AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 21, 1997
REGISTRATION NO. 333-18683
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PALEX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2448
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
DELAWARE 76-0520673
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3555 TIMMONS LANE, SUITE 610
HOUSTON, TEXAS 77027
(713) 626-9711
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
VANCE K. MAULTSBY, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3555 TIMMONS LANE, SUITE 610
HOUSTON, TEXAS 77027
(713) 626-9711
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO: COPY TO:
JOHN F. WOMBWELL THOMAS J. MURPHY
ANDREWS & KURTH L.L.P. MCDERMOTT, WILL & EMERY
4200 TEXAS COMMERCE TOWER 227 WEST MONROE STREET
HOUSTON, TEXAS 77002 CHICAGO, ILLINOIS 60606
(713) 220-4200 (312) 372-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes
effective.
------------------------
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 of
1933, 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, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED FEBRUARY 21, 1997
3,000,000 SHARES
[PALEX LOGO]
COMMON STOCK
------------------
All of the 3,000,000 shares of Common Stock offered hereby are being sold
by PalEx, Inc. (the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $9.00 and $11.00 per
share. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "PALX".
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------
Per Share.. $ $ $
- --------------------------------------------------------------------------------
Total(2)... $ $ $
================================================================================
(1) Before deducting expenses of the offering payable by the Company estimated
at $500,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public as shown above. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
----------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland on or about ,
1997.
ALEX. BROWN & SONS MONTGOMERY SECURITIES
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[PICTURE OF PRODUCTS IN USE AND AUTOMATED MANUFACTURING PROCESS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
CONCURRENTLY WITH THE CLOSING OF THE OFFERING MADE HEREBY (THE "OFFERING"),
PALEX, INC. PLANS TO ACQUIRE, IN SEPARATE TRANSACTIONS (COLLECTIVELY, THE
"ACQUISITIONS"), IN EXCHANGE FOR CONSIDERATION INCLUDING SHARES OF ITS COMMON
STOCK, THREE BUSINESSES: FRASER INDUSTRIES, INC. ("FRASER"), RIDGE PALLETS, INC.
("RIDGE") AND INTERSTATE PALLET CO., INC. ("INTERSTATE" AND, TOGETHER WITH
FRASER AND RIDGE, THE "FOUNDING COMPANIES"). UNLESS OTHERWISE INDICATED,
REFERENCES HEREIN TO "PALEX" MEAN PALEX, INC., AND REFERENCES TO THE "COMPANY"
MEAN PALEX AND THE FOUNDING COMPANIES COLLECTIVELY.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION AND
SHARE AND PER SHARE DATA IN THIS PROSPECTUS (I) GIVE EFFECT TO THE ACQUISITIONS,
(II) ASSUME THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (III)
GIVE EFFECT TO A 1,021-FOR-1 STOCK SPLIT OF THE COMMON STOCK EFFECTED IN
DECEMBER 1996.
THE COMPANY
PalEx was formed in January 1996 to create a national provider of pallets
and related services. Concurrently with the closing of this Offering, PalEx will
acquire three of the leading U.S. pallet businesses, making it one of the
largest producers of new pallets and one of the largest pallet recyclers in the
U.S. The Company believes that these acquisitions will enable it to capitalize
on the significant trends currently affecting product manufacturing and
distribution practices throughout the U.S., including the increasing reliance by
shippers and logistics agents on a smaller number of better capitalized, more
sophisticated vendors. The Company will provide 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); maintenance of depot operations and the
sorting and storage of pallets for selected customers; and the processing and
marketing of various wood-based by-products derived from pallet recycling
operations. The Company will initially operate from 22 facilities in Florida,
Texas, Virginia, California, Arkansas, Georgia, Illinois, Mississippi and South
Carolina. For its fiscal year ended November 30, 1996, the Company generated pro
forma combined revenues, income from operations and net income of $102.0
million, $8.5 million and $5.0 million, respectively. Ridge and Fraser, two of
the Founding Companies, are currently among the largest pallet businesses in the
U.S., based on revenues, and Interstate is regarded in the pallet industry as a
leading developer of pallet recycling services and products. The Company intends
to actively pursue acquisitions of additional leading pallet companies as part
of its growth strategy.
The pallet industry produces a variety of storage and shipping platforms.
Pallets are typically constructed of wood and 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. Based on information
supplied by industry sources, the Company estimates that the U.S. pallet
industry generated revenues of approximately $5 billion in 1995 and that it is
served by approximately 3,600 companies, most of which are small, privately
held, operate in only one location and serve customers within a limited
geographic radius.
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
has also prompted large manufacturers and distributors to outsource key elements
of those processes that are not within their core competencies 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.
Palletized freight facilitates movement through the supply chain, reducing
costly loading and
3
<PAGE>
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. As a result, there has been an increased
demand for high-quality pallets in an attempt to reduce product damage during
shipping and storage.
The 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 the quality of newly manufactured pallets. In recognition of
these trends, Chep USA ("CHEP") has established a national pallet leasing
program that provides high-quality pallets to customers throughout the U.S. for
a daily fee. CHEP is a partnership created by Brambles Industries Limited, an
Australian publicly-held corporation, and GKN, Ltd., a publicly-held U.K.
corporation. Ridge and Fraser, two of the Founding Companies, manufacture and
repair pallets for CHEP and provide a variety of logistical services with
respect to its existing pallet pool, including the repair, storage and
just-in-time delivery of pallets. CHEP currently does not manufacture pallets
and engages in limited repair operations. During the fiscal year ended November
30, 1996, approximately 34% of the Company's pro forma combined revenues and a
significant percentage of the Company's growth were attributable to CHEP. The
Company expects to continue to build its relationship with CHEP both
geographically and by providing additional logistical services.
GROWTH STRATEGY
The Company's goal is to become a leading national provider of pallets and
related services by pursuing an aggressive acquisition strategy and by
continuing to expand its existing operations.
GROWTH THROUGH ACQUISITIONS. The Company intends to actively pursue
acquisitions of leading companies whose management and operating philosophies
are complementary to those of the Founding Companies. The Company also intends
to expand within its existing markets through "tuck-in" acquisitions to
increase its market penetration as well as to provide a broader range of
services to existing customers in those markets. These tuck-in acquisitions will
generally involve smaller pallet companies whose operations can be incorporated
into the Company's existing operations without a significant increase in
infrastructure.
INTERNAL GROWTH. The Company has opened nine new locations in the past
three years and expects to open additional locations in the future. The Company
intends to expand the service offerings at many of its locations to include a
combination of manufacturing, repair, recycling and the sale of by-products. The
Company also expects to be able to accelerate the internal growth of the
Founding Companies and businesses acquired in the future by continuing to
develop the Company's relationship with CHEP and other large customers and by
developing and implementing a "best practices" program.
PalEx believes that a significant market opportunity exists for a company
that can consistently offer high-quality pallets and related value-added
services to large pallet users in the U.S. The Company believes that the
prominence and operating strength of the Founding Companies and the experience
of its executive management will provide the Company with a significant
competitive advantage as it pursues its growth strategy.
4
<PAGE>
THE OFFERING
Common Stock offered by the Company..... 3,000,000 shares
Common Stock to be outstanding after the 10,123,889 shares
Offering(1)...........................
Use of proceeds......................... To pay the cash portion of the
purchase price for the Founding
Companies, to repay certain
indebtedness (including related
party indebtedness), to make S
corporation distributions to the
existing stockholders of the
Founding Companies and for general
corporate purposes, which may
include future acquisitions. See
"Use of Proceeds."
Nasdaq National Market symbol........... PALX
- ------------
(1) Includes (i) 5,910,000 shares to be issued to the owners of the Founding
Companies as a portion of the consideration to be paid in the Acquisitions,
(ii) 50,000 shares issued to Vance K. Maultsby, Jr., President and Chief
Executive Officer of PalEx, (iii) 1,021,389 shares issued to Main Street
Capital Partners, L.P. ("Main Street"), (iv) 3,000,000 shares to be sold
in the Offering and (v) 142,500 shares to be issued to the Founding
Companies' profit sharing plans. Excludes options to purchase 200,000 shares
which are currently outstanding and options to purchase 725,000 shares which
are expected to be granted upon consummation of this Offering. See
"Management" and "Certain Transactions."
5
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PalEx will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, however, Fraser, one of the Founding Companies, has been
identified as the "accounting acquiror." The following summary unaudited pro
forma combined financial data presents certain data for the Company, as adjusted
for (i) the effects of the Acquisitions on an historical basis, (ii) the effects
of certain pro forma adjustments to the historical financial statements and
(iii) the consummation of this Offering. See "Selected Financial Data", the
Unaudited Pro Forma Combined Financial Statements and the notes thereto and the
historical financial statements for each of Fraser and Ridge and the notes
thereto included elsewhere in this Prospectus.
PRO FORMA(1)
-----------------
FISCAL YEAR
ENDED
NOVEMBER 30, 1996
-----------------
INCOME STATEMENT DATA:
Revenues........................ $ 102,030
Gross profit.................... 15,852
Selling, general and
administrative expenses(2)..... 6,453
Goodwill amortization(3)........ 867
Income from operations.......... 8,532
Interest income (expense),
net(4)......................... 15
Net income...................... 4,954
Net income per share............ $ 0.49
Shares used in computing pro
forma net income per
share(5)....................... 10,123,889
AS OF
NOVEMBER 30, 1996
---------------------------
PRO AS
FORMA(6) ADJUSTED(7)
-------- -----------
BALANCE SHEET DATA:
Working capital................. $ (5,551) $12,530
Total assets.................... 56,846 59,791
Total debt, including current
portion........................ 12,727(8) 600
Stockholders' equity............ 24,424 51,824
- ------------
(1) The pro forma combined income statement data assume that the Acquisitions
and the Offering were closed on December 1, 1995 and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results. During the
periods presented above, the Founding Companies were not under common
control or management and, therefore, the data presented may not be
comparable to or indicative of post-combination results to be achieved by
the Company. The pro forma combined income statement data is based on
preliminary estimates, available information and certain assumptions that
management deems appropriate and should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.The pro forma income statement data include operating results of
Ridge for the twelve months ended December 1, 1996 and Interstate for the
fiscal year ended August 31, 1996.
