarily from the adverse impact of currency fluctuations in the
European perishables operations and marginally lower average prices,
notwithstanding unit increases in the European perishables operations.
European Perishables Operations. Revenues decreased $8.2 million, or 7.1%, to
$106.9 million in 1997 from $115.1 million in 1996. This decrease was primarily
attributable to a 1.6% decline in average prices. The decrease was partially
offset by increased volume of RTCs used for fresh produce. The increase in RTC
trips was a result of establishing new retail partners as well as increased
volume from existing customers.
Non-European Perishables Operations. Revenues decreased $1.3 million, or
81.9%, to $0.3 million in 1997 from $1.6 million in 1996, as a result of a
decrease in sales volume in Argentina. The decrease was primarily attributable
to a change in management, which caused a temporary interruption in the
business.
Dry Good Operations. Revenues increased $2.9 million, or 42.8%, to $9.6
million in 1997 from $6.7 million in 1996, as a result of significant volume
increases with its major customer.
Cost of Sales and Gross Profit. The IFCO Companies' combined cost of sales
decreased $18.8 million, or 15.8%, to $99.6 million in 1997 from $118.4 million
in 1996, and gross profit as a percentage of revenues increased from 3.7% for
1996 to 14.7% for 1997. These margin increases from 1996 to 1997 were mainly
driven by decreased breakage costs and increased RTC trips.
European Perishables Operations. Cost of sales decreased $20.0 million, or
18.0%, to $90.8 million in 1997 from $110.8 million in 1996. The decrease in
the cost of sales was, apart from currency translation effects, attributable to
a significant reduction in the number of broken RTCs of 2.8 million in 1997. In
addition, in 1996, IFCO Europe experienced high washing costs due to a
significant reorganization of washing activities. This was normalized in 1997,
resulting in a significant decrease in washing costs.
Non-European Perishables Operations. Cost of sales decreased $1.2 million, or
83.9%, to $0.2 million in 1997 from $1.4 million in 1996. The decrease was due
to a management change and the related reduction in revenues.
Dry Good Operations. Cost of sales increased $1.9 million, or 28.6%, to $8.6
million in 1997 from $6.7 million in 1996. The percentage increase was lower
than the percentage increase in related revenues for the same period due to
increasing economies of scale.
Selling, General and Administrative Expenses and Other Operating Income
(Expenses), Net. Selling, general and administrative expenses and other
operating income (expenses), net increased $1.8 million, or 10.6%, to $18.2
million in 1997 from $16.4 million in 1996. During 1997, the IFCO Companies
increased infrastructure expenditures in various areas, including electronic
data processing and controlling, to support an anticipated significant growth
in revenues. Due to financing restrictions, however, the IFCO Companies were
required to postpone the efforts to increase revenues until 1998. With respect
to non-European perishables operations, fixed costs could not be reduced to
match the reduction in revenues resulting from the change in management in
Argentina.
Primarily as a result of the foregoing, net loss decreased to $11.8 million
in 1997 from $19.5 million in 1996.
45
Liquidity and Capital Resources
The IFCO Companies have historically financed their growth with medium-term
financing, the funds from which have been primarily used to fund their
investment in the RTC pools.
Cash Flows. Operating activities provided $33.4 million of cash in the first
ten months of 1999 compared to $40.5 million in the first ten months of 1998,
which represents a decrease of $7.1 million, or 17.5%. This net decrease is due
to several factors. During the first ten months of 1998, the IFCO Companies
reduced accounts receivable through increased factoring activities, which led
to additional positive cash flow of $17.7 million. In the first ten months of
1999, the IFCO Companies did not realize any additional cash effect for
factoring. Accounts receivable net of factoring volume increased $18.7 million
in the first ten months of 1999. During the same period, accounts payable
increased $17.4 million as the result of increased business activity.
Operating activities provided $59.9 million of cash in 1998 compared to $32.5
million in 1997, which represents an increase of $27.4 million, or 84.5%. This
net increase is due to several factors. In 1997, the IFCO Companies experienced
an increase in accounts receivable of $11.6 million. In 1998, the IFCO
Companies reduced accounts receivable through increased factoring activities,
which led to additional positive cash flow of $2.2 million. In 1997, the IFCO
Companies decreased inventory by $7.4 million compared to a $1.6 million
increase in 1998. The IFCO Companies obtained additional liquidity through
factoring proceeds of $25.4 million in 1998. Accounts payable increased $5.1
million in 1997 and $10.9 million in 1998 due to higher sales volume in each
period.
Cash used in investing activities in the first ten months of 1999 was $40.1
million compared to $35.9 million in the first ten months of 1998, which
represents an increase of $4.2 million, or 11.7%. The majority of cash used in
both periods was for the purchase of RTCs and other property, plant, and
equipment. The investment in RTCs decreased by $4.3 million from $35.2 million
in the first ten months of 1998 to $30.9 million in the first ten months of
1999, mainly because of a lower average price for purchased RTCs due to the
product mix. In addition, for the first ten months of 1999, the IFCO Companies
recognized capitalized merger costs of $3.4 million.
Cash used in investing activities in 1998 was $38.8 million compared to $43.2
million in 1997, which represents a decrease of $4.4 million, or 10.3%. 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 IFCO Companies experienced in
1998. Financial assets and property and equipment were also sold in 1998 and
contributed $2.9 million in cash.
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 IFCO Companies 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, GE Erste acquired a 24% interest in IFCO Europe 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
46
received the right to require Schoeller Industries to contribute 100% of its
interests in MTS to IFCO Europe. As part of the transactions related to the
merger, GE Capital and GE Erste will contribute all of their interests and
release all of their rights to IFCO Systems.
Credit Facilities. In 1998, IFCO Europe negotiated a new financing
arrangement with a lending syndicate for a total of DM181.0 million, or
approximately $91.1 million. The amount of credit available under the financing
arrangement was reduced in 1999 to DM160.5 million, or approximately $80.8
million. The credit facility consists of DM125.5 million, or approximately
$63.2 million, available under a Senior Facility Agreement and DM35.0 million,
or approximately $17.6 million, available under a Senior Subordinated Facility
Agreement.
The Senior Facility Agreement consists of a DM64.0 million, or approximately
$32.2 million, fixed-term loan and two revolving credit facilities totaling
DM61.5 million, or approximately $31.0 million. All borrowings under the Senior
Facility Agreement, $53.2 million of which was outstanding as of October 31,
1999, contain principal reduction provisions, mature in 2004, and accrue
interest at EURIBOR plus 1.75%, or 4.61% as of October 31, 1999. Available
credit under the Senior Facility Agreement as of October 31, 1999, was $14.3
million.
Outstanding borrowings under the Senior Subordinated Agreement, which totaled
DM35.0 million, or approximately $18.8 million, as of October 31, 1999, accrue
interest at a rate of EURIBOR plus 2.75%, or 5.61% as of October 31, 1999. The
Senior Subordinated Agreement does not have scheduled principal reductions
until a balloon payment in 2005. IFCO Systems intends to use the net proceeds
of this offering, together with the proceeds from the high yield debt offering,
and the initial borrowings under the new senior credit facility, to repay the
outstanding balances under the Senior Facility Agreement and the Senior
Subordinated Agreement, each of which will then be terminated.
A significant portion of IFCO Europe's receivables and long-lived assets are
pledged as security against all outstanding borrowings under the Senior
Facility Agreement and Senior Subordinated Agreement, which also prohibit any
dilution of GE Erste's capital investment. The Senior Facility Agreement and
Senior Subordinated Agreement prohibit any payment of dividends as long as any
outstanding borrowings exist under either agreement, restrict IFCO Europe's
incurrence or assumption of other indebtedness and require IFCO Europe to
comply with non-financial and financial covenants, including funded debt and
interest expense to earnings before taxes, depreciation, interest, and
amortization ratios and cash flow ratios. As of October 31, 1999, and as of the
date of this prospectus, IFCO Europe was in compliance with, or had obtained
waivers for, each of the covenants contained in the Senior Facility Agreement
and the Senior Subordinated Agreement.
The Senior Facility Agreement and Senior Subordinated Agreement also permit
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 4.11% as of October 31, 1999. IFCO Europe factored 20% of
its combined revenues and incurred
factoring and interest charges under this agreement of $2.6 million in 1998.
During the first ten months of 1999, IFCO Europe factored 40% of its combined
revenues and incurred factoring and interest charges of $3.4 million.
At October 31, 1999, the IFCO Companies had entered into $31.3 million of
capital leases.
To reduce its variable rate interest risk, IFCO Europe entered into an
interest rate cap agreement. As of October 31, 1999, this interest rate cap
covered $54.5 million of its outstanding debt and limited interest rates
applicable to those borrowings to 6.75% for $11.3 million of borrowings under
the Senior Facility Agreement and to 7.75% for $43.2 million of borrowings
under the Senior Subordinated Agreement. The costs of this agreement are
included in interest expense ratably over the term of the agreement.
47
Future Liquidity Needs. In addition to this offering, IFCO Systems intends to
pursue other financing including further equity investment, the issuance of
notes, or syndicated bank facilities. At the same time as the completion of the
merger and this offering, IFCO Systems plans to issue approximately 180.0
million euros, or approximately $177.2 million, of debt in the form of a high
yield debt offering and enter into a new senior credit facility. See
"Concurrent Transactions." IFCO Systems believes that available cash and cash
flow from operations, together with the proceeds from this offering, the high
yield debt offering, and the new senior credit facility will be adequate to
repay a substantial portion of IFCO Systems' debt and to meet IFCO Systems'
liquidity needs for the foreseeable future. IFCO Systems' ability to make
scheduled payments of principal or interest on, or to refinance, its
indebtedness, or to fund planned capital expenditures, will depend on its
future performance. IFCO Systems' 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 Systems may not generate sufficient cash flow from
operations, that anticipated revenue growth and operating improvements may not
be realized or that future capital may not be available in an amount
sufficient, or on acceptable terms, to enable it to service its indebtedness or
to fund its other liquidity needs.
IFCO Systems anticipates that the new senior credit facility and the
indenture with respect to any high yield debt offering will contain a number of
significant covenants that, among other things, will restrict corporate and
business activities, including the ability of IFCO Systems to:
. dispose of assets;
. incur additional indebtedness;
. prepay other indebtedness;
. pay dividends;
. repurchase or redeem capital stock;
. enter into specified investments or create new subsidiaries;
. enter into 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 addition, under any new senior credit facility, IFCO Systems will be
required to comply with specified financial 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.
Capital Expenditures. The IFCO Companies' aggregate capital expenditures were
$36.1 million for the first ten months of 1999, $40.2 million for 1998, and
$42.5 million for 1997. These capital expenditures were principally for the
purchase of RTCs. IFCO Systems anticipates that a planned expansion of the
European perishables RTC pool will require investments of $69.5 million in 2000
and $46.7 million in 2001. For the planned expansion of the non-European
perishables RTC pool, IFCO Systems projects capital expenditures of $0.5
million in 2000 and $1.3 million in 2001.
The IFCO Companies believe they will be able to finance operations and
scheduled debt repayments from operating cash flow and additional borrowings
under existing credit facilities. However, the planned increase in capital
expenditures for expansion of the non-European RTC pool will require financing
from other sources, like this offering and the proposed concurrent financing
transactions.
48
Impact of Inflation
The results of the IFCO Companies' operations for the periods discussed have
not been materially affected by inflation.
Foreign Currency Translation Effects
The functional currency of the IFCO Companies is the Deutsch mark. The IFCO
Companies have elected the U.S. dollar as their 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 IFCO Companies' 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
Period average rate(1) balance sheet date(2)
------ --------------- ---------------------
Year ended December 31,
1996..................... 0.6631 0.6432
Year ended December 31,
1997..................... 0.5757 0.5580
Ten Months ended October
31, 1998................. 0.5638 0.6038
Year ended December 31,
1998..................... 0.5685 0.6140
Ten Months ended October
31, 1999................. 0.5500 0.5374
- --------
(1) The average of the noon 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 month during the indicated period.
(2) The noon buying rate, expressed as U.S. dollars per DM1.00, as of the
indicated balance sheet date.
Seasonality
The IFCO Companies' revenues vary depending on the fruit and vegetable
harvesting season in different countries. Historically a higher portion of
their sales and operating income has been recognized in the fourth quarter than
in the first quarter, which has historically been their 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 the IFCO Companies' RTCs from warmer
countries in Southern Europe are higher than the costs to transport the RTCs
from closer locations in Central Europe. The IFCO Companies accordingly charge
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 to provide the IFCO Companies with all of
its new RTCs. The supply agreement was later assigned to Schoeller Plast AG, an
indirect 80%-owned subsidiary of Schoeller Industries. Changes in pricing may
occur when Schoeller Plast AG's production costs vary by more that 15%. Under
the terms of the supply agreement, the IFCO Companies receive a fixed price per
kilogram for broken containers, which are taken back by Schoeller Plast AG. See
"Certain Relationships and Related Transactions--Supply Agreement."
Year 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations causing disruptions to various activities
and operations.
The IFCO Companies began addressing the year 2000 issue in 1997 by setting up
Project 2000, which is managed through interaction between the IFCO Companies'
internal electronic data processing department and
49
the managing directors of the individual businesses. In addition to using these
internal resources, third parties are also assisting in renovating and testing
computer hardware and software and embedded systems. The IFCO Companies'
critical business operations are concentrated in the financial accounting and
inventory management systems, which, as discussed below, have been replaced by
a new comprehensive accounting system. These existing systems will serve as
backup systems after the successful implementation of the new system. The IFCO
Companies have no significant internally developed computer systems that need
to be updated. All locations of the IFCO Companies were examined for non-IT and
non-embedded systems. All third-party providers of computer systems and
services, including embedded systems, have been contacted. Approximately 80% of
the contacted vendors have responded to the IFCO Companies' requests.
Management believes that year 2000 issues, if any, with respect to the
remaining 20% of their contacted vendors will not have a material adverse
effect on the IFCO Companies' financial condition or results of operations.
The IFCO Companies have not to date, including since January 1, 2000,
experienced any disruptions to their manufacturing operations, systems, or
other processes due to year 2000 problems, nor are they aware of any material
disruptions to their manufacturing operations, systems, or other processes that
could occur because of year 2000 problems. The IFCO Companies could, however,
experience isolated failures at random locations due to year 2000 problems that
were previously undetected in some personal computers and related software or
in microprocessor-driven machinery. The IFCO Companies believe, however, that
they can compensate for any isolated failures, if they occur, by manual
intervention without any material adverse affect on the IFCO Companies'
financial condition and results of operations.
During 1999, the IFCO Companies completed the installation of a new computer
system. The system is a comprehensive "enterprise response program" based on
software developed and sold by SAP, a leading German developer of systems
applications. The system was installed and implemented by Siemens Business
Systems, a leading application installer in the electronic data processing
environment in Germany. Each of SAP and Siemens has represented to the IFCO
Companies that the new computer system is year 2000 compliant.
The IFCO Companies have developed contingency plans that are focused on
ensuring that daily and long-term work routines can be performed without
significant interruption in the event of year 2000 difficulties. The
contingency plans include performing some processes manually, repairing
affected systems, and changing suppliers as necessary. The IFCO Companies'
efforts in addressing the year 2000 issue would be expected to minimize, but
not eliminate, the risks of third party non-compliance. If the IFCO Companies
or a third party upon which they rely fail to adequately address the year 2000
issue, the resulting problems could disrupt the IFCO Companies' business.
Possible problems that could result in a worst case scenario include:
. incomplete or inaccurate accounting, recording, or processing of
revenues or other financial information;
. delays or failures in obtaining RTCs;
. incomplete or inaccurate accounting, recording, or processing of product
distribution to customers; and
. interruptions in product distribution.
In addition, there are not readily available substitute public utility
vendors for power, water, or telephone services, all of which are an integral
part of the IFCO Companies' operations. If any or all of the IFCO Companies'
utility vendors fail to deliver services due to their own year 2000 problems,
the financial condition and results of operations of the IFCO Companies would
be materially adversely affected.
Project 2000 cost approximately $500,000 through the end of 1999, of which
$430,000 was incurred through December 31, 1998. The IFCO Companies'
development of new operating systems and modification of existing systems have
not been subject to any delay caused in whole or in part by year 2000 efforts
and, therefore, management believes it should not have a material adverse
effect on the IFCO Companies' financial condition or results of operations.
50
There are many risks associated with year 2000 issues, including the risk
that the IFCO Companies' computer systems will not operate as intended. The
systems, services, and products of the IFCO Companies and other third parties
may not be year 2000 compliant. Likewise, the IFCO Companies' compliance
schedule may not be met. Any significant unresolved issues related to the year
2000 compliance initiatives could result in an interruption in, or failure of,
normal business activities or operations, or the incurrence of unanticipated
damages or expenses related to the resolution of these issues or related
regulatory actions or legal liabilities, that could have a material adverse
effect on the IFCO Companies' results of operations or financial condition.
To the fullest extent permitted by law, this year 2000 discussion is a "Year
2000 Readiness Disclosure" within the meaning of the U.S. Year 2000 Information
and Readiness Disclosure Act, 15 U.S.C. Section 1.
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. The IFCO Companies have assessed their
internally developed and purchased applications to determine the changes needed
to process euro-denominated transactions. As a result, the IFCO Companies'
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 the IFCO Companies' financial results. In the future, the IFCO Companies
will use the euro as its functional currency in connection with its new
electronic data processing systems.
Quantitative and Qualitative Disclosures About Market Risks
The IFCO Companies are exposed to two broad classes of risk: interest rate
risk and currency exchange rate fluctuations.
The IFCO Companies' exposure to interest rate risk relates primarily to their
variable rate debt. At October 31, 1999, the carrying value of their total
variable rate debt was $72.0 million. To help to reduce the IFCO Companies'
variable rate interest risk, the IFCO Companies have entered into an interest
rate cap agreement, which as of October 31, 1999, covers $54.5 million of their
outstanding debt and limits interest rates related to these borrowings to 6.75%
for $11.3 million of borrowings under the Senior Facility Agreement and to
7.75% for $43.2 million of borrowings under the Senior Subordinated Agreement.
The following table shows interest sensitivities at the current borrowing level
of hypothetical changes in interest rates on the debt, net of any interest rate
differential received on the cap:
Change in interest rate in
percentage points from current
borrowing level............... -3% -1% +1% +3% +5% +10%
Increase (decrease) in net
interest expense (in
thousands).................... $(2,160) $(720) $720 $1,690 $2,041 $2,916
The IFCO Companies are exposed to a degree of currency risk by virtue of
conducting a portion of its business in currencies other than the Deutsch mark.
The IFCO Companies' 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. The IFCO Companies' 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 the IFCO Companies'
exposure to exchange rate fluctuations from their European operations.
51
PalEx
You should read the following discussion in conjunction with PalEx's
consolidated financial statements included in this prospectus. In addition, you
should also read "Business" for more information about PalEx.
Introduction
PalEx's revenues are derived from:
. the manufacture and sale of new pallets;
. the reconditioning and repair of steel drums, leasing of intermediate
bulk containers, and provision of management services to users of steel
drums and intermediate bulk containers;
. the repair, remanufacture, and sale of recycled pallets and the provision
of pallet management services; and
. pallet and container leasing, retrieval, repair, and management services.
New pallet sales accounted for approximately 54% of PalEx's consolidated
revenues for the 1998 fiscal year, which ended December 27, 1998. A substantial
portion of the cost of a new pallet is lumber, and new pallet sales prices are
strongly influenced by the cost, availability, and type of lumber used. As a
result, changes in lumber prices can significantly impact PalEx's revenues and
margins. New pallet manufacturing is generally considered to be a mature
industry characterized by moderate growth rates.
The reconditioning and repair of steel drums accounted for approximately 27%
of PalEx's consolidated revenues for the 1998 fiscal year. The steel drum
reconditioning and repair industry has barriers to entry by new competitors,
including compliance with environmental standards and high capital
requirements. Consequently, competition is generally stable or declining in the
industry, which provides surviving industry participants with the opportunity
to acquire market share via pricing strategy or acquisitions.
The repair, remanufacture, and sale of recycled pallets and recycled pallet
management services accounted for approximately 17% of PalEx's consolidated
revenues for the 1998 fiscal year. These activities are more labor intensive
and require fewer raw materials than manufacturing new pallets. Recycling
operations generally generate higher gross profits as a percentage of revenues
than new pallet sales.
Canadian pallet leasing, retrieval, repair, and management services and
intermediate bulk container leasing in the United States accounted for
approximately 2% of PalEx's consolidated revenues for the 1998 fiscal year.
PalEx recognizes revenue upon the delivery of a product or service to a
customer. PalEx does not generally maintain significant finished goods
inventory. Cost of sales for pallets are predominantly variable, including the
cost of lumber, labor, fasteners, transportation, equipment maintenance, and
utilities. Fixed costs in pallet cost of sales include depreciation of
equipment, supervisory labor, and direct overhead. A significant number of
PalEx's pallet production employees are paid on a production or piecework
basis, which PalEx believes provides incentives for increased productivity.
Cost of sales for reconditioned steel drums contain higher fixed costs, a
reflection of the high capital requirements of the business. Fixed costs of
sales for reconditioned steel drums include depreciation, transportation, and
facility repairs. Variable costs to recondition steel drums include chemicals
and coatings, hardware, labor, and raw drums.
Although PalEx sells products to a broad range of industries, approximately
7% of PalEx's revenues for the 1998 fiscal year were attributable to the
agricultural industry in the Southeastern and Western regions of the United
States, with the citrus and produce industries constituting the largest
component of these revenues. Revenue associated with these industries is highly
seasonal, concentrated in the period from October through May. Moreover, severe
weather, particularly during the harvesting seasons, may cause a reduction in
demand from agricultural customers, adversely affecting PalEx's revenues and
results of operations. Adverse weather conditions may also affect PalEx's raw
material costs.
52
Termination of CHEP USA Relationship
During the last quarter of 1997 and the first part of the first quarter of
1998, various members of PalEx's management had numerous discussions with
representatives of PalEx's then largest customer, CHEP USA, regarding numerous
issues affecting the profitability of the products PalEx manufactured for CHEP
USA and the pricing of new pallets, the uncertainty of CHEP USA production
requirements, the absence of fees for extra services provided to CHEP USA,
quality control, and the opening of new facilities that would be primarily
dedicated to performing services for CHEP USA. PalEx manufactured new, high-
grade pallets for CHEP USA, which in turn leased these pallets to its
customers. These pallets were part of a closed-loop materials handling and
management system that included recovery of the pallet from the end user,
aggregating them in PalEx-operated depots, where they were sorted, repaired,
and returned to CHEP USA's customers.
In addition, during this same period PalEx began renegotiating the prices
CHEP USA was being charged for new pallets to more accurately reflect
constantly changing lumber prices. After subsequent discussion and
communications, PalEx recognized that these issues would not be resolved to the
mutual satisfaction of CHEP USA and PalEx. Accordingly, PalEx notified CHEP USA
that effective on April 29, 1998, it would cease supplying CHEP USA with new
pallets and provided advance notice, generally, 10 to 60 days, under
contractual arrangements to discontinue repair and depot services for CHEP USA.
The termination of PalEx's relationship with CHEP USA adversely affected the
operations of some of PalEx's facilities in the Southeastern and Western United
States. PalEx developed a restructuring plan to close, curtail, or convert
operations at facilities related to CHEP USA production to alternative business
activities. As of December 27, 1998, three CHEP USA-related manufacturing
facilities had closed, one was sold, and two more were consolidated into one
facility. Two other CHEP USA-related facilities were converted to manufacture
non-CHEP USA products. PalEx also terminated approximately 400 production-
related employees at CHEP USA-related facilities during 1998.
During the 1998 fiscal year, approximately 8% of PalEx's consolidated
revenues were attributable to CHEP USA. Sales to CHEP USA for the year ended
November 30, 1996, were approximately 21% of consolidated revenues and for the
year ended December 28, 1997, were approximately 26% of consolidated revenues.
Results of Operations
Following the acquisition of the founding companies and PalEx's initial
public offering and during fiscal 1997, PalEx acquired five additional
companies. During the 1998 fiscal year, PalEx acquired a total of 19 companies.
Of the 1998 acquisitions, ten are engaged in the pallet business in the United
States, eight are engaged in the reconditioning and rebuilding of industrial
steel containers in the United States, and one, SMG Corporation, is engaged in
the rental of pallets in Canada.
53
The following table lists PalEx's acquisitions through October 24, 1999:
Date of
Company Acquired Acquisition
---------------- -----------
Founding companies (1):
Fraser Industries, Inc............................... 3/25/97
Ridge Pallets, Inc................................... 3/25/97
Interstate Pallet Co., Inc........................... 3/25/97
Pooled companies (2):
Sheffield Lumber & Pallet Company, Inc............... 8/1/97
Sonoma Pacific Company............................... 8/1/97
New London Pallet Inc................................ 10/14/97
Bay Area Pallet Company.............................. 10/31/97
Other 1997 fiscal year acquisitions (3):
Summers Pallet Manufacturing, Inc.................... 11/20/97
1998 pooled companies (4):
Acme Barrel Company, Inc............................. 2/23/98
Western Container, Limited Liability Company......... 2/23/98
Drum Service Co. of Florida.......................... 2/27/98
Consolidated Container Corporation................... 2/27/98
1998 purchased companies (5):
American Pallet Recyclers, Inc....................... 1/2/98
Consolidated Drum Reconditioning, Inc................ 2/12/98
Capital Pallet, Incorporated......................... 3/18/98
Pallet Outlet Company, Inc........................... 3/20/98
Southern Pallets, Inc................................ 3/25/98
Shipshewana Pallet Co., Inc.......................... 5/21/98
Gilbert Lumber Inc................................... 6/11/98
Valley Pallets, Inc.................................. 6/17/98
Duckert Pallet Co., Inc.............................. 7/14/98
Continental Pallet Company, Inc...................... 7/27/98
McCook Drum & Barrel Co., Inc........................ 8/4/98
Isaacson Lumber Company.............................. 8/31/98
SMG Corporation...................................... 9/11/98
Charlotte Steel Drum Corporation..................... 10/23/98
Atlas Container Company, Inc......................... 10/30/98
- --------
(1) PalEx acquired the founding companies concurrently with the closing of its
initial public offering.
(2) PalEx acquired the pooled companies in the 1997 fiscal year following
PalEx's initial public offering. PalEx accounted for each of these
acquisitions as a pooling-of-interests.
(3) PalEx accounted for the 1997 acquisition of Summers as a purchase.
(4) PalEx acquired the 1998 pooled companies in the 1998 fiscal year and
accounted for each of these acquisitions as a pooling-of-interests.
(5) The 1998 purchased companies were acquired in the 1998 fiscal year and were
accounted for as purchases. PalEx sometimes refers to the 1998 purchased
companies, together with Summers, as the purchased companies.
54
The following table sets forth selected financial data and that data as a
percentage of PalEx's revenues for the periods indicated:
Year Ended Ten-Month Period Ended
-------------------------------------------------------------- --------------------------------------
November 30, 1996 December 28, 1997 December 27, 1998 October 25, 1998 October 24, 1999
----------------- ----------------- ----------------- ---------------- ----------------
(dollars in thousands)
(unaudited)
Revenues................ $ 145,030 100.0% $ 222,993 100.0% $ 319,691 100.0% $ 256,874 100.0% $ 320,433 100.0%
Cost of goods sold...... 121,865 84.0 188,084 84.3 259,562 81.2 207,850 80.9 257,472 80.4
Inventory valuation
adjustment............. -- -- -- -- 1,235 0.4 1,679 0.7 -- --
---------- ------- ---------- ------- ---------- ------- --------- ------ --------- ------
Gross profit............ 23,165 16.0 34,909 15.7 58,894 18.4 47,345 18.4 62,961 19.6
Selling, general and
administrative
expenses............... 14,063 9.7 20,135 9.0 33,042 10.3 27,374 10.7 36,142 11.3
Amortization of goodwill
and other intangible
assets................. 165 0.1 820 0.4 3,334 1.0 2,186 0.9 3,993 1.2
Compensation
differential........... -- -- 1,020 0.5 1,062 0.3 1,062 0.4 -- --
Pooling expenses........ -- -- -- -- 1,841 0.6 1,841 0.7 -- --
Restructuring charge.... -- -- -- -- 949 0.3 2,404 0.9 -- --
Plant closure costs and
asset abandonment
loss................... -- -- -- -- 1,369 0.4 1,369 0.5 -- --
---------- ------- ---------- ------- ---------- ------- --------- ------ --------- ------
Income from operations.. 8,937 6.2 12,934 5.8 17,297 5.4 11,109 4.3 22,826 7.1
Interest expense........ (1,576) (1.1) (1,722) (0.8) (8,468) (2.7) (6,317) (2.5) (12,047) (3.7)
Other income (expense),
net.................... 511 0.3 132 0.1 262 0.1 239 0.1 1,387 0.4
---------- ------- ---------- ------- ---------- ------- --------- ------ --------- ------
Income before income
taxes.................. 7,872 5.4 11,344 5.1 9,091 2.8 5,031 1.9 12,166 3.8
Income tax provision.... 1,833 1.2 4,704 2.1 5,105 1.6 2,676 1.0 5,402 1.7
---------- ------- ---------- ------- ---------- ------- --------- ------ --------- ------
Net income.............. $ 6,039 4.2% $ 6,640 3.0% $ 3,986 1.2% $ 2,355 0.9% $ 6,764 2.1%
========== ======= ========== ======= ========== ======= ========= ====== ========= ======
Ten-Month Period Ended October 24, 1999, Compared to Ten-Month Period Ended
October 25, 1998
Revenues increased 24.7% from approximately $256.9 million in the ten-month
period ended October 25, 1998, to approximately $320.4 million in the ten-month
period ended October 24, 1999. On April 29, 1998, PalEx notified its largest
customer, CHEP USA, that PalEx was terminating all existing agreements with
CHEP USA. Effective that date, PalEx ceased supplying CHEP USA with new pallets
and provided advance notice, generally ten to 60 days, under contractual
arrangements to discontinue repair and depot services to CHEP USA. The
termination of PalEx's relationship affected some of PalEx's facilities in the
Southeastern and Western United States. Revenues related to CHEP USA sales for
the ten-month period ended October 25, 1998, were approximately $26.1 million.
The increase in revenues for the ten-month period ended October 24, 1999,
compared to the ten-month period ended October 25, 1998, is primarily
attributable to the companies acquired as purchases and sales to new customers
that replaced sales previously made to CHEP USA.
Gross profit increased from approximately $47.3 million for the ten-month
period ended October 25, 1998, to approximately $63.0 million for the ten-month
period ended October 24, 1999, primarily as a result of increased volumes due
to the acquisition of the purchased companies. Gross profit as a percentage of
revenues increased from 19.1%, excluding the inventory valuation adjustment
resulting from the termination of the business relationship with CHEP USA, for
the ten-month period ended October 25, 1998, to 19.6% for the ten-month period
ended October 24, 1999, primarily due to higher margins from both recycled
pallet sales and new pallet manufacturing, which higher margins were partially
offset by lower gross margins in drum reconditioning and services and pallet
leasing in Canada. PalEx's gross profit as a percentage of revenues may
fluctuate as a result of competitive pricing in different market areas in which
it operates, continued changes to product mix, and changes in raw material
costs.
Selling, general and administrative expenses increased from approximately
$27.4 million, or 10.7% of revenues, in the ten-month period ended October 25,
1998 to $36.1 million, or 11.3% of revenues, in the ten-month period ended
October 24, 1999. This increase is generally attributable to the purchased
companies
55
acquired during 1998, and to PalEx's continued efforts in organizing and
building its regional operating structure.
The results of operations for the ten-month period ended October 25, 1998,
include approximately $1.8 million for pooling expenses and approximately $1.1
million for compensation differential related to the acquisition of Acme and
Western. Restructuring charges relating to PalEx's termination of its
relationship with CHEP USA were approximately $5.5 million during the ten
months ended October 25, 1998.
Amortization of goodwill and other intangible assets increased from
approximately $2.2 million for the ten-month period ended October 25, 1998, to
approximately $4.0 million for the ten-month period ended October 24, 1999.
This increase was due to the additional companies acquired as purchases.
Interest expense increased from approximately $6.3 million for the ten-month
period ended October 25, 1998, to approximately $12.1 million for the ten-month
period ended October 24, 1999, primarily as a result of the additional
borrowings related to the acquisitions of the 1998 purchased companies and
higher interest rates.
As a result of the foregoing, net income increased from approximately $2.4
million for the ten-month period ended October 25, 1998, to approximately $6.8
million for the ten-month period ended October 24, 1999.
Year Ended December 27, 1998, Compared to Year Ended December 28, 1997
Revenues increased approximately $96.7 million, or 43.4%, to approximately
$319.7 million from approximately $223.0 million. Revenues attributable to the
1998 purchased companies were approximately $94.7 million. Revenues for the
founding companies and the pooled companies and Summers, adjusted for the
comparable period in 1998 for which there were no revenues in 1997, decreased
approximately $23.0 million from 1997 to 1998. CHEP USA sales decreased
approximately $32.4 million from 1997 to 1998. Approximately $9.4 million of
the decrease in sales attributable to CHEP USA was replaced in 1998 after the
termination of PalEx's CHEP USA relationship with increased sales to other
customers.
Revenues from new pallet sales increased approximately $19.2 million and
revenues from recycled pallet sales increased approximately $47.5 million in
1998 over 1997. Revenues from pallet leasing and related services increased
approximately $4.6 million in 1998 over 1997. Revenues from reconditioned drum
sales increased approximately $25.4 million in 1998 over 1997. All of these
increases were primarily attributable to the addition of the revenues of the
1998 purchased companies.
Gross profit as a percentage of revenues increased to 18.4% for 1998 compared
to 15.7% for 1997. PalEx's consolidated sales mix now consists of a higher
percentage of sales of recycled pallets and reconditioned drums, which have
higher gross margins.
Selling, general and administrative expenses increased 64.1% to approximately
$33.0 million in 1998 from approximately $20.1 million in 1997 and were 10.3%
of revenues in 1998 and 9.0% of revenues in 1997. Approximately $10.5 million
of this increase was attributable to the acquisitions of the 1998 purchased
companies and approximately $2.4 million was associated with the costs of being
a public company.
The results of operations for 1998 included charges of approximately $1.8
million for pooling expenses and approximately $1.1 million for compensation
differential. Compensation differential is the difference between previous
owners' compensation before their companies were acquired by PalEx and the
amounts they contractually agreed to be paid afterward. There were no pooling
expenses for 1997. Compensation differential for 1997 was approximately $1.0
million.
Goodwill amortization increased in 1998 to approximately $3.3 million from
approximately $0.8 million because of the additional companies PalEx acquired
during 1998 that were accounted for as purchases.
56
The results of operations for 1998 include after-tax charges of approximately
$1.2 million for costs associated with the conversion or closure of facilities
and approximately $0.8 million for plant closure and asset abandonment losses
related to the termination of PalEx's relationship with CHEP USA.
Interest expense increased in 1998 to approximately $8.5 million from
approximately $1.7 million in 1997. The increase in interest expense was
primarily attributable to the additional indebtedness incurred in conjunction
with the acquisitions of the 1998 Purchased Companies and the refinanced debt
of the 1998 pooled companies.
Federal and state income taxes have been provided on the earnings of Fraser,
the pooled companies, and the 1998 pooled companies for 1997 and on Ridge,
Interstate, and Summers from their dates of acquisition. The provision for
income taxes for 1997 also includes a charge of approximately $0.5 million,
representing deferred income taxes for Fraser at the time of PalEx's initial
public offering. This charge was not previously recorded because of Fraser's
status under Subchapter S of the Internal Revenue Code. PalEx's effective
income tax rate was 56.2% of pretax income for 1998, primarily due to
nondeductible amortization of goodwill and costs and expenses incurred in
conjunction with those companies acquired as poolings-of-interests.
As a result of the foregoing, net income for 1998 decreased approximately
$2.6 million to approximately $4.0 million from approximately $6.6 million in
1997.
Year Ended December 28, 1997, Compared to Year Ended November 30, 1996
Revenues increased approximately $78.0 million, or 53.8%, to approximately
$223.0 million in 1997 from approximately $145.0 million in 1996. Of this
increase, approximately $45.4 million was attributable to the acquisition of
Ridge and Interstate and approximately $21.4 was attributable to an increase in
new pallet sales. Approximately $11.2 million of the increase was attributable
to an increase in unit sales of reconditioned drums.
Gross profit as a percentage of revenues remained relatively unchanged at
15.7% in 1997 compared to 16.0% in 1996. The slight decrease in gross profit
percentage was partially attributable to increased lumber costs during the
year. Gross margins for reconditioned drums were slightly lower due to market
driven price pressures.
Selling, general and administrative expenses increased 43.2% to approximately
$20.1 million in 1997 from approximately $14.1 million in 1996 and were 9.0% of
revenues in 1997 and 9.7% of revenues in 1996. The amount of increase was
primarily attributable to increased costs associated with being a public
company and the acquisitions of Ridge, Interstate, and Summers.
Goodwill amortization in 1997 is primarily attributable to the acquisition of
Ridge, Interstate, and Summers.
Interest expense increased to approximately $1.7 million in 1997 from
approximately $1.6 million in 1996 as a result of the increase in indebtedness
in 1997.
As a result of the foregoing, net income increased to approximately $6.6
million in 1997 from approximately $6.0 million in 1996.
Liquidity and Capital Resources
On March 25, 1997, PalEx completed its initial public offering, which
involved the sale of 3.0 million shares of its common stock at a price to the
public of $7.50 per share. The net proceeds to PalEx from its initial public
offering, after deducting underwriting discounts, commissions, and offering
expenses, were approximately $20.1 million. Of this amount, $3.4 million was
used to pay the cash portion of the purchase prices relating to the
acquisitions of the founding companies with the remainder being used to repay
57
indebtedness of the founding companies. On April 22, 1997, PalEx sold an
additional 450,000 shares of its common stock at a price to the public of $7.50
per share, which generated net proceeds to PalEx of $3.1 million after
underwriting discounts and commissions, pursuant to an over-allotment option
granted by PalEx to the underwriters in connection with its initial public
offering. The net proceeds were used to repay debt borrowed under PalEx's
senior credit facility.
PalEx and members of a lending syndicate, which includes Bank One, Texas, NA
as a lender and administrative agent are parties to an amended senior credit
facility dated as of September 26, 1999. The senior credit facility provides
PalEx with a revolving line of credit of up to $150.0 million, which may be
used for general corporate purposes, including acquisitions, the repayment or
refinancing of indebtedness of all acquisitions including future acquisitions,
capital expenditures, letters of credit, and working capital. The senior credit
facility will terminate and all amounts outstanding, if any, will be due and
payable on the earlier of June 30, 2000, or a change of control, which will
occur upon completion of the pending merger with IFCO Systems, which is
expected to close in the first quarter of 2000. Amounts outstanding under the
senior credit facility at October 24, 1999, are classified as current
liabilities.
Advances under the senior credit facility bear interest at a defined base
interest rate of Bank One plus a margin of 200 basis points. At PalEx's option,
advances may bear interest based on a designated LIBOR plus a margin of 400
basis points. The interest rate on the senior credit facility will increase by
50 basis points on March 31, 2000. Commitment fees of 50 basis points are
payable quarterly on the unused portion of the senior credit facility. The
senior credit facility contains a limit for standby letters of credit of $10.0
million. There were letter of credit commitments of approximately $3.8 million
outstanding under the senior credit facility as of October 24, 1999.
The senior credit facility prohibits the payment of dividends by PalEx,
restricts PalEx's incurrence or assumption of other indebtedness and
acquisitions, and requires PalEx to comply with financial covenants including
consolidated net worth, fixed charge coverage, and funded debt and senior debt
to earnings before interest, taxes, depreciation, and amortization ratios. The
approximate level of borrowings available under the senior credit facility as
of October 24, 1999 was $13.2 million. The senior credit facility is secured by
a lien on the real and tangible personal property of PalEx, a pledge of the
outstanding stock of each of PalEx's U.S. subsidiaries and 65% of the
outstanding stock of PalEx's Canadian subsidiary. The amounts due under the
senior credit facility are also guaranteed by PalEx's U.S. subsidiaries. IFCO
Systems intends to use the net proceeds of this offering, the high yield debt
offering, and initial borrowings under the new senior credit facility to repay
the outstanding balance of PalEX's senior credit facility, which will then be
terminated.
On November 10, 1999, PalEx entered into a note purchase agreement for CIBC
Inc. to acquire $25.0 million of PalEx's unsecured Senior Subordinated Notes
due September 30, 2000. Under the terms of the senior subordinated notes, PalEx
will pay interest at the greater of LIBOR plus 600 basis points and the rate on
the senior credit facility plus 200 basis points. The interest rate on the
senior subordinated notes will increase by 50 basis points on each of March 31,
2000, and June 30, 2000. PalEx was required to pay a fee of approximately $0.8
million when the senior subordinated notes were issued and will be required to
pay a fee of approximately $0.6 million on June 30, 2000, if the senior
subordinated notes have not been repaid as of that date. If the senior
subordinated notes are not repaid in full before September 30, 2000, the
holders of the senior subordinated notes will be granted warrants to purchase
5% of the then outstanding, fully diluted shares of PalEx common stock. At
CIBC's option, the holders may be paid a cash fee instead of the warrants. Net
proceeds from the issuance of these senior subordinated notes were used to pay
down the amounts outstanding under the senior credit facility and increase the
amounts available thereunder. IFCO Systems intends to use the next proceeds of
this offering, the high yield debt offering, and initial borrowings under the
new senior credit facility to repay the outstanding $25.0 million balance of
these senior subordinated notes.
Under the terms of the senior credit facility and the CIBC note purchase
agreement, capital expenditures are limited to $7.5 million for the fiscal
quarter ending December 26, 1999, $17.5 million for the fiscal quarter ending
March 26, 2000, and $25.0 million for the fiscal quarter ending June 25, 2000.
This is also a cumulative limitation.
58
PalEx issued approximately $10.0 million in subordinated convertible notes
payable to former owners of the 1998 Purchased Companies. The convertible
notes, which bear interest at rates ranging from 6% to 8%, include provisions
that allow conversion into shares of PalEx's common stock beginning on the
first anniversary date of the convertible notes at conversion prices ranging
from $10.78 to $15.86 per share. If the convertible notes are not converted,
they become due and payable on their second anniversary. At PalEx's option, the
convertible notes may be prepaid at any time following the conversion date.
Since October 24, 1999, approximately $1.6 million of these notes has been
paid. IFCO Systems intends to use the net proceeds of this offering, the high
yield debt offering, and initial borrowings under the new senior credit
facility to repay the remaining approximately $8.4 million of these notes.
PalEx's liabilities under the senior credit facility mature on June 30, 2000,
and its liabilities under the subordinated notes mature on September 30, 2000.
PalEx intends to refinance these liabilities in connection with the completion
of the merger with IFCO Systems. However, PalEx cannot assure you the merger
with IFCO will be completed or completed before the maturity of these
liabilities. In either event, PalEx would have to extend the maturity dates
under the senior credit facility and the subordinated notes or obtain
additional or new financing to satisfy or refinance these liabilities. PalEx
cannot assure you that it could extend the maturity dates or obtain additional
or new financing or that it could do so on commercially favorable terms.
PalEx's failure to accomplish at least one of these objectives could have a
material adverse effect on its results of operations and financial condition.
PalEx's capital expenditures were $8.3 million for the ten-month period ended
October 24, 1999, $14.0 million for the year ended December 27, 1998, and $9.1
million for the year ended December 28, 1997. These expenditures were primarily
for additional and replacement pallet and drum manufacturing equipment. PalEx's
currently anticipated capital expenditures for additional and replacement
pallet and drum manufacturing equipment and pallet pool expenditures are $27.0
million during fiscal 2000 and $24.2 million during fiscal 2001.
Seasonality
The pallet manufacturing and crating business is subject to seasonal
variations in operations and demand. PalEx's third quarter is traditionally the
quarter with the lowest demand. PalEx has a significant number of agricultural
customers and typically experiences the greatest demand for new pallets from
these customers during the citrus and produce harvesting seasons, generally
October through May. Yearly results can fluctuate significantly in this region
depending on the size of the citrus and produce harvests, which, in turn,
largely depend on the occurrence and severity of freezing weather and changes
in rainfall. Adverse weather conditions may also affect PalEx's ability to
obtain adequate supplies of lumber at a reasonable cost. PalEx locations
serving predominantly manufacturing and industrial customers experience less
seasonality. PalEx's drum reconditioning segment is seasonally impacted in the
Southeastern and Western United States by the agricultural industries.
Reconditioned drum sales are strongest during a period generally beginning in
April and extending through September, with preseason production for this
period running from January through March.
Management believes that the effects of seasonality will diminish as PalEx
grows and expands its customer base both internally and through acquisition.
However, management believes the third quarter currently represents the
seasonally slow quarter of PalEx's fiscal year.
Year 2000 Issues
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations causing disruptions to various activities
and operations.
59
PalEx has conducted an evaluation of the actions necessary in order to ensure
that its computer systems will be able to function without disruption with
respect to the application of dating systems in the year 2000. The majority of
PalEx's information technology software with potential year 2000 concerns was
licensed from vendors that have either changed their product to remove the
effects of the year 2000 issue or have committed to have the necessary changes
made during 1999. PalEx has also conducted reviews and inquiries concerning
software used in the operation of PalEx's manufacturing equipment. PalEx's
operating businesses do not require extensive systems-oriented applications.
The pallet manufacturing business consists of harvesting, transporting,
cutting, assembling, and delivering finished wood products. The drum
reconditioning business consists of collecting, reconditioning, and delivering
empty steel containers. Isolated microprocessor-driven manufacturing equipment
involved in the pallet manufacturing and drum reconditioning processes have
either been conformed to year 2000 standards or are scheduled for conformity by
the vendor in 1999. PalEx has not experienced any disruptions to its
manufacturing operations, systems, or other processes to date, including since
January 1, 2000, due to year 2000 problems, nor is it aware of any material
disruptions to its manufacturing operations, systems, or other processes that
could occur because of year 2000 problems. PalEx is also unaware of any
exposure to contingencies related to the year 2000 issue for the products it
has sold in the past. PalEx does not anticipate the loss of any revenues due to
the year 2000 issue.
As a result of its evaluations of the year 2000 issue, PalEx has upgraded and
replaced some of its information and other computer systems in order to be able
to operate without disruption after 1999. The costs of these actions were
approximately $100,000. Although PalEx is assessing the reliability of its year
2000 compliance, disruptions of the computer systems of banks, vendors,
customers, or other third parties, whose systems are outside PalEx's control,
could impair PalEx's ability to obtain necessary raw materials or to sell to or
service its customers. Disruption of PalEx's computer systems, or the computer
systems of its banks, vendors, or customers, as well as the cost of avoiding
any disruption, could have a material adverse effect upon PalEx's financial
condition and results of operations. It is also possible, based upon a worst
case scenario analysis, that PalEx could experience isolated failures at random
locations due to year 2000 problems that were previously undetected in some
personal computers and related software or in microprocessor-driven machinery.
PalEx believes, however, it can compensate for any isolated failures, if they
occur, by manual intervention without any material adverse affect on PalEx's
financial condition and results of operations.
PalEx has developed contingency plans with respect to different areas of its
operations. These plans are intended to allow PalEx to continue to operate if
there is a year 2000 failure. The contingency plans include performing some
processes manually, repairing affected systems, and changing suppliers as
necessary. PalEx's efforts in addressing the year 2000 issue can only minimize,
but cannot eliminate, the risks of third party non-compliance. If we or a third
party upon which we rely fail to adequately address the year 2000 issue, the
resulting problems could disrupt PalEx's business. Possible problems include:
. incomplete or inaccurate accounting, recording, or processing of revenues
or other financial information;
. delays or failures in obtaining raw materials and manufacturing supplies;
. incomplete or inaccurate accounting, recording, or processing of product
distribution to customers; and
. interruptions in product distribution.
PalEx, as part of its contingency plan, has initiated a formal communication
program with significant vendors to evaluate their year 2000 compliance, and is
assessing their responses to PalEx's year 2000 readiness questionnaire.
Approximately 46% of those vendors surveyed have responded to our inquiry
regarding their own year 2000 readiness. Of those vendors that have replied,
all have stated that their ability to supply PalEx will not be affected by year
2000 issues. However, if a significant vendor becomes unable to deliver
materials or services, PalEx has identified replacement vendors that can
provide substitute materials and services for many of the goods PalEx sells and
substitutes for many of the services it receives can be obtained from other
vendors. No single supplier accounts for more than approximately 3% of PalEx's
purchases, and PalEx does not currently foresee any significant impairment in
its ability to procure materials due to operational failures of
60
vendors. Management believes that year 2000 issues, if any, with respect to the
vendors surveyed who have not responded will not have a material adverse effect
on PalEx's financial condition or results of operations. However, PalEx cannot
assure timely compliance of vendors and may be adversely affected by failures
of significant vendors to supply products or services due to year 2000
compliance failures. In addition, there are not readily available substitute
public utility vendors for electricity, natural gas, water, or telephone
services, all of which are an integral part of PalEx's operations. If any or
all of PalEx's utility vendors fail to deliver services due to their own year
2000 problems, PalEx's financial condition and results of operations would be
materially adversely affected.
To the fullest extent permitted by law, this year 2000 discussion is a "Year
2000 Readiness Disclosure" within the meaning of the U.S. Year 2000 Information
and Readiness Disclosure Act, 15 U.S. C. Section 1.
Projections for PalEx and the IFCO Companies
The following sets forth financial information and projections provided in
connection with the merger by each of PalEx and the IFCO Companies to the other
party for the fiscal years ending December 31, 2000 through 2002. Each of PalEx
and the IFCO Companies developed their financial projections based on their
best estimates of the expected future performance at the time the projections
were prepared. These projections could change and are not necessarily
indicative of the actual performance at the time of the merger and this
offering, or the actual future performance after the merger and this offering,
of PalEx, the IFCO Companies, or IFCO Systems. These projections constitute
forward-looking statements of IFCO Systems, the IFCO Companies, and PalEx.
None of IFCO Systems, PalEx, or the IFCO Companies publicly disclose
financial projections in the ordinary course and do not intend to publish any
financial projections in the future. The following projections were not
prepared with a view to public disclosure. The projections were delivered to
PalEx's and the IFCO Companies' management in connection with each party's due
diligence investigation of the other party for the merger and were included as
required disclosure in the proxy statement/prospectus that forms part of IFCO
Systems' registration statement on Form F-4 filed with the SEC on February 2,
2000. These projections also were not prepared in accordance with generally
accepted accounting principles in the United States or elsewhere. Neither
PalEx's nor the IFCO Companies' independent accountants have examined,
reviewed, or compiled any of the following projections or expressed any
conclusion or provided any other form of assurance with respect to the
projections and, accordingly, assume no responsibility for the projections.
These projections were not prepared with a view to compliance with the
guidelines established by the American Institute of Certified Public
Accountants regarding projections, which would require more complete
presentation of data than as shown below. If these guidelines had been
followed, the projected financial information could be materially different
than the projections presented below. Given this level of uncertainty, you
should not place any reliance on the projections.
PalEx (in millions):
2000 2001 2002
---- ---- ----
Revenues.................................................. $421 $540 $670
EBITDA.................................................... $ 47 $ 63 $ 87
EBIT...................................................... $ 32 $ 42 $ 60
Net income................................................ $ 7 $ 9 $ 16
IFCO Companies (in millions):
2000 2001 2002
---- ---- ----
Revenues.................................................. $199 $266 $340
EBITDA.................................................... $ 57 $ 74 $ 98
EBIT...................................................... $ 21 $ 27 $ 37
Net income................................................ $ 6 $ 10 $ 14
61
INDUSTRY OVERVIEW
Round-trip Systems
Traditionally, corrugated cardboard, wood, and steel containers have been
used for the packaging and handling of products. Growers and manufacturers have
purchased or constructed containers for one-time shipment of their products.
Recipients of containers have then removed the products from the containers for
display, sale, or further distribution. Generally, the recipients have then had
to dispose or arrange for disposal of the containers.
IFCO Systems believes that the traditional packaging and material handling
industry is now evolving into round-trip systems in order to make the flow of
goods more efficient. The development of round-trip systems has been driven by
retailer and customer preferences, cost-savings, and environmental sensitivity.
Round-trip systems bring the historically separate segments of packaging and
material handling into an integrated system by combining:
. logistics management;
. standardized round-trip containers, pallets, industrial containers, and
other material handling products;
. reconditioning and recycling services to reduce the amount of packaging
for transport; and
. information management for the flow of products.
Round-trip Containers
The traditional one-way cardboard or wood containers have been the primary
means of transporting grocery and dry goods products, including fresh fruits
and vegetables. Prior to 1992, there were few alternatives for retailers in the
produce industry to ship their products. Fruits and vegetables transported to
grocery retailers in corrugated cardboard boxes have been damaged frequently
because of collapsed or wet boxes.
Round-trip containers, or RTCs, are reusable plastic or metal crates or
trays, which are an alternative to a one-trip outer packaging case, including
corrugated boxes. RTCs were initially developed to transport fruits and
vegetables, but have been expanded to other product categories and sectors.
They are typically used within exchange pools or closed loop round-trip
systems. Exchange pools are cooperatives for the sharing and exchange of RTCs
from company to company. In a closed-loop round-trip system, RTCs are provided
by a company to growers or manufacturers, filled and transported to retailers,
returned to the provider when empty for inspection and cleaning, repair, or
recycling when necessary, and are then reused in the flow of goods.
There are two basic categories of RTCs: collapsible and non-collapsible. They
are usually based on ISO standard dimensions, including 600 mm x 400 mm or 400
mm x 300 mm, in varying heights, and are compatible with standard-sized
pallets. Containers full of products are stacked at various heights.
Collapsible containers have become popular with many retailers for fresh
produce because when folded flat they require less storage space.
Based on industry information, the estimated number of corrugated containers
manufactured in Europe is approximately 15 billion each year, with
approximately 10% used for perishables and approximately 30% used for dry
goods. In the United States, the estimated number of containers is
approximately 20 billion each year, with approximately 8% used for perishables
and 30% used for dry goods. In Europe, approximately 20% of perishables are now
being shipped in RTCs. In the United States, the use of RTCs is just beginning,
with an estimated 15 million RTCs now in use for transporting perishables.
The market for RTCs presents the possibility for significant growth because
of cost savings and more efficient distribution through:
. multiple reuse;
. improved load utilization and container handling;
. reduced product handling, reduced product damage, and longer shelf life;
62
. more efficient temperature regulation;
. easier in-store display; and
. reduction of the amount of packaging for transport.
Pallets
A pallet is a platform, usually made of wood, that is used for storing and
shipping goods. Pallets are used in virtually all U.S. industries where
products are physically distributed, including the automotive, chemical,
consumer products, grocery, produce and food production, paper and forest
products, retail, and steel and metals industries. Pallets come in a wide range
of shapes and sizes. Although most pallets are made of wood, they may also be
made of steel, plastic, cardboard, molded wood fiber, and other materials to
satisfy smaller niche markets. The wooden pallet has traditionally been the
basis for the design of storage racks, warehouse storage areas, forklifts,
docks, and containers used for shipping goods.
PalEx believes that there are over 1,000 different sizes and specifications
of pallets used in North America. The grocery industry, which utilizes
approximately one-third of all new pallets produced, uses a standard size 48
inch x 40 inch pallet, although many other styles and specifications are also
manufactured for use in that industry. Other industries use pallets having
specifications that are appropriate for their particular needs. Based on
information supplied by industry sources, PalEx believes that over 90% of the
pallets used were of the traditional wooden type, fabricated from lumber and
metal fasteners.
Based on information supplied by industry sources, PalEx estimates that the
U.S. pallet industry generated revenues of approximately $5.6 billion in 1997
and is served by approximately 3,600 companies. PalEx believes, based on its
own experience in the industry, that most of these companies are small,
privately held entities operating in only one location and serving customers
within a limited geographic radius. Historically, the industry has been
composed of companies that manufacture new pallets and companies that repair
and recycle pallets. PalEx estimates, based on industry sources, that during
1998 approximately 400 million new wooden pallets were produced and
approximately 175 million wooden pallets were repaired or recycled. PalEx also
estimates there were approximately 1.9 billion pallets in circulation in the
United States in 1998. Increasingly, pallet companies are considering the
creation of pallet pools for leasing to customers and management of their
pallet needs.
The pallet industry has experienced significant changes and growth during the
past several years. These changes are due, among other factors, to the focus by
FORTUNE 1000 businesses on improving the logistical efficiency of their
manufacturing and distribution systems. This focus has caused many of these
businesses to attempt to reduce significantly the number of vendors serving
them in order to simplify their procurement and product distribution processes.
It also has prompted large manufacturers and distributors to outsource key
elements of processes that are not within their core operations and to develop
just-in-time procurement, manufacturing, and distribution systems. With the
adoption of these systems, expedited product movement has become increasingly
important and the demand for a high quality source of pallets has increased.
Freight on pallets assists movement through the supply chain, reducing costly
loading and unloading delays at distribution centers and warehouse facilities.
However, the use of low-quality or improperly sized pallets may increase the
level of product damage during shipping or storage.
These broad changes affecting U.S. industry have created significant demand
for higher quality pallets distributed through an efficient, more sophisticated
system. Environmental and cost concerns have also accelerated the trend toward
increased reuse or recycling of previously used pallets, further increasing the
importance of higher quality new pallets, which can be reused more often and
are easier to recycle than lower quality pallets.
63
Industrial Containers or Steel Drums
There are two basic types of steel drums--open top and closed top. Open top
drums are containers with a removable top that is fastened to the drum by a
locking ring. These drums are reconditioned in a thermal process that uses
high temperature furnaces. Open top drums are generally used for agricultural
purposes and for viscous materials, including paints, coatings, greases, and
adhesives. Closed top drums are those in which the top is an integral part of
the drum's construction. Closed top drums are typically used for solvents,
resins, and most petroleum products. These drums are reconditioned using a
chemical washing process.
Companies that use steel drums can choose between new and reconditioned
steel drums. Reconditioned steel drums are previously used drums that are
cleaned, repaired, and refurbished and are a cost effective alternative to new
drums. Steel drums can typically be reconditioned and reused six to eight
times and can then be scrapped and recycled. Similar to many other recycling
industries, drum reconditioners return a useful product to the marketplace and
solve a major disposal problem that would otherwise severely burden industry
and municipalities.
According to the Reusable Industrial Packaging Association, there are
approximately 120 steel drum recyclers and reconditioners in North America.
Based on 1996 market information from this industry association, PalEx
estimates that steel drum recyclers and reconditioners process an estimated 40
million drums each year, which represents approximately $500 million in
revenues annually based on estimated reconditioning revenue per container.
Fifty-five gallon steel drums are part of the non-bulk industrial packaging
industry and are found in virtually every industrial facility. These drums are
used to transport and store products primarily for the petroleum, chemical,
coatings, agricultural, and food processing industries.
Steel drum reconditioners in the United States tend to be regionally located
in industrialized and agricultural areas. These companies are regionally
located because of the freight costs of shipping empty drums long distances.
Steel drums have traditionally been owned by the customers. Recently,
companies have begun offering integrated drum management services to manage
customers' drum usage.
64
BUSINESS
Overview
When the merger with PalEx is completed, IFCO Systems will combine the IFCO
Companies' round-trip systems with PalEx's pallet and industrial container
operations. The IFCO Companies' operations are primarily in Europe, and PalEx's
operations are located in North America. The round-trip systems offer customers
and retailer groups a variety of services and products for the movement of many
types of goods.
The IFCO Companies provide RTCs and related services to growers or
manufacturers in order to distribute goods to retailers. Retailers benefit from
improved product handling and automation capabilities, in-store display in
RTCs, reduced storage requirements, and reduction of the amount of packaging
for transport. The IFCO Companies contract third parties to collect empty RTCs
from retailers for inspection and reconditioning by the IFCO Companies as
necessary.
The RTCs are then reintroduced into the round-trip system for multiple reuse
on a just-in-time basis. The IFCO Companies' RTCs, which are based on patented
technology, are made of plastic and are collapsible. The RTCs are available in
many different standardized sizes and structures depending on the goods to be
moved. They are designed to be stacked interchangeably regardless of size.
PalEx manufactures, sells, leases, and recycles wooden pallets in a wide
variety of shapes and sizes. PalEx also reconditions industrial container
products, which include steel closed top drums, steel drums with fully
removable heads, plastic drums, and industrial bulk containers.
IFCO Systems believes it will be a leading provider of round-trip systems
internationally, serving over 9,000 customers in 17 countries. IFCO Systems
believes it will:
. own and manage the largest pool of RTCs in Europe based on 1997 market
information;
. own and manage 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;
. be the largest provider of new and recycled pallets in North America
based on PalEx's pallet industry experience and of industry information;
and
. be the largest provider of industrial container reconditioning services
in North America based on PalEx's 1998 volume and its estimate of the
total number of industrial containers reconditioned in the United States
each year using information obtained from the Reusable Industrial
Packaging Association.
Company Strengths
IFCO Systems believes that following the merger the combined company will
have the following strengths:
. Leading Provider of Round-trip Systems. IFCO Systems will be a leading
provider of round-trip systems for the transport of fruits and
vegetables in Europe. In addition, IFCO Systems will have a rental pool
of over 1.5 million pallets in Canada and is positioned to expand its
pallet pooling services into the United States.
. Systems Approach to Product Flow. IFCO Systems will provide customers
and retailers with comprehensive systems to effectively manage the flow
of products throughout the distribution process. IFCO Systems will offer
solutions to its customers tailored to their product categories or
sectors. These solutions are expected to reduce costs, maintain product
quality and freshness, and increase the efficiency of the flow of goods.
The merger with PalEx will provide IFCO Systems with an existing North
American network of 72 distribution and maintenance facilities and
additional round-trip products--pallets and industrial containers. By
offering RTCs, pallets, and industrial containers and services from the
same sites in its extensive regional networks, IFCO Systems will have
the ability to manage complete shipping platform systems for customers
and retailers, which include production, distribution, display,
collection of RTCs from retailers' back docks after use, and cleaning
and reuse.
65
. Innovative Patented Technology and Economic Efficiencies. IFCO Systems'
patented technology will allow it to provide user-friendly, stackable,
and collapsible RTCs. IFCO Systems' plastic RTCs will be competitive
with other plastic container alternatives. Most IFCO RTCs are
manufactured in a one-piece injection process, which reduces
manufacturing costs. IFCO RTCs are also stackable with other RTCs and
cardboard boxes. While some competitors offer RTCs that are collapsible,
based upon a comparison with CHEP's container, IFCO Systems' principal
competitor, IFCO Systems believes none are as fully and easily
collapsible as the IFCO RTCs. In addition, IFCO Systems' RTCs will offer
a significant economic advantage to retailers and growers and
manufacturers over corrugated and wood boxes for the following reasons:
. Multiple reuse--the containers are reusable, reducing the amount of
waste and disposal costs;
. Time savings--the time spent handling goods is reduced, both in
terms of product handling during distribution and direct placement
on the retail floor;
. Handling efficiency and space savings--the patented containers are
easier to handle for product loading and transport. After removal of
the product, RTCs are collapsible to the same height, minimizing the
amount of space a user needs to devote to handling and storing
containers;
. Reduction of product spoilage and waste--RTCs reduce spoilage and
waste, and promote longer shelf life, because RTCs are not subject
to water damage and there is less breakage and crushing during
distribution and display as compared to less durable corrugated
boxes;
. Energy efficiency--for produce, the open design of the RTCs allows
more efficient cooling through air circulation and better
temperature control; and
. Easier in-store display--products may be displayed in the RTCs
without any additional handling.
. Well-established Partnerships with Retailers and Growers. IFCO Systems
has established or will be developing relationships with many retailers
and growers. Retailers using IFCO Systems' products or services include,
for example, Metro in Germany, Migros in Switzerland, and Waitrose in
the United Kingdom. In many cases, retailers in Europe have begun to
require growers to use the IFCO Companies' RTCs. IFCO Systems is
developing relationships with Wal-Mart and H.E. Butt in the United
States, among others, and intends to expand its market share in the
United States.
. Geographic Diversity. IFCO Systems will have geographically diverse
operations with 62 locations in Europe, 11 locations in Japan, six
locations in Argentina, and 83 locations in North America, including
PalEx's 72 locations. Its decentralized facilities will provide IFCO
Systems with a competitive advantage and allow it to meet retailers'
needs in these regions. IFCO Systems believes it will also be positioned
to take advantage of transcontinental transport opportunities for the
movement of produce and other perishables from producing regions to
consuming regions.
. Experienced Management Team and Strong Strategic Relationships. IFCO
Systems' management team will have extensive experience in the
transportation, logistics, and packaging industries. PalEx brings to
IFCO Systems management with broad experience in transportation and
logistics operations, acquisitions, and knowledge of the U.S. market.
This management group understands and has experience integrating
acquired businesses into a common infrastructure. IFCO Systems also will
enter both major markets--Europe and North America--with established
local management personnel for day-to-day operations and expansion. In
addition, GE Capital will have a continuing relationship with IFCO
Systems because of the right of its subsidiary to become a direct or
indirect holder of IFCO Systems ordinary shares. IFCO Systems intends to
use this continuing relationship to avail itself of GE Capital's
extensive experience and other relationships.
Business Strategy
IFCO Systems' objective is to be the preeminent international provider of
round-trip systems through the implementation of the following strategy:
. Expand into the United States. IFCO Systems believes the combination of
(1) the IFCO Companies comprehensive round-trip systems and high quality
RTCs and (2) PalEx's relationships with
66
producers and retailers, knowledge of shipping platform and container
management services, and experience with North American distribution
channels will offer IFCO Systems a significant opportunity to expand the
combined company's round-trip systems business in the United States. In
Europe, the IFCO round-trip systems have become several large-scale
retailers' preferred alternative to conventional packaging and are
continuing to grow in popularity. IFCO Systems believes a similar
evolution will occur in the United States based upon comparable
opportunities and receptiveness among growers and retailers. Since IFCO
Systems will be able to benefit from the existing PalEx network of 72
supply and maintenance depots, this strategy is expected to reduce
expenditures on network infrastructure in the United States. These
expenditures are a significant part of start-up costs in the United
States.
. Cross Sell Among Businesses in the United States. Additional benefits of
expanding the IFCO round-trip systems in the United States are the
operating efficiencies and transportation savings as a result of
increased volume at common depot facilities. IFCO Systems believes that
it will be able to offer round-trip systems to U.S. pallet and
industrial container customers and retailers, pallet and industrial
container services to U.S. RTC customers and retailers, and
comprehensive shipping platform and management of backdock services to
both. Backdock services include the initial product receiving and
container or pallet disposition operations on a retailer's back dock.
. Further Development of Markets. IFCO Systems intends to continue its
expansion into other geographic and product markets with both existing
and new products and services.
. Dry Goods. IFCO Systems intends to continue expanding its round-trip
systems to the dry goods market. The dry goods market is
significantly larger than the produce market in both Europe and the
United States and remains largely unpenetrated by RTCs. IFCO Systems
believes the many advantages of RTCs will enable it to attract dry
goods manufacturers and retailers and provide it with additional
market share in geographic markets where it is already a leading
provider of RTCs for produce and other perishables.
. Worldwide. In the future, IFCO Systems intends to continue
expanding its round-trip systems to other geographic markets with an
initial emphasis on accelerating the growth of its developing
operations in Japan and South America.
. Further Logistics Systems Opportunities. Retailers, distributors, and
producers are focusing increasingly on cost-effective means of
transporting and effectively tracking their goods. IFCO Systems intends
to capitalize upon this trend by increasing and improving its array of
logistics services. IFCO Systems plans to continue development of a
number of services that are intended to grow its business profitably and
ensure its position as a leading provider of round-trip systems. One
example is the development of technology beyond traditional barcode
scanners that will allow its customers to record and transmit
electronically significantly more data about the location and movement
of RTCs and the products being transported in the RTCs.
. Continue to Pursue Strategic Acquisitions and Alliances Worldwide. IFCO
Systems believes that the fragmented nature of its industries provides
opportunities for both internal growth and growth through strategic
acquisitions. IFCO Systems intends to pursue both strategic acquisitions
and those that enable it to expand in selected geographic areas. In the
last two years, PalEx has successfully completed and integrated 24
acquisitions. In addition, IFCO Systems will consider joint ventures
that would give it access to new products, markets, or technologies.
History
The IFCO Companies
The IFCO Companies began the world's first round-trip systems business. The
business was initially founded in 1992 as IFCO International Fruit Container
Organization GmbH, an affiliate of Schoeller Industries, which later changed
its name to IFCO International Food Container Organization GmbH. Today, IFCO
GmbH is the operating company for IFCO Europe.
67
Since 1992, the IFCO Companies have developed European-wide round-trip
systems for fresh fruit and vegetables. The IFCO Companies hold several
international patent rights on its RTCs.
Schoeller Industries is a family-owned business with its origins in the
paper, sugar, wood, and textile industries dating back to the eighteenth
century. In 1958, Alexander Schoeller invented, developed, and launched the
first plastic beverage crates for use in the German beverage market and plastic
moldings are still one of the Schoeller group's core businesses. In 1982,
Alexander's sons, Christoph and Martin Schoeller, joined the group and, in
1992, were responsible for the design of the collapsible RTCs and the launch of
the IFCO Companies.
In 1994, IFCO International entered into a joint venture with Mitsubishi in
Japan, the IFCO Companies' first market entry outside of Europe. In 1996, IFCO
International also entered into a U.S. joint venture. In 1997, GE Capital
became an investor in IFCO Europe. In 1998, IFCO Europe was named one of
Europe's Top 500 Growth Companies by the Association of Dynamic Entrepreneurs
in Brussels, Belgium.
PalEx
PalEx was formed in January 1996 to create a national provider of pallets and
related services. Concurrently with the closing of its initial public offering
in March 1997, PalEx acquired three businesses engaged in pallet manufacturing
and recycling. Since that time, PalEx acquired 16 additional pallet companies,
making it the largest producer of new pallets and the largest pallet recycler
in the United States. In the United States, PalEx provides a broad variety of
pallet products and related services, including the manufacture and
distribution of new pallets, the recycling of pallets, including used pallet
retrieval, repair, remanufacture, and secondary marketing, and the processing
and marketing of various wood-based by-products derived from pallet recycling
operations. In Canada, PalEx conducts pallet rental and repair operations and
pallet pooling management services through SMG Corporation, a Canadian
subsidiary. PalEx currently conducts its pallet operations from 60 facilities
in 18 states in the United States and seven Canadian provinces.
In separate transactions in February 1998, PalEx acquired four leading steel
drums reconditioning companies, which formed the base for expanding its
operations into the industrial container management industry. As a result of
these acquisitions and three subsequent acquisitions, PalEx is now the largest
reconditioner of industrial containers in North America. PalEx's container
group is also engaged in drum and intermediate bulk container leasing
operations. Its container group operates from 12 facilities in ten states in
the United States.
Systems and Services
Round-trip Containers
The IFCO round-trip systems provide a complete system for product flow that
minimizes waste and improves customer satisfaction and retailer profitability.
The IFCO round-trip systems include delivery of RTCs to producers when needed,
collection of empty containers from retailers, cleaning of containers, and
quality control. The producers are invoiced for the RTCs on a per use or a time
basis. After cleaning and any necessary repair, the RTCs are reintroduced into
the product distribution cycle.
Since the IFCO Companies started the RTC pool in Europe in 1992, they believe
they have become the leading supplier of RTCs in Europe. Currently there are
approximately 60 million IFCO RTCs in circulation. IFCO Europe's RTC pool now
serves over 4,000 growers supplying produce to approximately 15,000 supermarket
outlets throughout Western Europe.
Producers and retailers enjoy several advantages with the IFCO round-trip
systems compared to the use of traditional, disposable packaging, including
lower costs, better product protection, increased handling efficiency, more
efficient space utilization during transport, and less waste and environmental
impact. The IFCO Companies are able to maximize these benefits as a result of
experience with container pooling and transport and their network of container
depots, which is extensive in Europe and growing in other regions.
68
The IFCO round-trip system is illustrated as follows:
[DIAGRAM OF IFCO SYSTEMS' ROUND TRIP SYSTEM]
This system includes the following steps:
. producer faxes order for IFCO RTCs to an IFCO container depot;
. RTCs are delivered from the IFCO container depot to producer;
. producer receives an invoice for round-trip services, which include the
one-time use of RTCs on either a trip or time basis;
. producer also receives an invoice for a deposit for RTCs;
. computer tracking system generally monitors the flow of RTCs, but does
not currently track the location of each individual RTCs, except for
RTCs used in dry goods distribution;
. producer packs RTCs and ships them to retailer's distribution center or
retail outlet, depending on retailer;
. producer bills the deposit for the RTCs to retailer;
. retailer displays the products in the RTCs or removes the products for
display;
. IFCO contracts third parties to collect empty, collapsed RTCs from
retailer's distribution center or retail outlet, depending on retailer,
for return to an IFCO container depot;
. once RTCs are recollected, IFCO returns deposit to the retailer; and
. IFCO inspects and cleans, repairs, or recycles, as necessary, empty RTCs
at the IFCO container depot to make them ready for their next delivery
to a producer.
69
The IFCO round-trip systems cover all of the steps in the flow of the goods
from delivery to return to depot, including:
. delivery to customer or first user;
. collection of empty containers from retailer;
. quality control;
. hygienic cleaning conforming to applicable health and safety guidelines;
. storage and delivery to the next customer; and
. optional tracking system.
The IFCO Companies invoice customers on a per trip basis in Europe, Japan,
and the United States and on a time basis in Argentina.
IFCO RTCs are extremely versatile. All IFCO RTCs are made of 100% recyclable
materials. They are light, yet strong enough to withstand the stresses of long
distance travel and handling and significantly reduce produce damage and loss.
They are compatible with automated packaging systems and provide an attractive
product presentation at the point of sale. The RTCs fold on average to one-
fourth of their original volume, dramatically reducing transport and storage
costs for empty RTCs.
Because the IFCO RTCs are made of durable plastic, the products packed in
RTCs have better protection for handling during transport and bad weather
conditions. The RTCs are better able to bear the stress of large loads as
compared to corrugated containers. This is especially true with produce and
other perishables, which have an increased chance of arriving at the point of
sale in prime condition. Produce is then ready for display with minimum
handling. Retailers have the option of using the RTCs for display purposes.
The IFCO RTCs move back and forth among countries based on where crops are
being harvested and the countries to which crops will be exported. For example,
if Spain were at peak harvest, RTCs from depots outside Spain would be shipped
directly to customers in Spain. In IFCO's European container pool, most packed
RTCs end up back in Germany, since Germany imports much more produce than it
grows domestically while other European countries tend to be net exporters. The
RTCs are generally used between three and 12 times per year, depending on the
type of RTC.
IFCO Europe initially developed RTCs for use with fresh produce. The IFCO
Companies subsequently developed RTC applications for other perishables like
fish, eggs, and bakery products. Other current applications for IFCO RTCs
include transport and display of food dry goods, bulk transport, postal
shipments, transport of products for department stores, and shipment protection
for appliances. IFCO RTCs include different sizes of containers in ISO standard
dimensions, including 600 mm x 400 mm and 400 mm x 300 mm. These different
sizes are stackable interchangeably whether erected or collapsed.
Pallets
PalEx offers new pallet manufacturing and pallet rental, repair,
remanufacture, and recycling services. Although new pallet manufacturing
accounts for a majority of PalEx's revenues, PalEx believes that rental pool,
repair, remanufacture, and recycling services present the greatest opportunity
for future growth.
New Pallet Manufacturing. The manufacturing process at its new pallet
facilities is generally the most capital intensive part of the pallet business,
with the majority of assembly and construction being automated. New pallets are
manufactured from an assortment of wood products, varying in type and quality,
with construction specifications being determined by the pallet's end use.
PalEx believes approximately 70% of the wood used in new pallets manufactured
in North America consists of hardwoods, including oak, poplar, alder, and gum,
with the balance consisting of pine or other softwoods.
PalEx uses sawing equipment that cuts large wood sections to specification.
The cut wood is then transported to assembly points where employees load the
side boards and deck boards into nailing machines
70
that nail the pallets together. After construction is completed, pallets are
transported to a stacker for shipment or storage. More customized or smaller
orders may be manufactured by hand on assembly tables by two laborers using
pneumatic nailers. PalEx typically manufactures pallets upon receipt of
customer orders and generally does not maintain a significant inventory of
completed pallets.
New pallet manufacturing represented approximately 54% of PalEx's revenues
for the 1998 fiscal year ended December 27, 1998, and approximately 57% of
revenues for the ten-month period ended October 24, 1999. The ten-month period
in 1999 included, for the full period, revenues from a crate manufacturing
business acquired in August 1998.
Pallet Pooling and Reconditioning. Many new pallets are discarded by pallet
users after one trip. However, pallets can be recovered, repaired, if
necessary, and reused. Pallet repair and recycling operations begin with the
retrieval or purchase of used pallets from a variety of sources. The condition
and size of these pallets vary greatly. Once obtained, the pallets are sorted
by size and condition. A portion of the pallets may require no repair and can
be resold or returned immediately. Repairable pallets have their damaged boards
replaced with salvaged boards or boards from new stock inventoried at the
repair facility. Pallets that cannot be repaired are dismantled, and the
salvageable boards are recovered for use in repairing and building other
pallets. Unsalvageable boards may be ground into wood fiber, which PalEx sells
for use as landscaping mulch, fuel, animal bedding, gardening material, and
other uses. Despite recent increasing automation, pallet recycling remains a
labor intensive process.
Pallet pooling and reconditioning represented approximately 17% of PalEx's
revenues for the 1998 fiscal year and approximately 16% of revenues for the
first ten months of the 1999 fiscal year.
Industrial Containers
Drum Reconditioning. Although the drum reconditioning process varies slightly
throughout the industry, two basic processes are used to recondition steel
drums, depending on whether the drums to be reconditioned are closed top drums
or open top drums. Closed top drums have secure tops that are an integral part
of the drum's construction and have 2 inch and 3/4 inch head openings in the
top of the drum. A steel drum with a fully removable head is referred to as an
open top drum.
Closed top drums are typically used to transport and store oils, solvents,
and flowable resins. Closed top drums are reconditioned by cleaning the
interior of the drum at a series of high-pressure alkaline and acid flush-and-
rinse stations. Pneumatic machinery reshapes the drum by removing dents and
restoring chimes (the top and bottom lid seals). Pressure tests required by
U.S. Department of Transportation regulations are then performed to check each
drum for leakage. The old exterior coatings are stripped from the drums with an
alkaline solution and steel-shot blasting. Next, new decorative coatings are
applied and baked on to provide a new durable exterior finish. The thermal
treatment used on open top drums cannot be used on closed top drums unless the
drum heads are removed.
An open top drum is used for a number of agricultural and industrial
applications, including storing and shipping citrus products, berries,
foodstuffs, adhesives, and coatings. Open top drums are reconditioned using a
thermal process. This process involves passing drums through a furnace that is
heated to approximately 1,200 degrees Fahrenheit which vaporizes residual
materials inside the drums. Residual chemicals and compounds created from this
process are drawn into an afterburner and destroyed by temperatures approaching
1,850 degrees Fahrenheit. Steel-shot blasting then strips old finishes from
both the interiors and exteriors of drums. After this process, the drums pass
through a series of hydraulic and pneumatic equipment to restore each drum's
shape and integrity. Finally, new interior protective and exterior decorative
coatings are baked onto the drums.
When closed top drums contain residues that cannot be purged through the
standard procedures described above, the drums are converted to open top drums
by cutting off the heads of the drums. The drums are then
71
reconditioned as open top drums and are used as converted open top drums or
reseamed and have new heads installed so that they can be re-used as a slightly
shorter closed top drum.
Waste separated from drums in the reconditioning process is packaged and
shipped to appropriate landfills or incinerated in accordance with strict
environmental controls. Worn out drums that can no longer be reconditioned are
subjected to reconditioning cleaning processes so that they are acceptable raw
material for scrap metal processors.
Like pallet recycling, drum reconditioning remains a labor intensive process
despite advances in reconditioning methods. Drum reconditioning represented
approximately 27% of PalEx's revenues for the 1998 fiscal year and
approximately 25% of revenues for the first ten months of the 1999 fiscal year.
Container Management. Container management is the process of providing a
combination of services related to a customer's pallet or drum usage, including
the manufacture, repair, retrieval, delivery, and storage of pallets or the
reconditioning, retrieval, delivery and storage of drums, as well as the
disposal of unusable pallets or drums and component parts. In a typical
arrangement, PalEx will contract with a customer to remove all pallets or drums
from a particular location and transport them to its repair or reconditioning
facility. The pallets or drums are sorted and repaired or reconditioned as
needed at a PalEx depot and sold to third parties, returned to either the
customer or its supplier or placed in storage and made available for return to
service. PalEx may contract with a customer to perform any or all of the
management services available. PalEx believes there are significant
opportunities to manage customers' entire shipping container and platform
requirements and that it is in a unique position to develop and offer these
services.
Expansion and Acquisitions
Round-trip Containers
IFCO International has interests in joint ventures in Japan and the United
States and has begun an operation in Argentina for the development and
operation of round-trip systems and RTC pools.
In Japan, IFCO International has a minority interest in a joint venture with
Mitsubishi, which began in 1995. The joint venture continues to encounter a
very fragmented market and strong cooperative controls.
In 1996, IFCO International entered into an agreement with Intertape Polymer
Group, Inc., to form IFCO-U.S., L.L.C. IFCO U.S. has been successful in
attracting some large retailers to the IFCO system. It still faces high costs,
however, as it works to develop the necessary infrastructure to support an RTC
pool. Although Intertape controls the day-to-day operation of IFCO U.S., IFCO
International currently has a majority equity interest. Effective as of October
1, 1999, Intertape exercised its option to purchase an additional joint venture
interest in exchange for a promissory note to IFCO International for
approximately $3.2 million, increasing its equity interest to 49%. IFCO Systems
has agreed to purchase the Intertape interest in IFCO U.S. following or
concurrently with the completion of this offering.
IFCO International entered the market in Argentina in mid-1998. The Argentine
operation began local production of RTCs in March 1999. It has had initial
success in attracting some major retailers to IFCO round-trip systems.
Pallets
Since its initial three acquisitions in connection with its initial public
offering in March 1997, PalEx has purchased 16 pallet companies in separate
transactions. The total purchase price for these acquired companies was
approximately 5.2 million shares of PalEx common stock, approximately $55.4
million in cash, and approximately $10.0 million principal amount of
convertible notes.
72
Industrial Containers
In February 1998, PalEx Container Systems, Inc., a wholly owned subsidiary of
PalEx, acquired five companies in separate transactions. Since that time, PalEx
Container Systems has completed three additional acquisitions of reconditioning
companies. The total purchase price for these acquisitions consisted of
approximately 4.5 million shares of PalEx common stock and approximately $29.9
million in cash.
PalEx made no acquisitions during the first ten months of 1999.
Sales and Marketing
Round-trip Containers
The IFCO Companies currently maintain a broad range of customers located
throughout Europe, Japan, the United States, and Argentina. The IFCO Companies'
sales and marketing department is comprised of approximately 50 people and is
headquartered in Germany, with eight regional offices in Western Europe and one
in Argentina. The sales process is managed by direct salespersons, supplemented
with high-level discussions between the top management of the IFCO Companies
and the retail chains. The marketing and sales strategy focuses primarily on:
. developing and enhancing relationships with retailer groups;
. encouraging retailers to request their suppliers to use the IFCO round-
trip systems; and
. working closely with new and existing customers, whether growers or
manufacturers, to implement IFCO round-trip systems for the customer and
expand their use.
Because the IFCO Companies seek to generate the majority of their business
through retailers, their marketing strategy focuses on large retail chains. The
IFCO Companies' marketing objective is to convince retailers of the advantages
of the IFCO round-trip systems, which will then, in turn, lead the retailers to
encourage producers to use the IFCO round-trip systems. This marketing strategy
results in a well-defined target group of approximately 150 retail chains
worldwide as compared to a large and highly fragmented group of producers. The
current consolidation trend in the retail industry favors this marketing
strategy.
The IFCO Companies' pricing is different in each country and is based on the
distance between the customer and the retailer. Generally, pricing is reviewed
on a yearly basis, except if there are changes in raw materials or taxes or
other exceptional events occur.
The IFCO Companies place a significant emphasis on marketing. The IFCO
Companies maintain a large advertising presence in relevant industry
publications in order to increase their international profile and create a
strong brand name. Another successful marketing tool which the IFCO Companies
utilize is attendance at trade fairs, where the IFCO Companies market their
services to retailers and growers. Additionally, the IFCO Companies have a
comprehensive and regularly updated website and also produce an array of
product brochures and other marketing materials.
The future growth prospects for the IFCO Companies are largely dependent upon
an internationally recognized brand name which will expand their existing
customer base and further advance the acceptance of round-trip systems by the
retail sector.
Pallets and Industrial Containers
PalEx currently sells to pallet and industrial container customers within the
various geographic regions in which it conducts operations. Its primary sales
and marketing activities involve direct selling by its sales force and by
members of senior management to local and regional customers at the plant level
and to large accounts and target industries more broadly on a geographic basis.
Because pricing is a function of regional material and delivery costs, pricing
is established at the regional level.
73
Because many of its customers need pallets and/or container management
services on a national scale, PalEx continues the development and
implementation of its national sales and marketing plan to provide these
services at many locations throughout the United States. PalEx seeks to
continue to develop a network of facilities that will allow these customers to:
. centralize purchases of new and recycled pallets, reconditioned drums,
and container management services;
. obtain convenient and dependable service and a consistent supply of
uniform quality pallets, reconditioned drums, and container management
services;
. achieve greater efficiencies in their shipping platform and container
use; and
. meet corporate recycling goals.
PalEx has developed relationships with several national customers and intends
to provide services to these and numerous other customers on a local, regional,
and national basis. The shipping platform and container management needs of
national companies are not uniform, and PalEx intends to tailor its national
programs for each customer. These programs include a combination of sourcing,
retrieving, repairing, and recycling pallets and drums according to individual
customer requirements.
Customers
Round-trip Containers
Although the direct customers of IFCO round-trip systems are producers, the
demand is driven mainly by the large retail chains and their product transport
requirements. The IFCO Companies' top twenty grower customers accounted for
approximately 16% of revenues for 1998. No grower customer accounted for more
than 5% of IFCO Europe's 1998 revenues, and IFCO Europe does not materially
rely on any single grower customer. The top ten retailer groups using IFCO RTCs
accounted for approximately 80% of the recollection of containers in 1998.
Currently, over 75 retailer groups are using IFCO round-trip systems,
including major retailers such as Tengelmann, Edeka, Rewe, and Metro in
Germany, Coop and Migros in Switzerland, and Waitrose in the United Kingdom. In
1998, the IFCO Companies added Coop of Switzerland as a new large retail chain
using IFCO RTCs. There has been a trend towards consolidation of grocery
retailers in Europe. For example, Allkauf and Kriegbaum were acquired by Metro,
and Wertkauf and Interspar were acquired by Wal-Mart in Germany. This trend is
expected to continue and has had a positive effect on the IFCO Companies as
they are able to obtain more volume through existing relationships.
Outside of Europe, the IFCO Companies' international operations are still
largely in the development stage. Major retailers in Japan using the IFCO
round-trip systems include Jusco, Coop Kobe, Odakyu, and Coop Tokyo. In the
United States, major retailers who have started to adopt the IFCO round-trip
systems include Wal-Mart, H.E. Butt, and Food Lion. In Argentina, the major
retailers now using the IFCO round-trip systems are Norte, Disco, Coto, Jumbo,
Unimark, and Toledo.
The IFCO Companies currently have three principal customers for their dry
good operations, two department stores, whose service agreements extend through
2003, and, Deutsche Post AG, whose contract extends to September 30, 2004.
Deutsche Post AG is one of the largest European transporters of parcels and
letters.
Pallets and Industrial Containers
PalEx seeks to efficiently serve large numbers of customers across diverse
markets and industries to provide a stable and diversified base for ongoing
sales of products and services in all operations.
74
PalEx customers include companies in the automotive, chemical, consumer
products, grocery, produce and food production, petroleum, paper and forest
products, retail, and steel and metals industries. They are both regional and
national in scale. Because a significant part of its products and services are
sold to customers engaged in the produce and citrus industries, PalEx's sales
volumes in some regions tend to be seasonal.
Suppliers and Raw Materials
Round-trip Containers
Schoeller Plast AG manufactures the RTCs used by the IFCO Companies in
Europe. Schoeller Plast AG has production sites throughout Europe. In addition
to production capability, Schoeller Plast AG also conducts destructive and non-
destructive testing, as appropriate, on raw material and production samples for
quality control, new product testing, and product development.