(2) The pro forma combined income statement data reflect an aggregate of
approximately $666,000 in pro forma reductions in salary and benefits of the
owners of the Founding Companies to which they have agreed prospectively,
and the effect of revisions of certain lease agreements between one of the
Founding Companies and its stockholder. In addition, the pro forma combined
income statement does not reflect a $300,000 non-recurring, non-cash charge
representing the difference between the amounts paid for shares issued to
the Company's President and Chief Executive Officer and their estimated fair
value on the date of sale assuming the Acquisitions would be consummated.
See "Certain Transactions."
(3) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 30-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(4) Includes interest income(expense) and other income(expense), net and
reflects the reduction of interest expense attributed to the repayment of
debt with proceeds from the Offering.
(5) Includes (i) 5,910,000 shares to be issued to the owners of the Founding
Companies, (ii) 50,000 shares issued to the management of PalEx, (iii)
1,021,389 shares issued to Main Street, (iv) 3,000,000 shares to be sold in
the Offering and (v) 142,500 shares to be issued to the Founding Companies'
profit sharing plans. Excludes options to purchase 200,000 shares which are
currently outstanding and options to purchase 725,000 shares which are
expected to be granted upon consummation of this Offering. See "Certain
Transactions."
(6) The pro forma combined balance sheet data assume that the Acquisitions were
closed on November 30, 1996. The pro forma combined balance sheet data is
based upon preliminary estimates, available information and certain
assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus. The pro forma balance sheet data include Ridge
as of December 1, 1996 and Interstate as of August 31, 1996.
(7) Reflects the closing of this Offering and the Company's application of the
net proceeds therefrom to fund the cash portion of the purchase price of the
Acquisitions and to repay indebtedness of the Founding Companies. See "Use
of Proceeds" and "Certain Transactions."
(8) Excludes $12.3 million representing the cash consideration and S Corporation
Accumulated Adjustment Accounts to be paid to the owners of the Founding
Companies with a portion of the net proceeds from the Offering.
6
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
(In thousands)
The following table presents certain summary data for each of Fraser, Ridge
and Interstate.
FISCAL PERIODS ENDED(1)
-------------------------------
1994 1995 1996
--------- --------- ---------
FRASER:
Revenues........................... $ 23,114 $ 30,135 $ 49,282
Gross profit....................... 2,359 4,576 7,773
Selling, general and administrative
expenses(2)...................... 1,761 2,131 3,171
Income from operations............. 598 2,445 4,602
RIDGE:
Revenues........................... $ 47,946 $ 54,450 $ 48,341
Gross profit....................... 7,340 8,062 7,801
Selling, general and administrative
expenses(2)...................... 4,018 3,826 3,825
Income from operations............. 3,322 4,236 3,976
INTERSTATE:
Revenues........................... $ 3,480 $ 3,772 $ 4,284
Gross profit....................... 712 601 943
Selling, general and administrative
expenses(2)...................... 260 163 84
Income from operations............. 452 438 859
- ------------
(1) The fiscal periods presented are as follows: Fraser -- fiscal years ended
November 30 for all years presented; Ridge -- fiscal years ended July 31,
1994, July 30, 1995 and July 28, 1996; and Interstate -- fiscal years ended
August 31 for all years presented.
(2) The Company anticipates reductions in selling, general and administrative
expenses aggregating approximately $666,000 annually from reductions in
salary and benefits to the owners of the Founding Companies to which they
have agreed prospectively and from revisions to certain lease agreements
between one of the Founding Companies and its stockholder. These reductions
are not reflected in the financial data presented.
7
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF
FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY. PalEx was founded in January 1996
but has conducted no operations and generated no revenue to date. PalEx has
entered into agreements to acquire the Founding Companies simultaneously with
the closing of this Offering. The Founding Companies have been operating as
separate independent entities and there can be no assurance that the Company
will be able to integrate these businesses on an economic basis. In addition,
there can be no assurance that the recently assembled management group will be
able to oversee the combined entity and effectively implement the Company's
operating or growth strategies. The pro forma combined financial results of the
Founding Companies cover periods when the Founding Companies and PalEx were not
under common control or management and, therefore, may not be indicative of the
Company's future financial or operating results. The success of the Company will
depend on the extent management is able to centralize and integrate certain
administrative and accounting functions and otherwise integrate the Founding
Companies and other future acquisitions into one organization in a profitable
manner. The inability of the Company to successfully integrate the Founding
Companies would have a material adverse effect on the Company's financial
condition and results of operations and would make it unlikely that the
Company's acquisition program will be successful.
SUPPLY AND DEMAND FOR LUMBER. 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,
depressing pallet prices overall and adversely affecting the Company's revenues
and operating margins. The majority of the lumber used in the pallet industry is
hardwood, which is only grown in certain regions of the country and which is
difficult to harvest in adverse weather, making its pricing volatile. For the
fiscal year ended November 30, 1996, purchases from two lumber vendors accounted
for approximately 13% and 11%, respectively, of the Company's total pro forma
combined lumber purchases. While the Company purchased plywood and lumber from
over 85 vendors during the fiscal year ended November 30, 1996, and believes
that it will benefit from strong relationships with multiple lumber suppliers,
there can be no assurance that the Company will be able to secure adequate
lumber supplies in the future. Lumber supplies and costs are affected by many
factors outside the Company's control, including weather, governmental
regulation of logging on public lands, lumber agreements between Canada and the
U.S. and competition from other industries that use similar grades and types of
lumber. For example, in November and December of 1996, the Company experienced
higher lumber costs resulting from the impact of wet weather on the harvesting
of hardwood timber in the southeast. To the extent the Company encounters
adverse lumber prices or is unable to procure adequate supplies of lumber, its
financial condition and results of operations could be materially adversely
affected. See "Business -- Raw Materials."
FACTORS AFFECTING INTERNAL GROWTH. The Company's ability to generate
internal earnings growth will be affected by, among other factors, its ability
to expand the range of services offered to customers, attract new customers,
increase volumes purchased by existing customers (including CHEP), hire and
retain employees, obtain raw materials at acceptable prices, open additional
manufacturing and repair facilities and reduce operating and overhead expenses.
RELIANCE ON ACQUISITIONS. One of the Company's principal growth strategies
is to increase its revenues and the markets it serves through the acquisition of
additional pallet manufacturing and recycling companies. There can be no
assurance that the Company will be able to identify or acquire additional
businesses or to integrate and manage such additional businesses successfully.
Acquisitions may involve a number of risks, including: adverse short-term
effects on the Company's reported operating results; diversion of management's
attention; dependence on retention, hiring and training of key personnel; risks
associated with unanticipated problems or legal liabilities; and amortization of
acquired intangible assets. Some or all of these risks could have a material
adverse effect on the Company's financial condition or results of operations. In
addition, to the extent that consolidation becomes more prevalent in the
industry,
8
<PAGE>
the prices for attractive acquisition candidates may increase and the number of
attractive acquisition candidates may decrease and, in any event, there can be
no assurance that businesses acquired in the future will achieve sales and
profitability that justify the investment therein. See "Business -- Strategy."
ACQUISITION FINANCING. The Company intends to use its Common Stock for a
portion of the consideration for future acquisitions. If the Common Stock does
not maintain a sufficient valuation or potential acquisition candidates are
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to pursue its acquisition program. If the
Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through future debt or equity
financings. Using cash to complete acquisitions and finance internal growth
could substantially limit the Company's financial flexibility, using debt could
result in financial covenants that limit the Company's operations and financial
flexibility, and using equity may result in significant dilution of the
ownership interests of the then existing stockholders of the Company. There can
be no assurance that the Company will be able to obtain financing if and when it
is needed or that, if available, it will be available on terms the Company deems
acceptable. As a result, the Company may be unable to pursue its acquisition
strategy successfully. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Combined" and "Business -- Strategy."
The Company has recently received a commitment letter from Bank One, Texas,
NA ("Bank One") to provide the Company with a credit facility which will allow
the Company to borrow up to $35.0 million to be used for acquisitions, working
capital and other general corporate purposes. It is anticipated that such
facility will require the Company to comply with various affirmative and
negative covenants (including maintenance of certain financial ratios) which
could limit the Company's operational and financial flexibility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Combined."
WEATHER CONDITIONS. The Company sells a significant portion of its
products and services to customers who ship agricultural products. Severe
weather, particularly during the harvesting seasons, may cause a reduction in
demand from agricultural customers, adversely affecting the Company's revenues
and results of operations. A heavy freeze or other weather adversely affecting
the citrus and produce industries in Florida could have a significant negative
impact on the Company's financial condition and results of operations. In
addition, adverse weather conditions may affect the Company's ability to obtain
adequate supplies of lumber at a reasonable cost. In November and December 1996,
the Company experienced higher lumber costs resulting from the impact of wet
weather on the harvesting of hardwood timber in the southeast. Additionally,
freezing weather conditions in south Florida during January 1997 adversely
impacted the produce harvest thereby reducing the demand for pallets. The
Company expects these two conditions to adversely affect its results of
operations for the first fiscal quarter ending February 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SEASONALITY; FLUCTUATION OF OPERATING RESULTS. The pallet manufacturing
business can be subject to seasonal variations in operations and demand.
Approximately 20% of the Company's pro forma combined revenues for the fiscal
year ended November 30, 1996 were attributable to the agricultural industry in
the southeastern U.S., with the citrus and produce industries comprising the
largest components thereof. As a result, the Company's southeastern operations
experience the greatest demand for new pallets during the citrus and produce
harvesting seasons (generally October through May) with significantly lower
demand in the summer months. Moreover, yearly results can also fluctuate
significantly, particularly in the southeast region as a result of the size of
the citrus and produce harvests, which, in turn, largely depend on the
occurrence and severity of freezing weather. (See "-- Weather Conditions".)