In 1997, IFCO GmbH and Schoeller Plast Industries GmbH entered into a ten-
year supply agreement, which was later assigned to Schoeller Plast AG. In
addition to supplying crates, the supply agreement provides for Schoeller Plast
AG to develop and improve RTCs for IFCO GmbH. Schoeller Plast AG is also
required to transfer the related intellectual property rights to IFCO GmbH,
which is in turn required to purchase the manufactured products from Schoeller
Plast AG . Schoeller Plast AG is obligated to supply the containers to IFCO
GmbH, and IFCO GmbH is required to purchase them from Schoeller Plast AG . The
supply agreement establishes a price structure that changes periodically and is
subject to upward and downward adjustment based on increases and decreases of
more than 15% in raw material prices paid by Schoeller Plast AG . The supply
agreement was negotiated on an arm's-length basis by GE Capital on behalf of
IFCO GmbH and on market terms. The supply agreement expires on December 31,
2007, and may, upon the request of IFCO GmbH, be renewed for an additional ten-
year period. For a more detailed description, see "Certain Relationships and
Related Transactions--Supply Agreement."
Pallets
The primary raw materials used in new pallet manufacturing are lumber and
plywood. PalEx has long-term relationships with its lumber and plywood vendors.
PalEx believes that these relationships, as well as its ability to pursue
larger volume purchases, will help to ensure adequate lumber supplies at
competitive prices in the future. During the 1998 fiscal year, PalEx purchased
lumber and plywood from over 120 vendors. One of these vendors accounted for
approximately 8% and another for approximately 5% of its total lumber purchases
during the 1998 fiscal year. PalEx does not believe that the loss of either of
these vendors would materially adversely affect its financial condition or
results of operations. PalEx intends to continue to pursue a strategy of
purchasing and upgrading low-grade and alternative sources of lumber as well as
exploiting pricing aberrations and market trends to take advantage of lower
prices in the marketplace as they occur.
Pallet prices are closely related to the changing costs and availability of
lumber, the principal raw material used in the manufacture and repair of wooden
pallets. Typically, lumber prices fall in oversupplied lumber markets, enabling
small pallet manufacturers with limited capital resources to procure lumber and
initiate production of low-cost pallets. This depresses pallet prices overall
and adversely affects PalEx's revenues and operating margins. While PalEx
believes that it will benefit from strong relationships with multiple lumber
suppliers, it cannot assure you that it will be able to secure adequate lumber
supplies in the future. Lumber supplies and costs are affected by many factors
outside its control, including governmental regulation of logging on public
lands, lumber agreements between Canada and the United States, and competition
from other industries that use similar grades and types of lumber. In addition,
adverse weather conditions may affect PalEx's ability to obtain adequate
supplies of lumber at a reasonable cost. In 1997, PalEx experienced higher
lumber costs resulting from high demand and the impact of wet weather on the
harvesting of hardwood timber in the southeast regions of the U.S.
PalEx attempts to take advantage of the price volatility of lumber by buying
additional quantities of lumber when prices are favorable and storing the
inventory for later use. PalEx also is able to buy low-quality
75
lumber and upgrade this lumber at its plants. Although PalEx had studied the
broad use of alternative materials, like plastic, for the manufacture of
pallets, PalEx believes that there is not currently an available alternative
raw material that possesses the tensile strength, recyclability, and low cost
of wood. PalEx continues to evaluate alternatives to wood and are receptive to
their future use in pallet production.
PalEx sources the majority of its pallets for reconstruction from businesses
that use pallets and from trucking companies. Businesses that receive and ship
a significant amount of goods are generally good sources for used pallets.
Often the pallets they receive are damaged or do not meet their size or other
specifications for internal systems or shipping. As a result, these businesses
accumulate pallets that can be recycled. PalEx identifies these sources through
establishing relationships with pallet users and by direct solicitation,
telemarketing, and advertising. PalEx generally achieves timely pallet removal
by placing a trailer at a source that is used to hold unwanted pallets. PalEx
then removes the load of pallets at the same time it delivers recycled pallets
to the pallet user. In some cases, PalEx is paid a tipping fee for hauling away
the used pallets or is allowed to take the pallets away at no charge. In other
cases, PalEx buys the used pallets.
Industrial Containers
PalEx sources the majority of drums to be reconditioned from customers to
which it provides reconditioning services. Customers usually own the drums they
use. The acquisition cost of used drums is highly dependent on the costs of
recollecting them, including transportation costs. Drum demand in some regions
of the United States has required more drums to be shipped outside of the
region than are shipped into the region. Consequently, the acquisition costs of
used drums, the primary raw materials for reconditioned drums, in these regions
are significantly higher since the used drum deficit must be replaced by
collecting and shipping used drums from over 250 miles away. The West Coast and
Southeast of the United States are regions that tend to be net exporters of
open top drums because of their emphasis on agriculture. The Midwest, on the
other hand, tends to be a significant accumulator of drums because of its
greater industrial content and usage of petroleum products, coatings, and
chemicals.
Intellectual Property
Round-trip Containers
The development and protection of proprietary technology is essential to the
IFCO Companies' business. Schoeller Plast conducts ongoing research and
development as part of its obligations under the supply agreement with IFCO
GmbH to create and improve the design of the IFCO Companies' products. These
efforts are conducted in collaboration with, and with input from, the IFCO
Companies. They have resulted in a number of innovative product designs and
improvements. The IFCO Companies have a policy of protecting their proprietary
technology with patents. The IFCO Companies file patent applications in the
countries in which they operate and have obtained several European and
international patents covering their products. The IFCO Companies believe the
loss of these patent rights would have a material adverse effect on their
businesses.
The IFCO Companies principal patents relate to their RTCs for perishables and
for dry goods. The principal patent for RTCs in the perishables segment
protects the IFCO Companies' rights to produce and use IFCO RTCs that consist
of one piece and are produced in one production step. The RTC consists of a
base and four sides with hinges that can be folded inward toward the base. The
patent expires in 2013. The principal patent in the dry goods segment protects
two main elements, a tray that can be used as the top or bottom and a
collapsible frame that holds the side walls. This patent expires in 2011.
Pallets and Industrial Containers
PalEx does not rely on patents or trademarks to any material degree in its
pallet or industrial container operations.
76
Competition
Round-trip Containers
The IFCO Companies believe that no other company has successfully challenged
their position in Europe with respect to round-trip systems. The IFCO Companies
do, however, anticipate more aggressive challenges. The principal competitive
factors are network economics, industry standards, and cost-savings. The IFCO
Companies believe that when retailers select container systems, they want to be
able to choose in a competitive environment. The IFCO Companies also believe
the market position they have obtained is protected as a result of:
. their established relationships with customers and retailers, which are
maintained in part by the logistical services provided through IFCO
round-trip systems;
. more locations to service customers and retailers where the volume of
produce shipping from grower customers or to retailers creates the need;
and
. the advantages of initial market entry.
IFCO Europe's direct competitors in Europe include CHEP in many countries in
Europe, Europe Pool System BV in Germany, and Steco International Plastics
Logistic AG in Germany and Austria, plus four other RTC pools serving more
regional markets. These seven companies have begun development of competitive
container systems, but have limited customers and infrastructure at this time.
In addition, agricultural cooperatives and retailers have a limited impact with
their own reusable container systems.
The principal competition to the IFCO Companies still comes from companies
that are not providing round-trip systems, including manufacturers of
disposable containers made from paper or wood. The majority of fresh produce is
still packed in disposable containers.
The IFCO Companies are currently supplying RTCs for dry goods to only three
principal customers.
The IFCO Companies believe that neither the Japanese joint venture nor the
Argentine operations have any direct competitors other than the providers of
traditional corrugated packaging. In the United States, the IFCO Companies face
similar competitive pressures to those in Europe, except that CHEP has a more
significant presence overall in the United States than IFCO U.S. and represents
a competitive challenge.
Pallets
PalEx believes that the principal competitive factors in the pallet industry
are price, quality of services, and reliability. With approximately 3,600
industry participants, the pallet industry has been, and is expected to remain,
extremely fragmented and highly competitive. Though several companies have
attempted to establish national pallet operations, most of PalEx's competitors
are small, privately held companies that operate in only one location and serve
customers within a limited geographic area. Competition on pricing is often
intense and PalEx may face increasing competition from pallet leasing or other
pallet systems providers that market to new pallet purchasers as less expensive
alternatives. CHEP USA's pallet leasing system competes with new pallet sales
and recycling to the grocery and wholesale distribution industries and may
expand into other industries in the future. In addition, pallet manufacturing
and recycling operations are not highly capital intensive and the barriers to
entry in these businesses are minimal. Other smaller competitors may have lower
overhead costs and, consequently, may be able to manufacture or recycle pallets
at lower costs than PalEx. Other companies with significantly greater capital
and other resources than PalEx, including CHEP USA, may enter or expand their
operations in the pallet manufacturing and recycling businesses in the future,
which could change the competitive dynamics of the industry. In the past, PalEx
has competed, and will continue to compete, with lumber mills in the sale of
new pallets. These mill competitors typically view pallet manufacturing as an
opportunity to use the lower grade lumber that would otherwise be waste.
77
Industrial Containers
Drum reconditioning businesses generally compete with respect to three
criteria: price; manufacturing responsiveness; and delivery performance.
Customers typically give less than 24 hours' notice for a majority of their
orders. This practice requires reconditioners to maintain flexibility in their
manufacturing capacity across product lines, carry sufficient levels of
inventory to meet customer demands and develop distribution systems with rapid
pick-up and delivery capabilities. Although the primary competitive criterion
is price, the increasing movement toward just-in-time delivery increases the
importance of customer service.
Transportation and regulatory requirements are also key competitive factors
in the drum reconditioning industry. Due to the high costs of transporting
drums, the competitive range of a reconditioning facility is approximately 250
miles. In each market in which PalEx has container operations, it faces local
competitors. In addition, drum reconditioning operations are subject to
significant regulatory oversight, which makes it difficult to open new
facilities. For instance, as previously discussed, open top drum reconditioning
operations require the use of large furnaces, which require regulatory permits
that are increasingly difficult to obtain. According to industry sources, less
than five new furnace permits have been granted to drum reconditioners in the
last ten years in the United States.
Employees
Round-trip Containers
As of January 1, 2000, the IFCO Companies had 517 full-time employees
internationally, including employees at container depots. The IFCO Companies
believe that their relationship with employees is satisfactory.
Pallets and Industrial Containers
At December 26, 1999, PalEx had 3,773 employees, approximately 700 of which
were employees of PalEx's container group. Approximately 300 employees of the
container group at three locations are covered by collective bargaining
agreements. PalEx believes that its relationship with its employees is
satisfactory.
At the end of its 1998 fiscal year, PalEx had approximately 3,600 employees,
approximately 700 of which were employees of PalEx's container group. At the
end of its 1997 fiscal year, PalEx had approximately 2,100 employees, all of
whom were involved in PalEx's pallet businesses.
Properties
Round-trip Containers
At October 31, 1999, the IFCO Companies operated 62 container depots in
connection with its European operations. The European RTC depots, which are
leased, are located in the following countries:
Austria (3)
Belgium (2)
Cyprus (1)
Denmark (5)
France (14)
Germany (9)
Greece (1)
Italy (11)
Netherlands (1)
Norway (7)
Spain (3)
Switzerland (1)
Turkey (1)
United Kingdom (3)
78
Through IFCO International's interests in joint ventures outside of Europe,
IFCO round-trip systems operations are operated from 28 leased depot facilities
in the following countries:
Argentina (6)
Japan (11)
United States (11)
Pallets and Industrial Containers
At December 31, 1999, PalEx operated 60 pallet facilities and 12 drum
reconditioning facilities in 24 states in the United States and seven Canadian
provinces. PalEx owns 25 of these facilities and leases 47. Most of PalEx's
facilities offer more than one pallet-related or drum-related service. The
corporate headquarters are located in Houston, Texas, and is leased. The chart
below summarizes the locations of PalEx's facilities:
Total Number of
Number Number of Number of Number of Drum Pallet
of New Pallet Recycling Reconditioning Leasing
State or Province Facilities Facilities Facilities Facilities Facilities
----------------- ---------- ---------- ---------- -------------- ----------
Alberta.......... 2 2
Arizona.......... 2 1 1
Arkansas......... 3 2 1
British Colum-
bia............. 1 1
California....... 4 2 1 1
Colorado......... 1 1
Florida.......... 4 1 1 2
Georgia.......... 4 3 1
Illinois......... 2 2
Indiana.......... 1 1
Kansas........... 1 1
Maine............ 1 1
Manitoba......... 1 1
Minnesota........ 1 1
Mississippi...... 1 1
Missouri......... 1 1
New Brunswick.... 1 1
North Carolina... 6 5 1
Ohio............. 4 2 2
Oklahoma......... 1 1
Ontario.......... 2 2
Pennsylvania..... 2 2
Quebec........... 1 1
Saskatchewan..... 2 2
South Carolina... 1 1
Tennessee........ 3 2 1
Texas............ 13 4 9
Utah............. 1 1
Virginia......... 1 1
Washington....... 1 1
Wisconsin........ 3 3
PalEx's interests in its owned and leased properties are pledged as security
for the repayment of amounts due under its senior credit facility. PalEx
believes that its properties are generally adequate for its present needs.
Further, PalEx believes that suitable additional or replacement space will be
available when required.
79
Regulation
Round-trip Containers
The IFCO Companies' businesses are subject to evolving environmental, health,
safety, and transportation laws and regulations. In Europe, these regulations
are administered by the respective government agencies and the European Union.
In the United States, they are administered by the U.S. Environmental
Protection Agency and various other federal, state, and local environmental,
zoning, health, and safety agencies.
Pallets
All of PalEx's businesses are subject to evolving environmental, health,
safety, and transportation laws and regulations at the federal, state, and
local levels. These regulations are administered by the U.S. Environmental
Protection Agency and various other federal, state, and local environmental,
zoning, health, and safety agencies. Many of these agencies periodically
examine PalEx's operations to monitor compliance with these laws and
regulations.
Industrial Containers
PalEx's industrial container businesses are subject to extensive regulations
governing location, design, operations, monitoring, site maintenance, and
corrective actions. In order to construct and operate a furnace for open top
drum reconditioning, PalEx's container group must obtain and maintain one or
more construction or operating permits and licenses and applicable zoning
approvals. Obtaining the necessary permits and approvals is difficult, time-
consuming, and expensive. Maintaining the necessary permits also requires
significant effort. Once obtained, operating permits are subject to
modification and revocation by the issuing agency. In addition, many drums
received by PalEx's container group for reconditioning may have contained
products classified as a solid waste, a hazardous substance or a hazardous
waste by applicable laws or regulations. PalEx's container group must ensure
that these drums are "empty" as determined by EPA regulations at the time they
are received at its facilities. PalEx's container group does not accept drums
that are not empty because they are classified as hazardous wastes and must be
handled and disposed of in an expensive manner in accordance with stringent
regulatory requirements.
Compliance with current and future regulatory requirements may require PalEx,
as well as others in the steel drum reconditioning industry, to make
significant capital and operating expenditures from time to time. PalEx makes a
continuing effort to anticipate regulatory, political, and legal developments
that might affect operations, especially the operations of PalEx's container
group, but PalEx will not always be able to do so. PalEx cannot predict the
extent to which any legislation or regulation that may be enacted, amended,
repealed, interpreted, or enforced in the future may affect the operations of
PalEx's container group or other of PalEx's businesses. These actions could
adversely affect PalEx's operations or impact PalEx's financial condition or
earnings for one or more fiscal quarters or years.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions, to obtain injunctions, or to impose civil or
criminal penalties in case of violations. During the ordinary course of its
operations, PalEx's container group or other of PalEx's subsidiaries may from
time to time receive citations or notices of violations or orders from
governmental authorities. When PalEx receives citations or notices, PalEx's
subsidiaries will work with the authorities to address their concerns. Failure
to be in full compliance with applicable governmental requirements could lead
to civil or criminal penalties, curtailed operations, facility closures, or the
inability to obtain or retain necessary operating permits. In addition, PalEx's
subsidiaries could be responsible for the remediation of an off-site source
through their status as a transporter of certain chemicals.
As a result of changing government and public attitudes in the area of
environmental regulation and enforcement, PalEx anticipates that changing
requirements in health, safety, and environmental protection laws
80
will require PalEx's container group to continually modify or replace various
facilities and alter methods of operation at costs that may be substantial.
PalEx's container group incurs substantial expenditures in the operation of its
businesses in order to comply with the requirements of environmental laws.
These expenditures relate to waste stream containment and treatment, facility
upgrades, and corrective actions. The majority of these expenditures are made
in the normal course of PalEx's container group's businesses and neither
materially adversely affects PalEx's earnings nor places PalEx at any
competitive disadvantage. Although, to PalEx's knowledge, PalEx is currently in
compliance in all material respects with all applicable federal, state, and
local laws, permits, regulations, and orders affecting PalEx's operations where
noncompliance would result in a material adverse effect on PalEx's financial
condition, results of operations, or cash flows, PalEx cannot assure you that
it will not have to expend substantial amounts for environmental matters in the
future.
PalEx's container group expects to grow in part by acquiring other existing
drum reconditioning operations. Although PalEx conducts due diligence
investigations of the past waste management practices and the environmental
condition of the businesses that PalEx's container group acquires, PalEx cannot
assure you that, through PalEx's investigation, PalEx will identify or quantify
all potential environmental problems or risks. As a result, PalEx's container
group may have acquired, or may in the future acquire, properties that have
environmental problems and related liabilities. PalEx seeks to mitigate these
risks by obtaining environmental representations and indemnities from the
sellers of the acquired businesses or by requiring remediation of known
environmental contamination before acquisition. PalEx cannot, however, assure
you that it will be able to rely on any of these actions if an environmental
liability exists.
Federal Statutes and Regulation. The primary U.S. federal statutes affecting
PalEx's businesses are summarized below. These statutes regulate the discharges
of hazardous substances and waste to the air and water and related permits, as
well as handling and disposal practices for solid and hazardous wastes.
The Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976, and its implementing regulations establish a framework
for regulating the handling, transportation, treatment, and disposal of
hazardous and nonhazardous waste. They also require states to develop programs
to ensure the safe disposal of solid waste in landfills. Container residues may
be hazardous waste under the Resource Conservation and Recovery Act or the
corresponding state regulations and as such require special handling,
transporting, storing, and disposal of not only the residues but also the
containers. PalEx, as well as other entities with drum reconditioning
operations, could incur significant costs in complying with these regulations;
however, PalEx does not believe that the costs of complying with these
standards will have a material adverse effect on its operations.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, or CERCLA, among other things, provides for the cleanup of sites from
which there is a release or threatened release of a hazardous substance into
the environment and the recovery of natural resource damages. Courts have
interpreted CERCLA to impose strict, retroactive, joint and several liability
for the costs of cleanup and for damages to natural resources upon the present
and former owners or operators of facilities or sites from which there is a
release or threatened release of hazardous substances with limited defenses.
Generators of hazardous substances and transporters are also strictly liable.
As a practical matter, at sites where there are multiple responsible parties
for a cleanup, the costs of cleanup are typically allocated according to a
volumetric or other standard among the parties. Under the authority of CERCLA
and its implementing regulations, detailed requirements apply to the manner and
degree of remediation of facilities and sites where hazardous substances have
been or are threatened to be released into the environment. Also, CERCLA
imposes substantial penalties for failure to report the release of a hazardous
substance.
Liability under CERCLA is not dependent upon the intentional disposal of
hazardous wastes, as defined under the Resource Conservation and Recovery Act.
Liability can be imposed upon the release or threatened release, even as a
result of lawful, unintentional, and non-negligent action, of any one of more
than 700 hazardous substances, including very small quantities of these
substances. CERCLA requires the EPA to
81
establish a National Priorities List of sites at which hazardous substances
have been or are threatened to be released and which require investigation or
cleanup. Because of the extremely broad definition of hazardous substances,
other industrial properties with which PalEx's subsidiaries or their
predecessors have been, or with which they may become, associated as an owner
or operator may subject PalEx's subsidiaries to liability under CERCLA.
Consequently, if there is a release or threatened release of these substances
into the environment from a site currently or previously owned or operated by a
subsidiary of PalEx, PalEx could be liable under CERCLA for the cost of
removing these hazardous substances at the site, remediation of contaminated
soil or groundwater, and damages to natural resources, even if those substances
were deposited at the facilities before PalEx's subsidiaries acquired or
operated them.
The Federal Water Pollution Control Act of 1972, or Clean Water Act regulates
the discharge of pollutants into streams, rivers, lakes, or the ocean from a
variety of sources, including nonhazardous solid waste disposal sites. The
Clean Water Act also regulates storm water runoff and indirect discharge.
PalEx's subsidiaries are required to apply for and obtain discharge permits,
conduct sampling and monitoring, and, under some circumstances, reduce the
quantity of pollutants in those discharges. The Clean Water Act provides civil,
criminal, and administrative penalties for violations of its provisions.
The Clean Air Act provides for the federal, state, and local regulation of
the emission of air pollutants. These regulations impose emission limitations
and monitoring and reporting requirements on several of PalEx's operations,
including the operations of PalEx's container group's open top drum
reconditioning furnaces. The costs of compliance with the Clean Air Act
permitting and emission control requirements are not anticipated to have a
material adverse effect on PalEx.
State and Local Regulation. The states in which PalEx operates have their own
laws and regulations that may be more strict than comparable federal laws and
regulations governing hazardous and nonhazardous solid waste disposal, water
and air pollution, releases, and cleanup of hazardous substances and related
liability. The states also have adopted regulations governing the permitting
and operation of furnaces, including those used in the open top drum
reconditioning operations of PalEx's container group. PalEx's container group's
facilities and operations are likely to be subject to many, if not all, of
these types of requirements.
Environmental Proceedings. PalEx subsidiaries are currently parties to the
following judicial or administrative proceedings with respect to environmental
matters.
Zellwood Superfund Site. In February 1998, a wholly owned subsidiary of PalEx
acquired Drum Service Co. of Florida, a steel drum reconditioning company with
a facility in Florida. In 1982, Drum Service was notified by the EPA and the
Florida Department of Environmental Regulation that Drum Service had been
identified as a potentially responsible party with respect to the Zellwood
Groundwater Contamination Site in Orange County, Florida. The Zellwood Site was
designated a Superfund environmental clean-up site after the Florida Department
discovered arsenic contamination in a shallow monitoring well adjacent to the
site. The Drum Service facility is located on a portion of the 57 acres
constituting the Zellwood Site. PalEx believes that Drum Service and its former
shareholders were among approximately 25 entities and individuals identified as
potentially responsible parties by the EPA.
Between March 1990 and July 1996, the EPA issued various unilateral
administrative orders and notices to Drum Service and the other potentially
responsible parties regarding the Zellwood Site. Those orders and notices
demanded reimbursement from the potentially responsible parties of
approximately $2.0 million of the EPA's costs related to the Zellwood Site and
requested the potentially responsible parties to accept financial
responsibility for additional clean-up efforts. During that time, the EPA
estimated that the cost of the selected remedy for soil and the selected remedy
for groundwater at the Zellwood Site would be approximately $6.1 million. The
EPA currently estimates that the total cost will be approximately $6.6 million.
Drum Service and the other potentially responsible parties 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 order.
82
On June 12, 1998, a suit was filed by the EPA in United States District Court
in Orlando, Florida, against Drum Service and certain other potentially
responsible parties with respect to the Zellwood Site. The EPA is seeking
reimbursement of costs incurred at the Zellwood Site during the past 18 years
and a declaratory judgment for future response costs.
Drum Service has maintained comprehensive general liability insurance
coverage over the past 25 years and has notified various insurers of the EPA's
claims regarding the Zellwood Site. A number of those relevant insurance
policies did not contain an exclusion for pollution. Drum Service has notified
the insurers that issued these policies of the EPA's claims regarding the
Zellwood Site and the commencement of the lawsuit. In 1992, Drum Service
settled a claim with one insurer for an amount that covered a substantial
portion of the costs Drum Service had incurred at that time in dealing with the
EPA and the Florida Department. Drum Service has identified other umbrella
liability policies for which coverage may also be available and has been
approached by the insurer under two of those policies seeking a settlement. In
addition, the former shareholders of Drum Service have a written agreement with
Drum Service and PalEx to bear liabilities and expenses with respect to the
Zellwood Site, to the extent such liabilities and expenses exceed Drum
Service's and PalEx's insurance recoveries.
Drum Service is vigorously defending the lawsuit and intends to 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 Drum Service under the EPA's lawsuit, the amount of recoveries
from other potentially responsible parties or the insurance coverage, or the
amount of insurance recoveries, PalEx believes that Drum Service's insurance
coverage, recoveries from other potentially responsible parties and the
obligations of Drum Service's former shareholders will be adequate to cover any
liability or expenses of Drum Service arising from the lawsuit. PalEx will
continue to determine the availability of additional insurance coverage for
this matter.
Legal Proceedings
Round-trip Containers
From time to time, any of the IFCO Companies may be a party to various legal
proceedings arising in the ordinary course of business. The IFCO Companies are
not currently a party to any material legal proceedings and are not aware of
any legal proceedings threatened against them that would have a material
adverse effect on their business. Since the beginning of the last two fiscal
years, the IFCO Companies have not been parties to litigation or similar
proceedings that had a significant effect on their financial condition.
Pallets
PalEx has from time to time been a party to litigation arising in the normal
course of its business. Most of that litigation involves claims for personal
injury or property damage incurred in connection with PalEx's operations. PalEx
believes that none of these actions will have a material adverse effect on its
financial condition or results of operations.
Industrial Containers
On June 12, 1998, a suit was filed by the EPA in United States District Court
in Orlando, Florida, against Drum Service and other potentially responsible
parties with respect to the Zellwood Site. 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. See "--Regulation--Industrial Containers."
Since the beginning of the last two fiscal years, PalEx has not been a party
to litigation or similar proceedings that had a significant effect on its
financial condition.
83
MANAGEMENT
Directors and Executive Officers
IFCO Systems
Responsibility for the management of IFCO Systems lies with its board of
directors. After the closing of the merger, the board of directors will consist
of A members and B members. The area of responsibility of the B members covers
in particular the general course of affairs of the company and its enterprise.
The area of responsibility of the A members covers in particular 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 shall resign no later
than upon the close of the annual shareholders meeting held in the fourth year
after the year of their last appointment, but may be reappointed. IFCO Systems
can be represented by the board of directors, by each A member individually,
and by each B member acting jointly with an A member. See "Description of IFCO
Systems Share Capital."
The directors and executive officers of IFCO Systems before the merger are as
follows:
Name Age Position
---- --- --------
Dr. Willy von Becker........ 36 Director and Chief Financial Officer
Martin A. Schoeller......... 43 Director and Chief Executive Officer
Dr. Willy von Becker is a director and the Chief Financial Officer of IFCO
Systems prior to the merger. Dr. von Becker became a director upon the
formation of IFCO Systems on March 31, 1999. Dr. von Becker joined IFCO Europe
in April 1998 as its Corporate Controller, the position he currently holds.
From 1994 until 1998, Dr. von Becker worked as an independent consultant,
specializing in financial accounting, business process re-engineering, and
strategic business planning. He has acted as consultant on a number of national
and international projects for major companies in a variety of industries
including information technology, automotive, and textiles. From 1991 to 1993,
Dr. von Becker was a consultant with a Munich-based software company, R&S.
Martin A. Schoeller has been a Managing Director of IFCO Europe since
November 1997 and the sole Managing Director of IFCO International since May
1995. Mr. Schoeller became a director and the Chief Executive Officer of IFCO
Systems in January 2000. In 1992, Martin 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 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.
84
The directors and executive officers of IFCO Systems after the merger will
be:
Name Age Position
---- --- --------
Christoph Schoeller......... 42 Chairman and B Director
Martin A. Schoeller......... 43 Chief Executive Officer and A Director
Cornelius Geber............. 47 B Director
Sam W. Humphreys............ 39 B Director
Randall Onstead............. 43 B Director
Eckhard Pfeiffer............ 58 B Director
Dr. Frank Tofflinger........ 39 B Director
A. Joseph Cruz.............. 53 President, North America
Vance K. Maultsby, Jr....... 47 Executive Vice President, Strategy and Finance and
Chief Financial Officer
Edward E. Rhyne............. 39 Executive Vice President and General Counsel
Howe Q. Wallace............. 44 Executive Vice President, Chief Human Resources Officer
Christoph Schoeller has been a Managing Director of IFCO Europe since
November 1997. In 1992, he co-founded IFCO GmbH and MTS with his brother,
Martin Schoeller. Christoph 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.
Cornelius Gerber 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 is engaged in private equity and venture capital investing.
Mr. Humphreys has been 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, 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.A.; and Envirofil, Inc., a solid-waste
management company.
Randall 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.
85
Eckhard 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 has been a director of the Carlyle Group Europe, a
private equity group based in Washington D.C., 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.
A. Joseph Cruz became a director in February 1998 and President and Chief
Operating Officer of PalEx in November 1998. Mr. Cruz previously served as
President of PalEx Container Systems since PalEx's acquisition of Consolidated
Drum Reconditioning, Inc., or CDR, in February 1998. Prior to that acquisition
and since it was acquired by Mr. Cruz and Philip M. Freeman in 1986, Mr. Cruz
was a 50% owner of CDR and its Chief Executive Officer.
Vance K. Maultsby, Jr. 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 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 acquisition lawyer for more than five years.
Howe Q. Wallace became the Chief Human Resource Officer of PalEx upon 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 Container Association, or NWPCA,
from February 1995 to February 1998, and has been active in industry education
efforts.
86
IFCO Companies
The directors and executive officers of the IFCO Companies are as follows:
Name Age Position
---- --- --------
Jorg Augustin......... 49 Managing Director of IFCO Europe, IFCO GmbH,
IFCO International, and MTS
Dr. Willy von Becker.. 36 Corporate Controller of IFCO Europe
Gunter Gerland........ 51 Managing Director of IFCO GmbH, MTS, and IFCO
Logistics System GmbH
Dirk Grosgen.......... 34 Managing Director of IFCO Finance Consulting
GmbH
Klaus Hufnagel........ 37 Managing Director of MTS
Hans E. Maier......... 31 Managing Director of MTS
Gustaf Sandahl........ 39 Director Sales & Marketing of IFCO GmbH
Holger Schmidt........ 36 Managing Director of IFCO Finance
Christoph Schoeller... 42 Managing Director of IFCO Europe
Martin A. Schoeller... 43 Managing Director of IFCO Europe and IFCO
International
Jorg Augustin has been a Managing Director and the Chief Financial Officer of
IFCO Europe and a Managing Director of IFCO GmbH, IFCO International, and MTS
since June 1999. From 1996 until 1998, Mr. Augustin was Chief Financial Officer
of ISS Holding GmbH. He served as Director Finance Europe Medical Products
Division of the NMC--Medical Division of W.R. Grace Inc. from 1994 to 1995. In
1991, he joined Digital-Kienzle GmbH, a manufacturer of electronic scales and
other equipment, as Manager Finance and Administration PCS, deputy and member
of the board of directors of PCS, a subsidiary of Digital-Kienzl. In 1993, Mr.
Augustin became responsible for business controls at Digital-Kienzle. Mr.
Augustin joined Texas Instruments in 1979 as Logistic Manager, became European
Controller of the MIS Division in 1981, and was promoted to Controller Germany
for Computers and Peripherals, Industrial Automation, Consumer Products,
Marcom, MIS, Metals and Controls in 1987.
Gunter Gerland became a Managing Director of IFCO GmbH in December 1994, of
MTS in January 1995, and of IFCO Logistics Services GmbH in April 1997. Since
1994, Mr. Gerland has been responsible for personnel, finance, internal
controls, electronic data processing, and procurement at the Schoeller group's
logistics operation. From 1990 until 1994, he was head of logistics at the REWE
retailing group. In 1987, he was made head of logistics in Northern Germany at
COOP, a German food retailer, and served until 1990.
Dirk Grosgen became a Managing Director of IFCO Finance, the financial
services and advisory company for the IFCO Companies, in January 1999. He
joined IFCO Finance in July 1997 as head of the Controlling Department and is
responsible for group consolidation, group planning and monthly reporting,
annual financial statements, and contact with independent auditors. From 1995
until 1997, Mr. Grosgen worked for IMM Office, an office equipment retail
chain, as a Controller. He joined Arthur Andersen Stuttgart in 1991, first as
an assistant and later becoming a senior accountant.
Klaus Hufnagel has been recently appointed the Managing Director of MTS. Mr.
Hufnagel has, since 1997, been Director of Business Development for GE
Transport International Pool & Modular Space Europe, a provider of rental and
leasing products for the transportation and construction industry in all major
European countries. From 1995 until 1997, Mr. Hufnagel was Managing Partner and
Executive Board Member of ERM Equity Research & Management AG, a private
equity, venture capital, and corporate finance consulting firm,
87
which he co-founded. From 1992 until 1995, Mr. Hufnagel was a Senior Manager of
Equity Investments at HKM Hypo Kapitalbeteiligungs-Management GmbH, a private
equity investment and management company.
Hans E. Maier joined MTS as a Managing Director in September 1998. From 1995
until September 1998, Mr. Maier was a director of Barkawi + Partners GmbH, a
consulting firm in Munich, where he had responsibility for projects within the
telecommunications industry, as well as for several projects for clients of the
Schoeller group of companies, in particular IFCO GmbH. From July 1992 to April
1995, he was with Roland Berger & Partner International Management Consultants.
He worked on assignments involving restructuring and corporate recovery,
mergers and acquisitions, and strategic advice for the service industry.
Gustaf Sandahl became Director Sales & Marketing of IFCO GmbH in 1999. Mr.
Sandahl joined the Schoeller group of companies in 1995. Initially, he was
responsible for the joint venture Schoeller Plast / Norsk Hydro in Norway. In
1996, he became a Managing Director of IFCO Scandinavia. From 1992 until 1995,
he was affiliated with MTP, a seafood transportation packaging company in
Bremerhaven, Germany, first as Manager of Sales and then, beginning in 1993, as
a Managing Director. From 1987 to 1992, Mr. Sandahl was Export Manager of
Danisco Pack, a leading Scandinavian manufacturer of packaging material.
Holger Schmidt became a Managing Director of IFCO Finance in June 1998. Mr.
Schmidt is responsible for accounting and treasury for IFCO Europe and MTS.
From 1996 until March 1998 he was the Head of the Finance and Controlling
Department at Telenet, a software company and subsidiary of Alcatel. Mr.
Schmidt joined Arthur Andersen in Munich in 1992, first as an assistant and
later advancing to senior accountant.
PalEx
PalEx's executive officers and directors before the merger are as follows:
Name Age Position
---- --- --------
Tucker S. Bridwell...... 48 Director (1)(2)
A. Joseph Cruz.......... 53 President, Chief Operating Officer, and
Director
John E. Drury........... 55 Director (1)(2)
Casey A. Fletcher....... 45 Chief Accounting Officer and Secretary
Troy L. Fraser.......... 50 Director
Philip M. Freeman....... 55 Executive Vice President
A.E. Holland, Jr........ 52 President of Ridge Pallets, Inc. and Director
Sam W. Humphreys........ 39 Chairman of the Board and Director (1)(2)
Vance K. Maultsby, Jr... 47 Chief Executive Officer
Elliot S. Pearlman...... 58 President and Chief Executive Officer of
PalEx Container Systems, Inc., and Director
Edward E. Rhyne......... 39 Vice President and General Counsel
Stephen C. Sykes........ 55 President of Interstate Pallet Co., Inc., and
Director
--------
(1) Member of the Audit Committee
(2)Member of the Compensation Committee
Tucker S. Bridwell became a director of PalEx in March 1997 upon the closing
of PalEx's initial public offering. Since October 1997, Mr. Bridwell has been
President of Mansefeldt Investment Corporation, a private investment firm. Mr.
Bridwell is also the President of Topaz Exploration Company, an oil and gas
exploration
88
company, a position he has held since 1980. From 1992 until October 1997, Mr.
Bridwell was the President of Fred Hughes Motors, Inc., which owned ten new-car
franchises in the Abilene, Texas area. From 1985 to 1992, Mr. Bridwell was
President of Ard Drilling Company, an oilfield drilling company, and served as
President of Texzona Corporation, a private investment company, from 1979 to
1980. From 1976 to 1979, Mr. Bridwell was Tax Manager with Condley & Company
and was an accountant with Price Waterhouse from 1974 to 1976. Mr. Bridwell is
a Certified Public Accountant.
John E. Drury became a director of PalEx in March 1997 upon the closing of
PalEx's initial public offering. From May 1994 until August 1999, Mr. Drury was
the Chairman and Chief Executive Officer of Waste Management, Inc., the largest
solid waste company in North America. Waste Management was formerly known as
USA Waste Services, Inc. until July 1998. USA Waste was the surviving
corporation in a May 1994 merger with Envirofil, Inc. From February 1991
through April 1994, Mr. Drury was a Managing Director of Sanders Morris Mundy,
Inc., an investment banking firm. From 1982 through January 1991, Mr. Drury was
President and Chief Operating Officer of Browning-Ferris Industries, Inc., or
BFI, where he was responsible for the worldwide operations of BFI. Mr. Drury is
a partner in Main Street.
Casey A. Fletcher became Chief Accounting Officer and Secretary of PalEx in
March 1997 upon the closing of PalEx's initial public offering. From 1983 until
PalEx's initial public offering and its acquisition of Ridge Pallets, Inc., one
of PalEx's founding companies, Mr. Fletcher was Ridge's Controller and Chief
Financial Officer. Prior to his employment with Ridge, Mr. Fletcher was
associated with Arthur Young from 1976 to 1979. Mr. Fletcher is a Certified
Public Accountant.
Troy L. Fraser became a director of PalEx in March 1997 upon the closing of
PalEx's initial public offering and currently works on business development
projects for PalEx's pallet operations. Mr. Fraser served as PalEx's Chief
Development Officer from March 1997 to November 1998. He was President of
Fraser Industries, Inc., one of PalEx's founding companies, beginning in 1975
when he and his two brothers purchased Fraser from their father, until PalEx's
reorganization of its Texas subsidiaries in March 1999. In 1988, Mr. Fraser was
elected to the Texas House of Representatives where he served three terms, and
was named the National Republican Legislator of the Year in 1991. In November
1996, Mr. Fraser was elected to the Texas State Senate. In 1996, Mr. Fraser
served as Vice President of the NWPCA and has served for two terms on the
NWPCA's board of directors.
Philip M. Freeman has been Executive Vice President since November 1998. Mr.
Freeman previously served as Chief Operating Officer of PalEx Container Systems
after PalEx's acquisition of CDR in February 1998. Prior to that acquisition,
and since it was acquired by Mr. Freeman and Mr. Cruz in 1986, Mr. Freeman was
a 50% owner of CDR and its Chief Operating Officer.
A. E. Holland, Jr. has been a director of PalEx since March 1997 upon the
closing of PalEx's initial public offering. Mr. Holland served as Chief
Operating Officer from March 1997 to November 1998. He has over 25 years of
experience in the pallet industry. Mr. Holland has been associated with Ridge
since 1969 and has served as President of Ridge since 1980. Mr. Holland has
served on the board of directors of the NWPCA and was President of the NWPCA
from 1990 to 1991. Mr. Holland has served the Florida Chamber of Commerce as
Treasurer, Chairman of the finance Committee and member of the State Strategic
Planning Committee.
Elliot S. Pearlman has been President and Chief Executive Officer of PalEx
Container Systems and a director of PalEx since PalEx acquired Acme Barrel
Company, Inc. in February 1998. Mr. Pearlman served as Acme's President and
Chief Executive Officer and was a principal stockholder from 1992 until PalEx's
acquisition of Acme. Mr. Pearlman serves as a director of the Association of
Container Reconditioners and served as chairman of this association in 1996 and
1997.
Stephen C. Sykes has been a director of PalEx since March 1997 upon the
closing of PalEx's initial public offering. Mr. Sykes founded Interstate Pallet
Co., Inc., one of PalEx's founding companies, in 1979 and has served as its
President and Chief Executive Officer from its inception. From 1974 to 1979,
Mr. Sykes was the Director of Transportation for the Virginia Division of Holly
Farms Poultry. Mr. Sykes has been an active member of the NWPCA since 1981 and
served as its President from 1992 to 1993.
89
Executive Compensation
IFCO Systems/IFCO Companies
Because IFCO Systems is a newly formed holding company, it will not pay any
compensation to its directors or officers until after the completion of the
merger and this offering. The total amount of compensation paid by the IFCO
Companies during the year ended December 31, 1999, to their officers and
directors for positions they then held with the IFCO Companies was
approximately DM1,242,000, or approximately $625,000. This total amount of
compensation does not include any compensation for Christoph and Martin
Schoeller, who are paid by Schoeller Industries as part of the management
services provided by Schoeller Industries to the IFCO Companies.
IFCO Systems has agreed upon employment terms with Vance K. Maultsby, Jr., as
Executive Vice President, Strategy and Finance and Chief Financial Officer, and
Edward E. Rhyne, as Executive Vice President and General Counsel, after the
merger. The new employment terms will be effective upon completion of the
merger. For each officer, the initial term of employment will be three years.
Mr. Maultsby will have a base salary of $300,000 per year initially. He will
also be granted options to purchase 100,000 IFCO Systems ordinary shares at the
IPO price, which will vest over a three-year period. Mr. Rhyne will have a base
salary of $236,000 per year initially, which will increase to $250,000 on June
1, 2000. He will also be granted options to purchase 135,000 IFCO Systems
ordinary shares at the initial public offering price, which will vest over a
three-year period. Both officers will be eligible to participate in an
executive bonus plan, which has not yet been adopted. In addition, upon
completion of the merger, both officers will be entitled to a transaction
closing bonus equal to one to two times his base salary.
Compensation of Directors. Upon completion of the merger and this offering,
IFCO Systems anticipates that class B directors will receive additional
compensation for serving as directors. The actual amount of compensation has
not yet been determined, but IFCO Systems expects it to be in line with
publicly traded companies of similar size. Directors of IFCO Systems will also
be reimbursed for out-of-pocket expenses incurred in their capacity as
directors.
Under the merger agreement, as of the closing date of the merger, IFCO
Systems will issue options to purchase 300,000 IFCO Systems ordinary shares to
each of Christoph Schoeller, Martin Schoeller, and Sam Humphreys as incentive
compensation for their involvement in the business of IFCO Systems. The
exercise price for these options will be the initial public offering price.
These options will be fully exercisable on the date of grant and will have a
term of ten years.
In January 2000, PalEx granted options to purchase 200,000 shares of PalEx
common stock to Eckhard Pfeiffer. The exercise price of the options is $7.00
per share, the closing sale price of the PalEx common stock on the date of the
grant. The options will only be exercisable if the merger and this offering are
completed and if Mr. Pfeiffer is an IFCO Systems director on the first
anniversary of the closing of the merger and this offering. Subject to these
conditions, the options will vest on the first anniversary of the closing of
the merger and this offering and will have a term of ten years from the date of
grant. The options will be converted into options to purchase IFCO Systems
ordinary shares as part of the merger.
Audit Committee. Promptly following the completion of the merger and this
offering, the board of directors will create an audit committee that will
consist of at least three independent directors. The audit committee, pursuant
to a written charter, will be charged with reviewing and assessing the adequacy
of accounting policies, internal and external reporting procedures, the
internal auditing and risk management control systems, and meeting with IFCO
System's independent accountants.
Compensation Committee. Promptly following the completion of the merger and
this offering, the board of directors will create a compensation committee that
will consist of at least two independent directors. The compensation committee
will advise the board of directors on the compensation of directors and
executive officers.
90
PalEx
Summary Compensation Table. The following table summarizes the compensation
paid to PalEx's Chief Executive Officer and PalEx's four other most highly
compensated executive officers as of the end of the 1999 fiscal year, referred
to as the named executive officers, for services rendered to PalEx during the
1999 fiscal year.
Annual Long-Term
Compensation Compensation
----------------- ------------------
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary ($) Options/SARS(#)(1) Compensation($)(2)
------------------ ------ ---------- ------------------ ------------------
Vance K. Maultsby, Jr... 1999 224,359 -- 7,128
Chief Executive Officer 1998 175,000 -- 3,500
1997 138,542 200,000 --
Edward E. Rhyne......... 1999 241,604 -- --
Vice President and
General Counsel 1998 168,100 110,000 --
1997 89,017 90,000 --
A. Joseph Cruz.......... 1999 190,385 -- 6,289
President and Chief
Operating Officer 1998 105,769 -- 1,250
1997 -- -- --
Philip M. Freeman....... 1999 190,385 -- 6,375
Executive Vice President 1998 105,769 -- 1,250
1997 -- -- --
Casey A. Fletcher....... 1999 150,462 -- 6,019
Chief Accounting Officer
and Secretary 1998 126,200 -- 2,524
1997 94,650 -- 1,893
- --------
(1) Options to acquire shares of PalEx common stock under PalEx's stock option
plan.
(2) Consists of PalEx's matching contribution under its 401(k) Plan.
Option Grants During 1999 Fiscal Year. PalEx did not grant any options to the
named executive officers during the year ended December 26, 1999, nor did PalEx
grant any stock appreciation rights to the named executive officers.
Option Exercised During 1999 Fiscal Year and Fiscal Year End Option
Values. The following table provides information related to options exercised
by the named executive officers during PalEx's 1999 fiscal year and the number
and value of options held at fiscal year-end. PalEx does not have any
outstanding stock appreciation rights.
91
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Value of
Number of Securities Unexercised
Shares Acquired on Exercise Underlying Unexercised In-the-Money
(#) Value Options at FY-End (#) Options at
Name Exercisable/Unexercisable(1) Realized(1) Exercisable/Unexercisable FY-End
---- ---------------------------- ----------- ------------------------- ------------
Vance K. Maultsby, Jr... -- -- 100,000/100,000 --/--
Edward E. Rhyne......... -- -- 72,500/127,500 --/--
- --------
(1) Value is calculated on the basis of the difference between the option
exercise price and the market value, $7.00 per share, of PalEx common stock
on December 23, 1999, the last trading day in PalEx's 1999 fiscal year.
Compensation of Directors. Directors who are PalEx employees do not receive
additional compensation for serving as directors. Each director who is not a
PalEx employee receives a fee of $1,000 for attendance at each PalEx board of
directors meeting and $500 for each committee meeting, unless the committee
meeting is held on the same day as a PalEx board of directors meeting. PalEx
directors are reimbursed for out-of-pocket expenses incurred in attending
meetings of the board of directors or board committees, and for other expenses
incurred in their capacity as PalEx directors. Each non-employee director
receives stock options under PalEx's stock option plan to purchase 20,000
shares of PalEx common stock upon election to the board of directors and an
annual grant of 5,000 options. These options vest six months after the date of
the grant.
Employment Agreements. PalEx has entered into employment agreements with each
of the named executive officers. These employment agreements prohibit each
individual from disclosing PalEx confidential information and trade secrets and
generally restricts these individuals from competing with PalEx. Each agreement
has an initial term of between one and three years and provides for an
automatic annual extension at the end of its initial term and is terminable by
PalEx for cause upon ten days written notice and without cause by either party
upon 30 days written notice. All employment agreements provide that if the
officer's employment is terminated by PalEx without cause, the officer will be
entitled to receive a lump-sum severance payment at the effective time of
termination equal to the base salary for the greater of the time period
remaining under the initial term of the agreement or one year. In addition, the
employment agreements provide that in the event of termination without cause,
the time period during which the officer is restricted from competing with
PalEx will be shortened to one year following termination.
The employment agreements of Mr. Maultsby, Mr. Rhyne, and Mr. Fletcher
contain provisions concerning a change-in-control of PalEx, including the
following:
. in the event five days' advance notice of the transaction giving rise to
the change in control is not received by PalEx and the officer, the
change in control will be deemed a termination of the employment
agreement by PalEx without cause, and the provisions of the employment
agreement governing a termination without cause will apply, except that
the severance amount otherwise payable will be tripled and the provisions
that restrict competition with us shall not apply;
. in any change-of-control situation, the officer may elect to terminate
his employment by giving five days' written notice prior to the
anticipated closing of the transaction giving rise to the change-in-
control, which will be deemed a termination of the employment agreement
by PalEx without cause, and the provisions of the employment agreement
governing a termination without cause will apply, except that the
severance amount otherwise payable shall be doubled and the time period
during which the officer is restricted from competing with us will be
shortened to two years; and
92
. the officer must be given sufficient time and opportunity to elect
whether to exercise all or any of his options to purchase PalEx common
stock, including any options with accelerated vesting under the
provisions of the stock option plan, so that, if he desires, the officer
may acquire PalEx common stock at or prior to the closing of the
transaction giving rise to the change-in-control.
Employee Benefit Plans. The board of directors has adopted, and PalEx
stockholders have approved, the stock option plan. The purpose of the stock
option plan is to provide directors, officers, key employees, and other persons
who will be instrumental in PalEx's success or the success of PalEx
subsidiaries with additional incentives by increasing their proprietary
interest in PalEx. The aggregate amount of PalEx common stock with respect to
which options may be granted may not exceed 15% of outstanding PalEx common
stock, as determined on each date an option is granted.
The stock option plan is administered by the compensation committee, which is
composed of non-employee directors. Subject to the terms of the stock option
plan, the compensation committee generally determines to whom options will be
granted and the terms and conditions of option grants. Options granted under
the stock option plan may be either non-qualified stock options or may qualify
as incentive stock options.
The exercise price of any option may not be less than the fair market value
of the underlying common stock as of the date of grant and no consultant may
receive an option in any year to purchase more than 51,000 shares of PalEx
common stock. The compensation committee determines the period over which
options become exercisable, provided that all options become immediately
exercisable upon death of the grantee or upon a change-in-control of PalEx.
The stock option plan also provides for automatic option grants to directors
who are not otherwise employed by PalEx or PalEx subsidiaries. Upon
commencement of service, a non-employee director will receive a non-qualified
option to purchase 20,000 shares of PalEx common stock, and continuing annually
non-employee directors will receive options to purchase 5,000 shares of PalEx
common stock. Options granted to non-employee directors are fully exercisable
following the expiration of six months from the date of grant.
Mr. Maultsby has been granted options to purchase 200,000 shares of PalEx
common stock under the stock option plan, all of which have an exercise price
equal to the initial public offering price. Mr. Maultsby's options vest
annually in 25% increments beginning in November 1997. Mr. Rhyne has been
granted options to purchase 65,000, 25,000, 10,000 and 100,000 shares of PalEx
common stock under the stock option plan at a per share exercise price of
$8.875, $11.375, $11.875, and $7.00, respectively. Mr. Rhyne's options vest
annually in 25% increments beginning in April 1998 as to the 65,000 shares
subject to options granted during April 1997, December 1998 as to the 35,000
shares subject to options granted during December 1997, and October 1999 as to
Mr. Rhyne's remaining options.
Pursuant to the merger agreement, each option to purchase PalEx common stock
that is outstanding at the effective time of the merger will automatically
convert into an option to purchase a number of IFCO Systems ordinary shares.
The number of IFCO Systems ordinary shares will be equal to the number of
shares of PalEx common stock that could have been purchased under the converted
option multiplied by the exchange ratio under the merger agreement. Upon
exercise, cash will be paid instead of any fractional IFCO Systems ordinary
share. The exercise price per share will be equal to the per share exercise
price of the converted option divided by the exchange ratio. With respect to
qualified or incentive stock options, the conversion will be made in a manner
consistent with the applicable provisions of the U.S. Internal Revenue Code.
PalEx optionholders will also be given the alternative of electing to exchange
their options for new, fully vested options, exercisable at the IPO price, to
purchase the number of IFCO Systems ordinary shares that represents the
economic equivalent of a straight conversion into options to purchase IFCO
Systems ordinary shares as described above.
93
The merger will be a change of control event under the terms of PalEx's stock
option plan. As a result, all of the outstanding stock options will be fully
vested at the effective time of the merger and at the time of conversion into
new options to purchase IFCO Systems ordinary shares.
Compensation Committee Interlocks and Insider Participation. During the 1999
fiscal year, the compensation committee consisted of Mr. Bridwell, Mr. Drury,
and Mr. Humphreys. Each of Messrs. Bridwell, Drury and Humphreys are
independent directors.
Main Street, a limited partnership where Sam H. Humphreys was a general
partner and John E. Drury was a special limited partner, paid $1.25 million of
PalEx expenses, including legal and accounting fees, incurred in connection
with PalEx's IPO and PalEx's acquisitions of Fraser, Interstate, and Ridge.
Tucker S. Bridwell received a payment from PalEx of $50,000 and options to
purchase 20,000 shares of PalEx common stock, exercisable at $7.50 per share
pursuant to the stock option plan, for providing advice to Fraser in connection
with PalEx's acquisition of Fraser. Mr. Bridwell and Mr. Drury received options
to purchase 20,000 shares of PalEx common stock, exercisable at $7.50 per share
pursuant to the stock option plan, in connection with their election to the
board of directors. In August 1998, Mr. Bridwell, Mr. Drury, and Mr. Humphreys
received options to purchase 5,000 shares of PalEx common stock at an exercise
price of $8.75 as non-employee directors in accordance with the terms of the
stock options plan. See "PalEx Executive Compensation--Compensation of
Directors" and "--Employee Benefit Plans."
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
Based upon information as of February 11, 2000, the following table sets
forth the beneficial ownership of IFCO Systems ordinary shares (1) before the
merger and this offering, (2) after giving effect to the merger, but before
this offering, assuming PalEx stockholders elect to receive 49% of the merger
consideration in cash, and (3) after giving effect to the merger, based on the
same assumption, and to this offering, by:
. each person who, to IFCO System's knowledge, beneficially owned more
than 5% of the common stock;
. each of IFCO Systems' directors and executive officers after the merger;
and
. all of IFCO System's directors and executive officers after the merger
as a group.
The number of IFCO Systems ordinary shares that will be owned by any former
PalEx stockholder after the merger assumes that a PalEx stockholder will
receive 0.6526 IFCO Systems ordinary shares in the merger for each share of
PalEx common stock that is subject to a stock election, based on an assumed
initial public offering price of $13.79. The actual number will depend on the
initial public offering price, the former PalEx stockholder's individual
election, and the elections of all former PalEx stockholders.
Except as indicated, beneficial ownership includes the sole power to vote and
to dispose of the IFCO Systems ordinary shares or the PalEx common stock that
will be converted into IFCO Systems ordinary shares in the merger. If a person
has the right to acquire beneficial ownership of any shares by exercise of
options within 60 days after February 11, 2000, the shares are deemed
beneficially owned by the listed person and are deemed to be outstanding solely
for the purpose of determining the percentage of IFCO Systems ordinary shares
that the listed person owns. These shares are not included in the computations
for any other person.
94
Shares Owned
Shares Owned After the Merger Shares Owned
Before the Merger and Before After the Merger and
and this Offering this Offering this Offering
--------------------- --------------------- ---------------------
Name of Beneficial Owner
or Group Shares Percentage Shares Percentage Shares Percentage
- ------------------------ ---------- ---------- ---------- ---------- ---------- ----------
Christoph Schoeller(1).. 20,000,000 100.0% 20,300,000 74.8% 20,300,000 50.6%
Martin A. Schoeller(1).. 20,000,000 100.0% 20,300,000 74.8% 20,300,000 50.6%
Andrea Schoeller........ 1,900,000 9.5% 1,900,000 7.1% 1,900,000 4.8%
Schoeller KG(2)......... 2,000,000 10.0% 2,000,000 7.5% 2,000,000 5.0%
Cornelius Geber......... -- -- -- -- -- --
Sam W. Humphreys(3)..... -- -- 453,034 1.7% 453,034 1.1%
Randall Onstead......... -- -- -- -- -- --
Eckhard Pfeiffer(4)..... -- -- -- -- -- --
Dr. Frank Tofflinger.... -- -- -- -- -- --
A. Joseph Cruz(5)....... -- -- 176,652 * 176,652 *
Vance K. Maultsby,
Jr.(6)................. -- -- 147,161 * 147,161 *
Edward E. Rhyne(7)...... -- -- 130,520 * 130,520 *
Howe Q. Wallace(8)...... -- -- 102,038 * 102,038 *
All directors and
executive officers as a
group (2 persons before
the merger and 11
persons after the
merger)................ 20,000,000 100.0% 21,609,405 78.8% 21,609,405 52.7%
- --------
* Less than 1%.
(1) Before the merger and this offering, all of the outstanding IFCO Systems
ordinary shares will be owned by Schoeller Holding, which is owned 75.95%
by Schoeller Industries and 24.05% by Gebruder Schoeller. Gebruder
Schoeller is owned by the same individuals and entity that own Schoeller
Industries. Christoph Schoeller and Martin Schoeller share voting and
investment power with respect to the capital shares of Schoeller
Industries. Includes (a) 1,900,000 shares beneficially owned by Andrea
Schoeller, Christoph Schoeller's wife, as a shareholder of Gebruder
Schoeller, and (b) 2,000,000 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 shares beneficially owned by Andrea
Schoeller and by Schoeller KG. Christoph and Martin Schoeller's ownership
numbers include options to purchase 300,000 IFCO Systems ordinary shares
at the initial public offering price that will be issued to each of them
as of the closing date of the merger.
(2) Includes IFCO Systems ordinary shares beneficially owned by Schoeller KG,
which is beneficially owned by Alexander Schoeller and Leopold Schoeller,
the children of Martin Schoeller.
(3) Includes options to purchase 303,263 IFCO Systems ordinary shares.
(4) Excludes options to purchase 130,520 IFCO Systems ordinary shares.
(5) IFCO Systems ordinary shares owned by CDRCO NW, L.L.C., a limited
liability company in which Mr. Cruz holds a 50% ownership interest.
(6) Includes options to purchase 130,520 IFCO Systems ordinary shares.
Excludes options to purchase 100,000 IFCO Systems ordinary shares to be
granted upon the closing of this offering.
(7) Includes options to purchase 130,520 IFCO Systems ordinary shares.
Excludes options to purchase 135,000 IFCO Systems ordinary shares to be
granted upon the closing of this offering.
(8) Includes a total of 998 IFCO Systems ordinary shares held by Mr. Wallace
as custodian for the benefit of his children. Mr. Wallace disclaims
beneficial ownership of these shares.
95
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Supply Agreement
IFCO International Food Container Organization GmbH, a wholly owned
subsidiary of IFCO Europe, is a party to a supply agreement with Schoeller
Plast Industries GmbH, dated November 4, 1997. The supply agreement was later
assigned to Schoeller Plast AG, an indirect 80%-owned subsidiary of Schoeller
Industries. Schoeller Industries will not become part of IFCO Systems upon
completion of the merger and will remain under the control of Martin and
Christoph Schoeller. Under the supply agreement, Schoeller Plast AG has agreed
to supply collapsible plastic RTCs exclusively to IFCO GmbH, and IFCO GmbH has
agreed to purchase RTCs for use in the European market exclusively from
Schoeller Plast AG. Schoeller Plast AG has also agreed to provide ongoing
research and development to improve technology relating to the RTCs. Under the
supply agreement, all IFCO RTC technological developments are registered on
behalf of IFCO GmbH under the supply agreement. The supply agreement also
includes an exclusive royalty-free license to Schoeller Plast AG with respect
to the manufacturing of the IFCO RTCs for IFCO GmbH.
The pricing of the RTCs purchased under the supply agreement is based upon
the type of RTC purchased. According to the terms of the supply agreement, IFCO
GmbH purchases the RTCs for cash, although, in the event that the average price
per RTC exceeds DM6.10, or approximately $3.07, IFCO GmbH may purchase the RTCs
by recording a payable, bearing interest at 7.59% per year, in favor of
Schoeller Plast AG for the aggregate cost of the RTCs purchased in excess of
DM6.10 per RTC. Additionally, IFCO GmbH has the option of requesting cost plus
pricing. Cost plus pricing would allow IFCO GmbH to purchase RTCs at Schoeller
Plast AG's actual cost of production plus an agreed amount or percentage for
Schoeller Plast AG's profit.
If IFCO GmbH desires to purchase additional, different, or improved products
from other suppliers, Schoeller Plast AG is entitled to deliver, within three
months, the products or any comparable products to IFCO GmbH, and IFCO GmbH is
required to purchase these products from Schoeller Plast AG under the terms and
conditions of the supply agreement. If Schoeller Plast AG is unable to supply
the requested products, IFCO GmbH may obtain the products from other sources.
If, however, IFCO GmbH is unsuccessful in marketing these products, Schoeller
Plast AG may market the products on a non-exclusive basis to third parties.
Further, if Schoeller Plast AG offers the products to any other customer at a
price or on conditions more favorable than those extended to IFCO GmbH, the
parties shall renegotiate the terms and conditions of the supply agreement.
The supply agreement expires on December 31, 2007, and may be renewed by the
parties for an additional ten-year period. The supply agreement may be
terminated by either party at any time for cause. If the supply agreement is
terminated by IFCO GmbH for good cause, Schoeller Plast AG is prohibited from
competing with IFCO GmbH for two years after that termination.
MTS may also become a party to the supply agreement whereby Schoeller Plast
AG will provide MTS with RTCs for dry goods.
In January 1999, IFCO GmbH entered into an additional agreement with
Schoeller Plast AG in which Schoeller Plast AG agreed to share higher initial
costs related to the strategic growth of the crate leasing and supply business
up to a maximum amount of DM6.0 million, or approximately $3.0 million, for the
year ended 1999. For the ten months ended October 31, 1999, Schoeller Plast AG
has reimbursed IFCO GmbH DM5.0 million, or approximately $2.5 million, which
has been recorded as a reduction of costs of goods sold. The additional
agreement terminated at the end of 1999, and after December 31, 1999, no
further costs related to the additional agreement will be reimbursed.
Management Agreements
Pursuant to a management agreement, dated as of January 2, 1997, Schoeller
Industries provides administrative and management services to IFCO Europe and
its subsidiaries, including management advice with respect to acquisition
activities and strategic alliances. In exchange for these services, IFCO Europe
and its subsidiaries pay Schoeller Industries an annual management fee, which
is paid monthly, that will not exceed
96
DM1.5 million, or approximately $0.8 million, for each of the fiscal years 1999
and 2000. This management agreement expires December 31, 2000, and may be
extended from year to year if mutually agreed upon.
Pursuant to a second management agreement, dated as of January 2, 1997,
Schoeller Industries provides administrative and management services to MTS,
including management advice with respect to acquisition activities and
strategic alliances. In exchange for these services, MTS pays Schoeller
Industries an annual management fee, which is paid monthly, that will not
exceed DM250,000, or approximately $126,000, for each of the fiscal years 1999
and 2000. This management agreement expires December 31, 2000, and may be
extended from year to year if mutually agreed upon. Each of the management
agreements will continue to be in effect upon completion of the merger,
although Schoeller Industries will not become part of IFCO Systems and will
remain under the control of Martin and Christoph Schoeller.
Loans and Guarantees
Martin Schoeller and Christoph Schoeller have, together, loaned IFCO
International $800,000 at an interest rate of 5% per annum. The loan became due
on December 31, 1998, and has been extended to December 31, 2000. The purpose
of the loan was to enable IFCO International to extend a loan of $800,000 to
IFCO U.S.
Additionally, pursuant to an agreement between Schoeller-U.S., Inc, and IFCO
U.S., Martin Schoeller and Christoph Schoeller have together loaned to IFCO
U.S. $300,000. The loans are to provide additional working capital to IFCO U.S.
The loans have an interest rate equivalent to the interest rate paid by IFCO
U.S. on loans to IFCO U.S. from Intertape and will be repaid upon the closing
of the merger and this offering.
Martin Schoeller and Christoph Schoeller have each loaned IFCO International
an amount equal to 37.5 million yen, or 75.0 million yen in total, or
approximately $0.7 million, at an interest rate of 2.5% per year. The purpose
of the loan was to enable IFCO International to purchase capital stock in IFCO
Japan. The loan becomes due on December 31, 2000.
Additionally, Martin Schoeller and Christoph Schoeller have each loaned to
IFCO International DM100,000, or DM200,000 in total, or approximately $101,000,
at an interest rate of 5.0% per annum. The purpose of the loan was to provide
additional working capital to IFCO International and will be repaid upon the
closing of the merger and this offering.
Creditanstalt--Bankverein AG has extended a credit facility of DM1.5 million,
or approximately $0.8 million, to IFCO International. Of this amount,
approximately $500,000 is available to IFCO Argentina through Banco B.I.
Creditanstalt S.A., an affiliate of Creditanstalt. The credit facility has a
variable interest rate and became due on June 30, 1998, and has been extended
to May 31, 2000. To secure the DM1.5 million credit facility provided by
Creditanstalt--Bankverein, Alexander Schoeller & Co. Management Holding GmbH, a
company owned by Alexander Schoeller, and Alexander Schoeller & Co. GmbH
Schweiz, also a company owned by Alexander Schoeller, have each provided a
guarantee of up to DM1.5 million in favor of Creditanstalt.
Participating Rights
IFCO GmbH has issued to Schoeller Plast Industries GmbH, an 80%-owned
subsidiary of Schoeller Industries, participating rights with a nominal value
of DM10.0 million, or approximately $5.0 million. The participating rights have
no voting rights and may be terminated by IFCO GmbH upon repayment of the
nominal value. In the event of IFCO GmbH's liquidation, the participating
rights are repayable after all other creditors and rank equally with the share
capital. The participating rights share in IFCO GmbH's profits, up to a maximum
of approximately $0.9 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. If the participating rights have been reduced from their nominal
value by their share of losses, future profits must first be used to restore
them to their nominal value before any other distributions may be made. IFCO
GmbH intends to redeem these participating rights at their book value at the
closing of this offering.
97
Redeemable Participating Rights
In 1996, IFCO International received DM2.0 million, or approximately $1.0
million, from Alexander Schoeller & Co. Management Holding GmbH, a company that
is wholly owned by the Schoellers. Each year that IFCO International recognizes
a profit under German GAAP, Alexander Schoeller & Co. is entitled to DM250,000,
or approximately $126,000 per year. This amount is cumulative, and any unpaid
balance due to IFCO International's lack of profit bears interest at 6.0% per
year. Alexander Schoeller & Co. does not participate in IFCO International's
losses and has no voting rights in IFCO International. The agreement is for an
unlimited duration and may be terminated by either party with a six-month
notice period. IFCO International intends to redeem these redeemable
participating rights at their book value at the closing of this offering.
Agreement with GE Capital and GE Erste
GE Erste owns the single outstanding preferential share of IFCO Europe.
Schoeller Industries, the shareholders of Schoeller Industries, Schoeller Plast
Industries GmbH, Gebruder Schoeller, Schoeller KG, and IFCO Systems entered
into the Option Release and IPO-Facilitation Agreement with GE Capital and GE
Erste in connection with the proposed merger and this offering. Pursuant to the
Option Release Agreement:
. GE Erste consented to the merger and this offering;
. GE Erste agreed to contribute the IFCO Europe preferential share to IFCO
Systems for purposes of the merger and this offering upon the request of
GE Capital or Schoeller Industries;
. GE Capital and GE Erste agreed, effective with the completion of the
merger and this offering, to cancel and waive all options and other
rights they have under existing agreements to purchase shares of IFCO
Europe, IFCO International, or MTS; and
. GE Capital and GE Erste will have board observation rights with respect
to IFCO Systems.
In January 2000, GE Erste contributed the IFCO Europe preferential share to
Schoeller Holding, which then contributed the share to IFCO Systems. In
exchange for the contribution of the IFCO Europe preferential share, Schoeller
Holding issued to GE Erste a convertible debenture in the principal amount of
DM45.0 million, or approximately $22.7 million, with a 30-year term and bearing
5% interest per year. The convertible debenture is convertible by GE Erste into
IFCO Systems ordinary shares held by Schoeller Holding consisting of not more
than 15.45% of the capital stock outstanding before completion of the merger
and this offering or into a corresponding number of ordinary shares in
Schoeller Holding. GE Erste may require conversion of the debenture on demand
at any time beginning six months after this offering. GE Erste's conversion of
its debenture into IFCO Systems ordinary shares after the merger will not
dilute the ownership of the former PalEx stockholders or the purchasers of
shares in this offering.
If at any time after this offering the value of 15.45% of the capital stock
outstanding before the merger and this offering is less than DM45.0 million, or
approximately $22.7 million, plus the accrued interest under the debenture, GE
Erste may require payment of the full principal plus accrued interest from
Schoeller Holding. In that case, however, Schoeller Holding has the right,
instead of making payment in cash, to deliver IFCO Systems ordinary shares with
a value equal to DM45.0 million, or approximately $22.7 million, plus accrued
interest. GE Erste will continue to own the debenture or the ordinary shares
received on exercise for at least one year after this offering. GE Erste will,
however, be able to sell the debenture or the ordinary shares after this
offering if IFCO Systems makes a corporate acquisition or merger with a company
or business that does not comply with GE Capital's internal rules for
affiliated companies.
In consideration of GE Capital's and GE Erste's release of options and other
rights, IFCO Systems has agreed to pay DM43.0 million, or approximately $21.7
million, out of the net proceeds of this offering, the
98
high yield debt offering, and initial borrowings under the new senior credit
facility. In addition, Schoeller Industries has granted GE Capital an option to
purchase approximately 95,000 IFCO Systems ordinary shares held by Schoeller
Holding at the initial public offering price.
The Option Release Agreement is subject to the written consent of IFCO
Europe's lenders. These consents were obtained in January 2000. The Option
Release Agreement also requires that this offering be completed by December 31,
2000.
99
DESCRIPTION OF IFCO SYSTEMS SHARE CAPITAL
IFCO Systems was incorporated under the laws of the Netherlands by deed dated
March 31, 1999. Material provisions of the articles of association of IFCO
Systems at the time the merger is completed and provisions of Netherlands law,
are summarized below. The summary covers the material provisions of the
articles of association, but is not a complete statement of these provisions
and is qualified in its entirety by reference to the articles of association
and applicable Netherlands law.
General
The authorized share capital of IFCO Systems is divided into 100,000,000
ordinary shares and 100,000,000 preference shares, each with a nominal value of
two euros per share. The ordinary shares will be in registered form. See "Share
Certificates and Transfer."
Dividends
Dividends may be paid out of annual profits shown in the annual accounts of
IFCO Systems as adopted by the shareholders at a general meeting of IFCO
Systems. At its discretion, however, and subject to statutory provisions, the
board of directors may distribute interim dividends on the ordinary shares
before the annual accounts for any financial year have been adopted at a
general meeting of shareholders. The board of directors may decide that all or
part of IFCO Systems' profits should be reserved and not be made available for
distribution to shareholders. Those profits that are not reserved will be
distributed to holders of ordinary shares, provided that the distribution does
not reduce shareholders' equity below the issued share capital increased by the
amount of reserves required by Netherlands law. Existing reserves that are
distributable in accordance with Netherlands law may be made available to the
general meeting of shareholders for distribution upon proposal by the board of
directors. The right to dividends and distributions will lapse if the dividends
or distributions are not claimed within five years following the day after the
date on which they were made available.
Voting Rights
Appointment of the Board Directors of IFCO Systems. Members of the board of
directors of IFCO Systems are appointed by the general meeting of shareholders.
General Meeting of Shareholders of IFCO Systems. General meetings of
shareholders will be held at least once a year, not later than six months after
the end of the fiscal year. Notices convening a general meeting will be mailed
to holders of registered shares at least 15 days before the annual meeting. In
order to attend, to address, and to vote at the general meeting of
shareholders, the holders of registered shares must notify IFCO Systems in
writing of their intention to attend the meeting. IFCO Systems does not solicit
from or nominate proxies for its shareholders and is exempt from the SEC's
proxy rules under the Exchange Act. However, shareholders and other persons
entitled to attend general meetings of shareholders may be represented by
proxies with written authority. See "Share Certificates and Transfer."
General meetings of shareholders may be held as often as deemed necessary by
the board of directors and must be held if one or more shareholders or other
persons entitled to attend the general meeting of shareholders, jointly
representing at least 10% of the issued share capital, make a written request
to that effect to the board of directors specifying in detail the business to
be considered.
Resolutions are adopted at general meetings of shareholders by a majority of
the votes cast (except where a different proportion of votes is required by the
articles of association or Netherlands law) in a meeting in which holders of at
least one-third of the issued shares are represented. Each share carries one
vote.
Amendment of Articles of Association and Winding Up of IFCO Systems. A
resolution of the general meeting of shareholders to amend the articles of
association or to wind up IFCO Systems may only be
100
approved if proposed by the board of directors. A resolution to dissolve IFCO
Systems must be approved by at least three-fourths of the votes cast.
Adoption of Annual Accounts
IFCO Systems' annual Netherlands statutory accounts, together with a
certificate of the auditor in respect of the accounts, will be submitted to the
general meeting of shareholders for adoption. Adoption of IFCO Systems' annual
accounts by the general meeting of shareholders discharges the board of
directors from liability for the performance of its duties for the past fiscal
year to the extent apparent from the annual accounts. Under Netherlands law,
this discharge is not absolute and will not be effective as to matters not
disclosed to the shareholders.
Liquidation Rights
If IFCO Systems is dissolved and liquidated, the assets remaining after
payment of all debts and liquidation expenses are to be distributed
proportionally to holders of the ordinary shares.
Issues of Shares; Preemptive Rights
The board of directors of IFCO Systems has the power to issue shares if it
has been designated to do so by the shareholders at a general meeting. Pursuant
to IFCO Systems' articles of association, the board of directors is authorized
to issue shares or rights to obtain shares through February 1, 2005, up to a
total share capital of 50,000,000 ordinary shares and 50,000,000 preference
shares. A further designation of the board of directors may be effective for a
specified period up to five years and may be renewed. In the absence of a
designation, the shareholders at a general meeting have the power to adopt
resolutions to issue shares.
Holders of shares have a pro rata preemptive right of subscription to any
share of the same class issued for cash, which right may be limited or
eliminated. Shareholders have no pro rata preemptive subscription right with
respect to any shares issued for a contribution other than cash or in the case
of shares issued to employees of IFCO Systems or its group companies. If
designated for this purpose by the shareholders at a general meeting, the board
of directors has the power to limit or eliminate such rights. Pursuant to the
articles of association, the board of directors is authorized to limit or
eliminate shareholder preemptive rights through February 1, 2005. A further
designation may be effective for up to five years and may be renewed. In the
absence of a designation, the shareholders at a general meeting have the power
to limit or eliminate these rights.
These provisions apply equally to the issuances of rights to subscribe for
ordinary shares, but not to the issue of ordinary shares to any person
exercising any previously acquired right to subscribe for shares.
Repurchase and Cancellation of Shares
IFCO Systems may repurchase fully paid-up ordinary shares, subject to
compliance with Netherlands law requirements and provided the aggregate nominal
value of the ordinary shares acquired by IFCO Systems at any one time amounts
to no more than 10% of IFCO Systems' issued share capital. Ordinary shares
owned by IFCO Systems may not be voted or counted for quorum purposes. Any
repurchases are subject to the approval of the board of directors and the
authorization of shareholders at the general meeting of shareholders of IFCO
Systems. The authorization may not be for more than 18 months and must specify
the number of shares that may be repurchased.
Upon the proposal of the board of directors, the shareholders at a general
meeting have the power to cancel shares acquired by IFCO Systems or to reduce
the nominal value of the shares. Any proposal for cancellation or reduction of
nominal value is subject to general requirements of Netherlands law with
respect to reduction of share capital.
101
Limitations on Right to Hold or Vote the Ordinary Shares
There are currently no limitations imposed by Netherlands law or by the
articles of association of IFCO Systems on the right of non-resident owners to
hold or vote the ordinary shares.
Obligations of Shareholders to Disclose Holdings
The Netherlands 1996 Act on Disclosure of Holdings in Listed Companies (Wet
melding zeggenschap in ter beurze genoteerde vennootschappen 1996) applies to
any person who, directly or indirectly:,
. acquires or disposes of an interest of voting rights and/or the capital
of a public limited company incorporated under Netherlands law;
. which has an official listing on a stock exchange within the European
Economic Area; and
. as a result of the acquisition or disposal the percentage of voting
rights or capital interest owned falls within a different percentage
range than the percentage that the person had ownership of immediately
prior to the acquisition or disposal. The percentage ranges are 0-5%, 5-
10%, 10-25%, 25-50%, 50-66 2/3%, and 66 2/3% and more.
The Holdings Disclosure Act requires the person to notify IFCO Systems as
well as the Securities Board of the Netherlands (Stichting Toezicht
Effectenverkeer) in writing immediately after the acquisition or disposal of
the triggering interest in the shares. Whenever the shares of a company subject
to the Holdings Disclosure Act are newly admitted to official listing on a
stock exchange within the European Economic Area, a disclosure obligation
arises for a person who knows or should know that his holding of capital
interest or voting rights amounts to 5% or more. This obligation must be
discharged within four weeks of the shares being admitted to listing.
Between five and nine days after receipt of the notification, the Securities
Board is required to disclose the information as notified to the public by
means of an advertisement in a newspaper distributed throughout the member
states of the European Economic Area in which the company is listed on a stock
exchange. At the request of the company made within three days after the
notification, the Securities Board may abstain from the disclosure if it finds
in its discretion that the disclosure would be in violation of the general
interest or if the company would suffer serious disadvantage from the
disclosure and nondisclosure could not lead to deception of the public with
respect to facts and circumstances essential for the assessment of the shares
issued by the company.
Noncompliance with the obligations of the Holding Disclosure Act constitutes
an economic offense under the laws of the Netherlands. Also, a civil court may
issue orders against any person who fails to notify or incorrectly notifies in
accordance with the Holdings Disclosure Act, including suspension of the voting
rights in respect of the person's ordinary shares.
As of January 1, 1999, new regulations regarding insider trading under the
Dutch 1995 Act on the Supervision of the Securities Trade (Wet toezicht
effectenverkeer 1995) came into force. The new regulations provide, among other
things, for an additional notification duty for shareholders holding, directly
or indirectly, more than 25% of the capital in a listed company. These
shareholders are obliged to notify the Securities Board of the Netherlands of
any and all transactions they enter into with respect to securities of a
company in which they hold an interest of more than 25%. If a shareholder
holding more than 25% is a legal entity and not an individual, the obligation
is extended to the managing directors and supervisory directors of the legal
entity.
102
SHARE CERTIFICATES AND TRANSFER
The IFCO Systems ordinary shares will be issuable in registered form only.
Registered shares issued to persons in the United States are referred to as New
York shares. Registered shares may consist of either New York shares registered
with Deutsche Bank AG, IFCO Systems' transfer agent and registrar in New York,
or other IFCO Systems ordinary shares registered in book-entry form in a
register kept by or on behalf of IFCO Systems in Amsterdam. New York shares
will be represented by certificates printed in English or, to the extent
possible, in book-entry form. IFCO Systems has applied to have the New York
shares quoted on the Nasdaq National Market and all other IFCO Systems ordinary
shares listed on the Frankfurt Stock Exchange. Only New York shares will be
traded on the Nasdaq National Market. All other IFCO Systems ordinary shares
will be traded on the Frankfurt Stock Exchange.
The transfer of registered shares requires an instrument intended for such
purpose and, except when IFCO Systems is a party to such transfer, the written
acknowledgement of the transfer by IFCO Systems or, in the case of New York
shares, the New York transfer agent and registrar in the name of IFCO Systems,
and in the case of New York shares, submission of any certificates to IFCO
Systems or the New York transfer agent and registrar.
IFCO Systems ordinary shares booked in the Amsterdam register may be
converted into New York shares. On presentation to the New York transfer agent
and registrar of New York shares for cancellation and when accompanied by the
appropriate request, the New York shares may be exchanged for IFCO Systems
ordinary shares registered in the Amsterdam register and vice versa.
Certificates for New York shares may be exchanged at the office of the New York
transfer agent and registrar for certificates of other authorized
denominations. A fee of up to $5.00 per 100 ordinary shares will be charged to
shareholders for the exchange of New York shares for registered shares at the
Amsterdam register and vice versa.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no limitations, either under the laws of the Netherlands
or in the articles of association of IFCO Systems, to the rights of non-
residents of the Netherlands to hold or vote ordinary shares. Cash
distributions, if any, payable in guilders or ordinary shares may be officially
transferred from the Netherlands and converted into any other currency without
Dutch legal restrictions, except that for statistical purposes any payments and
transactions must be reported by Clearstream Banking AG to the Dutch Central
Bank. Cash distributions, if any, on New York shares will be paid in U.S.
dollars, converted at the rate of exchange at the close of business on the date
fixed for that purpose by the board of directors in accordance with IFCO
Systems' articles of association. IFCO Systems has no current intention to pay
dividends on its ordinary shares in the foreseeable future. See "Description of
IFCO Systems Share Capital--Dividends" and "Share Certificates and Transfer."
ENFORCEABILITY OF CIVIL LIABILITIES
IFCO Systems is a public limited liability company incorporated under the
laws of the Netherlands. Upon completion of the merger and this offering, some
members of the board of directors, some of the officers of IFCO Systems, and
some of the experts named in this prospectus will reside outside of the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon IFCO Systems or those persons, or to
enforce, in courts outside of the United States, judgments against IFCO Systems
or those persons obtained in U.S. courts and based upon the civil liability
provisions of the federal securities laws of the United States. Furthermore,
since a substantial portion of the assets of IFCO Systems will be located
outside of the United States, any judgment obtained in the United States
against those persons or IFCO Systems may not be collectible within the United
States. Additionally, there may be doubt as to the enforceability, in original
actions in Dutch courts, of liabilities based solely upon the federal
securities laws of the United States.
103
TAXATION
Netherlands Taxation
The following is a summary of the material tax consequences under the laws of
the Kingdom of the Netherlands to an owner of IFCO Systems ordinary shares who
is deemed to be a citizen or resident of the United States for purposes of the
relevant tax codes. This summary is not a complete analysis or listing of all
the possible tax consequences and does not address all tax considerations that
may be relevant to all categories of owners of IFCO Systems ordinary shares,
some of whom may be subject to special rules. This summary is based upon
current Netherlands tax law, which may change from time to time.
Investors in this offering should consult your own tax advisor with respect
to the tax consequences of the ownership and disposition of IFCO Systems
ordinary shares based upon your particular circumstances.
Netherlands Dividend Withholding Tax. Under Netherlands domestic law,
dividend distributions by IFCO Systems are generally subject to withholding tax
at a rate of 25%. These dividend distributions include dividends in cash or in
kind, constructive dividends, and liquidation and repurchase proceeds in excess
of recognized paid-in capital, as determined according to Dutch tax law. Stock
dividends are also subject to Netherlands withholding tax unless they are
distributed out of IFCO Systems' paid-in capital as recognized for Netherlands
tax purposes.
Under the treaty with the United States, however, dividends paid by IFCO
Systems to a resident of the United States are generally eligible for a
reduction of the 25% Netherlands withholding tax to 15%, or 5% if the
beneficial owner is a U.S. corporation owning at least 10% of the voting power
of IFCO Systems. To be eligible for the reduction, an IFCO Systems shareholder
must not have an enterprise or an interest in an enterprise that is, in whole
or in part, carried on through a permanent establishment or a permanent
representative in the Netherlands and to which the IFCO Systems ordinary shares
are attributable. The treaty with the United States provides for a complete
exemption for dividends received by exempt organizations and exempt pension
trusts.
Certification Procedure to Obtain the 15% Rate. A shareholder that claims the
reduced withholding or an exemption from withholding must first complete and
file a Form IB 92 U.S.A with the Netherlands tax authority. A copy should also
be filed with the IRS. In order to apply for the reduction or an exemption upon
the receipt of dividends, the shareholder should present the form to the payor.
If a person claims a refund, this form must be filed with the Netherlands tax
authority within three years after the end of the calendar year in which the
tax was levied. The person making the claim must describe the circumstances
that prevented applying for the reduction or exemption upon receipt of the
dividends. Qualifying U.S. exempt organizations or exempt pension trusts
subject to the 25% withholding rate must seek a full refund of the tax withheld
by using a Form IB 95 U.S.A.
Netherlands Income Tax and Corporate Income Tax. In general, a nonresident
shareholder will not be subject to Netherlands income tax, other than
withholding tax, with respect to dividends distributed by IFCO Systems on the
IFCO Systems ordinary shares. In addition, a non-resident shareholder is not
generally subject to Netherlands income or withholding tax on gain on the sale
or disposition of IFCO Systems ordinary shares to persons other than IFCO
Systems or its direct and indirect subsidiaries. These general rules are
applicable as long as the nonresident shareholder:
. does not carry on a business in the Netherlands through a permanent
establishment or a permanent representative to which the IFCO Systems
ordinary shares are attributable;
. does not carry out and has not carried out employment activities in the
Netherlands with which the holding of the IFCO Systems ordinary shares
is connected; and
. is not a resident or a deemed resident of the Netherlands for
Netherlands tax purposes.
104
However, in some cases, Netherlands tax may be imposed on the dividends or
gains if the nonresident shareholder, alone or with related parties, holds a
substantial interest in IFCO Systems. In general a U.S. holder can only be
taxed on this basis if the U.S. holder has been a resident of the Netherlands
for the five years immediately preceding the dividend or sale. In general, a
substantial interest will exist if the nonresident shareholder, alone or
together with his or her spouse, holds either directly or indirectly, a
participation interest in, or right to acquire at least 5% of the issued shares
of any class of shares of IFCO Systems or holds, either directly or indirectly,
profit sharing rights representing entitlement to at least 5% of the annual
profit of IFCO Systems or of the liquidation process. A deemed substantial
interest will be present if all or part of a substantial interest has been
disposed of, or is deemed to have been disposed of, under a deferral facility.
Under most tax treaties, the Netherlands may not impose tax on capital gains
realized upon the sale or disposition of shares by shareholders entitled to
treaty benefits unless additional conditions are met. Under the U.S. tax
treaty, the Netherlands may not impose tax on capital gains realized by a
shareholder that is a treaty beneficiary unless:
. the shareholder, alone or with specified relatives, owns at least 25% of
any class of shares or has owned that size of interest during the
previous five years; and
. the shareholder has, at any time during the previous five years, been a
resident of the Netherlands.
Netherlands Net Wealth Tax. A nonresident shareholder who is an individual is
not subject to Netherlands net wealth tax with respect to the IFCO Systems
ordinary shares, provided that the nonresident shareholder does not carry on a
business in the Netherlands through a permanent establishment or a permanent
representative to which the shares are attributable. Corporations are not
subject to Netherlands net wealth tax.
Netherlands Gift and Inheritance Tax. No Netherlands gift or inheritance tax
will arise as a result of the gift of the IFCO Systems ordinary shares by, or
on the transfer of the IFCO Systems ordinary shares at the death of, a
nonresident shareholder who is an individual, unless:
. the shareholder is a resident or a deemed resident of the Netherlands
for tax purposes; or
. the IFCO Systems ordinary shares are attributable to a permanent
establishment or a permanent representative of the shareholder in the
Netherlands. In some cases, an individual who was previously a resident
of the Netherlands may be deemed to continue to be a resident at the
time of the gift or death. Corporations are not subject to Netherlands
gift or inheritance tax.
United States Taxation
The following is a summary of the material U.S. federal income tax
considerations relevant to the purchase, ownership, and disposition of the IFCO
Systems ordinary shares by a holder that is a citizen or resident of the United
States or a U.S. domestic corporation or that otherwise will be subject to U.S.
federal income tax on a net income basis in respect of the ordinary shares. The
summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a decision to purchase the ordinary
shares. In particular, this summary deals only with U.S. holders that will hold
the ordinary shares as capital assets and does not address the tax treatment of
U.S. holders that may be subject to special tax rules, such as banks, tax-
exempt entities, insurance companies, securities dealers, investors liable for
alternative minimum tax, persons that hold the ordinary shares as part of an
integrated investment, including a straddle, comprised of shares and one or
more other positions, persons whose functional currency is not the U.S. dollar,
and holders of 5% or more of the voting shares of IFCO Systems. The summary is
based on the U.S./NL Income Tax Treaty and the tax laws of the United States
and the Netherlands in effect on the date of this prospectus, which are subject
to change. Investors in this offering should consult their own advisors as to
the tax consequences of the purchase, ownership, and disposition of the shares
in light of their own particular circumstances, including the effect of any
state, local, or other national laws.
Taxation of Dividends. Distributions paid out of IFCO Systems' current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles, in respect of the ordinary shares, including the
105
amounts withheld in respect of Netherlands withholding tax, generally will be
subject to U.S. federal income taxation as foreign source dividend income and
will not be eligible for the dividends received deduction generally allowed to
U.S. corporations. In addition, dividends would generally be subject to the
separate foreign tax credit limitation applicable to passive income.
Subject to generally applicable limitations and the discussion below,
Netherlands withholding tax imposed on dividends at the treaty rate will be
treated as a foreign income tax eligible for credit against a U.S. holder's
U.S. federal income tax liability or, at a U.S. holder's election, may be
deducted in computing taxable income. Under rules enacted or announced in 1997,
foreign tax credits will not be allowed for withholding taxes imposed in
respect of short-term or hedged positions in securities or in respect of
arrangements in which a U.S. holder's expected economic profit, after non-U.S.
taxes, is insubstantial in relation to the foreign tax credits claimed. U.S.
holders should consult their own advisors concerning the implications of these
rules in light of their particular circumstances.
Taxation of Capital Gains. Gains or losses realized by a U.S. holder on the
sale or other disposition of the ordinary shares generally will be treated for
U.S. federal income tax purposes as capital gains or losses and generally will
be long-term gains or losses if the ordinary shares have been held for more
than one year. Long-term capital gain recognized by an individual holder
generally is subject to taxation at a maximum rate of 20%. Gain, if any,
realized by a U.S. holder on the sale or other disposition of the ordinary
shares generally will be treated as U.S. source income for U.S. foreign tax
credit purposes.