Quarterly results may also be materially affected by the timing of acquisitions,
the timing and magnitude of acquisition assimilation costs, costs of opening new
facilities, gain or loss of a material customer, variation in product mix and
weather conditions. In addition, the Company's revenues and gross margins can
fluctuate significantly with variations in lumber prices. Accordingly, the
Company's performance in any particular quarter may not be indicative of the
results which can be expected for any other quarter or for the entire year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
9
<PAGE>
RELIANCE ON CHEP. During the fiscal year ended November 30, 1996,
approximately 34% of the Company's pro forma combined revenues and a significant
percentage of the Company's growth were attributable to CHEP. In addition,
certain of the Company's facilities are substantially dependent on CHEP as their
predominant customer. If CHEP were to materially decrease its purchase of
pallets and services from the Company, either because CHEP's operations
encounter financial reversals or as a result of CHEP's determination to
manufacture pallets internally, to buy pallets and services from competitors of
the Company or to substantially increase the number of pallets it repairs or for
any other reason, the Company's financial condition and results of operations
could be materially adversely affected. The Company and CHEP enter into an
agreement for each Company facility which performs CHEP repair or depot
services. These agreements generally do not contain fixed volume requirements,
may be terminated with or without cause depending on the nature of the service
provided and have both indefinite and fixed terms of between one and three
years. The contracts prohibit the Company's contracting facilities from
competing with CHEP in pallet leasing and from repairing pallets for other
leasing companies during the term of the agreement and for a period of up to
three years thereafter. Although CHEP has not terminated or failed to renew any
of these agreements to date, there can be no assurance that CHEP will not
terminate or fail to renew such agreements in the future. See
"Business -- Customers."
MANAGEMENT OF GROWTH. The Company expects to grow through internal growth
and acquisitions. Management expects to expend significant time and effort in
evaluating, completing and integrating acquisitions and opening new facilities.
There can be no assurance that the Company's systems, procedures and controls
will be adequate to support the Company's operations as they expand. Any future
growth also will impose significant added responsibilities on members of senior
management, including the need to identify, recruit and integrate new senior
level managers and executives. There can be no assurance that such additional
management will be identified and retained by the Company. To the extent that
the Company is unable to manage its growth efficiently and effectively, or is
unable to attract and retain additional qualified management, the Company's
financial condition and results of operations could be materially adversely
affected. See "Business -- Strategy."
COMPETITION. The markets for pallet manufacturing and recycling services
are highly fragmented and competitive. Competition on pricing is often intense
and the Company may face increasing competition from pallet leasing or other
pallet systems providers, which are marketed as less expensive alternatives to
new pallet purchasers. CHEP's pallet leasing system competes with new pallet
sales 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 such
businesses are minimal. Certain other smaller competitors may have lower
overhead costs and consequently, may be able to manufacture or recycle pallets
at lower costs than the Company. Other companies with significantly greater
capital and other resources than the Company (including CHEP) may enter or
expand their operations in the pallet manufacturing and recycling businesses in
the future, changing the competitive dynamics of the industry. The Company has
in the past and will continue to compete with lumber mills in the sale of new
pallets. The lumber mills typically view pallet manufacturing as an opportunity
to use the lower grade lumber that would otherwise represent waste that must be
disposed by the mill. While the Company estimates, based on industry sources,
that non-wooden pallets currently account for less than 10% of the pallet
market, there can be no assurance that the Company will not face increasing
competition from pallets fabricated from non-wooden components in the future.
For example, Ridge currently sells agricultural harvesting boxes. These products
have recently faced increasing competition from plastic agricultural containers
which has reduced the number of agricultural harvesting boxes sold by Ridge. The
Company expects competition with plastic agricultural containers to continue in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Competition."
EFFECT OF NON-COMPETE AGREEMENT. Interstate and its stockholder are
parties to a non-competition agreement which may restrict until January 14,
1998, Interstate's or such stockholder's ability to engage in any activity or
business enterprise or own an interest in any entity which engages in any
activity or business enterprise which competes with an organization whose
membership includes pallet recyclers and manufacturers and was created to pursue
the national and global marketing and management of pallet systems,
10
<PAGE>
including the sale or leasing of pallets. The Company has been notified by the
organization that it intends to enforce the terms of the non-compete agreement.
The non-compete provision explicitly excludes from its coverage any product or
services sold by Interstate before October 1995. Given the non-compete
agreement's short duration and exclusion of the business currently conducted by
Interstate, the Company believes that such agreement will not have a material
adverse effect on its operations. There can be no assurance, however, that a
court would invalidate such provision if tested and, if not invalidated, of the
scope or nature of any attempted enforcement.
EFFECT OF CERTAIN CHARTER PROVISIONS. The Board of Directors of the
Company is empowered to issue Preferred Stock without stockholder action. The
existence of this "blank-check" Preferred Stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise, even if such a transaction would
provide greater value to the Company's stockholders than if the Company remained
independent. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors. See "Description of Capital Stock."
DEPENDENCE ON KEY PERSONNEL. The Company's operations are dependent on the
continued efforts of its executive officers and on senior management of the
Founding Companies. Furthermore, the Company will likely be dependent on the
senior management of companies that may be acquired in the future. Although the
Company will enter into an employment agreement with each of the Company's
executive officers, there can be no assurance that any individual will continue
in such capacity for any particular period of time. The loss of key personnel,
or the inability to hire and retain qualified employees could have an adverse
effect on the Company's business, financial condition and results of operations.
The Company does not intend to carry key-person life insurance on any of its
employees. See "Management."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. Following the completion
of the Acquisitions and this Offering, the Company's executive officers,
directors and key employees, and entities affiliated with them, will
beneficially own 70.4% of the outstanding shares of Common Stock (67.4% if the
Underwriters' over-allotment option is exercised in full). These persons, if
acting in concert, will be able to continue to exercise control over the
Company's affairs, to elect the entire Board of Directors and to control the
disposition of any matter submitted to a vote of stockholders. See "Principal
Stockholders."
PROCEEDS OF OFFERING PAYABLE TO AFFILIATES. Approximately $19.8 million of
the net proceeds of this Offering will be paid in cash to the owners of the
Founding Companies (all of whom will become officers, directors or key employees
of the Company) or will be used to repay indebtedness of the Founding Companies.
Approximately $7.0 million of the $13.3 million of indebtedness to be repaid is
held by certain stockholders and affiliates of the Founding Companies. See "Use
of Proceeds" and "Certain Transactions."
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES. The Company'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 its facilities, the
Company may be required to incur remediation costs and other expenses related
thereto. In addition, although the Company intends to conduct appropriate due
diligence with respect to environmental matters in connection with future
acquisitions, there can be no assurance that the Company will be able to
identify or be indemnified for all potential environmental liabilities relating
to any acquired business.
NO PRIOR MARKET, POSSIBLE VOLATILITY OF STOCK. Prior to this Offering, no
public market for the Common Stock has existed, and the initial public offering
price, which was determined by negotiation between the Company and
representatives of the Underwriters, may not be indicative of the price at which
the Common Stock will trade after this Offering. See "Underwriting" for the
factors considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market, subject to
notice of final issuance, although no assurance can be given that an active
trading market for the Common Stock will develop or, if developed, continue
after the Offering. The market price of the Common Stock after the Offering may
be subject to significant fluctuations from time to
11
<PAGE>
time in response to numerous factors, including variations in the reported
financial results of the Company and changing conditions in the economy in
general or in the Company's industry in particular. In addition, the stock
markets experience significant price and volume volatility from time to time
which may affect the market price of the Common Stock for reasons unrelated to
the Company's performance.
SHARES ELIGIBLE FOR FUTURE SALE. As of February 20, 1997, 1,071,389 shares
of Common Stock were issued and outstanding. Simultaneously with the closing of
the Offering, the stockholders of the Founding Companies will receive, in the
aggregate, 5,910,000 shares of Common Stock as a portion of the consideration
for their businesses and the Company will issue 142,500 shares of Common Stock
to the Founding Companies' profit sharing plans. None of these 6,052,500 shares
was or will be issued in a transaction registered under the Securities Act of
1933, as amended (the "Securities Act"), and, accordingly, such shares may not
be sold except in transactions registered under the Securities Act or pursuant
to an exemption from registration, including the exemption contained in Rule 144
under the Securities Act. When these shares become saleable, the market price of
the Common Stock could be adversely affected by the sale of substantial amounts
of the shares in the public market. The current stockholders of the Company have
certain registration rights with respect to their shares which may be exercised
after the expiration of the 180-day lock-up period described below. If such
stockholders, by exercising such registration rights, cause a large number of
shares to be registered and sold in the public market, such sales may have an
adverse effect on the market price of the Common Stock. See "Shares Eligible
for Future Sale."
Upon the closing of this Offering, the Company also will have outstanding
options to purchase up to a total of 925,000 shares of Common Stock issued
pursuant to the Company's 1996 Stock Option Plan (the "Plan"). A total of
1,800,000 shares will be issuable pursuant to such plan. The Company intends to
register all the shares subject to these options under the Securities Act for
public resale. See "Management -- 1996 Stock Option Plan."
The Company has agreed that it will not offer, sell or issue any shares of
Common Stock or options, rights or warrants to acquire any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated, except for the grant of employee
stock options and for shares issued (i) in connection with acquisitions and (ii)
pursuant to the exercise of options granted under the Plan. Further, the
Company's directors, officers and certain stockholders who beneficially own
7,123,889 shares in the aggregate have agreed not to directly or indirectly
offer for sale, sell or otherwise dispose of any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated. In addition, the owners of the Founding
Companies have agreed not to sell, contract to sell or otherwise dispose of any
shares of Common Stock received as consideration in the Acquisitions for a
period of two years following receipt thereof.
The Company currently intends to file a registration statement covering up
to an additional 4,000,000 shares of Common Stock under the Securities Act for
its use in connection with future acquisitions. These shares generally will be
freely tradeable after their issuance by persons not affiliated with the Company
unless the Company contractually restricts their resale.