Non-U.S. Holders. A holder of the ordinary shares that is, with respect to
the United States, a foreign corporation or a nonresident alien individual,
generally will not be subject to U.S. federal income or withholding tax on
dividends received on the ordinary shares unless the dividend income is
effectively connected with the non-U.S. holder's conduct of a trade or business
in the United States. A non-U.S. holder of shares will not be subject to U.S.
federal income tax or withholding tax in respect of gain realized on the sale
or other disposition of the ordinary shares, unless (1) the gain is effectively
connected with the non-U.S. holder's conduct of a trade or business in the
United States or (2) if realized by an individual non-U.S. holder, the non-U.S.
holder is present in the United States for 183 days or more in the taxable year
of the sale and other specified conditions are met.
U.S. Backup Withholding. A U.S. holder may be subject to backup withholding
at the rate of 31% with respect to payments of dividends or proceeds from a
sale of the ordinary shares, unless the U.S. holder (1) is a corporation or
other exempt recipient, and demonstrates this fact when so required, or (2)
provides a correct taxpayer identification number, certifies that it is not
subject to backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. Any amount withheld under these
rules will be creditable against the U.S. holder's U.S. federal income tax
liability. While non-U.S. holders generally are exempt from backup withholding,
a non-U.S. holder may, in some circumstances, be required to comply with
information and identification procedures in order to prove this exemption.
106
SHARES ELIGIBLE FOR FUTURE SALE
When this offering closes, approximately 13.0 million IFCO Systems ordinary
shares will be outstanding, or approximately 14.95 million shares if the
underwriters exercise their over-allotment option in full. The shares sold in
this offering will be freely tradeable without restriction or further
registration under the Securities Act, unless held by an affiliate of IFCO
Systems as that term is defined in Rule 144 under the Securities Act. In
addition, the shares issued to PalEx stockholders in the merger will be freely
tradeable, unless held by an affiliate of IFCO Systems or held by persons
deemed to be an affiliate for purposes of Rule 145 under the Securities Act.
The remaining 20.0 million ordinary shares are restricted securities and are
subject to restrictions under the Securities Act.
In addition to restrictions under the Securities Act, IFCO Systems' directors
and executive officers after the merger and significant shareholders of IFCO
Systems, who together will hold approximately 16.4 million ordinary shares
immediately following the merger, the merger and this offering, assuming PalEx
stockholders elect to receive 49% of the total merger consideration in cash,
have agreed with the underwriters not to, directly or indirectly, sell, offer
for sale, or otherwise dispose of any ordinary shares for a period of 12 months
after the date of this prospectus. The underwriters have also required
shareholders, who together will hold not less than 4.0 million ordinary shares
immediately following the merger, to agree not to sell, offer for sale, or
otherwise dispose of any ordinary shares for a period of six months after the
date of this prospectus. In addition, the Frankfurt Stock Exchange may impose
additional lockup requirements on IFCO Systems' shareholders.
In addition to the lockup agreements with the underwriters, Christoph
Schoeller, Martin Schoeller, Schoeller Industries, Schoeller Holding, and
certain senior executives of PalEx and members of Pal Ex's senior management
will have entered into a lockup agreement with IFCO Systems pursuant to the
merger agreement. The lockup agreement restricts the transfer for two years
after the closing date of this offering of all ordinary shares directly or
indirectly owned, or entitled to be received, by these restricted stockholders.
The restriction period will terminate early for any of the PalEx officers or
senior executives whose employment with PalEx or a PalEx subsidiary is
terminated without cause or because of a breach by IFCO Systems, PalEx, or a
PalEx subsidiary. The restricted IFCO Systems ordinary shares may begin to be
sold during the restricted period as follows:
Time After the Closing Date of This Offering Shares That May Be Sold
-------------------------------------------- -----------------------
one month................. 20%
12 months................. additional 15%
15 months................. additional 15%
18 months................. additional 15%
21 months................. additional 15%
As a result of this schedule, at any time beginning 24 months after the
closing date of this offering, these IFCO Systems ordinary shares will no
longer be restricted from transfer.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person, or
persons whose ordinary shares are aggregated, including persons who may be
deemed to be IFCO Systems affiliates pursuant to Rule 145, would be entitled to
sell within any three-month period a number of ordinary shares that does not
exceed the greater of:
. 1% of the then-outstanding ordinary shares, which equals approximately
398,000 ordinary shares immediately after this offering; or
. the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
Sales under Rule 144 are also subject to restrictions as to the manner of
sale, notice requirements, and the availability of current public information
about IFCO Systems. In addition, under Rule 144(k), if a period of at least two
years has elapsed since the later of the date the restricted securities were
acquired from IFCO
107
Systems or the date they were acquired from an IFCO Systems affiliate, a
shareholder who is not an IFCO Systems affiliate at the time of the sale and
who has not been an IFCO Systems affiliate for at least three months prior to
the sale would be entitled to sell ordinary shares in the public market
immediately without compliance with the requirements under Rule 144. Rule 144
does not require the same person to have held the securities for the applicable
periods. This summary is not intended to be a complete description of Rule 144.
Prior to this offering, there has been no public market for the ordinary
shares. No information is currently available and IFCO Systems cannot predict
the timing or amount of future sales of shares, or the effect, if any, that
future sales of shares, or the availability of shares for future sale, will
have on the market price of the ordinary shares prevailing from time to time.
Sales of substantial amounts of ordinary shares, including shares issuable upon
the exercise of stock options, in the public market after the lapse of
restrictions described above, or the perception that these sales may occur,
could materially adversely affect the prevailing market prices for ordinary
shares and the ability of IFCO Systems to raise equity capital in the future.
108
UNDERWRITING
The underwriters of the offering of ordinary shares in the United States, the
concurrent public offering of the ordinary shares in Germany and the private
placement outside of Germany and the United States, for whom Lehman Brothers
International (Europe), Commerzbank Aktiengesellschaft, Cazenove & Co., CIBC
World Markets PLC, HSBC Investment Bank plc, Credit Agricole Indosuez, and
Fidelity Capital Markets, a division of National Financial Services
Corporation, are acting as representatives, have agreed to purchase from IFCO
Systems the respective number of ordinary shares shown opposite its name below:
Number of
Underwriters Ordinary Shares
------------ ---------------
Lehman Brothers
International (Europe)...
Commerzbank
Aktiengesellschaft.......
Cazenove & Co. ...........
CIBC World Markets PLC....
HSBC Investment Bank plc..
Credit Agricole Indosuez..
Fidelity Capital Markets,
a division of National
Financial Services
Corporation .............
----------
Total................... 13,000,000
Lehman Brothers International (Europe) is acting as Global Coordinator and
Sole Bookrunner of this offering.
Sales made in the United States will be made through affiliates of the
underwriters listed above, including Lehman Brothers Inc. and CIBC World
Markets Corp.
The underwriting agreement provides that the obligations of the underwriters
to purchase ordinary shares included in this offering depend on the
satisfaction of the conditions contained in the underwriting agreement, and
that if any of the ordinary shares are purchased by the underwriters under the
underwriting agreement, then all of the ordinary shares that the underwriters
have agreed to purchase under the underwriting agreement must be purchased. The
conditions contained in the underwriting agreement include the requirement that
the merger and the high yield debt offering are completed, the total proceeds
to IFCO Systems from this offering and the high yield debt offering are at
least $250.0 million, the representations and warranties made by IFCO Systems
to the underwriters are true, and that IFCO Systems deliver to the underwriters
customary closing documents.
The representatives have advised us that the underwriters propose to offer
the ordinary shares directly to the public at the public offering price set
forth on the cover page of this prospectus, and to dealers, who may include the
underwriters, at a public offering price less a selling concession not in
excess of $ per ordinary share. The underwriters and dealers may allow a
concession not in excess of $ per ordinary share to brokers and dealers.
After the offering, the underwriters may change the offering price and other
selling terms.
IFCO Systems has agreed with the underwriters that it may, at its sole
discretion, pay to some or all of the underwriters a performance fee of up to
0.5% in total of the gross proceeds of this offering.
IFCO Systems has granted the underwriters an option to purchase up to an
aggregate of 1.95 million additional shares, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the
closing date, which is expected to be on , 2000. If this option is
exercised, each underwriter will be committed, so long as the conditions of the
underwriting agreement are satisfied, to purchase a number of additional
ordinary shares proportionate to the initial commitment of each underwriter as
indicated in the preceding tables, and IFCO Systems will be obligated, under
the over-allotment option, to sell the ordinary shares to the underwriters.
IFCO Systems, its directors and executive officers after the merger, and
specified significant shareholders have agreed, without the prior consent of
Lehman Brothers, not to, and IFCO Systems has agreed to cause its affiliates
not to, directly or indirectly, issue, offer, pledge, or contract to purchase
securities, including options
109
or warrants, which carry rights to subscribe for or acquire any ordinary shares
of IFCO Systems, grant, sell or purchase any option or right to purchase such
securities, or undertake to grant, sell, or purchase such right or option for a
period of 12 months after the date of this prospectus.
The above does not apply to:
. the exercise of stock options or warrants existing on the date of this
offering; and
. ordinary shares issued for employees of IFCO Systems.
Prior to the offering, there has been to public market for the ordinary
shares. The initial public offering price was negotiated between the
representatives and IFCO Systems. In determining the initial public offering
price of the ordinary shares, the representatives considered various factors,
including:
. prevailing market conditions;
. our historical performance and capital structure;
. estimates of IFCO Systems' business potential and earning prospects;
. an overall assessment of IFCO Systems' management; and
. consideration of the above factors in relation to the market valuation
of companies in related businesses.
IFCO Systems has applied for its ordinary shares to be listed on the Official
List of the Frankfurt Stock Exchange under the symbol "IFE" and the ordinary
shares have been approved for listing, subject to official notice of issuance,
on the Nasdaq National Market under the symbol "IFCO."
IFCO Systems has agreed in the underwriting agreement to indemnify the
underwriters against specified liabilities under the Securities Act and to
contribute to payments that the underwriters may be required to make for these
liabilities.
Until the distribution of the ordinary shares is completed, SEC rules may
limit the ability of the underwriters and selling group members to bid for and
purchase ordinary shares. As an exception to these rules, the representatives
are permitted to engage in transactions that stabilize the price of the
ordinary shares. These transactions may consist of bids or purchases for the
purposes of pegging, fixing, or maintaining the price of the ordinary shares.
The underwriters may create a short position in the ordinary shares in
connection with the offering, which means that they may sell more ordinary
shares than are set forth on the cover page of this prospectus. If the
underwriters create a short position, the representatives may reduce that short
position by purchasing ordinary shares in the open market. The representatives
also may elect to reduce any short position by exercising all or part of the
over-allotment option. The underwriters have informed us that they do not
intend to confirm sales to discretionary accounts that exceed 5% of the total
number of ordinary shares offered by them.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that if the representatives purchase ordinary shares
in the open market to reduce the underwriters' short position or to stabilize
the price of the ordinary shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
ordinary shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of the security
to the extent that it were to discourage resales of the security by purchasers
in an offering.
Neither IFCO Systems nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above any have on the price of the ordinary shares. In addition,
neither we nor any of the underwriters make any representation that the
representatives will engage in these transactions or that such transactions,
once commenced, will not be discontinued without notice.
110
The underwriters have each agreed to the following:
. They will not offer the ordinary shares to persons in the United Kingdom
within six months after the closing date of this offering, except to
persons whose ordinary activities include acquiring, holding, managing,
or disposing of investments, as principal or agent, and in circumstances
that have not resulted and will not result in an offer to the public in
the United Kingdom within the meaning of the Public Offer of Securities
Regulations 1995.
. They will comply with all applicable provisions of the Financial
Services Act of 1986 and the Public Offer of Securities Regulations
1995, with respect to anything done by them in relation to the ordinary
shares in, from or otherwise involving the United Kingdom.
. They will only issue, and pass on, in the United Kingdom, any document
received by them in connection with the issue of the ordinary shares to
a person who is of a kind described in Article 8(3) of the Financial
Service Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as
amended) or is a person to whom the document may otherwise lawfully be
issued or passed on.
. No action has been or will be taken in any jurisdiction other than
Germany or the United States that would constitute a public offering of
the ordinary shares. They will comply with all applicable securities
laws and regulations in each jurisdiction in which they purchase, offer,
self, or deliver ordinary shares or have in their possession or
distributes any offering material and they must pay for the costs they
incur to comply with the legal obligations described above.
. They understand that the ordinary shares have not been and will not be
registered under the Securities and Exchange Law of Japan and represent
that they have not offered or sold, and agree not to offer or sell,
directly or indirectly, any ordinary shares in Japan or for the account
of any resident of Japan except pursuant to any exemption from the
registration requirements of the Securities and Exchange Law of Japan
and otherwise in compliance with applicable provisions of Japanese law.
No action has been taken or will be taken in any jurisdiction by IFCO Systems
or the underwriters that would permit a public offering of the ordinary shares
in any jurisdiction where action for that purpose is required, other than in
the United States and Germany. Persons who acquire this prospectus are required
by IFCO Systems and the underwriters to inform themselves about and observe any
restrictions as to the offering and the distribution of this prospectus.
Purchasers of the ordinary shares offered in this prospectus may be required
to pay stamp taxes and other charges under the laws and practices of the
country of purchase, in addition to the offering price listed on the cover page
of this prospectus.
Lehman Brothers International (Europe), CIBC World Markets PLC, and some of
their affiliates have provided, and in the future may provide, investment
banking and other services for IFCO Systems, PalEx, and their affiliates. CIBC
Inc., an affiliate of CIBC World Markets PLC, provided PalEx with $25.0 million
interim financing on November 10, 1999, which financing is being repaid as part
of this offering and the concurrent transactions. CIBC Inc. is a lender under
PalEx's existing senior credit facility, which facility is being repaid.
Canadian Imperial Bank of Commerce, an affiliate of CIBC World Markets PLC,
will be a lender under the new senior credit facility. In addition, CIBC World
Markets Corp., an affiliate of CIBC World Markets PLC, is one of the initial
purchasers of the high yield debt offering.
111
LEGAL MATTERS
The validity of the shares of IFCO Systems ordinary shares to be issued in
connection with the merger will be passed upon by Stibbe Simont Monahan Duhot
P.C., New York, New York. Specific legal matters will be passed upon for the
underwriters by Shearman & Sterling, London, England.
EXPERTS
The combined financial statements of the IFCO Companies as of December 31,
1997 and 1998, and for each of the years then ended and the balance sheet of
IFCO Systems as of March 31, 1999, appearing in this prospectus have been so
included in reliance on the report of PwC Deutsche Revision AG, independent
accountants, given on the authority of that firm as experts in auditing and
accounting.
The financial statements of IFCO U.S. as of December 31, 1997 and 1998, and
for each of the years then ended, appearing in this prospectus have been so
included in reliance on the report (which contains an explanatory paragraph
relating to the company's ability to continue as a going concern as described
in Note 1 to the financial statements) of PricewaterhouseCoopers LLP,
independent certified public accountants, given on the authority of that firm
as experts in auditing and accounting.
The consolidated financial statements of PalEx and its subsidiaries as of
November 30, 1996, December 28, 1997, and December 27, 1998, and for the years
ended November 30, 1995, November 30, 1996, December 28, 1997, and December 27,
1998, and the one-month period ended December 31, 1996, included in this
prospectus have been audited by Arthur Andersen LLP, independent certified
public accountants, as indicated in their reports dated February 27, 1998, and
February 26, 1999, and are included in reliance upon the report of that firm as
experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a registration statement on Form F-1 we
have filed under the Securities Act with the SEC with respect to this offering.
This prospectus does not contain all the information the registration statement
sets forth or its exhibits, in accordance with the rules and regulations of the
SEC, and we refer you to that omitted information. The statements this
prospectus makes respecting the content of any contract, agreement, or other
document that is an exhibit to the registration statement necessarily are
summaries of their material provisions, and we qualify them in their entirety
by reference to those exhibits for complete statements of their provisions.
Interested persons may (1) inspect the registration statement and its exhibits,
without charge, at the public reference facilities of the SEC at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at its regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New
York, New York 10048 and (2) obtain copies of all or any part of the
registration statement at prescribed rates from the Public Reference Section of
the SEC at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. The SEC maintains an Internet web site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that
site is http://www.sec.gov.
As a result of this offering, IFCO Systems will become subject to the
informational requirements of the Exchange Act. IFCO Systems will fulfill its
obligations with respect to those requirements by filing periodic reports and
other information with the SEC. We intend to furnish our stockholders with
annual reports that will include a description of its operations and audited
consolidated financial statements certified by an independent public accounting
firm.
112
INDEX TO FINANCIAL STATEMENTS
IFCO Systems N.V.
Report of Independent Accountants........................................ F-2
Balance Sheet as of March 31 and October 31, 1999 (unaudited)............ F-3
Unaudited Interim Statement of Comprehensive Loss for the period from
April 1, 1999 to October 31, 1999....................................... F-4
Unaudited Interim Statement of Shareholders' Equity...................... F-5
Notes to the Financial Statements........................................ F-6
IFCO
Report of Independent Accountants........................................ F-8
Combined Balance Sheets as of December 31, 1997 and 1998 and October 31,
1999 (unaudited)........................................................ F-9
Combined Statements of Operations for the years ended December 31, 1997
and 1998 and the ten months ended October 31, 1998 and 1999 (unaudited)
........................................................................ F-10
Combined Statements of Comprehensive Loss for the years ended December
31, 1997 and 1998 and the ten months ended October 31, 1998 and 1999
(unaudited)............................................................. F-11
Combined Statements of Net Investment for the years ended December 31,
1997 and 1998 and the ten months ended October 31, 1998 and 1999
(unaudited)............................................................. F-12
Combined Statements of Cash Flows for the years ended December 31, 1997
and 1998 and the ten months ended October 31, 1998 and 1999
(unaudited)............................................................. F-13
Notes to the Combined Financial Statements............................... F-14
PalEx, Inc. and Subsidiaries
Report of Independent Certified Public Accountants....................... F-31
Consolidated Balance Sheets as of December 28, 1997, December 27, 1998,
and October 24, 1999 (unaudited)........................................ F-32
Consolidated Statements of Operations for the years ended November 30,
1996, December 28, 1997, and December 27, 1998, the one-month period
ended December 31, 1996, and the ten-month
periods ended October 25, 1998, and October 24, 1999 (unaudited)........ F-33
Consolidated Statements of Comprehensive Income for the years ended
November 30, 1996,
December 28, 1997, and December 27, 1998, the one-month period ended
December 31, 1996,
and the ten-month periods ended October 25, 1998, and October 24, 1999
(unaudited)............................................................. F-34
Consolidated Statements of Changes in Stockholders' Equity for the years
ended November 30, 1995, November 30, 1996, December 28, 1997, and
December 27, 1998, and the ten-month period ended October 24, 1999
(unaudited)............................................................. F-35
Consolidated Statements of Cash Flows for the years ended November 30,
1996, December 28, 1997, and December 27, 1998, the one-month period
ended December 31, 1996, and the ten-month
periods ended October 25, 1998, and October 24, 1999 (unaudited)........ F-36
Notes to Consolidated Financial Statements............................... F-37
IFCO-U.S., L.L.C.
Report of Independent Certified Public Accountants....................... F-57
Balance Sheets as of December 31, 1997 and 1998 and October 31, 1999
(unaudited)............................................................. F-58
Statements of Operations and Changes in Accumulated Members' Deficit for
the years ended December 31, 1997 and 1998 and the ten months ended
October 31, 1998 and 1999 (unaudited)................................... F-59
Statements of Cash Flows for the years ended December 31, 1997 and 1998
and the ten months ended October 31, 1998 and 1999 (unaudited).......... F-60
Notes to Financial Statements ........................................... F-61
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
of IFCO Systems N.V.
Burgermeister Rijnderstean 20
1185 MC Amsterdam, The Netherlands
In our opinion, the accompanying balance sheet presents fairly in all material
respects, the financial position of IFCO Systems N.V. ("the Company") at March
31, 1999, in conformity with generally accepted accounting principles in the
United States. The financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on the financial
statement based on our audit. We conducted our audit of the statement in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is 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 audit provides a reasonable basis
for the opinion expressed above.
PwC Deutsche Revision
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
Dusseldorf, Germany
August 25, 1999
/s/ Betz /s/ Hartmann
F-2
IFCO SYSTEMS N.V.
BALANCE SHEET
ASSETS
March 31, October 31,
1999 1999
--------- -----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents................................ $54,040 $52,590
======= =======
SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY
Common stock............................................. $54,040 $54,040
Accumulated other comprehensive loss..................... -- (1,450)
------- -------
Total shareholder's equity.............................. $54,040 $52,590
======= =======
The accompanying notes are an integral part of this financial statement.
F-3
IFCO SYSTEMS N.V.
UNAUDITED INTERIM STATEMENT OF COMPREHENSIVE LOSS
for the Period from April 1, 1999 to October 31, 1999
Net loss......................................................... $ --
Other comprehensive loss:
Foreign currency translation adjustment........................ (1,450)
-------
Comprehensive loss............................................... $(1,450)
=======
F-4
IFCO SYSTEMS N.V.
UNAUDITED INTERIM STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated
Other
Common Comprehensive Shareholders'
Stock Loss Equity
------- ------------- -------------
Original contribution on and balance at
March 31, 1999........................... $54,040 $ -- $54,040
Foreign currency translation adjustment... (1,450) (1,450)
------- ------- -------
BALANCE October 31, 1999.................. $54,040 $(1,450) $52,590
======= ======= =======
F-5
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS
1.BASIS OF PRESENTATION
IFCO Systems N.V. was incorporated under the laws of the Netherlands on
March 31, 1999. On the incorporation date, $54,040 of cash was contributed by
Schoeller Packaging Systems GmbH ("SPS") in exchange for 5,000 ordinary shares
of common stock. The authorized share capital of IFCO Systems N.V. is divided
into 25,000 ordinary shares, with a nominal value of 10 euro per share. IFCO
Systems N.V. is a wholly owned subsidiary of SPS.
The accompanying financial statement has been prepared in accordance with
United States generally accepted accounting principles.
The unaudited interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the information therein.
2.SIGNIFICANT ACCOUNTING POLICIES
The functional currency is the euro. The Company has selected the United
States dollar ("US$") 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.
3.SUBSEQUENT EVENTS
IFCO Systems N.V. was formed pursuant to a definitive merger agreement
effective March 29, 1999 with PalEx, Inc. ("PalEx"). Under the terms of the
agreement, prior to the merger, IFCO Systems N.V. will form Silver Oak
Acquisition Corp. as its wholly owned subsidiary to participate in the merger.
Silver Oak Acquisition Corp. will have authorized capital stock of 100 shares
of common stock, par value $0.01 per share. Silver Oak Acquisition Corp. will
issue all of its authorized shares to IFCO Systems N.V.
Prior to the merger with PalEx, SPS will contribute the shares it owns of
IFCO Europe Beteiligungs GmbH ("IFCO Europe"), which is 76% owned by SPS, and
MTS Okologistik Verwaltungs GmbH ("MTS"), 100% owned by SPS, to IFCO Systems
N.V. In addition, Gebruder Schoeller Beteilungsverwaltungs GmbH ("GSB") will
contribute the shares of Schoeller International Logistics
Beteiligungsgesellschaft mbH ("SIL"), 100% owned by GSB, to IFCO Systems N.V.
Both SPS and GSB are owned by the same group of shareholders, the Schoeller
family. The merger with PalEx will occur on the same day as, but immediately
before, an initial public offering of shares in IFCO Systems N.V.
IFCO Europe is the holding company of IFCO International Food Container
Organisation GmbH ("IFCO GmbH"). IFCO Europe is involved in the organization
and administration of the purchase, distribution and leasing of reusable crate
systems in Germany and other European countries. IFCO Europe is 76% owned by
SPS, with a subsidiary of General Electric Capital Corporation ("GECC") holding
a preferred share representing 24%. In connection with its initial investment
of DM 45 million ($24.9 million) 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. In connection with the merger agreement, a
debenture in the amount of DM 45 million ($27.6 million) will be issued to GECC
by a company controlled by the Schoeller family for GECC's preferred share in
IFCO Europe. This debenture will have a 30 year term and bear interest at 5%
per year. The debenture will be exchangeable for IFCO Systems N.V. ordinary
shares that are held by the Schoeller controlled issuer of the debenture after
a mandatory holding
F-6
IFCO SYSTEMS N.V.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
period. GECC's options to increase its investment in IFCO Europe, MTS and SIL
will be exchanged for a promissory note payable issued by IFCO Systems N.V. in
the amount of DM 45 million ($27.6 million), of which DM 11.25 million ($6.9
million) will be paid out of the proceeds from the initial public offering. The
balance will be paid over five years beginning on December 31, 2001. In the
first year the annual interest rate will be EURIBOR plus 2.75%, increasing to
10% in the second year.
MTS is a German company that is 100% owned by SPS 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, is a German company which is 100% owned by GSB and holds ownership
interests in reusable crate systems in the United States, Argentina and Japan.
The operation in Argentina is wholly owned by SIL and is consolidated within
SIL. SIL has a 50% voting interest in the operations in the United States
("IFCO-US") and a 33% ownership investment in the Japanese operations. SIL's
business processes are generally similar to those of IFCO Europe. In connection
with the merger agreement, the Company intends to purchase the remainder of
IFCO-US, giving it 100% ownership.
Prior to the merger with PalEx, SPS will change its name to Schoeller
Logistics Technologies GmbH and SIL will change its name to IFCO International
Network Beteiligungsgesellschaft mbH.
The closing of the merger is subject to the approval of shareholders of
PalEx, completion of the initial public offering of IFCO Systems N.V. and other
customary conditions. Under the current terms of the agreement, the
participating rights (see below) will remain outstanding. The transaction is
expected to be completed by the end of the first quarter of 2000.
Unaudited Subsequent Events
Effective November 4, 1999, SPS contributed its shares of IFCO Europe, which
is 76% owned by SPS, and MTS, 100% owned by SPS, to IFCO Systems N.V. In
addition, GSB contributed its shares of SIL, 100% owned by GSB, to IFCO Systems
N.V. effective November 4, 1999. Both SPS and GSB are owned by the same group
of shareholders, the Schoeller family.
F-7
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Schoeller Packaging Systems GmbH
and Gebruder Schoeller Beteilungsverwaltungs GmbH
Zugspitzstrabe 15
82049 Pullach
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, comprehensive income, net investment and of
cash flows present fairly, in all material respects, the combined financial
position of IFCO Europe Beteiligungs GmbH and MTS Okologistik GmbH,
subsidiaries of Schoeller Packaging Systems GmbH, Pullach and Schoeller
International Logistics Beteiligungsgesellschaft mbH, a subsidiary of Gebruder
Schoeller Beteilungsverwaltungs GmbH, Munich (collectively "IFCO") at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the years then ended, in conformity with generally accepted accounting
principles in the United States. These financial statements are the
responsibility of IFCO's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards in Germany, which are substantially consistent with those in the
United States, 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 30, 1999
/s/ Betz /s/ Hartmann
(Betz) (Hartmann)
Wirtschaftsprufer Wirtschaftsprufer
F-8
IFCO
COMBINED BALANCE SHEETS
(In thousands of US$)
December 31,
------------------ October 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents........... $ 7,992 $ 23,642 $ 9,134
Receivables............ 93,397 74,462 81,509
Other.................. 775 1,874 3,838
-------- -------- --------
Total current assets.. 102,164 99,978 94,481
PROPERTY, PLANT AND
EQUIPMENT, net......... 134,776 172,437 162,772
OTHER ASSETS............ 12,617 12,038 16,393
-------- -------- --------
Total assets.......... $249,557 $284,453 $273,646
======== ======== ========
LIABILITIES AND NET
INVESTMENT
CURRENT LIABILITIES:
Short-term loans....... $ 53,440 $ 500 $ 500
Short-term related
party loans........... 23,298 2,618 2,254
Current maturities of
long-term debt........ -- 4,912 5,413
Current maturities of
capital lease
obligations........... 4,738 9,340 10,528
Refundable deposits.... 64,323 70,875 70,820
Accounts payable....... 65,010 69,287 76,533
Accrued expenses and
other current
liabilities........... 12,294 7,303 11,591
Deferred income........ 4,660 6,573 5,996
-------- -------- --------
Total current
liabilities.......... 227,763 171,408 183,635
ACCUMULATED LOSSES IN
EXCESS OF INVESTMENT IN
EQUITY ENTITIES........ 3,136 4,472 5,684
LONG-TERM DEBT, net of
current maturities..... 464 77,874 67,183
CAPITAL LEASE
OBLIGATIONS, net of
current maturities..... 7,971 26,867 20,768
COMMITMENTS AND
CONTINGENCIES
PARTICIPATING RIGHTS.... 3,956 4,274 3,871
REDEEMABLE PARTICIPATING
RIGHTS................. 1,256 1,544 1,477
REDEEMABLE CONVERTIBLE
PREFERRED STOCK........ 25,001 28,887 26,335
NET INVESTMENT:
Contributed share
capital............... 10,017 10,017 10,017
Accumulated deficit.... (29,945) (38,858) (46,400)
Accumulated other
comprehensive loss.... (62) (2,032) 1,076
-------- -------- --------
(19,990) (30,873) (35,307)
-------- -------- --------
Total liabilities and
net investment....... $249,557 $284,453 $273,646
======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
F-9
IFCO
COMBINED STATEMENTS OF OPERATIONS
(In thousands of US$)
Year Ended Ten Months Ended
December 31, October 31,
------------------ -----------------------
1997 1998 1998 1999
-------- -------- ----------- -----------
(unaudited) (unaudited)
REVENUES........................... $116,735 $134,721 $106,021 $126,399
COST OF SALES:
Depreciation and amortization
expense and crate breakage....... 26,929 28,487 21,176 28,162
Other costs of sales.............. 72,693 77,731 64,698 72,168
-------- -------- -------- --------
99,622 106,218 85,874 100,330
-------- -------- -------- --------
Gross profit..................... 17,113 28,503 20,147 26,069
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 22,263 28,515 20,729 24,029
AMORTIZATION OF GOODWILL........... 675 383 274 344
OTHER OPERATING (INCOME) EXPENSES,
net............................... (4,099) (3,081) (2,979) (1,976)
-------- -------- -------- --------
Income (loss) from operations.... (1,726) 2,686 2,123 3,672
INTEREST EXPENSE................... (11,815) (8,637) (7,355) (7,347)
INTEREST INCOME.................... 3,887 1,607 1,331 466
FOREIGN CURRENCY (LOSSES) GAINS.... 25 (188) (166) (690)
LOSSES FROM EQUITY ENTITIES........ (2,347) (2,726) (2,431) (1,632)
OTHER INCOME (EXPENSE), net........ 183 (83) (325) (611)
-------- -------- -------- --------
Loss before income taxes......... (11,793) (7,341) (6,823) (6,142)
INCOME TAX PROVISION............... (47) (210) (173) (144)
-------- -------- -------- --------
Net loss......................... (11,840) (7,551) (6,996) (6,286)
-------- -------- -------- --------
ACCRETION OF PREFERRED STOCK AND
PARTICIPATING RIGHTS.............. 630 (1,362) (1,123) (1,256)
Net loss applicable to common
stock........................... $(11,210) $ (8,913) $ (8,119) $ (7,542)
======== ======== ======== ========
Unaudited pro forma basic loss per
share (in US$).................... $ (.45) $ (.38)
======== ========
The accompanying notes are an integral part of these combined financial
statements.
F-10
IFCO
COMBINED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands of US$)
Year Ended Ten Months Ended
December 31, October 31,
----------------- -----------------------
1997 1998 1998 1999
-------- ------- ----------- -----------
(unaudited) (unaudited)
Net loss............................. $(11,840) $(7,551) $(6,996) $(6,286)
Other comprehensive loss:
Foreign currency translation
adjustment......................... 317 (1,970) (1,663) 3,108
-------- ------- ------- -------
Comprehensive loss................... $(11,523) $(9,521) $(8,659) $(3,178)
======== ======= ======= =======
The accompanying notes are an integral part of these combined financial
statements.
F-11
IFCO
COMBINED STATEMENTS OF NET INVESTMENT
(In thousands of US$)
Accumulated
Contributed Other
Share Accumulated Comprehensive Net
Capital Deficit Loss Investment
----------- ----------- ------------- ----------
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)
Accretion of redeemable
convertible preferred stock,
net of tax.................. -- (1,274) -- (1,274)
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..................... -- (7,551) -- (7,551)
------- -------- ------- --------
BALANCE December 31, 1998.... $10,017 $(38,858) $(2,032) $(30,873)
Accretion of redeemable
convertible preferred stock,
net of tax (unaudited)...... -- (1,077) -- (1,077)
Participating rights, net of
tax (unaudited)............. -- (60) -- (60)
Redeemable cumulative
participating rights,
(unaudited)................. -- (119) -- (119)
Foreign currency adjustment
(unaudited)................. -- -- 3,108 3,108
Net loss (unaudited)......... -- (6,286) -- (6,286)
------- -------- ------- --------
BALANCE October 31, 1999..... $10,017 $(46,400) $ 1,076 $(35,307)
======= ======== ======= ========
The accompanying notes are an integral part of these combined financial
statements.
F-12
IFCO
COMBINED STATEMENTS OF CASH FLOWS
(In thousands of US$)
Year Ended Ten Months Ended
December 31, October 31,
----------------- -----------------------
1997 1998 1998 1999
-------- ------- ----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............................ $(11,840) $(7,551) $(6,996) $(6,286)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation of property, plant and
equipment and crate breakage...... 26,929 28,487 21,176 28,162
Amortization of goodwill........... 675 383 274 344
Amortization of intangible assets
and debt issuance costs........... -- 664 228 38
Foreign exchange (gain)/loss....... (25) 188 166 690
(Profit)/loss on sale of property,
plant and equipment............... (2) -- -- 106
Losses from equity entities........ 2,347 2,726 2,431 1,632
Changes in operating assets and
liabilities--
Proceeds from factoring
arrangement....................... -- 25,435 19,883 28,004
Receivables........................ (11,588) 2,160 (2,186) (46,654)
Other assets, long term............ 243 112 586 (1,456)
Inventory.......................... 7,414 (1,621) (1,205) (2,293)
Prepaid expenses and other current
accounts.......................... 107 673 714 47
Accounts payable................... 5,076 10,933 251 17,435
Other current liabilities.......... 3,515 (7,791) (5,422) 1,334
Accrued liabilities................ 8,722 3,803 9,980 12,068
Deferred income.................... 917 1,337 617 249
-------- ------- ------- -------
Net cash provided by operating
activities....................... 32,490 59,938 40,497 33,420
-------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of crates................. (41,950) (38,098) (35,170) (33,054)
Purchase of property, plant and
equipment......................... (562) (2,097) (2,062) (3,021)
Purchase of other intangible
assets............................ (243) (33) -- (188)
Merger costs....................... -- -- -- (3,421)
Investment in equity entities...... (478) (1,390) (1,386) (420)
Proceeds from sale of property and
equipment......................... 448 106 -- --
Sale (purchase) of investments
carried at cost................... (436) 2,746 2,723 --
-------- ------- ------- -------
Net cash used in investing
activities....................... (43,221) (38,766) (35,895) (40,104)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sale of redeemable
convertible preferred stock....... 24,949 --
Payments on short term bank
borrowings........................ -- (51,254) (50,699) --
Payments on long term bank
borrowings........................ (3,502) (15,351) (15,221) (11,581)
Payments on related party loans.... -- (25,779) (25,616) (196)
Payments on capital lease
obligations....................... (14,214) (5,331) (4,589) (4,527)
Proceeds from short term bank
borrowings........................ 8,591 --
Proceeds from long term bank
borrowings........................ -- 91,756 90,764 11,010
Proceeds from related party loans.. 3,997 1,850 1,595 139
Payment for interest rate cap...... -- (202)
Debt issuance costs................ (6,621) (2,131) (1,703) --
Capital distribution to
shareholders...................... (8,635) -- -- --
Other.............................. 464 -- -- --
-------- ------- ------- -------
Net cash provided by (used in)
financing activities............. 5,029 (6,442) (5,469) (5,155)
-------- ------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS.......... (549) 920 589 (2,669)
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (6,251) 15,650 (278) (14,508)
CASH AND CASH EQUIVALENTS, beginning
of the period 14,243 7,992 7,992 23,642
-------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 7,992 $23,642 $ 7,714 $ 9,134
======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest............. $ 6,772 $ 6,959 $ 5,841 $ 6,805
Cash paid for income taxes......... $ 47 $ 64 $ 64 $ 181
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Accretion of redeemable convertible
preferred stock................... -- $ 1,274 -- --
Redeemable cumulative participating
rights............................ $ 144 $ 149 -- --
Participating rights............... $ (774) $ (61) -- --
Purchase of containers on capital
leases............................ $ 8,465 $ 9,382 $ 4,228 $ 4,125
The accompanying notes are an integral part of these combined financial
statements.
F-13
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS
(In thousands of US$ unless otherwise stated)
1.BUSINESS AND ORGANIZATION:
These combined financial statements represent the operations of IFCO Europe
Beteiligungs GmbH ("IFCO Europe") and MTS Okologistik Verwaltungs GmbH ("MTS"),
which are subsidiaries of Schoeller Packaging Systems GmbH, Pullach ("SPS"), as
well as the operations of Schoeller International Logistics
Beteiligungsgesellschaft mbH ("SIL"), a subsidiary of Gebruder Schoeller
Beteilungsverwaltungs GmbH, Munich ("GSB") (collectively "IFCO" or the
"Company"). The entities are involved in crate leasing and servicing
activities. SPS and GSB are wholly owned by the same group of shareholders, the
Schoeller family. IFCO Europe, MTS and SIL previously reported separately to
SPS and GSB respectively, and all costs relating to each entity were
historically billed through management charges. These costs include all general
corporate overheads, 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. All significant inter-company
transactions and balances between the combined companies have been eliminated.
Income taxes have been calculated on a separate return basis.
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 reusable crate
systems in Germany and other European countries. The crates 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 crates to various
intermediaries and ultimately retailers for sale to consumers. IFCO Europe
delivers the empty crates to customers' bulk warehouses and collects the empty
crates from regional service points, where the crates are transported to the
Company's depots and cleaned for reuse. IFCO Europe is 76% owned by SPS, with a
subsidiary of General Electric Capital Corporation ("GECC") holding a preferred
share representing 24%. In connection with its initial investment of $24,949 in
IFCO Europe in 1997, GECC received options to increase its investment in IFCO
Europe to 49% and then up to 100% after certain dates have passed and criteria
have been met. GECC also received options to purchase 100% of MTS and up to
100% of SIL after certain dates have passed and criteria have been met.
MTS, a German company that is 100% owned by SPS, was established in 1992 and
offers a reusable packing system for dry goods sold primarily by retailers.
MTS's business processes are generally similar to those of IFCO Europe.
SIL, a German company which is 100% owned by GSB was established in 1994 to
hold ownership interests in reusable crate systems in the United States,
Argentina and Japan. The operation in Argentina is wholly owned and is
consolidated within SIL. SIL has a 50% voting interest in the operations in the
United States and a 33% ownership investment in the Japanese operations. SIL
has agreed to fund its proportionate share of losses of the operation in the
United States in excess of its capital investment. Both of these operations are
accounted for under the equity method. SIL's business processes are generally
similar to those of IFCO Europe.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Principles
The accompanying combined financial statements have been prepared in
accordance with United States generally accepted accounting principles.
Fiscal Year
All combined entities maintain their accounting records using a December 31
year-end.
F-14
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
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 crate 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 crate rental pool to ensure that all unusable crates are reduced to net
realizable value in accordance with the Company's crate supply contract. These
charges are considered breakage by the Company and are included in cost of
sales in the accompanying combined 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
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 and has determined that no impairments would have been recognized under
SFAS No. 121.
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 to the fair value of the
leased property at the inception of the lease 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 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 financial statements as of December 31, 1998.
Investments Carried at Cost
Entities where IFCO has less than 20% of the voting rights and over which
IFCO does not exercise significant influence are accounted for at cost, and are
included in other assets on the combined balance sheet. In 1997 this consisted
of one entity, APOLLO Verwaltungsgesellschaft mbH, Munchen, which was sold in
1998.
F-15
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
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. SIL has not recorded its proportionate share of IFCO-
Japan's losses in excess of its investment in IFCO Japan as SIL is under no
obligation, and has no intention, to fund IFCO-Japan's losses. IFCO Japan's
losses that have been recorded are included in losses from equity entities on
the combined 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
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 statement of operations.
Participating Rights
The participating rights were originally issued to Schoeller Plast Industries
GmbH, Pullach, ("SPI"), a company wholly owned by SPS, 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 $0.9
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.
Redeemable Participating Rights
In 1996 SIL received DM 2 million ($1,228) from Alexander Schoeller & Co.
Management Holding GmbH ("Schoeller Management Holding"), a company which is
wholly owned by the Schoellers. Each year that SIL recognizes a profit under
German GAAP, Schoeller Management Holding is entitled to DM 250,000 ($154) per
annum. This amount is cumulative, and any unpaid balance due to SIL's lack of
profit bears interest at 6.0% per annum. Schoeller Management Holding does not
participate in SIL's losses, and has no voting rights in SIL. The agreement is
for an unlimited duration, and may be terminated by either party with a six
month notice period.
Income Taxes
The Company uses the liability method of accounting for income taxes, wherein
deferred tax assets and liabilities are recognized for future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to reverse. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance if,
based on the weight of the available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. As changes
in tax laws or rate are enacted, deferred tax assets and liabilities are
adjusted through income tax expense.
F-16
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Revenue Recognition
The majority of the Company's combined revenues are generated from crate
usage fees and are recognized over the Company's service obligation period,
which is complete when the customer's product is removed from the crates and
the crate is ready to be returned to the Company.
The Company also generates revenues from the lease of crates for specified
periods of time, which are recognized on a straight-line basis over the lease
term. Additionally, the Company generates revenues from the sales of broken
crates.
Refundable Deposits
The Company receives a deposit from its customers upon crate delivery that is
classified as a refundable deposit in the accompanying combined balance sheets.
This deposit is refunded by the Company when the crate 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 Statement of Operations.
The functional currency is the local currency of each subsidiary. The Company
has selected the United States dollar ("US$") as its reporting currency. The
financial statements of the Company's operations which are not denominated in
United States dollars are translated using the exchange rate as of the balance
sheet date for assets and liabilities and a weighted average exchange rate for
the reported amount of revenues, expenses, gains and losses during the
reporting period. The cumulative translation adjustment is recorded as a
separate component of shareholders' equity.
Use of Estimates
The preparation of combined financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the combined
financial statements and the reported amount of revenues and expenses during
the reporting period. Although the Company reviews all significant estimates
affecting its combined financial statements on a recurring basis and records
the estimated effect of any necessary adjustments prior to their publication,
actual results could differ from these estimates.
F-17
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Unaudited Pro Forma Loss Per Share
Unaudited pro forma basic loss per share has been computed using an estimate
of the number of ordinary shares that will be issued to the shareholders of the
Company upon formation of IFCO Systems N.V. This amount has been calculated as
20.0 million. The numerator used in the calculation of unaudited proforma basic
loss per share has been calculated using the net loss for the year plus
accretion on the redeemable convertible preferred stock, 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. See additional
discussion related to the formation of IFCO Systems N.V. in Note 12.
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 quarter 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 consolidated financial statements.
Interim Financial Statements
The unaudited combined consolidated interim financial statements included
herein have been prepared in accordance with United States generally accepted
accounting principles. These statements reflect all adjustments, consisting
only of normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the information contained therein. All
significant inter-company transactions and balances between the combined
companies have been eliminated.
3.PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
Estimated
Useful At December 31,
Lives in ------------------
Years 1997 1998
--------- -------- --------
Crates....................................... 8-15 $145,444 $188,848
Machinery and equipment...................... 4-10 5,783 7,631
Furniture and fixtures....................... 4-10 2,881 4,213
-------- --------
$154,108 $200,692
Less: Accumulated depreciation and
amortization................................ (19,332) (28,255)
-------- --------
$134,776 $172,437
======== ========
Depreciation expense for the years ended December 31, 1997 and 1998 was
$8,579 and $10,414, respectively. Of the total assets above, costs of $14,388
and $38,288, along with accumulated depreciation of $651 and $981, are held
under capital leases at December 31, 1997 and 1998, respectively.
F-18
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
4.DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts Receivable
The major components of accounts receivable are as follows:
At December 31,
---------------- At October 31,
1997 1998 1999
------- ------- --------------
(unaudited)
Trade (gross).................................. $71,946 $63,292 $68,582
Less: Allowance for doubtful accounts.......... (5,886) (6,079) (4,101)
Related party.................................. 14,396 7,538 8,678
Other.......................................... 12,941 9,711 8,350
------- ------- -------
$93,397 $74,462 $81,509
======= ======= =======
Activity in the Company's allowance for doubtful accounts consists of the
following:
Year ended
December 31,
-------------
1997 1998
------ ------
Balance, beginning of the year................................... $5,460 $5,886
Write-offs....................................................... -- --
Additional provisions............................................ 426 193
------ ------
$5,886 $6,079
====== ======
Other Assets
The major components of other assets are as follows:
At December 31,
----------------
1997 1998
------- -------
Goodwill................................................... $ 3,805 $ 4,187
Debt issuance costs........................................ 6,417 9,364
Investment accounted for under the cost method............. 2,695 --
Other...................................................... 942 962
------- -------
$13,859 $14,513
Less: Accumulated amortization............................. (1,242) (2,475)
------- -------
$12,617 $12,038
======= =======
Accounts payable
The major components of accounts payable are as follows:
At December 31,
--------------- At October 31,
1997 1998 1999
------- ------- --------------
(unaudited)
Trade......................................... $64,712 $65,525 $ 72,129
Related party................................. 298 3,762 4,404
------- ------- --------
$65,010 $69,287 $ 76,533
======= ======= ========
F-19
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
5.DEBT:
Long-Term Debt
During 1998, IFCO Europe negotiated a new financing arrangement through a
lending syndicate under a Deutsch Mark ("DM") 146 million ($89,644) Senior
Facility Agreement ("SFA"), and a DM 35 million ($21,490) Senior Subordinated
Agreement ("SSA"). The proceeds from the SFA and SSA were primarily used to
reduce the Company's outstanding short-term borrowings.
The SFA consists of a DM 76 million ($46,664) fixed term loan and two
revolving credit facilities totaling DM 70 million ($42,980). All borrowings
under the SFA contain principal reduction provisions, mature in 2004 and accrue
interest at EURIBOR plus 1.75% (4.98% as of December 31, 1998). The SSA is due
in full in 2005. Outstanding borrowings under the SSA accrue interest at a rate
of EURIBOR plus 2.75% (5.98% as of December 31, 1998).
IFCO Europe borrowed DM 76 million ($46,664) under the SFA fixed term loan,
and repaid DM 4 million ($2,456) on December 31, 1998 as required by the debt
agreement. At December 31, 1998, borrowings under the SFA revolving credit
facility totaled DM 27 million ($16,578), leaving DM 43 million ($26,403)
available for future borrowings. The entire amount of the SSA was borrowed
during 1998, and was outstanding at December 31, 1998.
Substantially all of IFCO Europe'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 factoring of receivables in excess of DM 80 million ($49,122). The
SFA and SSA limit the amount of capital lease obligations that IFCO Europe may
enter into from January 1, 1999 onwards to DM 75 million ($46,052). The SFA and
SSA also prohibit the payment of dividends by IFCO Europe as long as any
outstanding borrowings exist under the SFA or SSA, restrict IFCO Europe's
incurrence or assumption of other indebtedness and require IFCO Europe 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. IFCO Europe was in compliance
with, or had subsequently obtained waivers for, such covenants as of December
31, 1998.
To hedge its variable rate interest risk, IFCO Europe has entered into an
interest rate cap agreement, which as of December 31, 1998, covers $65,600 of
IFCO Europe's outstanding debt and limits interest rates applicable to those
borrowings to 6.75%. 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 balance
sheets.
Long-term debt consists of the following:
At December
31,
------------- At October 31,
1997 1998 1999
----- ------- --------------
(unaudited)
SFA term loan ................................. $ -- $44,208 $34,393
SFA credit facilities ......................... -- 16,578 18,808
SSA term loan ................................. -- 21,490 18,808
Other.......................................... 464 510 587
----- ------- -------
$ 464 $82,786 $72,596
Less: current maturities....................... -- (4,912) (5,413)
----- ------- -------
$ 464 $77,874 $67,183
===== ======= =======
F-20
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
The maturities of long-term debt are as follows for the years ending December
31:
Amount
-------
1999................................................................. $ 4,912
2000................................................................. 6,036
2001................................................................. 7,368
2002................................................................. 12,894
2003................................................................. 12,894
Thereafter........................................................... 38,682
-------
$82,786
=======
Short-Term Loans
Short-term loans in 1997 consisted of short-term notes with banks and other
third parties and were due on demand. These loans were repaid with the proceeds
from the SFA and SSA. There are no short-term loans at December 31, 1998.
Short-Term Related Party Loans
SPS and GSB, SPS's subsidiaries and SPS'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%.
Related Party Loans
The balance in related party loans represents funding that has been provided
by companies under common control, and have due dates that extend beyond
December 31, 1999.
Receivable Factoring
Prior to May 1998, IFCO GmbH 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 GmbH's
books. The administrative processes related to collecting the receivables was
performed by the third party acting as an agent for IFCO GmbH, for which IFCO
GmbH paid a fee.
In May 1998 the arrangement was altered to allow IFCO GmbH 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 GmbH. The remainder, less a factoring charge, is
held in an escrow account and is remitted to IFCO GmbH following collection.
There is no risk of loss associated with the funds initially received by IFCO
GmbH, and these funds have been netted off against receivables. The risk of
loss on the balance held in the escrow account remains with IFCO GmbH, with the
factoring agent performing the administrative collection process for all
factored receivables. The balance held in the escrow account is included in
receivables on the combined balance sheet and at December 31, 1998 was $7,279.
The interest rate on cash advances relating to uncollected factored receivables
is based on the three-month EURIBOR rate plus 1.25% (4.48% as of December 31,
1998). IFCO GmbH factored approximately $25,435 of its combined receivables in
1998 and incurred approximately $2,629 in factoring and interest charges
relating to this agreement for the year ended December 31, 1998.
F-21
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Capital Lease Obligations
The Company has entered into leases with third parties principally for
plastic crates 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:
Amount
-------
1999................................................................ $11,603
2000................................................................ 11,135
2001................................................................ 7,607
2002................................................................ 4,704
2003................................................................ 2,501
Thereafter.......................................................... 3,734
-------
Total future minimum lease payments................................. $41,284
Less amounts representing interest.................................. (5,077)
-------
Present value of future minimum lease payments...................... $36,207
=======
Current............................................................. $ 9,340
Non-current......................................................... 26,867
-------
Total............................................................... $36,207
=======
6.REDEEMABLE CONVERTIBLE PREFERRED STOCK
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 ($1,382) of profits
before any profits are distributed to the common stockholders.
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 ($27,630), plus preferential
dividends which have not been distributed, less any eventual distribution of
profits in excess of the preferential dividends.
In connection with the investment in the preferred share, GECC received
options to increase its investment in IFCO Europe to 49% and then up to 100%
after certain dates have passed and criteria have been met. In addition, GECC
received options to purchase 100% of MTS and up to 100% of SIL after certain
dates have passed and criteria have been met. Also in connection with the
investment, SPS has a put option to sell its interest in IFCO Europe to GECC
after certain dates have passed and criteria have been met.
F-22
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
7.INCOME TAXES:
Year ended
December 31,
---------------
1997 1998
------- ------
Loss before income taxes
Germany................................................... $ 8,227 $3,802
Foreign................................................... 3,217 3,539
------- ------
Total...................................................... $11,444 $7,341
======= ======
Income tax provision
Current
Germany................................................... $ -- $ --
Foreign................................................... (47) (210)
------- ------
Total current.............................................. $ (47) $ (210)
------- ------
Deferred
Germany................................................... $ -- $ --
Foreign................................................... -- --
------- ------
Total Deferred............................................. $ -- $ --
------- ------
Total provision ........................................... $ (47) $ (210)
======= ======
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
------ ------
Tax benefit at statutory rate (48.8%)....................... $5,585 $3,582
Increase (decrease) resulting from:
Movement in valuation allowance............................ (3,693) (3,605)
Participating rights....................................... (378) (30)
Non deductible finance charges............................. (464) (348)
Goodwill amortisation...................................... (131) (118)
Other...................................................... (966) 309
------ ------
$ (47) $ (210)
====== ======
F-23
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
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,
-----------------
1997 1998
------- --------
Deferred income tax liabilities:
Accelerated depreciation................................. $57,893 $ 81,114
Other.................................................... 4,685 3,467
------- --------
Total deferred income tax liabilities..................... $62,578 $ 84,581
Deferred income tax assets:
Carryforward losses...................................... $61,422 $ 73,891
Interest on accretion.................................... -- 622
Capitalized crate cost................................... 6,181 17,679
Patent................................................... 3,676 3,596
Other..................................................... 3,018 6,164
------- --------
Total deferred income tax assets.......................... $74,297 $101,952
Valuation allowance....................................... (11,719) (17,371)
------- --------
Net deferred income tax assets............................ $62,578 $ 84,581
Deferred income tax assets, net........................... $ -- $ --
======= ========
Current deferred tax assets, net are recorded in other current assets in the
accompanying combined balance sheets.
Income taxes payable at December 31, 1997 and 1998 was approximately $47 and
$146, respectively and are included in accrued liabilities in the accompanying
combined balance sheets.
As certain crate 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, 1997 and 1998, the Company has net operating loss
carryforwards in Germany of approximately $115,453 and $135,275, respectively.
The loss carryforwards attributable to German operations do not expire. The
loss carryforwards attributable to foreign operations at December 31, 1997 and
1998 are $11,840 and $18,468, respectively. These operating loss carryforwards
expire in 2004 and 2005. These carryforwards are available to offset future
taxable income. A valuation allowance has been made by the Company to provide
for deferred tax assets. The valuation allowance is necessary as the specific
subsidiaries for which it is attributable have not made profits consistently,
thereby making it more likely than not that the asset will not be realized. The
amount of the valuation allowance is reviewed periodically and will be released
in the future if it becomes more likely than not that these carryforward losses
can be realised.
F-24
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Activity in the Company's valuation allowance for deferred tax assets
consists of the following:
Year ended
December 31,
----------------
1997 1998
------- -------
Balance, beginning of year................................ $ 5,497 $11,719
Increase (decrease) due to foreign exchange translation... (958) 1,485
Additions in the year due to subsidiary loss
carryforwards............................................ 7,180 4,167
------- -------
Balance, end of year...................................... $11,719 $17,371
======= =======
The valuation allowance allocated by tax jurisdiction is as follows:
Year ended
December 31,
---------------
1997 1998
------- -------
Germany:
Current...................................................... $ 300 $ 800
Long-term.................................................... 7,192 10,451
------- -------
$ 7,492 $11,251
Other:
Long-term.................................................... $ 4,227 $ 6,120
------- -------
Total........................................................ $11,719 $17,371
======= =======
8.COMMITMENTS AND CONTINGENCIES:
Litigation
One of the Company's subsidiary's has been 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 crate 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.
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 accrued on a straight-line basis over the
term of the lease. Minimum future rental payments under these leases as of
December 31, 1998 are as follows:
Amount
-------
1999................................................................. $ 4,094
2000................................................................. 3,605
2001................................................................. 2,700
2002................................................................. 1,603
2003................................................................. 1,504
Thereafter........................................................... 1,449
-------
$14,955
=======
Rent expense under operating leases was approximately $2,335 and $4,442 for
the years ending December 31, 1997 and 1998, respectively.
F-25
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
9.RELATED PARTY TRANSACTIONS:
Crate Supply Contracts
IFCO Europe has historically purchased the majority of its crates 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
crates. SPI will not provide plastic crates to other third parties. 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 than 15%,
as defined in the agreement. This supply agreement also states that the Company
is to receive a fixed price per kilogram for broken containers that are
recollected from the Company by SPI. During 1997 and 1998, the Company paid SPI
$45,472 and $46,397, respectively, for crates. Sales of broken containers from
the Company to SPI totaled $8,750 in 1997 and $9,438 in 1998, and are included
within revenues.
Management Fee
The Company has entered into a management contract expiring in November 2000
with SPS to provide management and administrative services to the Company. The
Company has recorded $769 and $576 in costs under this contract during fiscal
years 1997 and 1998, respectively, which are included in selling, general and
administrative costs in the accompanying combined statement of operations. The
current contract expires on December 31, 2000, and the total management fee
payable by the Company to SPS in 1999 and 2000 is DM 1.75 million ($995) per
annum.
Related Party Working Capital Financing
The Company has generated payables to and receivables from SPI, primarily as
a result of the purchase of crates from SPI and the subsequent sale of broken
crates 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 8%.
The Company has recorded net interest income (expense) from related parties
which principally consist of SPS and SPI of approximately ($1,266) and $215
during the fiscal years' 1997 and 1998, respectively.
Capital Distribution
During 1997, IFCO Europe purchased a patent for a type of plastic crate from
SPI for $8,635. The patent had been internally developed by SPI and had a
nominal carrying value. As this represented a transfer of assets under common
control, the amount paid for the patent has been treated as a capital
distribution, and IFCO Europe is carrying the patent at the nominal carrying
value.
Unaudited Related Party Transactions
In January 1999, the Company entered into an additional agreement with
Schoeller Plast AG, an indirect 80%-owned subsidiary of SPS, in which Schoeller
Plast AG agreed to share higher initial costs related to the strategic growth
of the crate leading and supply business up to a maximum amount of DM 6 million
for the year ended 1999. For the ten months ended October 31, 1999, Schoeller
Plast AG has reimbursed the Company DM 5 million which has been recorded as a
reduction of cost of goods sold. The agreement terminated at the end of 1999
and subsequent to December 31, 1999, no further costs related to the additional
agreement will be reimbursed.
F-26
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
10.BUSINESS SEGMENTS:
The Company has three business segments, the European plastic crate
operations ("European perishables"), the dry good container operations ("Dry
good"), and the non-European plastic crate operations ("Non-European
perishables"). The European perishables and Non-European perishables segments
sell, repair/wash, lease and retrieve plastic crates primarily for use in
agricultural and industrial markets. The Dry good segment has a reusable
packing system for dry goods, primarily for use in agricultural and 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 balance sheet of a portion of IFCO-US's losses
recognized in excess of the carrying value of the investment in IFCO-US. Losses
from equity entities represents the portion of IFCO-US and IFCO Japan's losses
that the Company has recognized in the combined statements of operations.
Year ended December 31, 1997
-------------------------------------------------
IFCO
Europe MTS SIL Eliminations Combined
-------- ------ -------- ------------ --------
Revenues................ $106,863 $9,580 $ 292 $ -- $116,735
Profit (loss) before
taxes ................. (7,338) (424) (4,031) -- (11,793)
Interest revenue........ 4,031 240 71 (455) 3,887
Interest expense........ (11,749) (244) (277) 455 (11,815)
Depreciation and crate
breakage............... (25,009) (1,783) (137) -- (26,929)
Amortization............ (675) -- -- -- (675)
Total assets............ 237,629 15,242 2,411 (5,725) 249,557
Net investment.......... (8,184) (3,003) (7,132) (1,671) (19,990)
Accumulated loss in
excess of investments
in equity entities..... -- -- (3,136) -- (3,136)
Losses from equity
entities............... -- -- (2,347) -- (2,347)
Capital expenditures.... (40,656) (1,783) (73) -- (42,512)
Year ended December 31, 1998
-------------------------------------------------
IFCO
Europe MTS SIL Eliminations Combined
-------- ------ -------- ------------ --------
Revenues................ $123,673 $9,901 $ 1,147 $ -- $134,721
Profit (loss) before
taxes.................. (2,644) (470) (4,227) -- (7,341)
Interest revenue........ 1,660 238 7 (298) 1,607
Interest expense........ (8,446) (133) (356) 298 (8,637)
Depreciation and crate
breakage............... (26,363) (1,917) (207) -- (28,487)
Amortization............ (383) -- -- -- (383)
Total assets............ 267,866 17,954 2,777 (4,144) 284,453
Net investment.......... (13,270) (3,812) (11,973) (1,818) (30,873)
Accumulated loss in
excess of investments
in equity entities..... -- -- (4,472) -- (4,472)
Losses from equity
entities............... -- -- (2,726) -- (2,726)
Capital expenditures.... (37,690) (2,122) (383) -- (40,195)
F-27
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Ten months ended October 31, 1998 (unaudited)
-----------------------------------------------
IFCO
Europe MTS SIL Eliminations Combined
-------- ------- ------ ------------ --------
Revenues.................. $ 97,420 $ 7,728 $ 873 -- $106,021
Profit (loss) before
taxes.................... (3,501) 17 (3,339) -- (6,823)
Total assets.............. 255,281 16,246 2,575 (4,461) 269,641
Ten months ended October 31, 1999 (unaudited)
-----------------------------------------------
IFCO
Europe MTS SIL Eliminations Combined
-------- ------- ------ ------------ --------
Revenues.................. $116,562 $ 7,869 $1,968 -- $126,399
Profit (loss) before
taxes.................... (2,853) 502 (3,791) -- (6,142)
Total assets.............. 260,777 14,392 6,068 (7,591) 273,646
Eliminations for revenue and expense items above are made to eliminate
intercompany sales and expenses. Eliminations 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 Ten Months Ended
December 31, October 31,
----------------- -----------------------
1997 1998 1998 1999
-------- -------- ----------- -----------
(unaudited) (unaudited)
Germany............................ $ 42,805 $ 48,383 $ 43,934 $ 51,785
Spain.............................. 20,914 23,727 15,683 14,844
Italy.............................. 14,746 18,369 14,428 15,462
France............................. 10,043 11,208 9,231 9,857
Other.............................. 28,227 33,034 22,745 34,451
-------- -------- -------- --------
Combined........................... $116,735 $134,721 $106,021 $126,399
======== ======== ======== ========
The Company's long-lived assets by country are as follows:
Year ended
December 31,
-----------------
1997 1998
-------- --------
Germany.................................................... $147,016 $183,888
Other...................................................... 377 587
-------- --------
Combined................................................... $147,393 $184,475
======== ========
11.EQUITY ENTITIES:
IFCO-US is considered a significant investment accounted for under the equity
method given that losses from equity entities recorded by the Company in
respect of IFCO-US is approximately 27% of the total net loss before income
taxes, participating rights and minority interest of the Company. Summarized
financial data is as follows for IFCO-US:
At December 31, At
------------------ October 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
Total assets.................................... $ 10,187 $ 9,731 $ 21,017
Total liabilities............................... $(16,458) $(20,273) $(34,466)
Members' deficit................................ $ (6,271) $(10,542) $(13,449)
F-28
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
Summarized income information for IFCO-US is as follows:
Year ended Ten Months Ended
December 31, October 31,
------------------ -----------------------
1997 1998 1998 1999
-------- -------- ----------- -----------
(unaudited) (unaudited)
Revenue.......................... $ 919 $ 1,657 $ 1,157 $ 4,268
Gross margin (loss).............. (1,338) (994) (921) 64
Loss from operations............. (2,761) (2,713) (2,345) (1,577)
Net loss......................... (3,783) (4,272) (3,691) (2,907)
12.SUBSEQUENT EVENT:
Effective March 29, 1999, the Company entered into a definitive merger
agreement with PalEx, Inc. ("PalEx") to merge their businesses. The combined
entity, to be named IFCO Systems N.V., will include the Company and PalEx's
North American pallet and industrial container operations. The merger will also
occur on the same day as, but immediately before, an initial public offering of
shares in IFCO Systems N.V.
IFCO Systems N.V. will initially be established as a subsidiary of SPS, and
IFCO Europe, MTS and SIL will be contributed to IFCO Systems N.V. Under the
terms of the agreement, PalEx will merge into a subsidiary of IFCO Systems N.V.
A debenture in the amount of DM 45 million ($27,631) will be issued to GECC
by a company controlled by the Schoeller family for GECC's preferred share in
IFCO Europe. This debenture will have a 30 year term and bear interest at 5%
per year. The debenture will be exchangeable for IFCO Systems N.V. ordinary
shares that are held by the Schoeller controlled issuer of the debenture after
a mandatory holding period. GECC's options to increase its investment in IFCO
Europe, MTS and SIL will be exchanged for a promissory note payable issued by
IFCO Systems N.V. in the amount of DM 45 million ($27,631), of which DM 11.25
million ($6,908) will be paid out of the proceeds from the initial public
offering. The balance will be paid over 5 years beginning on December 31, 2001.
In the first year the annual interest rate will be EURIBOR plus 2.75%,
increasing to 10% in the second year.
The Company intends to purchase the remainder of IFCO-US, giving it 100%
ownership.
Prior to the merger with PalEx, SPS will change its name to Schoeller
Logistics Technologies GmbH and SIL will change its name to IFCO International
Network Beteiligungsgesellschaft mbH.
The closing of the merger is subject to the approval of shareholders,
completion of the initial public offering of IFCO Systems N.V. and other
customary conditions. The transaction is expected to be completed by the end of
the first quarter of 2000.
Unaudited subsequent events
Effective November 4, 1999, Schoeller Packaging Systems GmbH ("SPS")
contributed its shares of IFCO Europe Beteiligungs GmbH ("IFCO Europe"), which
is 76% owned by SPS, and MTS Okologistik Verwaltungs GmbH ("MTS"), 100% owned
by SPS, to IFCO Systems N.V. In addition, Gebruder Schoeller
Beteilungsverwaltungs GmbH ("GSB") contributed its shares of Schoeller
International Logistics Beteilungsverwaltungs GmbH ("SIL"), 100% owned by GSB,
to IFCO Systems N.V. effective November 4, 1999. Both SPS and GSB are owned by
the same group of shareholders, the Schoeller family.
F-29
IFCO
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(In thousands of US$ unless otherwise stated)
In connection with the merger, the Company has agreed to reimburse PalEx up
to a maximum amount of $2.3 million for costs incurred by PalEx related to the
merger. For the ten months ended October 31, 1999, the Company recorded
expenses of $2.1 million related to this agreement. These expenses are included
in selling, general and administrative expenses.
The bank syndicate for the credit facilities has consented to the scheduled
IPO under the condition, that the lenders receive a payment of DM40.0 million,
or approximately $21.1 million, from the IPO net proceeds to reduce by that
amount the borrowings under the term loan portion of Senior Facility Agreement.
Additionally, at the time of the merger and IPO, the available facility amount
under the revolving credit portion of the Senior Facility Agreement will be
reduced by DM20.0 million, or approximately $10.6 million, and any borrowings
in excess of the reduced revolving credit limit will be repaid from the net
proceeds of the initial public offering or proceeds from a debt financing. In
addition, if the IPO occurs, the final maturity date of the Senior Facility
Agreement term loan and revolver will be accelerated to June 30, 2001, and the
Senior Subordinated Agreement repayment schedule will be modified to provide
for semiannual principal payments through September 30, 2005.
F-30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of PalEx. Inc.:
We have audited the accompanying consolidated balance sheets of PalEx. Inc.
(a Delaware corporation) and subsidiaries as of December 28, 1997, and December
27, 1998, and the related consolidated statements of operations, comprehensive
income, changes in stockholders' equity and cash flows for the years ended
November 30, 1996, December 28, 1997, and December 27, 1998, and the one-month
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PalEx, Inc. and subsidiaries
as of December 28, 1997, and December 27, 1998, and the results of their
operations and their cash flows for the years ended November 30, 1996, December
28, 1997, and December 27, 1998, and the one month period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Tampa, Florida
February 26, 1999
F-31
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 28, December 27, October 24,
1997 1998 1999
------------ ------------ -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 7,448 $ 4,157 $ 5,255
Accounts receivable, net of allowances
of $617, $1,616 and $1,500............ 21,592 44,543 51,068
Inventories............................ 20,383 29,986 27,535
Deferred income taxes.................. 945 2,105 2,503
Prepaid expenses and other current
assets................................ 3,387 4,427 8,954
-------- -------- --------
Total current assets..................... 53,755 85,218 95,315
PROPERTY, PLANT AND EQUIPMENT, net....... 37,850 75,724 75,239
GOODWILL AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization of
$1,313, $4,648 and $8,464............... 27,974 128,568 125,406
OTHER ASSETS............................. 426 2,928 3,657
-------- -------- --------
Total assets............................. $120,005 $292,438 $299,617
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit......................... $ 1,150 $ -- $ --
Current maturities of long-term debt... 1,057 1,960 135,018
Current maturities of subordinated
convertible notes payable to related
parties............................... -- -- 10,012
Bank overdraft......................... -- 8,407 7,945
Accounts payable....................... 9,342 9,004 11,232
Accrued expenses....................... 5,094 10,646 13,910
Income taxes payable................... 1,407 529 1,995
-------- -------- --------
Total current liabilities................ 18,050 30,546 180,112
LONG-TERM DEBT, net of current
maturities.............................. 30,673 143,902 2,151
SUBORDINATED CONVERTIBLE NOTES PAYABLE TO
RELATED PARTIES, net of current
maturities.............................. -- 9,910 --
DEFERRED INCOME TAXES.................... 3,167 5,350 5,668
FOREIGN DEFERRED INCOME TAXES............ -- 3,957 4,512
OTHER LONG-TERM LIABILITIES.............. 678 3,493 3,561
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
30,000,000 shares authorized;
17,644,520, 20,289,091 and 20,299,341
shares outstanding.................... 176 203 203
Capital in excess of par value......... 54,107 79,030 79,107
Unearned compensation.................. (1,770) (1,770) (1,770)
Accumulated other comprehensive income
(loss):
Foreign currency translation
adjustment........................... -- (623) 869
Retained earnings........................ 14,924 18,440 25,204
-------- -------- --------
Total stockholders' equity............... 67,437 95,280 103,613
-------- -------- --------
Total liabilities and stockholders'
equity.................................. $120,005 $292,438 $299,617
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Ten-Month
One Month Period Ended
Year Ended Period Ended Year Ended Year Ended ----------------------
November 30, December 31, December 28, December 27, October October
1996 1996 1997 1998 25, 1998 24, 1999
------------ ------------ ------------ ------------ ---------- ----------
(unaudited) (unaudited)
REVENUES................ $ 145,030 $ 3,828 $ 222,993 $ 319,691 $ 256,874 $ 320,433
COST OF GOODS SOLD...... 121,865 3,121 188,084 259,562 207,850 257,472
INVENTORY VALUATION
ADJUSTMENT............. -- -- -- 1,235 1,679 --
--------- --------- ---------- ---------- ---------- ----------
Gross Profit............ 23,165 707 34,909 58,894 47,345 62,961
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 14,063 749 20,135 33,042 27,374 36,142
AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE
ASSETS................. 165 -- 820 3,334 2,186 3,993
POOLING EXPENSES........ -- -- -- 1,841 1,841 --
COMPENSATION
DIFFERENTIAL........... -- -- 1,020 1,062 1,062 --
RESTRUCTURING CHARGE.... -- -- -- 949 2,404 --
PLANT CLOSURE COSTS AND
ASSET ABANDONMENT
LOSS................... -- -- -- 1,369 1,369 --
--------- --------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. 8,937 (42) 12,934 17,297 11,109 22,826
INTEREST EXPENSE........ (1,576) (25) (1,722) (8,468) (6,317) (12,047)
OTHER INCOME (EXPENSE),
NET.................... 511 1 132 262 239 1,387
--------- --------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES.................. 7,872 (66) 11,344 9,091 5,031 12,166
PROVISION FOR INCOME
TAXES.................. 1,833 -- 4,704 5,105 2,676 5,402
--------- --------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)....... $ 6,039 $ (66) $ 6,640 $ 3,986 $ 2,355 $ 6,764
========= ========= ========== ========== ========== ==========
Net income (loss) per
share--basic........... $ .64 $ (.01) $ .43 $ .21 $ .13 $ .33
========= ========= ========== ========== ========== ==========
Net income (loss) per
share--diluted......... $ .64 $ (.01) $ .42 $ .21 $ .12 $ .33
========= ========= ========== ========== ========== ==========
Shares used in computing
net income (loss) per
share--basic........... 9,433,414 9,433,414 15,561,489 18,937,354 18,651,737 20,297,016
========= ========= ========== ========== ========== ==========
Shares used in computing
net income (loss) per
share--diluted......... 9,433,414 9,433,414 15,914,157 19,310,295 19,047,287 20,299,381
========= ========= ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
One Month Ten-Month Ten-Month
Year Ended Period Ended Year Ended Year Ended Period Ended Period Ended
November 30, December 31, December 28, December 27, October 25, October 24,
1996 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
Net income (loss)....... $6,039 $(66) $6,640 $3,986 $2,355 $6,764
Other comprehensive
income (loss):
Foreign currency
translation
adjustment............. -- -- -- (623) (440) 1,492
------ ---- ------ ------ ------ ------
Comprehensive income
(loss)................. $6,039 $(66) $6,640 $3,363 $1,915 $8,256
====== ==== ====== ====== ====== ======
The accompanying notes are integral part of these consolidated financial
statements.
F-34
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Common Stock
--------------------
Accumulated
Capital in Treasury Other
Stockholders' Excess Unearned Retained Stock Income Comprehensive
Shares Amount of Par Value Compensation Earnings (Loss) Income (Loss) Total
------ ------------- ------------ ------------ -------- ------------ ------------- --------
BALANCE, November 30,
1995................... 9,433 $ 94 $ 5,232 $(2,260) $16,834 $(876) $ -- $ 19,024
Distributions to
stockholders, net...... -- -- -- -- (2,229) -- -- (2,229)
Capital contributions
equal to the current
income taxes of S
corporations........... -- -- 1,329 -- -- -- -- 1,329
Shares released under
leveraged ESOP plan.... -- -- -- 280 -- -- -- 280
Net income.............. -- -- -- -- 6,039 -- -- 6,039
------ ---- ------- ------- ------- ----- ----- --------
BALANCE, November 30,
1996................... 9,433 94 6,561 (1,980) 20,644 (876) -- 24,443
Issuance of common
stock:
Shares issued to profit
sharing plans.......... 143 1 800 -- -- -- -- 801
Public offering, net of
offering costs......... 3,450 35 23,529 -- -- -- -- 23,564
Acquisition of founding
companies.............. 4,087 41 17,228 -- -- -- -- 17,269
Acquisition of purchased
company................ 286 3 4,457 -- -- -- -- 4,460
Acquisition of pooled
company at inception... 245 2 92 -- 497 -- -- 591
Retire treasury shares.. -- -- -- -- (876) 876 -- --
Capital contributions... -- -- 231 -- -- -- -- 231
Capital contributions
equal to the current
income taxes of S
corporations........... -- -- 1,209 -- -- -- -- 1,209
Distributions to
stockholders, net...... -- -- -- -- (12,382) -- -- (12,382)
Net loss for the one-
month period ended
December 31, 1996...... -- -- -- -- (66) -- -- (66)
Adjustment to conform
year-end of pooled
companies.............. -- -- -- -- 467 -- -- 467
Shares released under
leveraged ESOP plan.... -- -- -- 210 -- -- -- 210
Net income, year ended
December 28, 1997...... -- -- -- -- 6,640 -- -- 6,640
------ ---- ------- ------- ------- ----- ----- --------
BALANCE, December 28,
1997................... 17,644 176 54,107 (1,770) 14,924 -- -- 67,437
Issuance of common
stock:
Acquisition of purchased
companies.............. 2,639 27 25,502 -- -- -- -- 25,529
Exercise of stock
options................ 6 -- 49 -- -- -- -- 49
Purchase of minority
interest in pooled
company................ -- -- (751) -- -- -- -- (751)
Capital contribution.... -- -- 123 -- -- -- -- 123
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (623) (623)
Adjustment to conform
year end of pooled
companies.............. -- -- -- -- (470) -- -- (470)
Net income.............. -- -- -- -- 3,986 -- -- 3,986
------ ---- ------- ------- ------- ----- ----- --------
BALANCE, December 27,
1998................... 20,289 $203 $79,030 $(1,770) $18,440 $ -- $(623) $ 95,280
Exercise of stock
options (unaudited).... 10 -- 77 -- -- -- -- 77
Foreign currency
translation adjustment
(unaudited)............ -- -- -- -- -- -- 1,492 1,492
Net income (unaudited).. -- -- -- -- 6,764 -- -- 6,764
------ ---- ------- ------- ------- ----- ----- --------
BALANCE, October 24,
1999................... 20,299 $203 $79,107 $(1,770) $25,204 $ -- $ 869 $103,613
====== ==== ======= ======= ======= ===== ===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
One Month Ten-Month Period Ended
Year Ended Period Ended Year Ended Year Ended ------------------------
November 30, December 31, December 28, December 27, October 25, October 24,
1996 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income (loss)....... $6,039 $(66) $ 6,640 $ 3,986 $ 2,355 $ 6,764
Net loss for Fraser for
the one month
transition period...... -- -- (66) -- -- --
Adjustment to conform
year-end of pooled
companies.............. -- -- 467 (470) (470) --
Unearned compensation... 280 -- 210 -- -- --
Cash acquired from
pooled company at
inception.............. -- -- 51 -- -- --
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization........... 3,597 99 5,847 11,665 7,974 12,325
(Gain) loss on sale of
property, plant and
equipment.............. 29 -- 400 1,135 1,430 (499)
Capital contributions
equal to the current
income taxes of S
corporations 1,329 -- 1,209 -- -- --
Deferred tax provision
(benefit).............. 134 -- (86) 1,082 53 483
Changes in operating
assets and liabilities
net of purchased
companies:
Accounts receivable..... (1,045) (387) (1,632) (7,349) (4,787) (6,394)
Inventories............. 282 (486) (5,458) 473 987 2,534
Prepaids and other
current assets......... (569) 80 (1,767) (386) (236) (4,522)
Other assets............ (1,173) 1 1,370 239 (1,173) (793)
Accounts payable........ 1,599 434 51 1,733 (1,766) 1,740
Accrued expenses........ 1,626 (402) (2,155) (837) 2,288 3,115
Income taxes payable.... 66 -- 1,135 (707) (1,407) 1,296
Deferred revenue........ (78) (2) 147 285 (192) 5
Other liabilities....... -- -- -- 2,747 2,016 158
------ ---- ------- -------- ----------- -----------
Net cash provided by
(used in) operating
activities............. 12,116 (729) 6,363 13,596 7,072 16,212
------ ---- ------- -------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment.... (7,355) (92) (9,149) (13,987) (12,472) (8,331)
Proceeds from sale of
equipment.............. -- -- -- -- 1,661 1,735
Purchase of minority
interest in pooled
company................ -- -- -- (751) -- --
Adjustments to purchase
price of certain
Purchased Companies.... -- -- -- -- -- --
Cash paid for purchased
companies, net of cash
acquired............... -- -- (4,607) (86,081) (80,572) --
------ ---- ------- -------- ----------- -----------
Net cash used in
investing activities... (7,355) (92) (13,756) (100,819) (91,383) (6,596)
------ ---- ------- -------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net payments on lines
for credit............. (3,535) -- (365) (1,150) (1,150) --
Net proceeds (payments)
on notes payable to
related parties........ 555 -- (2,980) -- -- --
Proceeds from debt...... 6,801 821 32,787 170,675 155,075 43,033
Payments on debt........ (6,642) -- (28,648) (59,064) (74,278) (51,624)
Payments of acquired
indebtedness of
purchased companies.... -- -- -- (26,664) -- --
Net proceeds from
exercise of stock
options................ -- -- -- 46 46 77
Net proceeds from
issuance of common
stock.................. -- -- 23,564 -- -- --
Purchase of minority
interest in pooled
company................ -- -- -- -- (751) --
Other capital
contributions.......... -- -- -- 123 -- --
Distributions to
stockholders........... (2,230) -- (12,382) -- -- --
------ ---- ------- -------- ----------- -----------
Net cash provided by
(used in) financing
activities............. (5,051) 821 11,976 83,966 78,942 (8,514)
------ ---- ------- -------- ----------- -----------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND
CASH EQUIVALENTS....... -- -- -- (34) (3) (4)
------ ---- ------- -------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (290) -- 4,583 (3,291) (5,372) 1,098
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 3,155 -- 2,865 7,448 7,448 4,157
CASH AND CASH
EQUIVALENTS, end of
period................. $2,865 $-- $ 7,448 $ 4,157 $ 2,076 $ 5,255
------ ---- ------- -------- ----------- -----------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for interest.. $1,703 $ 25 $ 1,710 $ 7,474 $ 5,977 $ 11,432
====== ==== ======= ======== =========== ===========
Cash paid for income
taxes.................. $1,008 $-- $ 1,835 $ 4,776 $ 4,512 $ 3,525
====== ==== ======= ======== =========== ===========
SUPPLEMENTAL SCHEDULE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES
Convertible notes
payable issued in
business acquisitions.. $ -- $-- $ -- $ 9,910 $ 9,910 $ --
====== ==== ======= ======== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
PalEx, Inc. ("PalEx" or the "Company") was founded in January 1996 to create
a nationwide provider of pallet products and related services. On March 25,
1997, concurrently with the closing of PalEx's initial public offering (the
"Offering") of its common stock, par value $.01 per share (the "Common Stock"),
PalEx and separate wholly owned subsidiaries of PalEx acquired, in separate
transactions (the "Acquisitions"), the following three businesses: Fraser
Industries, Inc. ("Fraser"), Ridge Pallets, Inc. ("Ridge"), and Interstate
Pallet Co., Inc. ("Interstate"), collectively referred to as the "Founding
Companies." The consideration for the acquisitions of the Founding Companies
consisted of a combination of cash and Common Stock.
Subsequent to the acquisition of the Founding Companies and the Offering, and
during fiscal 1997, PalEx acquired 5 additional companies. Sheffield Lumber &
Pallet Company, Inc. ("Sheffield"), Sonoma Pacific Company ("Sonoma"), Bay Area
Pallet ("Bay Area") and New London Pallet ("New London") were accounted for as
poolings-of-interests (the "Pooled Companies"). The fifth acquisition, Summers
Pallet Manufacturing, Inc. ("Summers"), was accounted for as a purchase.
During fiscal 1998, the Company acquired 19 additional companies, 4 of which,
Acme Barrel Company, Inc. ("Acme"), Drum Service Co. of Florida ("DSF"),
Consolidated Container Corporation ("CCC") and Western Container, Limited
Liability Company ("Western"), were accounted for as poolings-of-interests (the
"1998 Pooled Companies"). The other 15 companies, Consolidated Drum
Reconditioning, Inc. ("CDR"), American Pallet Recyclers, Inc. ("APR"), Capital
Pallet, Incorporated ("Capital"), Pallet Outlet Company, Inc. ("POC"), Southern
Pallets, Inc. ("Southern"), Shipshewana Pallet Co., Inc. ("Shipshewana"),
Gilbert Lumber Inc. ("Gilbert"), Valley Pallets, Inc. ("Valley"), Duckert
Pallet Co., Inc. ("Duckert"), Continental Associated Investments
("Continental"), Isaacson Lumber Company ("Isaacson"), McCook Drum & Barrel
Co., Inc. ("McCook"), Charlotte Steel Drum ("CSD"), Atlas Drum ("Atlas") and
SMG Corporation ("SMG") were accounted for as purchases (the "1998 Purchased
Companies" and, together with Summers, the "Purchased Companies"). Eight of the
19 companies acquired in fiscal 1998 are engaged in the reconditioning and
rebuilding of industrial steel containers. SMG is engaged in the rental of
pallets in Canada.
The Company's headquarters are in Houston, Texas, with significant
manufacturing operations located in Arkansas, California, Florida, Georgia,
Illinois, North Carolina, Ohio, Pennsylvania, Texas and Wisconsin and pallet
leasing operations in 7 Canadian provinces. Sales are made throughout the
United States and Canada with significant concentrations in the southeastern,
midwestern and western regions of the United States serving primarily
agricultural and industrial customers. The Company's pallet leasing operations
serve six Canadian provinces. Revenues related to the agricultural customers
are highly seasonal, occurring primarily during the harvesting season.
Unless the context otherwise requires, all references herein to the Company
include PalEx, the Founding Companies, the Pooled Companies, the 1998 Pooled
Companies and the Purchased Companies.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Fraser has been identified as the accounting acquiror for financial statement
presentation purposes. The acquisitions of Ridge, Interstate and the Purchased
Companies were accounted for using the purchase method of accounting. The
allocations of the purchase price to the assets acquired and liabilities
assumed have been assigned and recorded based on estimates of fair value and
will be adjusted to reflect changes in the estimates of fair value, although
the Company does not believe those changes will be material. The accompanying
consolidated financial statements present Fraser combined with the Pooled
Companies and the 1998 Pooled
F-37
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Companies for all periods, and include Ridge, Interstate and the Purchased
Companies from their respective dates of acquisition. All significant
intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to prior year consolidated financial
statements to conform with the current-year presentation.
The Pooled Companies previously reported on a calendar year-end. As such, the
accounts of these companies for their 1996 calendar year have been consolidated
with the accounts of PalEx as of and for the year ended November 30, 1996.
Acme, DSF and CCC previously reported on year-ends of April 30, October 31 and
November 30, respectively. The results of operations for Acme have been
conformed to the fiscal-year end of PalEx for 1997. Revenues and net loss for
the four month period ended April 30, 1997 were approximately $8,445,000 and
$467,000, respectively. Acme's net loss for the four-month transition period is
included as an adjustment to the consolidated statements of stockholders'
equity and cash flows for the year ended December 28, 1997. Acme's results of
operations for its year ended April 30, 1997 has been included in the Company's
consolidated statement of operations for the year ended November 30, 1996. The
results of operations included herein for the years ended November 30, 1996 and
December 28, 1997 include DSF and CCC for their respective twelve-month periods
ended October 31, 1996 and 1997 and November 30, 1996 and 1997. An adjustment
has been made to the accompanying consolidated statements of stockholders'
equity and cash flows for the year ended December 27, 1998, to reflect the net
loss for the transition periods of DSF and CCC. Revenues and net loss for DSF
and CCC for the transition period were approximately $3,075,000 and $470,000,
respectively.
Fiscal Year
During 1997, PalEx changed its year-end to the last Sunday in the calendar
year from November 30. Accordingly, it maintains its accounting records using a
52/53-week year ending on the last Sunday in December. Each quarter contains 13
weeks, unless otherwise noted. The accompanying consolidated financial
statements include the statement of operations and cash flows for the one-month
period ended December 31, 1996, representing the income and cash flows of
Fraser, the accounting acquiror, for this one-month transition period.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis or by specific identification. The cost of
finished goods inventory includes direct materials, direct labor and overhead.
Property, Plant and Equipment
Property, plant and equipment acquired in purchase business combinations is
recorded at fair value. Property, plant, and equipment acquired subsequently 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 Company's capital leases are insignificant. The
straight-line method of depreciation is utilized for substantially all assets
for financial reporting purposes, but accelerated methods are used for tax
purposes.
The Company's rental pool consists of a pallet rental pool at its Canadian
operations and industrial bulk containers at one of the drum operations. Where
the Company repairs its own pallets or reuses industrial
F-38
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
containers, cost includes materials plus direct labor and applicable overhead.
The rental pool is being depreciated to estimated salvage value using the
straight line method over lives ranging from 3 to 10 years, with a weighted
average useful life approximately 9 years.
Expenditures for maintenance and repairs are charged to expense as incurred.
Additions and major replacements or betterments that increase capacity or
extend useful lives are added to the cost of the asset. Upon sales or
retirement of property, plant and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net, in the accompanying
consolidated statements of operations.
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). 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 and has determined that
no impairments would have been recognized under SFAS No. 121, other than those
related to the termination of the Company's relationship with CHEP USA
("CHEP"), as discussed in Note 11.
Goodwill
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 30
years. The Company evaluates on a regular basis whether events and
circumstances have occurred that indicate that the carrying amount of goodwill
may warrant revision. Management believes that there has been no impairment of
the goodwill as reflected in the Company's consolidated financial statements as
of December 27, 1998.
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 income taxes were not provided on the undistributed foreign earnings
of SMG because such earnings are expected to be reinvested indefinitely.
The stockholders of Fraser and three of the four Pooled Companies elected to
be taxed under the provisions of Subchapter S of the Internal Revenue Code
prior to their acquisition by the Company. Under these provisions, these
companies did not pay federal and certain state income taxes. Instead, these
companies' respective stockholders paid income taxes on their proportionate
shares of the companies' net earnings. The S Corporation status of Fraser and
the applicable Pooled Companies was terminated effective with the combination
with PalEx, and the Company is now subject to federal and state income taxes.
The Company recorded a charge to income tax expense of approximately $488,000
on March 25, 1997, representing income taxes at that date which were not
previously recorded because of Fraser's status under Subchapter S.
F-39
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of these consolidated financial statements, federal and state
income taxes have been provided for the net income of the applicable Pooled
Companies as if these companies had filed C Corporation tax returns for the
preacquisition periods. The current income tax expense of the applicable Pooled
Companies is reflected in the consolidated financial statements in the
provision for income taxes and as an increase to capital in excess of par
value.
Revenue Recognition
The Company recognizes revenue upon delivery of the product to the customer.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments", and
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments", require the disclosure of the fair value of
financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. The carrying value of the Company's financial instruments approximates
fair value.