The effect, if any, of the availability for sale, or sale, of the shares of
Common Stock eligible for future sale on the market price of the Common Stock
prevailing from time to time is unpredictable, and no assurance can be given
that the effect will not be adverse.
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchasers of the shares of Common
Stock offered hereby will experience immediate dilution in the net tangible book
value of their shares of $7.45 per share (assuming an initial public offering
price of $10.00 per share). See "Dilution." In the event the Company issues
additional shares of Common Stock in the future, including shares which may be
issued in connection with acquisitions or other public or private financings,
purchasers of Common Stock in the Offering may experience further dilution in
the net tangible book value per share of the Common Stock of the Company.
12
<PAGE>
THE COMPANY
PalEx was founded in January 1996 to create a national provider of pallets
and related services. PalEx has conducted no operations and generated no revenue
to date. Concurrently with and as a condition to the closing of this Offering,
PalEx will acquire the three Founding Companies. A brief description of each of
the Founding Companies is set forth below.
FRASER. Fraser was founded in 1975 and is a leading manufacturer and
recycler of pallets in the southwestern U.S. Fraser is headquartered in Big
Spring, Texas, has 15 plant locations and employs approximately 815 people.
Fraser has experienced significant growth in the past three years, opening nine
facilities and acquiring two additional facilities. Fraser's fiscal 1996
revenues were $49.3 million, with income from operations of $4.6 million. Fraser
has established a leading presence in the supply of new and recycled pallets in
the Southwest and has developed significant relationships with CHEP and Wal-Mart
Stores, Inc. ("Wal-Mart"), among others. The services Fraser provides include
pallet manufacturing, repair, sorting, storage and transportation. Troy L.
Fraser, the President of Fraser, has served in such capacity for 21 years and
will become the Company's Chief Development Officer as well as serve on the
Company's Board of Directors upon consummation of the Offering. Mr. Fraser is a
Vice President and a two-term member of the Board of Directors of the National
Wooden Pallet and Container Association (the "NWPCA").
RIDGE. Ridge was founded in 1967 and is a leading manufacturer of pallets
in the southeastern U.S. Ridge's fiscal 1996 revenues were $48.3 million, with
income from operations of $4.0 million. Ridge is headquartered in Bartow,
Florida, has five plant locations and employs approximately 550 people. Ridge's
traditional strength has been the manufacture of large volumes of new pallets
for customers who have time-sensitive delivery requirements and demand a high
level of customer service. In addition to its traditional focus on the
manufacture of new pallets, Ridge also builds agricultural harvesting boxes and
specialty bins, and has recently entered the pallet repair and recycling market.
A. E. Holland, Jr. has served as President of Ridge for 16 years and has more
than 25 years experience in the pallet industry. Mr. Holland will become the
Company's Chief Operating Officer as well as serve on the Company's Board of
Directors upon consummation of the Offering. Mr. Holland is a past President and
long-standing member of the Board of Directors of the NWPCA. In addition, each
of the nine members of Ridge's senior management team has in excess of 13 years
of experience in the pallet business, is actively involved in the NWPCA and will
continue to serve the Company after the Offering.
INTERSTATE. Interstate was founded in 1979 in Richmond, Virginia and is
recognized as an innovator in pallet recycling services. Interstate has two
facilities and employs approximately 60 people, primarily in the manufacture and
sale of reconstructed wooden pallets. Interstate's fiscal 1996 revenues were
$4.3 million, with income from operations of approximately $900,000. In addition
to the sale of recycled pallets, Interstate has developed pallet management
systems through which Interstate delivers pallets to a customer, retrieves them
for repair after use and redeploys the pallets to the same customer. Interstate
is also an innovator in the sale of wood by-products, including garden mulches
and playground surface materials. Interstate was awarded a special commendation
from the Governor of Virginia recognizing Interstate's commitment to natural
resource conservation for recycling over 50 million pallets since 1980. Stephen
C. Sykes has served as Interstate's President from its inception and will become
a member of the Company's Board of Directors upon consummation of the Offering.
Mr. Sykes is a former President and board member of the NWPCA.
The aggregate consideration to be paid by the Company in the Acquisitions
consists of approximately $1.3 million in cash and 5,910,000 shares of Common
Stock. The consideration to be paid by the Company for the Founding Companies
was determined by negotiations among the Company and representatives of the
Founding Companies. See "Certain Transactions."
PalEx, Inc. was incorporated in Delaware in January 1996. Its executive
offices are located at 3555 Timmons Lane, Suite 610, Houston, Texas 77027, and
its telephone number at that address is (713) 626-9711.
13
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the sale of the shares of Common Stock
offered hereby, after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company, are estimated to be
approximately $27.4 million (approximately $31.6 million if the Underwriters
exercise their over-allotment option in full), assuming an initial public
offering price of $10.00 per share.
Of the net proceeds, the Company estimates that approximately $1.3 million
will be used to pay the cash portion of the purchase price for the Founding
Companies, all of which will be paid to former stockholders of the Founding
Companies. In addition, approximately $13.3 million of the net proceeds will be
used to repay the estimated outstanding indebtedness of the Founding Companies
at the closing of the Offering. Of that $13.3 million, approximately $7.0
million is owed to stockholders and affiliates of Ridge, bears interest at the
prime rate (which at November 30, 1996 was 8.25%) and matures January 3, 2000,
and approximately $70,000 is owed to an affiliate of Fraser, bears interest at
14.0% per annum and matures in January 2005. The remaining estimated
indebtedness at closing consists of amounts drawn under letters of credit by
each of Ridge (approximately $2.2 million) and Fraser (approximately $4.0
million). Both facilities bear interest at the prime rate, with the Ridge
facility maturing in June 1997 and the Fraser facility maturing in April 1997.
Approximately $11.0 million of the net proceeds will be used to make
distributions to the former stockholders of the Founding Companies representing
S Corporation earnings previously taxed to such holders. Approximately $518,000
of the proceeds will be used to pay certain financial advisory fees incurred by
the Founding Companies and $88,000 will be used to purchase equipment owned by
one of the stockholders of the Founding Companies. See "Certain Transactions."
The approximately $1.2 million of remaining net proceeds will be used for
working capital and for general corporate purposes, which are expected to
include future acquisitions. Pending such uses, the Company intends to invest
the net proceeds of the Offering in short-term, investment-grade,
interest-bearing instruments. The Company currently has no binding agreements to
effect any acquisitions. See "Managements's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Combined."
The Company has recently received a commitment from Bank One to provide the
Company with a $35.0 million credit facility which may be used for acquisitions,
working capital and other general corporate purposes. To the extent the net
proceeds of the Offering are insufficient to fund the use of proceeds described
above, the Company may supplement the proceeds for such purposes by utilizing
amounts available under the new credit facility, if available, by drawing on
credit facilities maintained by each of Ridge and Fraser, if available, or by
electing to lower the amount of outstanding debt repaid. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Combined."
DIVIDEND POLICY
It is the Company's current intention to retain earnings to finance the
expansion of its business. Any future dividends will be at the discretion of the
Board of Directors after taking into account various factors, including, among
others, the Company's financial condition, results of operations, cash flows
from operations, current and anticipated cash needs and expansion plans, the
income tax laws then in effect and the requirements of Delaware law. In
addition, the new credit facility may prohibit the payment of dividends by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Combined."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
November 30, 1996 (i) on a pro forma basis to give effect to the Acquisitions
and (ii) as adjusted, to give effect to both the Acquisitions and this Offering
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the Unaudited Pro
Forma Combined Financial Statements of the Company and the related notes thereto
included elsewhere in this Prospectus.
NOVEMBER 30, 1996
---------------------------
PRO FORMA(1) AS ADJUSTED
------------ -----------
(IN THOUSANDS)
Current maturities of long-term
obligations(2)........................ $ 2,858 $ 50
============ ===========
Long-term obligations, less current
maturities............................ 9,869 550
Stockholders' equity:
Preferred stock: $0.01 par value,
5,000,000 shares, authorized; no
shares issued and outstanding..... -- --
Common stock: $0.01 par value,
30,000,000 shares authorized;
7,123,889 shares issued and
outstanding, pro forma; and
10,123,889 shares issued and
outstanding, as adjusted.......... 71 101
Additional paid-in capital.............. 25,410 52,780
Retained earnings....................... (1,057) (1,057)
------------ -----------
Total stockholders' equity......... 24,424 51,824
------------ -----------
Total capitalization.......... $ 34,293 $52,374
============ ===========
- ------------
(1) Combines the respective accounts of PalEx and the Founding Companies as
reflected in the Pro Forma Combined Balance Sheet as of November 30, 1996.
(2) Includes $455,000 drawn under lines of credit as of November 30, 1996.
15
<PAGE>
DILUTION
The deficit in adjusted net tangible book value of the Company at November
30, 1996 was $(1,574,000) or $(0.22) per share after giving effect to the
Acquisitions. "Adjusted net tangible book value per share" is the adjusted
tangible net worth (total tangible assets less total liabilities) of the Company
divided by the number of shares of Common Stock outstanding after giving effect
to the Acquisitions. After giving effect to the sale of the shares of Common
Stock offered hereby (at an assumed price of $10.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses), the pro forma net tangible book value of the Company at
November 30, 1996 would have been $25,826,000 or $2.55 per share, representing
an immediate increase in net tangible book value of $2.77 per share to existing
stockholders and an immediate dilution of $7.45 per share to the investors
purchasing the shares in this Offering ("New Investors"). The following table
illustrates this dilution to New Investors:
Assumed initial public offering price
per share............................. $ 10.00
Adjusted net tangible book value
per share at November 30, 1996.... $ (0.22)
Increase per share attributable to
New Investors..................... 2.77
---------
Pro forma net tangible book value per
share after Offering.................. 2.55
---------
Net tangible book value dilution per
share to New Investors................ $ 7.45
=========
The following table sets forth as of the date of this Prospectus the number
of shares of Common Stock purchased from the Company, the total consideration to
the Company and the average price per share paid by existing stockholders (after
giving effect to the Acquisitions) and by the New Investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 7,123,889 70.4% $ (1,574,000) (5.5%) $ (0.22)
New Investors........................... 3,000,000 29.6 30,000,000 105.5 10.00
------------ ------- -------------- -------
Total.............................. 10,123,889 100.0% $ 28,426,000 100.0%
============ ======= ============== =======
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Founding Companies before this Offering,
adjusted to reflect: (i) the payment of approximately $1.3 million in cash
to the stockholders of the Founding Companies as part of the consideration
for the Acquisitions; (ii) the distribution of $11.0 million to the
stockholders of the Founding Companies representing S Corporation earnings
previously taxed to such stockholders prior to the Acquisitions; (iii)
payment of $518,000 in financial advisory fees incurred by the Founding
Companies in connection with the Acquisitions; (iv) the issuance of 142,500
shares of Common Stock to the Founding Companies' profit sharing plans; (v)
the transfer of certain non-operating assets to the stockholders of the
Founding Companies with an approximate book value of $175,000 in connection
with the Acquisitions; and (vi) the deferred income tax liability of
approximately $1.4 million attributable to the temporary differences between
financial reporting and income tax bases of assets and liabilities currently
held in S Corporations. See "Certain Transactions."
16
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PalEx will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, however, Fraser has been identified as the "accounting
acquiror." The following selected historical financial data for Fraser as of
November 30, 1995 and 1996 and for the years ended November 30, 1994, 1995 and
1996, have been derived from audited financial statements of Fraser, reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such data. The selected historical financial data as of November
30, 1992, 1993 and 1994, and the fiscal years ended November 30, 1992 and 1993,
have been derived from unaudited financial statements of Fraser, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of Fraser, reflect all adjustments consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The following
summary unaudited pro forma combined financial data presents certain data for
the Company, adjusted for (i) the Acquisitions, (ii) the effects of certain pro
forma adjustments to the historical financial statements and (iii) the
consummation of this Offering and the application of the net proceeds therefrom.
See the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
FRASER
Revenues........................ $ 13,110 $ 18,254 $ 23,114 $ 30,135 $ 49,282
Gross profit.................... 2,193 2,286 2,359 4,576 7,773
Selling, general and
administrative expenses....... 1,971 2,080 1,761 2,131 3,171
Income from operations.......... 222 206 598 2,445 4,602
Interest expense, net(1)........ (100) (170) (344) (431) (540)
Net income...................... $ 118 $ 21 $ 248 $ 1,923 $ 3,846
========= ========= ========= ========= =========
</TABLE>
PRO FORMA COMBINED(2):
Revenues........................ $ 102,030
Gross profit.................... 15,852
Selling, general and
administrative expenses(3)..... 6,453
Goodwill amortization(4)........ 867
Income from operations.......... 8,532
Interest income(expense),
net(5)......................... 15
Net income...................... $ 4,954
=============
Net income per share............ $ 0.49
=============
Shares used in computing pro
forma net income per
share(6)....................... 10,123,889
=============
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF NOVEMBER 30, 1996
----------------------------------------------------- ------------------------------
1992 1993 1994 1995 1996 PRO FORMA(7) AS ADJUSTED(8)
--------- --------- --------- --------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Fraser
Working capital................. $ 562 $ 796 $ (2,280) $ 997 $ 1,449 $(5,551) $ 12,530
Total assets.................... 4,630 5,018 9,950 12,295 13,040 56,846 59,791
Total debt, including current
portion....................... 1,901 3,550 5,787 5,920 2,454 12,727(9) 600
Stockholders' equity............ 1,672 1,639 1,887 3,810 7,236 24,424 51,824
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
17
<PAGE>
- ------------
(1) Includes interest expense and other income (expense), net.
(2) The pro forma combined income statement data assume that the Acquisitions
and the Offering were closed on December 1, 1995 and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results. During the
periods presented above, the Founding Companies were not under common
control or management and, therefore, the data presented may not be
comparable to or indicative of post-combination results to be achieved by
the Company. The pro forma combined income statement data is based on
preliminary estimates, available information and certain assumptions that
management deems appropriate and should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus. The pro forma income statement data include operating results
of Ridge for the twelve months ended December 1, 1996 and Interstate for
the fiscal year ended August 31, 1996.
(3) The pro forma combined income statement data include aggregate of
approximately $666,000 in pro forma reductions in salary and benefits to
the owners of the Founding Companies to which they have agreed
prospectively, and the effect of revisions of certain lease agreements
between one of the Founding Companies and its stockholder. In addition, the
pro forma combined income statement data does not reflect a $300,000
non-recurring, non-cash charge representing the difference between the
amounts paid for shares issued to the Company's President and Chief
Executive Officer and their estimated fair value on the date of the sale
assuming the Acquisitions would be consummated. See "Certain Transactions."
(4) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 30-year period and computed on the basis described in
the Notes to the Unaudited Pro Forma Combined Financial Statements.
(5) Includes interest income (expense) and other income (expense), net and
reflects the reduction of interest expense attributed to the repayment of
debt with proceeds from the Offering.
(6) Includes (i) 5,910,000 shares to be issued to the owners of the Founding
Companies, (ii) 50,000 shares issued to the management of PalEx, (iii)
1,021,389 shares issued to Main Street, (iv) 3,000,000 shares to be sold in
the Offering and (v) 142,500 shares to be issued to the Founding Companies'
profit sharing plans. Excludes options to purchase 200,000 shares which are
currently outstanding and options to purchase 725,000 shares which are
expected to be granted upon consummation of this Offering. See "Certain
Transactions."
(7) The pro forma combined balance sheet data assume that the Acquisitions were
closed on November 30, 1996. The pro forma combined balance sheet data is
based upon preliminary estimates, available information and certain
assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus. The pro forma balance sheet data include
Ridge as of December 1, 1996 and Interstate as of August 31, 1996.
(8) Reflects the closing of this Offering and the Company's application of the
net proceeds therefrom to fund the cash portion of the purchase price of
the Acquisitions and to repay indebtedness of the Founding Companies. See
"Use of Proceeds" and "Certain Transactions."
(9) Excludes $12.3 million representing the cash consideration and S
Corporation Accumulated Adjustment Accounts to be paid to the owners of the
Founding Companies with a portion of the net proceeds from the Offering.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Founding
Companies' Financial Statements and related notes thereto and "Selected
Financial Data" appearing elsewhere in this Prospectus.
The Company's net revenues are derived from: (i) the manufacture and sale
of new pallets; (ii) the repair, remanufacture and sale of recycled pallets and
the provision of pallet management services; (iii) the manufacture and sale of
ancillary products, including agricultural harvesting boxes and specialty bins,
and lumber sales; and (iv) sales of by-products, including landscape mulch and
playground material.
New pallets constitute one of two core product lines and accounted for
approximately 60% of the Company's revenues for the fiscal year ended November
30, 1996 on a pro forma combined basis. 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 the Company's revenues and margins. New pallet
manufacturing is generally considered to be a mature industry characterized by
moderate growth rates. Ridge has historically focused on new pallet sales.
The repair, remanufacture and sale of recycled pallets and the provision of
pallet management services accounted for approximately 25% of the Company's
revenues for the fiscal year ended November 30, 1996 on a pro forma combined
basis and constitutes the Company's other core product line. These activities
are more labor intensive and require fewer raw materials than new pallets.
Recycling operations generally generate higher gross profits as a percentage of
revenues. Fraser's repair and recycling services have grown rapidly in the past
three years and Ridge has recently begun to offer such products and services.
Ancillary product and lumber sales accounted for approximately 15% of the
Company's revenues for the fiscal year ended November 30, 1996 on a pro forma
combined basis. Ancillary products include harvesting boxes and specialty bins
used by the agricultural industry and other products. These products are
generally characterized by higher unit sales costs and higher gross margins than
the Company's core products. Purchases of agricultural harvesting boxes and
specialty bins represent significant capital expenditures to the Company's
customers and can vary significantly from period to period. In addition, Ridge's
sale of agricultural harvesting boxes to the citrus industry in Florida has
declined from 1994 through 1996 as a result of competition from plastic
agricultural containers. The Company expects this competition to continue.
The sale of pallet by-products (generally, landscape mulch and playground
material produced by grinding unusable lumber and scrap) does not represent a
significant portion of the Company's revenues. However, these products produce
significant gross margins because the raw materials costs have been recovered
from the production of a core or ancillary product. In addition, the sale of
by-product enables the Company to avoid disposal costs for unusable lumber and
scrap. Interstate is regarded as a leading innovator in utilizing and marketing
pallet by-products.
Ridge and Fraser, two of the Founding Companies, manufacture and repair
pallets for CHEP and provide a variety of logistical services with respect to
CHEP's existing pallet pool, including the repair, storage and just-in-time
delivery of pallets. CHEP currently does not manufacture pallets and engages in
limited repair operations. During the fiscal year ended November 30, 1996,
approximately 34% of the Company's pro forma combined revenues and a significant
percentage of the Company's growth were attributable to CHEP, with a majority of
revenue growth generated by the opening of six new Fraser facilities within the
past two years which are primarily dedicated to providing services to CHEP.
Although the Company sells products to a broad range of industries,
approximately 20% of the Company's pro forma combined revenues for the fiscal
year ended November 30, 1996 were attributable to the agricultural industry in
the southeastern U.S., with the citrus and produce industries comprising the
largest component thereof. The pallet purchases associated with these industries
are highly seasonal with most sales revenues 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,
19
<PAGE>
adversely affecting the Company's revenues and results of operations. In
November and December 1996, the Company experienced higher lumber costs
resulting from the impact of wet weather on the harvesting of hardwood timber in
the southeast. Additionally, freezing weather conditions in south Florida during
January 1997 adversely impacted the produce harvest thereby reducing the demand
for pallets. The Company expects these two conditions to adversely affect its
results of operations for the first fiscal quarter ending February 1997.
In August 1994, Ridge purchased its pallet and box manufacturing business
in a management buyout (the "Ridge Buyout") from Ridge Resources, Inc.