Foreign Currency Translation
The financial statements of the Company's Canadian subsidiary are translated
to U.S. dollars 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
stockholders' equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenues and
expenses during the reporting period. Although the Company reviews all
significant estimates affecting its 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.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"). The Company adopted SFAS No. 128
for the year ended December 28, 1997. Under SFAS No. 128, net income per
share--basic excludes dilution and is determined by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Net income per share--diluted reflects the
potential dilution that could occur if securities and other contracts to issue
common stock were exercised or converted into common stock. Net income per
share--diluted is computed similarly to fully diluted net income per share
under previous accounting rules.
Net income per share--basic and diluted was computed using 9,433,414 shares
(the aggregate number of shares attributable to Fraser and the shares issued in
acquisitions accounted for under the pooling-of-interests method) for the year
ended November 30, 1996 and the one-month transition period ended December 31,
1996. Net income per share--basic for the year ended December 28, 1997 was
computed using, in addition to the aforementioned shares, 6,128,075 weighted
average shares issued in consideration for the acquisition of Ridge, Interstate
and Summers, the shares issued pursuant to the Offering and overallotment
option, the shares issued to Main Street Capital Partners, L.P. and to PalEx
management, the shares issued to the profit sharing plans of the Founding
Companies and the shares issued in the acquisition of one of the 1998 Pooled
Companies, deemed to have been acquired at its date of inception in 1997.
F-40
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net income per share--basic for the year ended December 27, 1998 was computed
using 17,644,521 shares issued in consideration for the acquisition of the
Founding Companies, the Pooled Companies, the 1998 Pooled Companies and
Summers, the shares issued pursuant to the Offering and overallotment option,
shares issued to Main Street Capital Partners, L.P. and to PalEx management,
the shares issued to the profit sharing plans of the Founding Companies and
1,292,833 weighted average shares issued for the acquisition of the 1998
Purchased Companies and exercise of stock options.
Net income per share--diluted for the years ended December 28, 1997 and
December 27, 1998 includes 352,668 and 372,941 shares, respectively, for
unexercised stock options computed under the treasury method. The weighted
average shares for 1998 includes as common stock equivalents those shares of
the Company's Canadian subsidiary which are convertible on a share for share
basis into the common stock of the Company. The effect of the conversion of the
Company's outstanding convertible notes payable was anti-dilutive for the year
ended December 27, 1998, and therefore not included in the calculation of net
income per share--diluted.
The following stock options were outstanding as of the end of the fiscal
years but were not included in the computation of net income per share--diluted
because the options' exercise prices were greater than the average market price
of the common shares:
Year ended December 27,
Year ended December 28, 1997 1998
-------------------------------- -------------------------
Number of options....... 292,000 1,056,000
Exercise price (range).. $11.38-$14.75 $10.25-$14.88
Expiration date
(range)................ August 1, 2007-December 10, 2007 June 6, 2007-May 21, 2008
Concentrations of Risk
Materials
Pallet prices are closely related to the changing costs and availability of
lumber, the principal raw material used in the manufacture and repair of wooden
pallets. Lumber supplies and costs are affected by many factors including
weather, governmental regulation of logging on public lands, lumber agreements
between Canada and the United States and competition from other industries that
use similar grades and types of lumber.
Drum demand in certain regions of the United States has required more drums
to be shipped outside of the region than are shipped into the region.
Consequently, the acquisition costs of used drums, the primary raw materials
for reconditioned drums, in these regions are significantly higher since the
used drum deficit must be replaced by collecting and shipping used drums over
significant distances. The West Coast and Southeast are regions that tend to be
net exporters of open top drums because of their emphasis on agriculture. The
Midwest tends to be a significant accumulator of drums because of its greater
industrial content and usage of petroleum products, coatings and chemicals.
Markets
Markets for pallet manufacturing and pallet recycling are highly fragmented
and competitive. These markets are not capital-intensive and barriers to entry
in such businesses are minimal.
Markets for steel drum reconditioning are highly fragmented and competitive.
There are three significant barriers to entry in the steel drum reconditioning
industry: (i) regulatory permits for facilities and ongoing compliance
requirements, (ii) significant distribution barriers as a result of high
transportation costs for containers and (iii) capital-intensive nature of the
business.
F-41
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Vendors
During the year ended December 27, 1998, the Company purchased approximately
13% of its lumber from two vendors.
Customers
The Company seeks to efficiently serve large numbers of customers across
diverse markets and industries to provide a stable and diversified base for
ongoing sales of products and services in all of its operations.
Customers of the Company include companies in the automotive, chemical,
consumer products, grocery, produce and food production, petroleum, paper and
forest products, retail, and steel and metals industries and are both regional
and national in scale. Because a significant part of the Company's products and
services are sold to customers engaged in the produce and citrus industries,
the Company's sales volumes in certain regions tend to be seasonal.
On April 29, 1998 the Company notified its largest customer, CHEP, that PalEx
was terminating all its existing agreements with CHEP (also see Note 11). CHEP
operates a national pallet leasing program that provides 48" x 40" pallets
primarily to grocery and consumer products customers throughout the U.S. for a
daily fee. The Company manufactured and repaired pallets for CHEP and provided
a variety of logistical services with respect to CHEP's pallet leasing program,
including the storage and just-in-time delivery of pallets. Sales to CHEP were
approximately 21 percent, 26 percent and 8 percent of the Company's
consolidated revenues in 1996, 1997, and 1998, respectively.
The Company sold approximately $490,000 and $481,000 of lumber to a
corporation owned by a board director and two other employees during the fiscal
years 1997 and 1998, respectively. Management believes the sales prices
approximate those charged to unaffiliated third parties.
Recent Accounting Pronouncements
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement establishes rules for the reporting of
comprehensive income and its components. The Company's comprehensive income
consists of net income and foreign currency translation adjustments and is
presented in the accompanying consolidated statements of comprehensive income.
The adoption of SFAS No. 130 had no impact on total stockholders' equity. The
Company had no other comprehensive income prior to 1998.
Segment Information
The Company operates in two business segments; pallet manufacturing and
recycling and steel drum reconditioning, and follows the reporting requirements
of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (see Note 12).
Interim Financial Information
The interim financial statements as of October 24, 1999 and for the ten
months ended October 25, 1998 and October 24, 1999, are unaudited, and certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
omitted. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to fairly
F-42
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
present the financial position, results of operations and cash flows with
respect to the interim financial statements have been included. Due to
seasonality and other factors, the results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
3.BUSINESS COMBINATIONS:
1997 Purchase Acquisitions
The acquisitions of Ridge, Interstate and Summers in 1997 were accounted for
as purchases and have been reflected in the Company's consolidated financial
statements from March 31, 1997 for Ridge and Interstate and from November 20,
1997 for Summers. The aggregate consideration paid in these transactions was
approximately $4.6 million in cash and 3,301,971 shares of commons stock with
an estimated fair value of approximately $21.7 million. The accompanying
consolidated balance sheet as of December 28, 1997 includes allocations of the
respective purchase prices of Ridge, Interstate and Summers. The allocations
resulted in approximately $25.2 million of goodwill, which represents the
excess of purchase price over the fair value of net assets acquired, as follows
(in thousands):
Goodwill........................................................... $ 25,241
Fair value of assets acquired...................................... 20,503
Liabilities assumed................................................ (19,408)
Fair value of common stock......................................... (21,729)
--------
Cash paid, net of cash acquired.................................... $ 4,607
========
1998 Purchase Acquisitions
The acquisitions of the 1998 Purchased Companies were accounted for as
purchases and have been reflected in the Company's financial statements from
the date of each respective acquisition. The aggregate consideration paid in
these transactions was approximately $85.5 million in cash, 2,638,571 shares of
common stock with an estimated fair value of approximately $25.5 million and
issuance of convertible notes payable to former shareholders of approximately
$9.9 million. The accompanying consolidated balance sheet as of December 27,
1998 includes allocations of the respective purchase prices of the 1998
Purchased Companies. The allocations resulted in approximately $103.9 million
in goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, as follows (in thousands):
Goodwill........................................................... $103,949
Fair value of assets acquired...................................... 62,602
Convertible notes payable issued................................... (9,910)
Liabilities assumed................................................ (45,597)
Fair value of common stock......................................... (25,532)
--------
Cash paid, net of cash acquired.................................... $ 85,512
========
F-43
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Presentation
The following table sets forth unaudited pro forma statements of operations
data of the Company which reflects adjustments to the consolidated financial
statements to present the effect of the acquisitions of Ridge, Interstate and
the Purchased Companies as if the acquisitions were effective January 1, 1997
(amounts in thousands, except per share data):
Year Ended Year Ended
December 28, December 27,
1997 1998
------------ ------------
(unaudited)
Revenues........................................... $379,534 $379,854
======== ========
Net Income......................................... $ 10,574 $ 6,512
======== ========
Net Income per share--diluted...................... $ .52 $ .32
======== ========
Pro forma adjustments included in the amounts above primarily relate to
adjustments to selling, general and administrative expenses for changes in the
compensation level of the owners of the acquired businesses, adjustments to
interest expense attributable to incremental borrowing levels and incremental
interest rate levels, amortization of goodwill and adjustment to the income tax
provisions based on pro forma operating results. Net income per share--diluted
assumes all shares had been outstanding for the periods presented, except for
shares issued pursuant to the over-allotment option and those shares issued to
the profit-sharing plans of the Founding Companies, which are included only
from their date of issuance.
The unaudited pro forma data presented above is not necessarily indicative of
actual results that might have occurred had the operations and management teams
of PalEx, the Founding Companies, the Pooled Companies, the 1998 Pooled
Companies and the Purchased Companies been combined at the beginning of each
period presented.
4.PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
Estimated Useful December 28, December 27,
Lives In Years 1997 1998
---------------- ------------ ------------
Land............................. $ 3,273 $ 5,485
Machinery and equipment.......... 5-10 48,089 60,753
Rental assets.................... 3-10 -- 15,537
Buildings........................ 15-40 12,977 19,890
Furniture and fixtures........... 5-8 1,706 3,890
Tractors and trailers............ 5-6 10,636 18,122
-------- --------
76,681 123,677
Less: accumulated depreciation... (38,831) (47,953)
-------- --------
$ 37,850 $ 75,724
======== ========
F-44
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5.DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
December 28, December 27,
1997 1998
------------ ------------
Balance at beginning of year..................... $ 253 $ 617
Additional charges to costs and expenses......... 227 394
Additional allowances from Purchased Companies... 165 843
Deductions for uncollectible accounts written
off............................................. (28) (238)
------- -------
Balance at end of year........................... $ 617 $ 1,616
======= =======
The major components of inventories are as follows (in thousands):
December 28, December 27,
1997 1998
------------ ------------
Raw materials.................................... $16,555 $23,174
Work-in-process.................................. 102 43
Finished goods................................... 3,726 6,769
------- -------
$20,383 $29,986
======= =======
Accrued expenses consist of the following (in thousands):
December 28, December 27,
1997 1998
------------ ------------
Accrued compensation and benefits................ $ 2,132 $ 2,762
Accrued taxes.................................... 756 1,503
Other accrued expenses........................... 2,206 6,381
------- -------
$ 5,094 $10,646
======= =======
6.DEBT:
Credit Facility
On March 25, 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A. ("Bank One"), which was amended on January 29, 1998, September 3,
1998 and November 10, 1998 (the "Credit Facility"). The Credit Facility
provided the Company with a revolving line of credit of up to $150.0 million
which could be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies, the Pooled Companies,
the 1998 Pooled Companies and the Purchased Companies, future acquisitions,
capital expenditures, letters of credit and working capital.
Advances under the Credit Facility bore interest at designated variable rates
plus margins ranging from 0 to 25 basis points, depending on the ratio of the
Company's interest bearing debt to its pro forma trailing earnings before
interest, taxes, depreciation and amortization for the previous four quarters.
At the Company's option, the loans could bear interest based on a designated
London interbank offered rate ("LIBOR") plus a margin ranging from 75 to 200
basis points, depending on the ratio noted above. Commitment fees of 17.5 to 30
basis points are payable on the unused portion of the line of credit. The
Credit Facility contained a limit for standby letters of credit up to $10.0
million. There were letter of credit commitments of approximately $3.0 million
outstanding under the Credit Facility as of December 27, 1998. The Credit
Facility prohibited the
F-45
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
payment of dividends by the Company, restricted the Company's incurrence or
assumption of other indebtedness and required the Company to comply with
financial covenants, including fixed charge coverage, certain funded debt to
earnings before taxes, depreciation, interest, amortization and tangible assets
to liabilities ratios. The Company was in compliance with, or had obtained
waivers for, the covenants on December 27, 1998. The approximate level of
borrowings available under the Credit Facility as of December 27, 1998 was
approximately $5.5 million. The Company's U.S. subsidiaries guaranteed and the
outstanding stock of each of the Company's U.S. subsidiaries and 65% of the
outstanding stock of the Company's Canadian subsidiary was pledged to secure
the repayment of all amounts due under the Credit Facility.
The Credit Facility was amended on December 28, 1998 (the "Amended Credit
Facility"). The Amended Credit Facility provides the Company with a revolving
line of credit of up to $150.0 million, which may be used for general corporate
purposes, including acquisitions, the repayment or refinancing of indebtedness
of all acquisitions including future acquisitions, capital expenditures,
letters of credit and working capital. The Amended Credit Facility will
terminate and all amounts outstanding thereunder, if any, will be due and
payable on April 1, 2000.
Advances under the Amended Credit Facility bear interest at Bank One's base
interest rate, as defined, plus a margin of 50 basis points through March 31,
1999 and increasing by 50 basis points on that date and each quarter until
maturity. At the Company's option, such advances may bear interest based on a
designated LIBOR plus a margin of 275 basis points through March 31, 1999 and
increasing by 50 basis points on that date and each quarter until maturity.
Commitment fees of 50 basis points are payable on the unused portion of the
line of credit through March 31, 1999 and increase by 50 basis points on that
date and each quarter until maturity. The Amended Credit Facility contains a
limit for standby letters of credit of up to $10.0 million. The Amended Credit
Facility prohibits the payment of dividends by the Company, restricts the
Company's incurrence or assumption of other indebtedness and requires the
Company to comply with certain financial covenants including consolidated net
worth, fixed charge coverage, and funded debt and senior debt to earnings
before interest, taxes, depreciation and amortization ratios. The Amended
Credit Facility is secured by a lien on the real and tangible personal property
of the Company, as defined, a pledge of the outstanding stock of each of the
Company's U.S. subsidiaries and 65% of the outstanding stock of the Company's
Canadian subsidiary. The amounts due under the Amended Credit Facility are also
guaranteed by the Company's U.S. subsidiaries.
Convertible Notes Payable to Related Parties
The Company issued approximately $9.9 million in subordinated convertible
notes payable (the "Convertible Notes") to certain former owners of the 1998
Purchased Companies. The Convertible Notes, which bear interest at rates
ranging from six to eight percent, include provisions that allow conversion
into shares of the Company's Common Stock beginning on the first anniversary
date of the Convertible Notes (the "Conversion Date") at conversion prices
ranging from $10.78 to $15.86 per share. If the Convertible Notes are not
converted they become due and payable on their second anniversary. At the
Company's option, the Convertible Notes may be prepaid at any time following
the Conversion Date.
F-46
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consists of the following (in thousands):
December 28, December 27,
1997 1998
------------ ------------
Advances under the Credit Facility, bearing
interest at rates ranging from 7.04% to 8.04 %
as of December 27, 1998........................ $24,000 $141,500
Industrial development revenue bonds, bearing
interest at a variable rate (6.20% at December
27, 1998), payable in annual installments of
$50 through maturity in 2008, secured by a
certificate of deposit and
bank letter of credit.......................... 550 500
Various notes payable, bearing interest at rates
ranging from 5.02% to 8.30% in 1997 and 7.00%
to 7.50% at December 27, 1998, with monthly
installments totaling approximately $31 and
maturity dates ranging
from 1999 until 2009, secured by certain
Company assets................................. 5,387 2,136
Variable rate note issued by the Acme ESOP (see
Note 10), guaranteed
by the Company, interest at 5.81% as of
December 27, 1998.............................. 1,770 1,700
Other notes payable............................. 23 26
------- --------
31,730 145,862
------- --------
Less-current maturities......................... (1,057) (1,960)
------- --------
$30,673 $143,902
======= ========
Future maturities of long-term debt as of December 27, 1998 are as follows
(in thousands):
Fiscal Year Ending December,
----------------------------
1999............................................................... $ 1,960
2000............................................................... 141,865
2001............................................................... 329
2002............................................................... 316
2003............................................................... 308
Thereafter......................................................... 1,084
--------
$145,862
========
7.INCOME TAXES:
The provision (benefit) for income taxes consists of the following (in
thousands):
Year Ended
--------------------------------------
November 30, December 28, December 27,
1996 1997 1998
------------ ------------ ------------
Federal
Current............................... $1,207 $3,944 $2,831
Deferred.............................. 143 (71) 892
------ ------ ------
1,350 3,873 3,723
------ ------ ------
Foreign
Current............................... -- -- 238
Deferred.............................. -- -- 184
------ ------ ------
-- -- 422
------ ------ ------
State
Current............................... 492 846 829
Deferred.............................. (9) (15) 131
------ ------ ------
483 831 960
------ ------ ------
$1,833 $4,704 $5,105
====== ====== ======
F-47
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (in thousands):
Year Ended
--------------------------------------
November 30, December 28, December 27,
1996 1997 1998
------------ ------------ ------------
Tax at federal statutory rate of
35%................................ $2,755 $3,970 $3,182
Increase (decrease) resulting from:
State income taxes, net of federal
benefit........................... 353 547 624
Income taxed to Fraser
stockholders...................... (1,381) (172) --
Additional foreign income tax
provision......................... -- -- 74
Nondeductible items:
Goodwill amortization.............. -- 200 484
Pooling expenses................... -- 45 603
Other nondeductible items.......... 76 16 89
Other.............................. 30 98 49
------ ------ ------
$1,833 $4,704 $5,105
====== ====== ======
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 (in thousands):
December 28, December 27,
1997 1998
------------ ------------
Deferred income tax liabilities:
Property and equipment............................ $(2,547) $(8,405)
Other............................................. (620) (902)
------- -------
Total deferred income tax liabilities.............. (3,167) (9,307)
------- -------
Deferred income tax assets:
Basis difference in inventory..................... -- 175
Allowance for doubtful accounts................... 111 654
Accruals and reserves............................. 834 1,276
------- -------
Total deferred income tax assets................... 945 2,105
------- -------
Net deferred income tax liabilities................ $(2,222) $(7,202)
======= =======
8.COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. While it is not possible to predict the outcome of
such proceedings with certainty, in the opinion of the Company's management,
all such proceedings are adequately covered by insurance or, if not so covered,
should not materially result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
Insurance
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy.
F-48
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is self-insured for certain medical claims up to $50,000 per
person per year. Provisions for expected future payments are accrued based on
the Company's estimate of its aggregate liability for all open and unreported
claims. Management believes the amount currently accrued is adequate to cover
all known and unreported claims as of December 27, 1998.
Operating Lease Agreements
The Company leases certain facilities and equipment. Minimum future rental
payments under noncancelable operating leases as of December 27, 1998 are as
follows (in thousands):
Fiscal Year Ending
------------------
1999................................................................. $ 2,889
2000................................................................. 2,313
2001................................................................. 2,050
2002................................................................. 1,599
2003................................................................. 1,122
Thereafter........................................................... 1,543
-------
$11,516
=======
Rent expense under operating leases was approximately $463,000, $1,445,000
and $2,995,000 for fiscal years 1996, 1997 and 1998, respectively. Rent expense
paid to related parties and included in the foregoing amounts was approximately
$227,000, $146,000 and $558,000 for fiscal years 1996, 1997 and 1998,
respectively. In June 1998, the company purchased property for $1,400,000 from
an officer/board director. Management believes that the purchase price
approximates market value.
Potential Environmental Liabilities
In February 1998, the Company acquired DSF, a steel drum reconditioning
company with a facility in Zellwood, Florida. DSF is a wholly-owned subsidiary
of the Company. In 1982, DSF was notified by the U.S. Environmental Protection
Agency (the "EPA") and the Florida Department of Environmental Regulation (the
"DER") that they believed that DSF might be a potentially responsible party
("PRP") regarding the Zellwood Groundwater Contamination Site in Orange County,
Florida (the "Zellwood Site"). The Zellwood Site was designated a "Superfund"
environmental clean-up site after the DER discovered arsenic contamination in a
shallow monitoring well adjacent to it. The DSF facility is a portion of the 57
acres constituting the Zellwood Site. The Company believes that DSF and its
former 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 $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.
F-49
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. In addition, the former
shareholders of DSF have agreed with DSF and the Company to bear liabilities
and expenses with respect to the Zellwood Site, to the extent such liabilities
exceed the Company'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 December 27,
1998 includes a $2.0 million receivable from a former shareholder of DSF and a
corresponding amount in other long-term liabilities.
In November 1998, Container Services Company ("CSC"), a subsidiary of PalEx
Container Systems, Inc. which acquired CDR, received notice from the EPA that
it had been identified as a de minimis PRP with respect to the Casmalia
Disposal Site in Santa Barbara County, California ("Casmalia Site"). The
Casmalia Site was a licensed hazardous waste disposal facility from 1974 to
1989. In 1989, the EPA refused to reissue Casmalia's RCRA permit on the grounds
that the operator of the site was in violation of the preexisting permit and
other environmental laws and regulations. As a result of the owner/operator
abandoning efforts to properly close and clean up the site, the EPA took
emergency action. There are approximately 10,000 generators who legally sent
(according to EPA estimates) approximately 4.5 billion pounds of waste to the
Casmalia Site. EPA estimates that the clean up of this site will cost
approximately $500 million and will take over 30 years to complete.
The EPA has entered in a partial settlement with 50 major PRPs and is
currently in negotiations with over 50 other major PRPs. In October 1998, the
EPA sent out general notices to 750 de minimis PRPs, including CSC. In
addition, it is expected that the EPA will send out several hundred additional
notice letters to de minimis PRPs. The EPA estimates that the original 750 de
minimis PRPs are responsible for an aggregate of about 10% of the volume of
waste shipped to the Casmalia Site.
Based on CSC's alleged contribution of waste to the Casmalia Site, the EPA
has offered to settle its claims against CSC for approximately $300,000, which
represents a 100% premium over EPA's estimate of CSC's proportionate share of
the estimated clean up costs. In return for settlement, CSC will be granted
contribution protection against lawsuits by other PRPs who contributed waste to
the Casmalia Site. CSC is currently reviewing EPA's settlement offer and
estimates of CSC's contribution of waste to the site. In addition, CSC has
joined a joint defense group of over 140 other de minimis PRPs for the primary
purpose of negotiating a reduction in, and the terms of, the EPA's settlement
offer. The Company has included such settlement amount as accrued expenses in
the accompanying consolidated balance sheet as of December 27, 1998.
Contingent Purchase Price
The Company is obligated under the terms of an agreement with the former
owners of one of the 1998 Purchased Companies to pay, in either cash or equal
amounts of cash and the Company's Common Stock, up to $6,000,000 based on the
subsidiary's post-acquisition earnings, as defined. Amounts due under this
contingency, if any, will be accrued as part of the purchase price when the
contingency is resolved in 1999 and 2000.
F-50
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employment Agreements
The Company has entered into employment agreements with certain Company
officers and certain former owners of the companies acquired by PalEx. The
remaining commitment under the terms of these agreements as of December 27,
1998 is approximately $5.6 million, of which approximately $4.6 million is
payable in 1999 and approximately $1.0 million is payable in 2000. These
employment agreements expire on various dates through September 2000.
Warrant
On September 30, 1998, the Company issued a warrant for the purchase of up to
250,000 shares of its Common Stock for professional advisory services at an
exercise price of $11.375 per share. The warrant may be exercised in whole or
in part upon the consummation of certain defined transactions, none of which
had occurred as of December 27, 1998, and expires in May 2005.
9. STOCK OPTION PLAN:
On June 1, 1996, the Board of Directors and the stockholders of the Company
approved the 1996 Stock Option Plan, as amended (the "Stock Option Plan"). The
Stock Option Plan provides for the granting of stock options to directors,
executive officers, other employees and certain non-employee consultants of the
Company. The Company accounts for the Stock Option Plan under APB Opinion No.
25, and no compensation expense has been recognized. The Stock Option Plan,
which permits an amount equal to no more than 15% of the outstanding shares of
PalEx common stock to be issued as optioned shares, terminates in June 2006. In
general, the terms of the option awards (including vesting schedules) are
established by the Compensation Committee of the Company's Board of Directors.
The following table summarizes activity under the Stock Option Plan:
Exercise
Shares Price
---------- ------------
Outstanding at November 30, 1996
Granted.......................................... 1,328,500 $7.50-$14.75
Exercised........................................ -- --
Forfeited and canceled........................... (7,000) $7.50
Outstanding at December 28, 1997.................. 1,321,500 $7.50-$14.75
Granted.......................................... 1,361,500 $5.88-$14.88
Exercised........................................ (6,500) $7.50
Forfeited and canceled........................... (65,850) $7.50-$13.50
Outstanding at December 27, 1998.................. 2,610,650 $5.88-$14.88
Weighted average fair value of options granted
during 1997...................................... $5.38
Weighted average fair value of options granted
during 1998...................................... $6.79
Weighted average remaining contractual life for
options issued in 1997........................... 8.33 years
Weighted average remaining contractual life for
options issued in 1998........................... 9.36 years
At December 27, 1998, options for approximately 257,000 shares of common
stock were exercisable. Unexercised options expire ten years from the issue
date.
F-51
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following pro forma summary of the Company's consolidated results of
operations have been prepared as if the fair value based method of accounting
required by SFAS No. 123, "Accounting for Stock-Based Compensation" had been
applied (in thousands, except per share data):
Year ended Year ended
December 28, December 27,
1997 1998
------------ ------------
Net income attributable to common stockholders... $6,640 $3,986
Pro forma adjustment............................. (775) (1,434)
------ ------
Pro forma net income attributable to common
stockholders.................................... $5,865 $2,552
Net income per share ("EPS")
Basic EPS as reported........................... $ .43 $ .21
Basic EPS pro forma............................. $ .38 $ .13
Diluted EPS as reported......................... $ .42 $ .21
Diluted EPS pro forma........................... $ .37 $ .13
Fair value of the options was estimated at the date of grant using the Black-
Scholes option-pricing model using the following weighted average assumptions:
Fiscal Year Fiscal Year
1997 Options 1998 Options
------------ ------------
Risk free interest rate............................ 6.66% 5.39%
Dividend yield..................................... 0.00% 0.00%
Volatility factor.................................. 35.77% 41.99%
Weighted average expected life..................... 10 years 10 years
A summary of stock options outstanding and exercisable as of December 27,
1998 is as follows:
Options outstanding Options exercisable
------------------------------------------------- ---------------------------------------------
Range of
exercise Number Weighted average Weighted average Number Weighted average
prices outstanding remaining life (years) exercise price exercisable exercise price
------------- ----------- --------------------- ---------------- ----------- ----------------
$5.88-$8.75 1,361,750 8.72 $ 7.51 181,750 $ 7.50
$8.88-$13.12 811,000 9.14 $11.73 29,100 $10.19
$13.13-$14.88 437,900 8.89 $14.23 46,580 $13.66
10.EMPLOYEE BENEFIT PLANS:
The Company approved a defined contribution profit-sharing plan (the "Plan")
in March 1997, which qualifies under Section 401(k) of the Internal Revenue
Code. Eligible employees may contribute up to the lesser of 15% of their annual
compensation or the maximum amount permitted under Internal Revenue Service
regulations to their account. The Company matches the contributions of
participating employees on the basis of the percentages specified in the Plan.
The employee and Company matching contributions are invested at the direction
of the individual employee.
Certain of the Company's subsidiaries had defined contribution employee
benefit plans at the time of their acquisition by PalEx. Employer contributions
to the Plan and the other defined contribution plans for the Pooled Companies
and the 1998 Pooled Companies for all periods presented and for Ridge,
Interstate and the Purchased Companies from their respective dates of
acquisition were approximately $2,184,000, $1,134,000 and $768,000 for 1996,
1997 and 1998, respectively.
F-52
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1985, Acme established an employee stock ownership plan ("ESOP") for
Acme's eligible employees, as defined. The ESOP is a qualified plan exempt from
taxes under Internal Revenue Section 401(a). In May 1994, the ESOP purchased
3,400 shares of Acme common stock at $765 per share from a stockholder for
$2,601,000. The ESOP funded the purchase by issuing a variable rate note to a
commercial bank that was guaranteed by Acme. Upon completion of the acquisition
of Acme by PalEx, the shares of Acme stock in the ESOP were replaced with
shares of PalEx stock of equal value and the guaranty by Acme was replaced by a
letter of credit issued under the Credit Facility.
The Company accounts for the ESOP in accordance with Statement of Position
93-6, "Employers' Accounting for Employee Stock Ownership Plan" ("SOP 93-6").
Accordingly, the debt of the ESOP is recorded as long-term debt and the shares
pledged as collateral are reported as unearned compensation on the Company's
consolidated balance sheet. As shares are released, the Company reports
compensation expense equal to the current estimated market price of the shares.
In accordance with SOP 93-6, additional paid in capital is adjusted whenever
the market value of the shares released is more or less than the cost of the
shares released.
Contributions to the ESOP amounted to approximately $727,000 and $153,000 for
the years ended December 28, 1997 and December 27, 1998, respectively. These
contributions include interest paid by Acme or the Company of approximately
$122,000 and $83,000 for the years ended December 28, 1997 and December 27,
1998, respectively, on the loan used to purchase the ESOP shares. The balance
in unearned compensation of $1,770,000 at December 28, 1997 and December 27,
1998 results from the leveraged ESOP stock purchase less the deemed release of
shares at cost. At December 27, 1998, the ESOP contained 843,061 allocated
shares and 425,923 unallocated shares of the Company's common stock, for a
total of 1,268,984 shares.
The Company received a Private Letter Ruling from the Internal Revenue
Service in 1999 that allows the termination of the ESOP and the non-taxable
disposal of the PalEx shares in the ESOP. It is the Company's intent to use the
proceeds from the sale of the shares to repay the ESOP's indebtedness. Upon
termination of the ESOP and debt retirement, the ESOP will allocate the
remaining unallocated shares to the plan participants, resulting in a charge to
earnings by the Company and a corresponding increase to capital in excess of
par for the difference between the total value of the shares at the time of
their sale and the ESOP indebtedness. In anticipation of the termination of the
ESOP, no additional shares were allocated in 1998.
11.TERMINATION OF CHEP RELATIONSHIP
During the fourth quarter of 1997 and first quarter of 1998, Company
management had numerous discussions with representatives of its largest
customer, CHEP, regarding numerous issues affecting the profitability of the
products manufactured for CHEP by the Company and the pricing of new pallets,
the uncertainty of CHEP production requirements, the absence of fees for extra
services provided to CHEP, quality control and the opening of new facilities
that would be primarily dedicated to performing services for CHEP. The Company
manufactured new, high-grade pallets for CHEP, which in turn leased these
pallets to its customers. These pallets were part of a "closed-loop" materials
handling and management system that included recovery of the pallet from the
end user, aggregating them in Company operated depots where they were sorted,
repaired and returned to CHEP's customers.
In addition, the Company began renegotiating the prices CHEP was being
charged for new pallets to more accurately reflect constantly changing lumber
prices. Subsequent discussion and communications ensued until it became
apparent to Company management that the issues would not be resolved to the
mutual satisfaction of CHEP and the Company. Accordingly, CHEP was notified
that effective April 29, 1998, the Company would cease supplying CHEP with new
pallets and provided advance notice (generally, 10 to 60 days) under
contractual arrangements to discontinue repair and depot services for CHEP.
F-53
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The termination of the Company's relationship with CHEP affected the
operations of certain of the Company's facilities in the southeastern and
western United States. As a result, management formally adopted a restructuring
plan, which was approved by the Board of Directors, to close, curtail, or
convert operations to alternative business activities at facilities related to
CHEP production. There were eight CHEP-related manufacturing facilities that
were targeted for either closure, sale, consolidation or conversion to
alternative product lines. As of December 27, 1998, three facilities dedicated
to CHEP production have been closed, one was sold and two more were
consolidated into one facility. The other two facilities were converted to
manufacture non- CHEP products. The Company terminated approximately 400
production-related employees at CHEP related facilities during 1998.
Management determined that there were four categories of CHEP restructuring
costs, in accordance with Emerging Issues Task Force 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-
3"): disputed accounts receivable; severance payments; lease cancellation fees
and penalties; and a valuation allowance to restate CHEP-related inventory at
its net realizable value.
The results of operations for the year ended December 27, 1998 include net
charges to continuing operations of approximately $1.2 million for an inventory
valuation adjustment to reduce CHEP-related inventory to net realizable value
and approximately $0.9 million for disputed accounts receivable, lease
cancellation fees and penalties and severance pay associated with the
termination of employees at CHEP related facilities. As of December 27, 1998,
all CHEP restructuring costs have been paid or incurred. Accordingly, there is
no remaining balance in accrued liabilities or inventory valuation allowance in
the accompanying consolidated balance sheet.
In addition, management determined that the termination of the CHEP
relationship also required the application of SFAS No. 121 and evaluated the
facts and circumstances with regard to the CHEP-related facilities and the
assets employed in the production of CHEP pallets. Accordingly, the results of
operations for the year ended December 27, 1998 include a charge of
approximately $1.4 million for plant closure and asset abandonment costs for
the CHEP facilities noted above. The charge includes approximately $0.9 million
for abandoned leasehold improvements and approximately $0.5 million to value
pallet production machinery and equipment at its net realizable value. The
abandoned and impaired assets had a book value of approximately $1.8 million
prior to the revaluation. The net realizable value of these assets was
determined based on management's estimates of current market value for similar
types of manufacturing equipment used in the pallet production process. There
have been no changes in the estimates used nor corresponding adjustments to the
charges previously taken. The Company is attempting to sell the machinery and
equipment as soon as possible. Depreciation expense on these assets for the
period from their impairment date until December 27, 1998 would have been
approximately $109,000.
Management reviewed the recoverability and possible impairment of goodwill
related to the subsidiaries which operated the CHEP facilities and determined
that no goodwill adjustments were necessary due to the potential for replacing
CHEP business with other customers.
Management believes that all CHEP-related restructuring was complete as of
December 27, 1998.
12.BUSINESS SEGMENTS:
The Company has two business segments, one operating in the pallet industry
and the other in the steel drum reconditioning industry. The pallet segment
produces, recycles, sells, repairs, leases and retrieves wooden pallets in the
United States and Canada primarily for use in agricultural and industrial
markets. The drum segment reconditions steel drums in the United States,
primarily for use in agricultural and industrial markets. There were no
significant intercompany sales between the two segments for the fiscal years
1996, 1997 or 1998.
F-54
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's business segments are managed separately because they require
different technology and marketing strategies. The accounting policies for the
segments are the same as those described in Note 2, Summary of Significant
Accounting Policies. 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.
Pallet Drum Consolidated
-------- ------- ------------
Year Ended December 27, 1998
Revenues..................................... $234,120 $85,571 $319,691
Segment earnings contribution................ 15,286 11,743 27,029
Depreciation and amortization................ 9,085 2,223 11,308
Total Assets................................. 255,363 37,075 292,438
Capital Expenditures......................... 9,428 4,523 13,951
Year Ended December 27, 1997
Revenues..................................... $162,848 $60,145 $222,993
Segment earnings contribution................ 15,402 (152) 15,250
Depreciation and amortization................ 4,607 951 5,558
Total Assets................................. 96,562 23,443 120,005
Capital Expenditures......................... 7,683 1,466 9,149
Year Ended December 27, 1996
Revenues..................................... $ 96,047 $48,983 $145,030
Segment earnings contribution................ 8,409 693 9,102
Depreciation and amortization................ 2,165 1,267 3,432
Total Assets................................. 37,129 20,739 57,868
Capital Expenditures......................... 4,063 3,292 7,355
Segment earnings contribution is reconciled to consolidated income before
provision for income taxes as follows:
Year Ended Year Ended Year Ended
November 30, December 28, December 27,
1996 1997 1998
------------ ------------ ------------
Total earnings contribution for
reportable segments............... $ 9,102 $ 15,250 $ 27,029
Unallocated amounts:
Corporate expenses................ -- 1,496 4,080
Interest expense.................. 1,576 1,722 8,468
Goodwill amortization............. -- 593 2,977
Restructuring charge.............. -- -- 949
Plant closure and asset
abandonment loss................. -- -- 1,369
Other income (expense)............ 346 (95) (95)
-------- -------- --------
Income before provision for income
taxes............................. $ 7,872 $ 11,344 $ 9,091
======== ======== ========
The Company's revenue by country, based on the location of the customer, is
as follows:
Year Ended Year Ended Year Ended
November 30, December 28, December 27,
1996 1997 1998
------------ ------------ ------------
United States...................... $145,030 $222,993 $314,967
Canada............................. -- -- 4,724
-------- -------- --------
Consolidated....................... $145,030 $222,993 $319,691
======== ======== ========
F-55
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's long-lived assets by country are as follows:
Year Ended Year Ended
December 28, December 27,
1997 1998
------------ ------------
United States...................................... $66,250 $176,063
Canada............................................. -- 31,157
------- --------
Consolidated....................................... $66,250 $207,220
======= ========
Earnings contribution for the Drum segment for the year ended December 27,
1998 includes charges of approximately $1.8 million for pooling expenses and
compensation differential (the difference between previous owners' and
officers' compensation before the acquisitions and the amounts to which they
have contractually agreed) of approximately $1.1 million. There were no pooling
expenses for the year ended December 28, 1997. Compensation differential was
approximately $1.0 million for the year ended December 28, 1997.
Earnings contribution for the Pallet segment for the year ended December 27,
1998 includes an inventory valuation adjustment of approximately $1.2 million.
13.QUARTERLY FINANCIAL RESULTS (UNAUDITED):
Summarized quarterly financial data for 1998 and 1997 is as follows (in
thousands except per share data):
Quarter
-------------------------------
First Second Third Fourth
------- ------- ------- -------
Year ended December 27, 1998
Revenues.................................... $68,970 $83,362 $77,912 $89,447
Gross profit................................ 12,600 14,086 15,380 16,828
Net income.................................. 1,160 169 1,177 1,480
Net income per share--basic................. .06 .01 .06 .08
Net income per share--diluted............... .06 .01 .06 .08
Quarter
-------------------------------
First Second Third Fourth
------- ------- ------- -------
Year ended December 28, 1997
Revenues.................................... $39,797 $63,866 $57,583 $61,747
Gross profit................................ 5,960 10,919 8,603 9,427
Net income.................................. 1,342 2,618 785 1,895
Net income per share--basic................. .12 .15 .05 .11
Net income per share--diluted............... .12 .15 .04 .11
The results of operations for the first and second quarters of 1998 include
charges of approximately $1.6 and $0.2 million, respectively, for pooling
expenses. The results of operations for the second quarter of 1998 includes a
pre-tax charge of approximately $5.0 million related to the termination of the
CHEP relationship (see Note 11). The results of operations for the third
quarter of 1998 includes a pre-tax charge of approximately $1.4 million for
plant closure and asset abandonment costs, offset by a pre-tax credit to the
CHEP restructuring charge of approximately $0.9 million, for a net third
quarter pre-tax charge of approximately $0.5 million. The results of operations
for the fourth quarter of 1998 include a pre-tax credit of approximately $1.9
million related to revisions in management's estimates of the CHEP
restructuring charge.
F-56
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members of IFCO-U.S., L.L.C.:
In our opinion, the accompanying balance sheets and the related statements of
operations and changes in accumulated members' deficit, and of cash flows
present fairly, in all material respects, the financial position of IFCO-U.S.,
L.L.C. (the "Company") at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, 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.
The Company is a limited liability corporation with two members and, as
disclosed in the notes to the financial statements, has extensive transactions
and relationships with its members and their affiliates. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's negative cash flow from operations, excess
liabilities over assets and debt in default raise substantial doubt about its
ability to continue as a going concern without significant financial support
from its members.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tampa, Florida
September 3, 1999
F-57
IFCO-U.S., L.L.C.
BALANCE SHEETS
December 31,
------------------------- October 31,
1997 1998 1999
----------- ------------ ------------
(unaudited)
ASSETS:
Cash................................. $ 8,030 $ 10,487 $ 32,316
Receivables, net of allowance for
doubtful accounts of $25,000,
$50,000 and $75,000................. 1,050,391 2,376,495 4,443,294
Related party receivables............ 2,095,216 95,749 4,824,018
Crate rental pool, net............... 5,427,486 5,299,773 10,394,471
Crates held for transfer to related
party............................... 243,569 611,107 145,427
Equipment and furniture, net......... 1,362,199 1,296,018 1,148,420
Other assets......................... -- 40,883 28,609
----------- ------------ ------------
$10,186,891 $ 9,730,512 $ 21,016,555
=========== ============ ============
LIABILITIES AND MEMBERS' DEFICIT:
Accounts payable and accrued
expenses............................ $ 455,109 $ 616,945 $ 1,077,028
Related party payables............... 1,942,965 3,120,816 4,538,374
Refundable deposits.................. 1,016,899 2,014,188 3,438,997
Installment loan..................... -- -- 144,492
Related party debt................... 13,042,632 14,521,444 25,267,426
----------- ------------ ------------
16,457,605 20,273,393 34,466,317
=========== ============ ============
Commitments and contingencies (Notes
1, 6 and 7)
MEMBERS' DEFICIT:
Class A voting membership interests,
$.40 par value; 1,000 shares
authorized.......................... 400 400 400
Class B non-voting membership
interests, $.40 par value; 1,500
shares authorized................... 600 600 600
Accumulated deficit.................. (6,271,714) (10,543,881) (13,450,762)
----------- ------------ ------------
Total members' deficit.............. (6,270,714) (10,542,881) (13,449,762)
----------- ------------ ------------
$10,186,891 $ 9,730,512 $ 21,016,555
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-58
IFCO-U.S., L.L.C.
STATEMENTS OF OPERATIONS AND CHANGES IN ACCUMULATED MEMBERS' DEFICIT
Ten-Month
Year Ended Period Ended
December 31, October 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ------------ ----------- ------------
(unaudited) (unaudited)
Rental revenues......... $ 919,427 $ 1,657,424 $ 1,156,754 $ 4,267,790
----------- ------------ ----------- ------------
Cost of revenues:
Rental logistics cost.. (1,254,538) (1,646,080) (1,289,533) (2,725,341)
Crate depreciation..... (499,098) (679,324) (482,568) (1,358,141)
Equipment
depreciation.......... (49,140) (132,763) (112,101) (120,000)
Loss on related party
crate transfers....... (454,445) (193,238) (193,238) --
----------- ------------ ----------- ------------
Total cost of revenues.. (2,257,221) (2,651,405) (2,077,440) (4,203,482)
----------- ------------ ----------- ------------
Gross margin (loss)... (1,337,794) (993,981) (920,686) 64,308
Selling, general and
administrative
expenses............... (1,423,417) (1,719,353) (1,424,015) (1,641,457)
----------- ------------ ----------- ------------
Loss from operations.. (2,761,211) (2,713,334) (2,344,701) (1,577,149)
Interest expense........ (1,033,872) (1,382,946) (1,168,975) (1,343,271)
Other income (expense),
net.................... 12,031 (175,887) (177,043) 13,539
----------- ------------ ----------- ------------
Net loss................ (3,783,052) (4,272,167) (3,690,719) (2,906,881)
Beginning accumulated
deficit................ (2,488,662) (6,271,714) (6,271,714) (10,543,881)
----------- ------------ ----------- ------------
Ending accumulated
deficit................ $(6,271,714) $(10,543,881) $(9,962,433) $(13,450,762)
=========== ============ =========== ============
The accompanying notes are an integral part of these financial statements.
F-59
IFCO-U.S., L.L.C.