("Resources"), a predecessor company owned by three of the stockholders of
Ridge. As consideration for this purchase, Ridge issued notes totaling
approximately $12.6 million to Resources and assumed approximately $1.8 million
of Resources' liabilities. The notes held by Resources and its stockholders are
referred to herein as the "Ridge Notes." A portion of the net proceeds of this
Offering will be used to repay the Ridge Notes. See "Certain Transactions."
The Founding Companies have been managed throughout the periods presented
as independent private companies, and their results of operations reflect tax
structures as S Corporations, which have influenced, among other things, their
historical levels of owners' compensation. Selling, general and administrative
expenses for the periods presented are therefore impacted by the amount of
compensation and related benefits that the former owners and certain key
employees received from their respective businesses during these periods. These
former owners and key employees have agreed to certain reductions in salaries
and benefits in connection with the founding of the Company or the acquisition
of their businesses by the Company. See the Unaudited Pro Forma Combined
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
The Company recognizes revenue upon the delivery of a product or service to
a customer. The Company does not generally maintain significant finished goods
inventory. Cost of sales are predominately variable costs such as lumber, labor,
fasteners, transportation, equipment maintenance and utilities. Fixed costs in
cost of sales include depreciation of equipment, supervisory labor and direct
overhead. Substantially all production employees are paid on a production or
"piecework" basis, which the Company believes provides incentives for
increased productivity.
Selling, general and administrative expenses are generally fixed costs such
as sales, administrative and management salaries and benefits, travel expenses,
professional services, computer costs and office expenses. Many sales,
administrative and managerial employees have variable compensation plans,
although the sales force is not paid a sales commission based on volume of
sales.
RESULTS OF OPERATIONS -- COMBINED
The combined results of operations for the periods presented do not purport
to present those of the combined Founding Companies in accordance with generally
accepted accounting principles, but represent merely a summation of the
revenues, cost of sales, gross profit and selling, general and administrative
expenses of the individual Founding Companies and PalEx on a historical basis
and exclude the effects of pro forma adjustments. This data will not be
comparable to, and may not be indicative of, the Company's post-combination
results of operations because (i) the Founding Companies were not under common
control or management and had different tax structures (S Corporations) during
the periods presented and (ii) the Company will use the purchase method to
establish a new basis of accounting to record the Acquisitions. References to
operations in the southwestern region refer to the operations previously
conducted by Fraser, and references to operations in the southeastern region
refer to operations previously conducted by Ridge.
20
<PAGE>
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL PERIODS ENDED(1)
-----------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 74,540 100.0% $ 88,357 100.0% $ 101,907 100.0%
Cost of Sales........................... 64,129 86.0 75,118 85.0 85,390 83.8
--------- --------- --------- --------- ---------- ---------
Gross profit....................... 10,411 14.0 13,239 15.0 16,517 16.2
Selling, general and administrative
expenses.............................. 6,039 8.1% 6,120 6.9% 7,380 7.2%
</TABLE>
- ------------
(1) The fiscal periods above include the following 12 month periods of the
individual Founding Companies: Fraser -- November 30 for all periods,
Ridge -- July 31, 1994, July 30, 1995 and July 28, 1996, and
Interstate -- August 31 for all periods.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues increased approximately 15.3% to $101.9 million from $88.4
million. Revenues in the southwestern region increased approximately $19.1
million as a result of the full year effect of revenues generated by five new
facilities opened during 1995, as well as an additional facility opened in 1996.
This increase was partially offset by a $6.1 million decline in revenues in the
southeastern region generally attributable both to lower average sales prices
resulting from lower raw material costs, a portion of which were passed on to
customers in the form of lower sales prices, and to a reduction in sales of
agricultural harvesting boxes and specialty bins.
Gross profit as a percentage of revenues increased to 16.2% from 15.0%.
This improvement was generally attributable to continued growth in the
southwestern region in repair and recycling operations which are characterized
by lower raw material costs as a percentage of revenues and generally have
higher gross margins than new pallet operations. As a result of additional
revenues, gross profit increased 24.8% to $16.5 million from $13.2 million.
Selling, general and administrative expenses increased 20.6% to $7.4
million from $6.1 million. The increase was attributable to increased selling
and infrastructure costs associated with the opening of facilities in Arkansas,
California, Illinois and Texas, and the nonrecurring, noncash charge of $300,000
recognized by PalEx in November 1996 representing the difference between the
amounts paid for the shares issued to management and their estimated fair value
on the date of the sale as if the Acquisitions had occurred.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues increased 18.5% to $88.4 million from $74.5 million. This increase
was attributable to the opening of five new facilities in the southwestern
region, higher raw material costs which were generally passed on to customers in
the form of higher sales prices and an increase in the quantity of new pallets
and agricultural harvesting boxes and specialty bins sold in the southeastern
region.
Gross profit as a percentage of revenues improved to 15.0% from 14.0%. This
improvement was generally attributable to growth in the southwestern region in
the repair and recycling operations which are characterized by lower raw
material costs as a percentage of revenue and generally have higher gross
margins than new pallet operations. As a result of additional revenues, gross
profit improved 27.2% to $13.2 million from $10.4 million.
Selling, general and administrative expenses remained stable at $6.1
million.
LIQUIDITY AND CAPITAL RESOURCES -- COMBINED
On a combined basis, the Founding Companies generated $12.2 million of cash
from operating activities during 1996. Net cash used in investing activities was
$5.1 million on a combined basis and was primarily used for purchases of
property and equipment. Net cash used in financing activities was $10.2
21
<PAGE>
million on a combined basis and was primarily used for reductions in long term
debt and for distributions to stockholders.
The Company has recently received a commitment letter from Bank One to
provide a credit facility which would be available upon the closing of the
Offering. According to the proposed terms, the Company would have an unsecured
revolving line of credit of up to $35.0 million, which may be used for general
corporate purposes, including post-Offering acquisitions, capital expenditures
and working capital. It is anticipated that such facility will require the
Company to comply with various affirmative and negative covenants including, but
not limited to (i) maintenance of certain financial ratios, (ii) a restriction
on additional indebtedness and (iii) restrictions on liens, guarantees,
advances, dividends and business activities unrelated to its existing
operations. Failure to comply with such covenants and restrictions would
constitute an event of default under the proposed facility.
The ability of the Company to secure the credit facility is subject to
completion of negotiations with Bank One as well as the satisfaction of certain
conditions, including the execution of appropriate loan documentation. In the
event the credit facility is not available after this Offering, the Company
believes that sufficient alternative sources of financing will be available on
reasonable terms to the Company.
The Company anticipates that its cash flow from operations will provide
sufficient cash to enable the Company to meet its working capital needs, debt
service requirements and planned capital expenditures for property and
equipment. On a combined basis, the Founding Companies made capital expenditures
of $3.5 million in fiscal 1996.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of a portion of the
net proceeds of the Offering, working capital, cash flow from operations and
borrowings, including borrowings under the proposed credit facility, as well as
issuances of additional equity.
Due to the relatively low levels of inflation experienced in fiscal 1994,
1995 and 1996, inflation did not have a significant effect on the results of the
combined Founding Companies in those fiscal years.
RESULTS OF OPERATIONS -- FRASER
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
----------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 23,114 100.0% $ 30,135 100.0% $ 49,282 100.0%
Cost of sales........................... 20,755 89.8 25,559 84.8 41,509 84.2
--------- --------- --------- --------- --------- ---------
Gross profit....................... 2,359 10.2 4,576 15.2 7,773 15.8
Selling, general and administrative
expenses.............................. 1,761 7.6 2,131 7.1 3,171 6.5
--------- --------- --------- --------- --------- ---------
Income from operations.................. 598 2.6 2,445 8.1 4,602 9.3
Interest expense........................ (335) (1.4) (450) (1.5) (387) (0.8)
Other income (expense), net............. (9) (0.1) 19 0.1 (153) (0.3)
--------- --------- --------- --------- --------- ---------
Income before tax....................... 254 1.1 2,014 6.7 4,062 8.2
Income taxes............................ 6 -- 91 0.3 216 0.4
--------- --------- --------- --------- --------- ---------
Net income.............................. $ 248 1.1% $ 1,923 6.4% $ 3,846 7.8%
========= ========= ========= ========= ========= =========
</TABLE>
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995
Revenues increased 63.5% to $49.3 million from $30.1 million. The increase
was primarily due to revenues from five facilities opened or acquired during
1995 and a new facility opened during 1996.
22
<PAGE>
Gross profit as a percentage of revenues increased to 15.8% from 15.2%. The
increase in gross profit as a percentage of revenues was generally attributable
to growth in repair and recycling operations which are characterized by lower
raw material costs as a percentage of revenues and generally have higher gross
margins than new pallet operations. Gross profit increased approximately 69.9%
to $7.8 million from $4.6 million, primarily as a result of increased revenues
associated with the new facilities.
Selling, general and administrative expenses increased 48.8% to $3.2
million from $2.1 million and were generally attributable to additional costs
associated with the facilities opened or acquired during both periods. Because
of the fixed nature of certain selling, general and administrative expenses,
such expenses decreased as a percentage of revenues to 6.5% from 7.1%.
Interest expense remained fairly constant between periods.
Other income (expense), net changed to a net expense of $153,000 from
income of $19,000 due primarily to a casualty loss.
Income before taxes increased to $4.1 million from $2.0 million.
YEAR ENDED NOVEMBER 30, 1995 COMPARED TO YEAR ENDED NOVEMBER 30, 1994
Revenues increased by 30.4% to $30.1 million from $23.1 million and
primarily reflected the opening of five new repair facilities in 1995.
Gross profit as a percentage of revenues increased to 15.2% from 10.2%. The
increase in gross profit as a percentage of revenues was generally attributable
to growth in repair and recycling operations which are characterized by lower
raw material costs as a percentage of revenues and generally have higher gross
margins than new pallet operations. Gross profit increased approximately 94.0%
to $4.6 million from $2.4 million, also as a result of lower raw material costs
and additional revenues.
Selling, general and administrative expenses increased 21.0% to $2.1
million from $1.8 million. The increase in operating expenses was primarily
attributable to increased infrastructure costs associated with the additional
facilities opened in 1995.
Interest expense increased to $450,000 from $335,000. The increase was
generally attributable to higher interest expense necessary to fund working
capital needs associated with the new facilities opened in 1995.
Income before taxes increased to $2.0 million from $254,000.
LIQUIDITY AND CAPITAL RESOURCES -- FRASER
The Company generated $7.2 million in net cash from operations for the year
ended November 30, 1996. Net cash used in investing activities was approximately
$3.4 million, principally for the purchase of property and equipment related to
the opening of new facilities. Net cash used in financing activities was $3.9
million in 1996, principally for the repayment of long-term debt.
23
<PAGE>
RESULTS OF OPERATIONS -- RIDGE
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
---------------------------------------------------------------- --------------------
JULY 31, 1994 JULY 30, 1995 JULY 28, 1996 OCTOBER 29, 1995
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 47,946 100.0% $ 54,450 100.0% $ 48,341 100.0% $ 10,499 100.0%
Cost of sales........................... 40,606 84.7 46,388 85.2 40,540 83.9 9,024 86.0
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........................ 7,340 15.3 8,062 14.8 7,801 16.1 1,475 14.0
Selling, general and administrative
expenses.............................. 4,018 8.4 3,826 7.0 3,825 7.9 1,033 9.8
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations.................. 3,322 6.9 4,236 7.8 3,976 8.2 442 4.2
Interest expense........................ (80) (0.1) (962) (1.8) (1,032) (2.1) (267) (2.5)
Other income (expense), net............. 922 1.9 101 0.2 199 0.4 64 0.6
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before tax................ 4,164 8.7 3,375 6.2 3,143 6.5 239 2.3
Income taxes (benefit).................. 99 0.2 83 0.2 76 0.2 6 0.1
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)....................... $ 4,065 8.5% $ 3,292 6.0% $ 3,067 6.3% $ 233 2.2%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED
--------------------
OCTOBER 27, 1996
--------------------
Revenues................................ $ 10,059 100.0%
Cost of sales........................... 9,171 91.2
--------- ---------
Gross profit........................ 888 8.8
Selling, general and administrative
expenses.............................. 985 9.8
--------- ---------
Income from operations.................. (97) (1.0)
Interest expense........................ (192) (1.9)
Other income (expense), net............. 20 0.2
--------- ---------
Income (loss) before tax................ (269) (2.7)
Income taxes (benefit).................. (6) (0.1)
--------- ---------
Net income (loss)....................... $ (263) (2.6)%
========= =========
THREE MONTHS ENDED OCTOBER 27, 1996 COMPARED TO THREE MONTHS ENDED OCTOBER 29,
1995
Revenues declined 4.2% to $10.1 million from $10.5 million. This decrease
resulted from a decline in the average sales price of new pallets resulting from
lower raw material costs, a portion of which were passed on to customers in the
form of lower sales prices and a decline in revenues from sales of agricultural
harvesting boxes, largely as a result of competition from plastic agricultural
containers.
Gross profit as a percentage of revenues declined to 8.8% from 14.0%,
primarily as a result of lower average sales prices for new pallets and fewer
new pallets sold. Raw material costs were approximately $400,000 higher in 1996
than in 1995 and were not generally passed on to customers due to competitive
pressures. Higher raw material costs were partially offset by reductions in
manufacturing costs as a result of improved operational efficiencies. As a
result of lower revenues, gross profit declined approximately 39.8% from $1.5
million to $888,000.
Selling, general and administrative expenses remained relatively stable at
approximately $1.0 million.
Interest expense declined 28.1% to $192,000 from $267,000 as a result of
the repayment of a portion of the Ridge Notes.
Income before taxes declined to a loss of $269,000 from income of $239,000.
TWELVE MONTHS ENDED JULY 28, 1996 COMPARED TO TWELVE MONTHS ENDED JULY 30, 1995
Revenues declined 11.2% to $48.3 from $54.5 million. This decline was
partly attributable to a decrease in the average sales price of new pallets, a
decrease which reflects lower raw material costs, a portion of which were passed
on to customers in the form of lower sales prices. The balance of the decline
was attributable both to fewer new pallets sold as a result of smaller citrus
and produce harvests and to a decrease in sales of agricultural harvesting boxes
largely as a result of competition from plastic agricultural containers.
Gross profit as a percentage of revenues improved to 16.1% from 14.8%. The
increase in gross profit percentage was generally attributable to declining raw
material costs. Labor and maintenance costs declined $600,000 as a result of
improved efficiencies. As a result of lower revenues, gross profit declined 3.2%
to $7.8 million in 1996 from $8.1 million in 1995.
Selling, general and administrative expenses remained constant at $3.8
million in 1996 and 1995. Despite lower production volumes, the Company
maintained its sales force, infrastructure and quality assurance training
programs in anticipation of improving market conditions and future growth.
Interest expense increased 7.3% to $1.0 million from $962,000 as a result
of an increase in interest rates, partially offset by the repayment of a portion
of the Ridge Notes. Other income (expense), net includes interest income on
invested cash and cash equivalents and increased to $199,000 from $101,000 due
to higher levels of cash equivalents available for investment.
24
<PAGE>
Income before taxes decreased 6.9% to $3.1 million from $3.4 million.
TWELVE MONTHS ENDED JULY 30, 1995 COMPARED TO THE TWELVE MONTHS ENDED JULY 31,
1994
Revenues increased 13.6% to $54.5 million from $47.9 million. The increase
was partly attributable to an increase in the average sales price of new
pallets, an increase which reflects higher raw material costs, which were
generally passed on to customers in the form of higher sales prices, as well as
an increase in the volume of new pallets sold to CHEP. The remainder of the
increase was attributable to a significant increase in revenues from the sale of
specialty agricultural bins which more than offset declining revenues from
agricultural harvesting boxes attributable to competition from plastic
agricultural containers.
Gross profit as a percentage of revenues declined to 14.8% from 15.3%. The
decrease in a gross profit as a percentage of revenues was generally
attributable to higher raw material costs, including a $4.6 million increase in
lumber costs and a $695,000 increase in fastener costs.
Selling, general and administrative expenses decreased to $3.8 million from
$4.0 million as a result of salary reductions in connection with the Ridge
Buyout.
Interest expense increased to $962,000 from $80,000 as a result of the
issuance of the Ridge Notes as consideration in the Ridge Buyout.
Other income (expense), net in 1994 includes a gain of approximately
$631,000 resulting from the cancellation of deferred compensation agreements in
connection with the Ridge Buyout. Interest income also declined to $131,000 from
$276,000 as a result of lower levels of invested cash and cash equivalents
during the period.
Income before taxes decreased 18.9% to $3.4 million from $4.2 million.
LIQUIDITY AND CAPITAL RESOURCES -- RIDGE
The Company generated $4.4 million of net cash from operating activities
during fiscal year 1996. Net cash used in investing activities was approximately
$1.7 million and was expended primarily for purchases of property and equipment.
Net cash used in financing activities was $5.7 million during 1996 and was
primarily used for distributions to stockholders and repayment of the Ridge
Notes and long-term debt.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Seasonality in the Company's results of operations varies by region. The
southeastern region has a significant number of agricultural customers and
typically experiences greater demand during harvesting periods (October through
May) with significantly lower demand in the summer months. Moreover, yearly
results can also fluctuate significantly in the southeast region depending on
the size of the citrus and produce harvests, which, in turn, largely depend on
the occurrence and severity of freezing weather. Facilities in the southwestern
region supplying agricultural customers can experience similar fluctuations. The
Company's locations serving predominantly manufacturing and industrial customer
bases experience significantly less seasonality. In addition, adverse weather
conditions may affect the Company's ability to obtain adequate supplies of
lumber at a reasonable cost. In November and December 1996, the Company
experienced higher lumber costs resulting from the impact of wet weather on the
harvesting of hardwood timber in the southeast. Additionally, freezing weather
conditions in south Florida during January 1997 adversely impacted the produce
harvest thereby reducing the demand for pallets. The Company expects these two
conditions to adversely affect its results of operations for the first fiscal
quarter ending February 1997. Finally, quarterly results may also be materially
affected by the timing of acquisitions and the timing and magnitude of
acquisition assimilation costs, costs of opening new facilities, gain or loss of
a material customer, variation in product mix and weather conditions.
Accordingly, the operating results for any three-month period are not
necessarily indicative of the results that may be achieved for any subsequent
fiscal quarter or for a full fiscal year. See "Risk Factors -- Weather
Conditions" and "-- Seasonality; Fluctuation of Quarterly Operating Results."
INFLATION
Inflation has not had a material impact on the Company's results of
operations for the last three years.
25
<PAGE>
BUSINESS
PalEx was formed in January 1996 to create a national provider of pallets
and related services. Concurrently with the closing of this Offering, PalEx will
acquire three of the leading U.S. pallet businesses, making it one of the
largest producers of new pallets and one of the largest pallet recyclers in the
U.S. The Company believes that these acquisitions will enable it to capitalize
on the significant trends currently affecting product manufacturing and
distribution practices throughout the U.S., including the increasing reliance by
shippers and logistics agents on a smaller number of better capitalized, more
sophisticated vendors. The Company will provide 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); maintenance of depot operations and the
sorting and storage of pallets for selected customers; and the processing and
marketing of various wood-based by-products derived from pallet recycling
operations. The Company will initially operate from 22 facilities in Florida,
Texas, Virginia, California, Arkansas, Georgia, Illinois, Mississippi and South
Carolina. For its fiscal year ended November 30, 1996, the Company generated pro
forma combined revenues, income from operations and net income of $102.0
million, $8.5 million and $5.0 million, respectively. Ridge and Fraser, two of
the Founding Companies, are currently among the largest pallet businesses in the
U.S., based on revenues, and Interstate is regarded in the pallet industry as a
leading developer of pallet recycling services and products. The Company intends
to actively pursue acquisitions of additional leading pallet companies as part
of its growth strategy.