STATEMENTS OF CASH FLOWS
Ten-Month
Year Ended Period Ended
December 31, October 31,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Net cash provided by (used
in) operating activities:
Net loss................... $(3,783,052) $(4,272,167) $(3,690,719) $(2,906,881)
Adjustments to reconcile
net loss to cash provided
by operating activities:
Depreciation.............. 557,934 826,042 726,885 1,511,471
Provision for doubtful
accounts receivable...... 25,000 25,000 25,000 25,000
Transfer of crates to
related parties,
excluding freight and
duty..................... 219,141 106,343 106,343 (193,148)
Loss on disposition of
equipment and furniture.. -- 198,547 198,547 --
Decrease (increase) in
receivables.............. (595,894) (1,351,104) (503,403) (2,091,799)
Decrease (increase) in
related party
receivables.............. (1,969,647) 1,999,467 2,015,877 (1,575,269)
Decrease (increase) in
other assets............. 58,577 (40,883) (101,998) 12,274
Increase (decrease) in
accounts payable and
accrued expenses......... 94,552 161,836 364,063 460,083
Increase (decrease) in
related party accounts
payable.................. 1,069,925 1,177,851 857,623 1,417,558
Increase (decrease) in
refundable deposits...... 561,991 997,289 328,302 1,424,809
----------- ----------- ----------- -----------
Net cash used in operating
activities................ (3,761,473) (171,779) 326,520 (1,915,902)
----------- ----------- ----------- -----------
Net cash provided by (used
in) investing activities:
Purchases of furniture and
equipment................. (683,066) (279,084) (322,277) (5,732)
Proceeds from crate
transfers to related
parties................... 1,790,551 1,128,973 1,039,908 1,695,809
----------- ----------- ----------- -----------
Net cash provided by
investing activities...... 1,107,485 849,889 717,631 1,690,077
----------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities:
Proceeds from issuance of
related party debt........ 4,504,285 1,682,585 1,282,320 2,896,664
Payment of installment
debt...................... -- -- -- (182,695)
Payment of related party
debt...................... (1,854,456) (2,358,238) (2,317,612) (2,466,315)
----------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities.. 2,649,829 (675,653) (1,035,292) 247,654
----------- ----------- ----------- -----------
Net increase (decrease) in
cash:
Cash equivalents at the
beginning of the period... (4,159) 2,457 8,859 21,829
Cash at the end of the
period.................... 12,189 8,030 8,030 10,487
----------- ----------- ----------- -----------
$ 8,030 $ 10,487 $ 16,889 $ 32,316
=========== =========== =========== ===========
Supplemental cash flow
information:
Interest paid............. 270,000 289,000 $ 231,500 $ 247,500
Non-cash investing and
financing activities:
During 1997 and 1998, the Company had crate purchases of approximately
$1,854,000 and $2,154,000, respectively. These crate purchases have been
financed with notes payable from related parties.
During the ten-month periods ended October 31, 1998 and 1999, the Company had
crate purchases of approximately $1,352,000 and $7,280,000, respectively. These
crates purchases have been financed with notes payable to related parties.
During the ten-month period ended October 31, 1999, the Company was assigned a
$3,153,000 member receivable in exchange for a member loan of $3,153,000 (Note
1).
The accompanying notes are an integral part of these financial statements.
F-60
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
IFCO-U.S., L.L.C. (the "Company" or "IFCO-US") is a limited liability
company. The Company's members are Schoeller-U.S., Inc. ("SIL-US") and Polymer
International Corporation ("PIC"). SIL-US is a wholly-owned subsidiary of
Schoeller International Logistics Beteiligungsgesellschaft mbH ("SIL") and PIC
is a wholly-owned subsidiary of Intertape Polymer Group Inc. ("IPG"). The
Company owns and manages a rental plastic container pool in the United States.
These collapsible, reusable plastic containers ("crates") offer produce
retailers and growers economic and environmental advantages over disposable
packaging alternatives. The crates are leased primarily to growers of fresh
fruit and vegetables in exchange for a one-time usage fee. The growers' goods
are transported in the crates to various intermediaries and ultimately
retailers for sale to consumers. The Company delivers the empty crates to
customers' bulk warehouses and collects the empty crates from regional service
points, where the crates are transported to the Company's depots and cleaned
for reuse.
The nature of the Company's business is such that short-term obligations are
typically met by cash flow generated from long-term assets. Consequently, the
accompanying balance sheet is presented on an unclassified basis.
The Company is currently trying to establish the plastic crate rental concept
to the produce distribution market in the United States. As such, the Company
is in a start-up business phase and will continue to realize net losses until
its sales and gross margins increase high enough to cover variable and fixed
operating costs. The Company's negative cash flow from operations, excess
liabilities over assets and related party debt in default raise substantial
doubt about its ability to continue as a going concern without significant
financial support from its members. The accompanying financial statements have
been prepared on a going concern basis, which contemplates continuity of
operations and the realization of assets and liquidation of liabilities in the
ordinary course of business.
On September 2, 1999, PIC and SIL-US entered into a Membership Interest and
Share Purchase Agreement (the "Purchase Agreement") which management believes
provides the framework for the continued funding for the Company's operations.
Upon execution of the agreement, PIC purchased from SIL 36.25% of the
outstanding shares in SIL-US (the "Polymer Shares") for a note payable of
$3,153,000 (the "Polymer Note"). Effective October 1, 1999, SIL assigned the
Polymer Note to the Company. As a result of the assignment, the Company
recorded a receivable from PIC and a payable to SIL for $3,153,000. Interest on
the Polymer Note and interest on an additional $3,153,000 of existing PIC debt
will be waived until March 31, 2000.
PIC also agreed to sell, subject to certain conditions including consummation
of a merger between IFCO Systems and PalEx, Inc. (the "PalEx Merger") and a
related initial public offering of IFCO Systems (the "IPO") no later than March
31, 2000, its entire 20% interest in IFCO-US (the "Polymer Interest") and the
Polymer Shares to IFCO Systems N.V. for approximately $10,657,500, plus all
outstanding indebtedness which was approximately $17,976,000 as of April 30,
1999 ($24,391,000 as of October 31, 1999). Such amount will be reduced by the
cancellation of the Polymer Note in the amount of $3,153,000, and $2,500,000
and certain other indebtedness.
Commencing September 10, 1999, and on the first business day of each month
thereafter until the earlier of the consummation of the PalEx Merger and IPO or
March 1, 2000, SIL-US and PIC shall each make a loan to the Company in the
amount of $75,000.
The Purchase Agreement may be terminated by mutual consent of the parties, if
there is a material breach of any representation, warranty or covenant, or if
the PalEx Merger and IPO are not consummated by March 31, 2000. If the PalEx
Merger and IPO have not occurred by March 31, 2000, SIL-US shall make a member
loan to the Company for half of the IPG debt, less SIL-US's existing debt. In
such event, SIL-US and IPG agree to proportionately fund the future cash and
operating and financial requirements of IFCO-US in accordance with the IFCO-US
budget. If SIL fails to timely fund its proportionate share of such cash
requirements, then PIC shall have an option to purchase SIL-US' 80% membership
interest in IFCO-US for
F-61
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
$11,092,500 together with redelivery of the Polymer Shares, less $2,500,000,
plus any indebtedness of IFCO-US to SIL or its Affiliates, and the Polymer Note
shall mature and be paid in full. If IPG fails to timely fund its proportionate
share of such cash requirements, then SIL shall have an option to purchase the
Polymer Interest and the Polymer Shares for $10,657,500, plus any indebtedness
of IFCO-US to IPG or its affiliates. In the event that neither option has been
exercised by December 31, 2002, the exercise price of such options shall be
adjusted to the fair market value of the Company at such time.
The Company's continuation as a going concern is dependent on its members
ability to fulfill the obligations under the terms as described above and
ultimately to obtain profitability and to generate sufficient cash flows, on a
timely basis, to meet its obligations. The financial statements do not include
any adjustments relating to recoverability and classifications of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
These interim financial statements as of October 31, 1999 and for the ten
months ended October 31, 1998 and 1999, are unaudited and reflect all
adjustments, consisting of normal recurring accruals which, in the opinion of
management, are necessary for a fair presentation of the information contained
therein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of the significant accounting policies followed in the preparation
of the Company's financial statements is set forth below:
Crates
The Company depreciates its crate pool using the straight line method over a
15 year life. Additionally, the Company accrues additional depreciation for
estimated crate breakage at a rate of 4.5% of the crate purchase price on a per
trip basis. The Company periodically reviews its crate rental pool to ensure
that all unusable crates are reduced to net realizable value.
Expenditures for repairs are charged to expense as incurred. Upon transfer or
retirement of crates, the cost and related accumulated depreciation are
eliminated from the respective accounts.
The gains and losses from related party crate transfers are included within
cost of revenues. The cost of related party crate transfers includes the net
book value of the asset sold and any direct costs associated with the
transfers.
Equipment and Furniture
Equipment and furniture are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line basis over the estimated useful
lives of the related assets. Machinery and equipment are depreciated from 5-10
years and furniture and fixtures are depreciated over 5 years.
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.
Income Taxes
The Company is a limited liability company which is treated as a partnership
for federal and state tax purposes. As such, the income or loss generated by
the Company is taxable to its members. Therefore, no provision for income taxes
is recorded by the Company.
Revenue Recognition
The majority of the Company's revenues are generated from crate rental fees.
Revenue is recognized over the Company's service obligation period. The service
obligation period is complete when the customer's
F-62
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
product is removed from the crates and the crate is ready to be returned to the
Company. The Company accrues for the cost of returning crates to the rental
pool.
The Company records a two-dollar per crate deposit receivable and an
offsetting refundable deposit liability for each crate delivered. Deposits are
refundable upon proof of crate shipment by the customer.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments,"
requires 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 amounts reported in the
accompanying balance sheets for accounts receivable, accounts payable and
accrued expenses, related party payables, and refundable deposits approximate
fair value because of their short term nature. It is not practicable for the
Company to reasonably estimate the fair market value of the long term debt due
to the related party nature of the debt, absence of a quoted market rate for
the debt or debt with similar characteristics and complexities surrounding
maturity dates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and 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 financial
statements on a recurring basis and records the estimated effect of any
necessary adjustments, actual results could differ from these estimates.
Advertising Expense
The Company expenses the cost of advertising as incurred. The Company
incurred approximately $80,000 and $295,000 in advertising costs for the year
ended December 31, 1997 and 1998, respectively.
Start-up and organization costs
The Company has expensed all start-up and organization costs when incurred.
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" requires that long-lived assets to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. The Company believes that there is no impairment of its long-lived
assets, primarily rental crates.
Concentrations of Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable. The Company performs
credit evaluation procedures on its customers and the Company's rental invoices
are primarily on 14-day terms. Historically, the Company has not incurred
significant credit related losses, however, an allowance for potential credit
losses is maintained. Risk may exist in the Company's business and accounts
receivable as approximately 36% and 29% of the Company's customers are located
in California and Florida, respectively. As the Company's customers are in the
produce industry, the Company's sales volumes in certain regions tend to be
seasonal and subject to weather and other naturally occurring conditions.
F-63
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During each of the years ended December 31, 1997 and 1998, the Company had
one customer each year that accounted for more than 10% of total revenues. DNE
International accounted for approximately 12% of revenues during fiscal year
ended December 31, 1997. Fresh From Texas accounted for 14% of revenues during
fiscal year ended December 31, 1998.
3. RECEIVABLES:
Receivables consisted of the following as of:
October 31,
December 31, 1999
---------------------- ----------------
1997 1998
---------- ----------
(unaudited)
Trade--Rental receivables............ $ 206,648 $ 523,339 $1,176,791
Trade--Deposit receivables........... 862,383 1,903,156 3,336,784
Less: Allowance for doubtful
accounts............................ (25,000) (50,000) (75,000)
Other receivables.................... 6,360 -- 4,719
---------- ---------- -----------
$1,050,391 $2,376,495 $ 4,443,294
========== ========== ===========
Related party receivables consisted of the following as of:
October 31,
December 31, 1999
-------------- -----------
1997 1998
----- --------
(unaudited)
Crate transfer receivable........................... $ $ 95,749 $ 1,671,018
Polymer Note receivable............................. -- 3,153,000
----- -------- -----------
$ $ 95,749 $ 4,824,018
===== ======== ===========
4. CRATE RENTAL POOL, NET
Crate rental pool, net consisted of the following as of:
October 31,
December 31, 1999
----------------------- ------------
1997 1998
---------- -----------
(unaudited)
Crate rental pool........................ $6,149,627 $ 6,367,117 $ 12,357,527
Less: accumulated depreciation........... (722,141) (1,067,344) (1,963,056)
---------- ----------- ------------
Crate rental pool, net................... $5,427,486 $ 5,299,773 $ 10,394,471
========== =========== ============
Crate depreciation expense for the years ended December 31, 1997 and 1998 was
$499,098 and $679,324, respectively.
F-64
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. EQUIPMENT AND FURNITURE:
Equipment and furniture consisted of the following at December 31:
1997 1998
---------- ----------
Machinery and equipment.............................. $1,405,317 $1,444,451
Furniture and fixtures............................... 18,538 25,040
---------- ----------
1,423,855 1,469,491
Less: accumulated depreciation....................... (61,656) (173,473)
---------- ----------
Equipment and furniture, net......................... $1,362,199 $1,296,018
========== ==========
Equipment and furniture depreciation expense for the years ended December 31,
1997 and 1998 was $58,836 and $146,718, respectively.
6. RELATED PARTY DEBT:
Indebtedness consists of the following as of:
October 31,
December 31, 1999
----------------------- ------------
1997 1998
----------- -----------
(unaudited)
U.S. prime rate advances from PIC........ $ 4,465,882 $ 4,353,392 $ 2,171,720
0% advances from PIC..................... -- 800,000 4,165,281
U.S. prime rate + 6% related party notes
payable in default from IFCO
Manufacturing........................... 860,807 1,339,883 2,573,042
10% related party notes payable from IFCO
Manufacturing .......................... 6,315,943 5,828,169 10,642,102
U.S. prime rate PIC member loan.......... 1,400,000 1,400,000 1,550,000
0% SIL-US member loan.................... -- 800,000 4,165,281
----------- ----------- ------------
$13,042,632 $14,521,444 $ 25,267,426
=========== =========== ============
The maturities of indebtedness are as follows for the years ending December
31:
Amount
-----------
1999.......................................................... $ 4,463,992
2000.......................................................... 1,647,699
2001.......................................................... 811,159
2002.......................................................... 245,201
2003.......................................................... --
Thereafter.................................................... 7,353,393
-----------
$14,521,444
===========
Advances from PIC
PIC has advanced funds to the Company for operating cash flow purposes. Under
the terms of the operating agreement between SIL-US and PIC, advances from
members accrue interest at the U.S. prime rate as published in the Wall Street
Journal ("U.S. prime rate"), which was 8.5% and 7.75% at December 31, 1997 and
1998, respectively.
In May 1998, PIC agreed to waive interest charges on the first $800,000 of
its advances to the Company (see discussion of member loans).
F-65
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Related Party Note Payables
The Company purchases its crates from IFCO Manufacturing, Inc. ("IFCO
Manufacturing"), a wholly-owned subsidiary of IPG. The Company finances crate
purchases with a three year note payable with IFCO Manufacturing. The notes
accrue interest at 10%, with interest becoming payable on a semi-annual basis.
One third of the principal of each note becomes due after every 12 months. The
Company is currently in default on a portion of its principal and interest
payments on its manufacturing note payables. Upon default, the notes and
interest due began accruing additional interest at the default interest rate
which is the US prime rate + 6% (14.5% and 13.75% at December 31, 1997 and
1998, respectively). Substantially all of the Company's receivables and long-
lived assets are pledged as collateral for all outstanding notes payable under
the crate supply agreement with IFCO Manufacturing.
Member Loans
The Company has a member loan with PIC for $1.4 million, which accrues
interest at the U.S. prime rate. The funds were provided to the Company during
1995 and 1996 to fund start-up and organization costs. In accordance with the
February 16, 1995 operating agreement between PIC and SIL-US, repayment of the
loan by the Company shall be at such times as the Company can repay the loan
when considering its future cash or requirements as contemplated in the
operating agreement. At the time the Company has sufficient operating capital
from profits, the entire principal and interest remaining outstanding shall
then become due and payable in semi-annual installments of principal together
with all accumulated interest until all amounts due and owing are paid in full.
As of December 31, 1998, no principal or interest payments have been made.
During May of 1998, SIL-US agreed to fund the Company's cash flow deficits
with an $800,000 interest free loan. The SIL-US loan was funded in cash and
does not have a stated maturity date. In conjunction with the SIL-US loan, PIC
agreed to waive interest charges on the first $800,000 of advances.
7. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. In the opinion of the Company's management, all
such proceedings are adequately covered by insurance or, if not so covered,
will 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 leases certain facilities and machinery under non-cancelable
operating leases. Additionally, the Company sub-leases office space from a
wholly-owned subsidiary of IPG. The Company's rent expense under the related
party sub-lease was $46,000 and $47,000 for the years ended December 31, 1997
and 1998, respectively. Lease payments are accrued on a straight-line basis
over the term of the lease. Minimum future rental payments under these leases
as of December 31, 1998 are as follows:
Amount
--------
1999............................................................. $275,619
2000............................................................. 276,416
2001............................................................. 185,173
2002............................................................. 7,000
--------
744,208
========
F-66
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense under operating leases was approximately $46,000 and $155,000
for the years ending December 31, 1997 and 1998, respectively.
8. MEMBERS' EQUITY:
SIL-US and PIC each own 500 shares of the Class A voting membership
interests. Additionally, SIL-US owns 100% of the 1,500 shares of the Class B
non-voting membership interests. All shares participate equally in the sharing
of the Company's profits/losses and distributions.
9. OTHER RELATED PARTY TRANSACTIONS:
Related Party Receivables and Payables
All of the Company's related party receivables are the result of crate
transfers. The Company's related party payables are related to services
provided by related parties in connection with export crate rentals under the
export servicing agreement, crate deposits, royalties, and other miscellaneous
payables. The related party payables are composed of the following:
December 31,
---------------------
1997 1998
---------- ----------
Crate deposits........................................... $ 152,400 $ 266,421
Reconditioning fees...................................... 297,257 574,672
Crate purchases.......................................... 317,735 22,608
Royalties................................................ 24,117 63,709
Interest payable......................................... 795,105 1,558,525
Interest payable in default.............................. 356,351 634,881
---------- ----------
$1,942,965 $3,120,816
========== ==========
Crate Supply Agreement
During 1996, the Company entered into a five-year supply agreement with IPG
(through its wholly-owned subsidiary IFCO Manufacturing) to provide all of the
Company's plastic crates. The agreement specifies that the Company must
purchase all crates from IPG and IPG is prohibited from selling crates to other
customers. Crate prices are determined by a formula based upon raw material
weight, the price for granulate and the actual quantity purchased by the
Company. The agreement does not call for a minimum purchase requirement. During
1997 and 1998, the Company purchased approximately $1,854,000 and $2,154,000,
respectively, for crates supplied by IFCO Manufacturing. These crate purchases
are financed through notes with IFCO Manufacturing.
System Licensing Agreement
In 1996, SIL and the Company entered into a ten-year licensing agreement.
Under the agreement, the Company shall owe SIL a royalty commission equal to 3%
of domestic crate rentals which are payable every quarter. For the years ended
December 31, 1997 and 1998, the Company recorded royalty commission expenses of
$19,123 and $45,484, respectively.
Export Servicing Agreement
Some of the Company's customers use the crates to ship produce to
international markets. In conjunction with its export rental program, the
Company has a service agreement with IFCO-GmbH, a related party, whereby, IFCO-
GmbH has agreed to collect, sort, wash, and include the crates within the
European operations rental pool. Under the agreement, the Company records an
amount equal to 80% of the export rental revenue as an expense payable to IFCO-
Europe as consideration for the services.
F-67
IFCO-U.S., L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Export rental revenue was approximately $273,000 and $306,000 for the years
ended December 31, 1997 and 1998, respectively.
Related Party Crate Transfers
Under the terms of the export servicing agreement discussed above, the
Company transfers ownership of crates shipped to Europe to related parties upon
completion of the export rental period at the net book value of the crates.
In 1997 and 1998, the Company agreed to transfer certain excess crates to
related parties. These transfers were not related to the export servicing
agreement. For the years ended December 31, 1997 and 1998, the Company
recognized losses of $454,000 and $193,000 on the transfer of crates to related
parties which have been included within cost of revenues.
Management
IPG employees oversee the daily management of the Company. The Company's
controller and assistant controller share responsibilities with other companies
owned by IPG, including IFCO Manufacturing. Their salaries are charged to the
Company based upon the estimated time spent working on Company business. All
significant business decisions are determined by the Company's Board of
Directors, which is composed of two members from SIL-US and two members from
PIC.
IPG has provided various management, accounting and administrative services
to the Company. Wherever appropriate and practical, the costs associated with
these services have been allocated and/or directly charged to the Company.
However, the costs of some services such as credit, collections, treasury
management, marketing and information systems management have not been
allocated to the Company and the Company's financial statements do not reflect
amounts associated with such services.
The significant services that have been allocated to the Company include:
Year ended
December 31,
-----------------
1997 1998
-------- --------
Employee benefits............................................ $ 35,000 $ 45,000
Leased vehicles for salesman travel.......................... 40,000 60,000
Telecommunications expenses.................................. 15,000 23,000
-------- --------
$ 90,000 $128,000
======== ========
10. EMPLOYEE BENEFITS:
The Company's employees are eligible to participate in IPG's 401(k) defined
contribution plan. The Company may make a discretionary match of up to 6% of
the participant's salary to the participant's account. Additionally, the
Company may make profit sharing distributions to the participants based upon
IPG's financial performance. Contributions for the years ended December 31,
1997 and 1998 were $12,000 and $24,000, respectively.
F-68
[Centered on page , two stacks of collapsed IFCO RTCs. Pictures, around the
two stacks, featuring, counterwise clockwise from top, two IFCO RTCs
containing produce and loaded on a pallet, a forklift lifting a stack of
pallets, a display of various IFCO RTCs containing produce, a forklift lifting
a stack of IFCO RTCs loaded on a pallet surrounded by similar stacks, a
product handling machine lifting IFCO RTCs from a stack of IFCO RTCs, and an
IFCO RTC containing produce.]
13,000,000 ordinary shares
IFCO SYSTEMS N.V.
------------
PROSPECTUS
, 2000
------------
Global Coordinator and Sole Bookrunner
Lehman Brothers
----------------------
Joint Lead Managers
Lehman Brothers Commerzbank
AKTIENGESELLSCHAFT
----------------------
Cazenove & Co. CIBC World Markets HSBC
Credit Agricole Indosuez
Fidelity Capital Markets
a division of National Financial Services Corporation
Dealer Prospectus Delivery Obligation
Until , 2000, which is the date 25 days after the commencement of the
offering, all dealers that effect transactions in these securities in the
United States, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to unsold
allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The table below lists the fees and expenses, other than underwriting
discounts and commissions, which the registrant will pay in connection with the
offering described in this registration statement. All the expenses are
estimates, except for the SEC registration fee, the German filing fees, the
Nasdaq National Market listing fee, the NASD filing fee, and the Frankfurt
Stock Exchange listing fee.
Amount
-------
SEC registration fee................................................... $48,217
NASD filing fee........................................................ 18,944
German filing fees..................................................... *
Nasdaq National Market listing fee..................................... *
Frankfurt Stock Exchange listing fee................................... *
Legal fees and expenses................................................ *
Accounting fees and expenses........................................... *
Printing and engraving expenses........................................ *
Transfer agent and registrar fees...................................... *
Miscellaneous expenses................................................. *
-------
Total.................................................................. $ *
=======
- --------
* To be completed by amendment.
Item 14. Indemnification of Directors And Officers
IFCO Systems N.V. has agreed to indemnify each member of its board of
directors if, in the course of executing his or her duties, the member incurs
personal liability under civil laws, subject to the right of IFCO Systems to
recover payment from each such member to the extent permitted by applicable
law. IFCO Systems will also maintain an insurance policy with a third-party
carrier insuring members of the board of directors against the foregoing
liabilities.
Item 15. Recent Sales of Unregistered Securities
The following is a summary of transactions by IFCO Systems involving sales of
its securities that have not been registered under the Securities Act of 1933.
None of these transactions involved any underwriters, underwriting discounts or
commissions, or any public offering.
(1) On March 31, 1999, upon its incorporation, IFCO Systems issued 5,000
ordinary shares, 10 euros nominal value per share, to Schoeller Industries
for 50,000 euros in fully paid capital.
(2) On November 3, 1999, pursuant to a purchase agreement between Schoeller
Industries and Schoeller Holding, Schoeller Industries sold and transferred
to IFCO Holding (formerly known as Avenue Verwaltungsgesellschaft mbH)
5,000 ordinary shares, 10 euros nominal value per share, for total
consideration of 50,000 euros.
(3) In connection with the merger and this offering:
(a) IFCO Systems will issue to Schoeller Holding 995,000 ordinary shares,
10 euros nominal value per share, in consideration for the contribution
to IFCO Systems of: (i) one share in the nominal amount of DM3,040,000 in
the capital of IFCO Europe, (ii) three shares in the nominal amount of
DM5,000, DM5,000, and DM40,000, respectively, in the capital of IFCO
International, and (iii) six shares in the nominal amount of DM11,300,
DM11,200, DM12,500, DM1,200, DM12,500, and DM1,300, respectively, in the
capital of MTS;
(b) IFCO Systems will issue to Schoeller Holding 250,000 ordinary shares,
10 euros nominal value per share, in consideration for one share in the
nominal amount of DM960,000 in the capital of IFCO Europe;
II-1
(c) IFCO Systems will issue to Schoeller Holding 2,750,000 ordinary
shares, 10 euros nominal value per share, to be paid in cash from the
share premium reserve account;
(d) IFCO Systems will effect a 5-for-1 stock split of the IFCO Systems
ordinary shares resulting in a nominal value per share of 2 euros after
the stock split.
The issuances of the securities set forth in paragraphs 1 through 3 above
were deemed to be exempt from registration under the Securities Act in
reliance, unless otherwise indicated, on Section 4(2) of the Securities Act
and, in certain circumstances, Regulation D and Regulation S promulgated under
the Securities Act. The recipients of such securities represented their
intentions to acquire the securities for investment only and not with a view
to, or for sale in connection with, any distribution thereof and appropriate
legends were affixed to the certificates representing the securities issued in
such transactions.
Item 16. Exhibits And Financial Statement Schedules
(a) Exhibits.
**1.1 Form of Underwriting Agreement.
3.1 Articles of Association of IFCO Systems (English translation)
(incorporated by reference to Appendix D to the proxy
statement/prospectus filed as part of IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
4.1 Specimen Certificate of IFCO Systems ordinary shares (incorporated by
reference to Exhibit 4.1 to IFCO Systems' Registration Statement on Form
F-4, registration no. 333-96021).
**5.1 Opinion of Stibbe Simont Monahan Duhot P.C. as to the legality of the
IFCO Systems ordinary shares.
9.1 Voting Agreement dated as of October 6, 1999, and effective as of March
29, 1999, by and among PalEx and certain stockholders of PalEx
(incorporated by reference to Exhibit 9.1 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.1 Amended and Restated Agreement and Plan of Reorganization, dated as of
October 6, 1999 and effective as of March 29, 1999, by and among IFCO
Systems, IFCO Europe, MTS, IFCO International, Schoeller Industries,
Silver Oak and PalEx, as amended by Amendment No. 1 dated as of January
31, 2000 (incorporated by reference to Appendix A to the proxy
statement/prospectus filed as part of IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.2 Form of Lockup Agreement to be executed by Christoph Schoeller, Martin
Schoeller, Schoeller Industries, Schoeller Holding, and certain senior
executives of PalEx and its subsidiaries (incorporated by reference to
Exhibit 10.1 to IFCO Systems' Registration Statement on Form F-4,
registration no. 333-96021).
10.3 Form of Waiver to be entered by IFCO Systems and by certain employees of
PalEx (incorporated by reference to Exhibit 10.2 to IFCO Systems'
Registration Statement on Form F-4, registration no. 333-96021).
10.4 Senior Facility Agreement, dated February 20, 1998, between IFCO
International Food Container Organization GmbH, as Borrower, IFCO
Europe, and the Financial Institutions named therein (incorporated by
reference to Exhibit 10.3 to IFCO Systems' Registration Statement on
Form F-4, registration no. 333-96021).
10.5 Amendment to Senior Facility Agreement, dated February 28, 1998
(incorporated by reference to Exhibit 10.4 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
II-2
10.6 Senior Subordinated Facility Agreement, dated February 20, 1998, between
IFCO International Food Container Organization GmbH as Borrower, IFCO
Europe, and the Financial Institutions named therein (incorporated by
reference to Exhibit 10.5 to IFCO Systems' Registration Statement on
Form F-4, registration no. 333-96021).
10.7 Intercreditor Agreement, dated February 20, 1998, between BHF Bank AG as
Senior Agent and Security Trustee, Barclays Bank PLC as Senior
Subordinated Agent and the Financial Institutions named therein as
Initial Senior Lenders and Initial Senior Subordinated Lenders
(incorporated by reference to Exhibit 10.6 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.8 Security Trust Agreement, dated February 27, 1998, between BHF Bank AG
as Security Trustee and Senior Agent, IFCO International Food Container
Organization GmbH as Borrower, IFCO Europe, Barclays Bank PLC as Senior
Subordinated Agent, and the Financial Institutions named therein
(incorporated by reference to Exhibit 10.7 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.9 Option Release and IPO-Facilitation Agreement, dated May 27, 1999, by
and among, inter alia, Schoeller Industries, Schoeller Plast AG, GE
Capital, and GE Erste as amended by the Amendment of the Option Release
and IPO-Facilitation Agreement, dated January 31, 2000 (incorporated by
reference to Exhibit 10.8 to IFCO Systems' Registration Statement on
Form F-4, registration no. 333-96021).
10.10 Supply Agreement, dated November 4, 1997, between IFCO Europe and
Schoeller Plast Industries GmbH (assigned to Schoeller Plast AG)
(incorporated by reference to Exhibit 10.9 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.11 Membership Interest and Share Purchase Agreement, dated September 2,
1999, by and among, inter alia, Polymer International Corp., as seller,
and IFCO Systems, as purchaser (incorporated by
reference to Exhibit 10.10 to IFCO Systems' Registration statement on
Form F-4, registration
no. 333-96021).
10.12 Management Agreement, dated as of January 2, 1997, between Schoeller
Industries and IFCO Europe (incorporated by reference to Exhibit 10.11
to IFCO Systems' Registration Statement on Form F-4, registration no.
333-96021).
10.13 Management Agreement, dated as of January 2, 1997, between Schoeller
Industries and MTS (incorporated by reference to Exhibit 10.12 to IFCO
Systems' Registration Statement on Form F-4, registration no. 333-
96021).
10.14 Asset Purchase Agreement, dated as of February 12, 1998, by and among
PalEx, Container Services Company NW Acquisition, Inc., Container
Services Company SW Acquisition, Inc., Consolidated Drum Reconditioning
Co., Inc., CDRCo. HC, LLC, CDRCo. NW, LLC, CDRCo SW, LLC, Joseph Cruz,
and Philip Freeman (incorporated by reference to Exhibit 2.1 to PalEx's
Current Report on Form 8-K dated February 12, 1998, Commission file no.
000-22237, as filed with the SEC on February 27, 1998).
10.15 Acquisition Agreement and Plan of Reorganization, dated as of February
23, 1998, by and among PalEx, Acme Acquisition, Inc., Acme Barrel
Company, Inc., and the stockholders named therein (incorporated by
reference to Exhibit 2.2 to PalEx's Current Report on Form 8-K dated
February 12, 1998, Commission file no. 000-22237, as filed with the SEC
on February 27, 1998).
10.16 Acquisition Agreement and Plan of Reorganization, dated as of February 23, 1998, by and among
PalEx, Acme Barrel Company, Inc., ESP Realty Corp., Inc., and the Elliot Pearlman Living Trust u/t/a
dated July 2, 1996 (incorporated by reference to Exhibit 2.3 to PalEx's Current Report on Form 8-K
dated February 12, 1998, Commission file no. 000-22237, as filed with the SEC on February 27, 1998).
II-3
10.17 Acquisition Agreement and Plan of Reorganization, dated as of February 23, 1998, by and among
PalEx, Western Container Acquisition, Inc., Environmental Recyclers of Colorado Inc., and the
individual optionees named therein (incorporated by reference to Exhibit 2.4 to PalEx's Current
Report on Form 8-K dated February 12, 1998, Commission file no. 000-22237, as filed with the SEC
on February 27, 1998).
10.18 Acquisition Agreement, dated as of February 23, 1998, by and among PalEx, Western Container
Acquisition, Inc., and Barton A. Kaminsky (incorporated by reference to Exhibit 2.5 to PalEx's
Current Report on Form 8-K dated February 12, 1998, Commission file no. 000-22237, as filed with
the SEC on February 27, 1998).
10.19 Share Purchase Agreement, dated as of September 11, 1998, by and among (a) PalEx, (b) 1313530
Ontario Inc., an Ontario corporation that is wholly owned by PalEx, and (c) 1271477 Ontario
Limited, Rollem Holdings Inc., 1271478 Ontario Limited, 1296288 Ontario Limited, Save On Pallets
Ltd., Pallet Management Services Inc., The David E. Turner Family Trust II, The David E. Turner
Family Trust III, The Enrico DiLello Family Trust II, The Enrico DiLello Family Trust III, The
Worden Teadsdale Family Trust, The Fraser Campbell Family Trust II, The Fraser Campbell Family
Trust III, The John F. Campbell Family Trust II, The John F. Campbell Family Trust, The Ronald
Doering Family Trust, Fraser Campbell, John F. Campbell, Enrice DiLello, Ronald Doering, Susan
Virginia Teadsdale, Worden Teadsdale, Clint Sharples, and David E. Turner (incorporated by reference
to Exhibit 2.1 to Palex's Current Report on Form 8-K dated September 11, 1998, Commission file
no. 000-22237, as filed on September 23, 1998).
10.20 Form of Employment and Noncompetition Agreement for Messrs. Maultsby, Rhyne, Fletcher, and
Fraser (the terms of each agreement are identical except for the level of compensation provided for
the respective individual) (incorporated by reference to Exhibit 10.4 to PalEx's Registration
Statement on Form S-1, registration no. 333-18683).
10.21 Form of Employment and Noncompetition Agreement for Messrs. Cruz and Freeman (incorporated by
reference to Exhibit 10.14 to PalEx's Annual Report on Form 10-K for the fiscal year ended
December 27, 1998, Commission file no. 000-22237, as filed with the SEC on March 30, 1999).
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to IFCO Systems'
Registration Statement on Form F-4, registration no. 333-96021).
*23.1 Consent of PwC Deutshe Revision Aktiengesellschaft Wirtschaftsprufungsgesellschaft.
*23.2 Consent of Arthur Andersen LLP.
**23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Stibbe Simont Monahan Duhot (included as part of Exhibit 5.1).
***23.5 Consent of Cornelius Geber.
***23.6 Consent of Sam W. Humphreys.
***23.7 Consent of Randall Onstead.
***23.8 Consent of Eckhard Pfeiffer.
***23.9 Consent of Christoph Schoeller.
II-4
***23.10 Consent of Dr. Frank Tofflinger.
24 Power of Attorney (included on signature page).
- --------
*Filed herewith.
**To be filed by amendment.
***Filed previously.
(b) Financial Statement Schedules.
Not required.
(c) Reports, Opinions, Appraisals.
Not required.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement;
(2) that, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering;
(4) to file a post-effective amendment to the registration statement to
include any financial statements required by Rule 3-19 of Regulation S-X
under the Securities Act of 1933 at the start of any delayed offering or
throughout a continuous offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, subject to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing, as specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-5
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
(e) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement on Form F-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Pullach, Germany, on this 14th day of February, 2000.
IFCO SYSTEMS N.V.
/s/ Martin A. Schoeller
By: ___________________________
Martin A. Schoeller
Director and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form F-1 has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Martin A. Schoeller Director and Chief February 14, 2000
______________________________________ Executive Officer
Martin A. Schoeller (principal executive
officer)
* Director and Chief February 14, 2000
______________________________________ Financial Officer
Dr. Willy von Becker (principal financial and
accounting officer)
Puglisi & Associates Authorized Representative February 14, 2000
in the United States
*
By: _____________________________
Gregory F. Lavelle
Vice President
/s/ Martin A. Schoeller
*By: _______________________
Attorney-in-fact
II-7
EXHIBIT INDEX
**1.1 Form of Underwriting Agreement.
3.1 Articles of Association of IFCO Systems (English translation)
(incorporated by reference to Appendix D to the proxy
statement/prospectus filed as part of IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
4.1 Specimen Certificate of IFCO Systems ordinary shares (incorporated by
reference to Exhibit 4.1 to IFCO Systems' Registration Statement on Form
F-4, registration no. 333-96021).
**5.1 Opinion of Stibbe Simont Monahan Duhot P.C. as to the legality of the
IFCO Systems ordinary shares.
9.1 Voting Agreement dated as of October 6, 1999, and effective as of March
29, 1999, by and among PalEx and certain stockholders of PalEx
(incorporated by reference to Exhibit 9.1 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.1 Amended and Restated Agreement and Plan of Reorganization, dated as of
October 6, 1999 and effective as of March 29, 1999, by and among IFCO
Systems, IFCO Europe, MTS, IFCO International, Schoeller Industries,
Silver Oak and PalEx, as amended by Amendment No. 1 dated as of January
31, 2000 (incorporated by reference to Appendix A to the proxy
statement/prospectus filed as part of IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.2 Form of Lockup Agreement to be executed by Christoph Schoeller, Martin
Schoeller, Schoeller Industries, Schoeller Holding, and certain senior
executives of PalEx and its subsidiaries (incorporated by reference to
Exhibit 10.1 to IFCO Systems' Registration Statement on Form F-4,
registration no. 333-96021).
10.3 Form of Waiver to be entered by IFCO Systems and by certain employees of
PalEx (incorporated by reference to Exhibit 10.2 to IFCO Systems'
Registration Statement on Form F-4, registration no. 333-96021).
10.4 Senior Facility Agreement, dated February 20, 1998, between IFCO
International Food Container Organization GmbH, as Borrower, IFCO
Europe, and the Financial Institutions named therein (incorporated by
reference to Exhibit 10.3 to IFCO Systems' Registration Statement on
Form F-4, registration no. 333-96021).
10.5 Amendment to Senior Facility Agreement, dated February 28, 1998
(incorporated by reference to Exhibit 10.4 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.6 Senior Subordinated Facility Agreement, dated February 20, 1998, between
IFCO International Food Container Organization GmbH as Borrower, IFCO
Europe, and the Financial Institutions named therein (incorporated by
reference to Exhibit 10.5 to IFCO Systems' Registration Statement on
Form F-4, registration no. 333-96021).
10.7 Intercreditor Agreement, dated February 20, 1998, between BHF Bank AG as
Senior Agent and Security Trustee, Barclays Bank PLC as Senior
Subordinated Agent and the Financial Institutions named therein as
Initial Senior Lenders and Initial Senior Subordinated Lenders
(incorporated by reference to Exhibit 10.6 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.8 Security Trust Agreement, dated February 27, 1998, between BHF Bank AG
as Security Trustee and Senior Agent, IFCO International Food Container
Organization GmbH as Borrower, IFCO Europe, Barclays Bank PLC as Senior
Subordinated Agent, and the Financial Institutions named therein
(incorporated by reference to Exhibit 10.7 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.9 Option Release and IPO-Facilitation Agreement, dated May 27, 1999, by
and among, inter alia, Schoeller Industries, Schoeller Plast AG, GE
Capital, and GE Erste as amended by the Amendment of the Option Release
and IPO-Facilitation Agreement, dated January 31, 2000 (incorporated by
reference to Exhibit 10.8 to IFCO Systems' Registration Statement on
Form F-4, registration no. 333-96021).
1
10.10 Supply Agreement, dated November 4, 1997, between IFCO Europe and
Schoeller Plast Industries GmbH (assigned to Schoeller Plast AG)
(incorporated by reference to Exhibit 10.9 to IFCO Systems' Registration
Statement on Form F-4, registration no. 333-96021).
10.11 Membership Interest and Share Purchase Agreement, dated September 2,
1999, by and among, inter alia, Polymer International Corp., as seller,
and IFCO Systems, as purchaser (incorporated by
reference to Exhibit 10.10 to IFCO Systems' Registration statement on
Form F-4, registration
no. 333-96021).
10.12 Management Agreement, dated as of January 2, 1997, between Schoeller
Industries and IFCO Europe (incorporated by reference to Exhibit 10.11
to IFCO Systems' Registration Statement on Form F-4, registration no.
333-96021).
10.13 Management Agreement, dated as of January 2, 1997, between Schoeller
Industries and MTS (incorporated by reference to Exhibit 10.12 to IFCO
Systems' Registration Statement on Form F-4, registration no. 333-
96021).
10.14 Asset Purchase Agreement, dated as of February 12, 1998, by and among
PalEx, Container Services Company NW Acquisition, Inc., Container
Services Company SW Acquisition, Inc., Consolidated Drum Reconditioning
Co., Inc., CDRCo. HC, LLC, CDRCo. NW, LLC, CDRCo SW, LLC, Joseph Cruz,
and Philip Freeman (incorporated by reference to Exhibit 2.1 to PalEx's
Current Report on Form 8-K dated February 12, 1998, Commission file no.
000-22237, as filed with the SEC on February 27, 1998).
10.15 Acquisition Agreement and Plan of Reorganization, dated as of February
23, 1998, by and among PalEx, Acme Acquisition, Inc., Acme Barrel
Company, Inc., and the stockholders named therein (incorporated by
reference to Exhibit 2.2 to PalEx's Current Report on Form 8-K dated
February 12, 1998, Commission file no. 000-22237, as filed with the SEC
on February 27, 1998).
10.16 Acquisition Agreement and Plan of Reorganization, dated as of February
23, 1998, by and among PalEx, Acme Barrel Company, Inc., ESP Realty
Corp., Inc., and the Elliot Pearlman Living Trust u/t/a
dated July 2, 1996 (incorporated by reference to Exhibit 2.3 to PalEx's
Current Report on Form 8-K
dated February 12, 1998, Commission file no. 000-22237, as filed with
the SEC on February 27, 1998).
10.17 Acquisition Agreement and Plan of Reorganization, dated as of February
23, 1998, by and among PalEx, Western Container Acquisition, Inc.,
Environmental Recyclers of Colorado Inc., and the
individual optionees named therein (incorporated by reference to Exhibit
2.4 to PalEx's Current Report on Form 8-K dated February 12, 1998,
Commission file no. 000-22237, as filed with the SEC
on February 27, 1998).
10.18 Acquisition Agreement, dated as of February 23, 1998, by and among
PalEx, Western Container Acquisition, Inc., and Barton A. Kaminsky
(incorporated by reference to Exhibit 2.5 to PalEx's
Current Report on Form 8-K dated February 12, 1998, Commission file no.
000-22237, as filed with the SEC on February 27, 1998).
10.19 Share Purchase Agreement, dated as of September 11, 1998, by and among
(a) PalEx, (b) 1313530 Ontario Inc., an Ontario corporation that is
wholly owned by PalEx, and (c) 1271477 Ontario
Limited, Rollem Holdings Inc., 1271478 Ontario Limited, 1296288 Ontario
Limited, Save On Pallets Ltd., Pallet Management Services Inc., The
David E. Turner Family Trust II, The David E. Turner
Family Trust III, The Enrico DiLello Family Trust II, The Enrico DiLello
Family Trust III, The Worden Teadsdale Family Trust, The Fraser Campbell
Family Trust II, The Fraser Campbell Family Trust III, The John F.
Campbell Family Trust II, The John F. Campbell Family Trust, The Ronald
Doering Family Trust, Fraser Campbell, John F. Campbell, Enrice DiLello,
Ronald Doering, Susan Virginia Teadsdale, Worden Teadsdale, Clint
Sharples, and David E. Turner (incorporated by reference
to Exhibit 2.1 to Palex's Current Report on Form 8-K dated September 11,
1998, Commission file no. 000-22237, as filed on September 23, 1998).
2
10.20 Form of Employment and Noncompetition Agreement for Messrs. Maultsby, Rhyne, Fletcher, and
Fraser (the terms of each agreement are identical except for the level of compensation provided for
the respective individual) (incorporated by reference to Exhibit 10.4 to PalEx's Registration
Statement on Form S-1, registration no. 333-18683).
10.21 Form of Employment and Noncompetition Agreement for Messrs. Cruz and Freeman (incorporated by
reference to Exhibit 10.14 to PalEx's Annual Report on Form 10-K for the fiscal year ended
December 27, 1998, Commission file no. 000-22237, as filed with the SEC on March 30, 1999).
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to IFCO Systems'
Registration Statement on Form F-4, registration no. 333-96021).
*23.1 Consent of PwC Deutshe Revision Aktiengesellschaft Wirtschaftsprufungsgesellschaft.
*23.2 Consent of Arthur Andersen LLP.
*23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Stibbe Simont Monahan Duhot (included as part of Exhibit 5.1).
***23.5 Consent of Cornelius Geber.
***23.6 Consent of Sam W. Humphreys.
***23.7 Consent of Randall Onstead.
***23.8 Consent of Eckhard Pfeiffer.
***23.9 Consent of Christoph Schoeller.
***23.10 Consent of Dr. Frank Tofflinger.
24 Power of Attorney (included on signature page).
- --------
*Filed herewith.
**To be filed by amendment.
***Filed previously.
3