INDUSTRY OVERVIEW
Based on information supplied by industry sources, the Company estimates
that the U.S. pallet industry generated revenues of approximately $5 billion in
1995 and that it is served by approximately 3,600 companies, most of which are
small, privately held entities operating in only one location and serving
customers within a limited geographic radius. The industry is generally composed
of companies that manufacture new pallets and companies that repair and recycle
pallets. The Company estimates, based on industry sources, that during 1995
approximately 450 million new wooden pallets were produced. The Company
estimates there are more than two billion pallets in circulation in the U.S.
today.
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 pallets are primarily made of wood, they may also be made
from steel, plastic, cardboard, molded wood fiber and other materials to satisfy
smaller niche markets. The Company believes that there are over 1,000 different
sizes and specifications of pallets used in North America. The grocery industry,
however, which accounts for approximately one-third of all new pallets produced,
uses a standard size 48 x 40 pallet, although many different styles and
specifications are manufactured for use in that industry. Other industries
utilize specifications which are appropriate for their particular needs. Based
on information supplied by industry sources, the Company believes that in 1995
over 90% of the pallets used were of the traditional wooden type, fabricated
from lumber and metal fasteners. The wooden pallet has traditionally been the
basis for the design of storage racks, warehouse storage areas, forklifts, docks
and containers used in shipping goods.
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
has also prompted large manufacturers and distributors to outsource key elements
of those processes that are not within their core competencies 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.
Palletized freight facilitates 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. As a result,
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there has been an increased demand for high-quality pallets in an attempt to
reduce product damage during shipping and storage.
The 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 the quality of newly manufactured pallets. In recognition of
these trends, CHEP has established a national pallet leasing program that
provides high-quality pallets to customers throughout the U.S. for a daily fee.
CHEP is a partnership created by Brambles Industries Limited, an Australian
publicly-held corporation, and GKN, Ltd., a publicly-held U.K. corporation.
Ridge and Fraser, two of the Founding Companies, manufacture and repair pallets
for CHEP and provide a variety of logistical services with respect to its
existing pallet pool, including the repair, storage and just-in-time delivery of
pallets. CHEP currently does not manufacture pallets and engages in limited
repair operations. During the fiscal year ended November 30, 1996, approximately
34% of the Company's pro forma combined revenues and a significant percentage of
the Company's growth were attributable to CHEP. The Company expects to continue
to build its relationship with CHEP both geographically and by providing
additional logistical services.
CHEP's pallet leasing system represents a significant change in the U.S.
pallet market. CHEP leases a high quality, standardized and easily identifiable
(all CHEP pallets are painted blue) 48 40 pallet, primarily for use by grocery
and consumer products customers. CHEP pallets are manufactured to strict
specifications by vendors, including the Company, that have been selected based
on their ability to provide large volumes of pallets manufactured to CHEP
specifications in a timely manner. The advantages CHEP offers to its customers
are high-quality, uniform pallets and just-in-time delivery capabilities.
STRATEGY
The Company's goal is to become a leading national provider of pallets and
related services by pursuing an aggressive acquisition strategy and by
continuing to expand its existing operations.
GROWTH THROUGH ACQUISITIONS. The Company intends to actively pursue
acquisitions of leading companies whose management and operating philosophies
are complementary to those of the Founding Companies. The Company also intends
to expand within its existing markets through "tuck-in" acquisitions to
increase its market penetration as well as to provide a broader range of
services to existing customers in those markets. These tuck-in acquisitions will
generally involve smaller pallet companies whose operations can be incorporated
into the Company's existing operations without a significant increase in
infrastructure.
INTERNAL GROWTH. The Company has opened nine new locations in the past
three years and expects to open additional locations in the future. The Company
intends to expand the service offerings at many of its locations to include a
combination of manufacturing, repair, recycling and the sale of by-products. The
Company also expects to be able to accelerate the internal growth of the
Founding Companies and businesses acquired in the future by continuing to
develop the Company's relationship with CHEP and other large customers and by
developing and implementing a "best practices" program.
PalEx believes that a significant market opportunity exists for a company
that can consistently offer high-quality pallets and related value-added
services to large pallet users in the U.S. The Company believes that the
prominence and operating strength of the Founding Companies and the experience
of its executive management will provide the Company with a significant
competitive advantage as it pursues its growth strategy.
DESCRIPTION OF SERVICES
NEW PALLET MANUFACTURING. New pallet manufacturing represents
approximately 60% of the Company's pro forma combined revenues. The
manufacturing process for new pallets at each of the Company's facilities is
generally the most capital intensive part of the 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. The Company believes
that approximately 70% of the wood used in new pallets manufactured in North
America consists of hardwood (including, oak, poplar, alder and gum) with the
balance consisting of pine or other softwoods.
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The Company utilizes sawing equipment which cuts large wood sections to
specification. The cut wood is then transported to assembly points where
employees load the side boards ("stringers") and deck boards into nailing
machines which nail the pallets together. A typical nailing machine can produce
an average of 150 pallets per hour with three to five employees. 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 utilizing two laborers with pneumatic nailers. The Company
typically manufactures pallets upon receipt of customer orders and does not
generally maintain significant finished goods inventory.
REPAIR, REMANUFACTURE AND RECYCLING. A large portion of new pallets is
currently discarded by pallet users after one trip. However, pallets can be
recovered, repaired, if necessary, and reused. In addition, used pallets which
are beyond repair can be disassembled and the recovered lumber can be reused in
repairing used pallets. Pallet repair and recycling operations are initiated
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. Pallets that can be repaired have their
damaged boards replaced with salvaged boards or boards from new stock
inventoried at the facility. Pallets that cannot be repaired are dismantled and
the salvageable boards are recovered for use in repairing and building other
pallets. The remaining damaged boards may be ground into wood fiber, which the
Company sells for use as landscaping mulch, fuel, animal bedding, gardening
material and other uses. Despite recent increases in levels of automation,
pallet recycling remains a labor intensive process.
PALLET MANAGEMENT. Pallet management is the process of providing a
combination of services related to a customer's pallet usage, including the
manufacture, repair, retrieval, delivery and storage of pallets as well as the
disposal of unusable pallets and component parts. In a typical arrangement, the
Company will contract with a customer to remove all pallets from a particular
location and transport them back to the Company's repair facility. The pallets
are sorted and repaired as needed and sold to a third party, returned to either
the customer or his supplier, or placed in storage and made available for return
to service ("depot services"). In a typical arrangement, the Company will
contract with a customer to perform any or all of the management services
available. Both Fraser and Interstate have developed such programs and believe
that they may provide a source of additional revenues when applied throughout
the Company.
PROPERTY AND EQUIPMENT
At February 15, 1997, the Company maintained 22 facilities. Most of the
Company's facilities offer more than one service. Of the Company's facilities, 6
are owned and 16 are leased. The Company's corporate headquarters are located in
Houston, Texas. The paragraphs below summarize the Company's primary operating
facilities and provide the number of employees at each location, including
administrative personnel, as of February 15, 1997. All of the Company's
facilities except for those located at Foreman, Arkansas, Bartow, Florida,
Homeland, Florida, Hazlehurst, Georgia, Walterboro, South Carolina and New
Boston, Texas, are leased. There are no major encumbrances on the titles to the
owned properties or to the leasehold interests in any of the leased properties,
except for liens on the Walterboro, South Carolina facilities securing the
payment of indebtedness incurred to finance these facilities. The Ridge Notes,
which are expected to be repaid in connection with the Offering, are secured by
the Bartow, Florida, Homeland, Florida, and Hazlehurst, Georgia facilities. See
"Certain Transactions -- Transactions Including Certain Officers, Directors and
Stockholders."
BENTONVILLE, ARKANSAS. The Bentonville facility was established in 1994,
has a work-force of approximately 3 employees and serves as a depot for CHEP
pallets as well as a repair facility for Wal-Mart pallets. The Bentonville
facility also sells repaired pallets to the grocery, agricultural and poultry
industries.
CLARKSVILLE, ARKANSAS. The Clarksville facility initiated operations in
1995 and has approximately 3 employees. The facility was initially operated as a
repair facility and currently serves only as a CHEP depot.
FOREMAN, ARKANSAS. The Foreman plant was purchased in 1982 and has
approximately 15 employees. The facility produces pine lumber for use in the
construction of pallets at various of the Company's manufacturing and repair
facilities.
MENA, ARKANSAS. The Mena facility was purchased in 1994 and has
approximately 20 employees. The lumber mill located on the facility processes
lumber for use at the Company's manufacturing and repair facilities in New
Boston, Texas as well as for sale to third parties.
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MULBERRY, ARKANSAS. The Company's Mulberry plant was purchased in 1992 and
has approximately 82 employees. The Mulberry facility manufactures new pallets
for the grocery and manufacturing industries in Oklahoma and Arkansas and also
produces cut stock for use in the Company's manufacturing and repair facilities.
SEARCY, ARKANSAS. The Searcy facility was purchased in 1994 and employs
approximately 34 workers. The Searcy facility serves as a depot and repair
facility for CHEP pallets as well as a repair facility for Wal-Mart pallets. The
Searcy facility also sells repaired pallets to the grocery, agricultural and
poultry industries.
TRACY, CALIFORNIA. The Company's operations in the San Francisco Bay area
were established in 1995 to serve as a CHEP depot and repair facility. The
facility employs approximately 133 workers and the Company anticipates that it
will begin operations as a non-CHEP repair facility in the future.
BARTOW, FLORIDA. The Company's Bartow facility was established in 1967 and
employs approximately 164 workers. Citrus and produce distributors are the
Bartow facility's largest customers, and the plant produces a broad variety of
new pallets as well as agricultural harvesting boxes and specialty bins, in many
instances custom designed to customer specifications.
HOMELAND, FLORIDA. The Homeland plant was established in 1983 and employs
approximately 94 workers. The Homeland facility produces both new and recycled
pallets, primarily for industrial use, and also processes lumber by-product for
sale as landscaping mulch.
HAZLEHURST, GEORGIA. The Hazlehurst facility was established in 1977 and
employs approximately 136 workers. The Hazlehurst facility produces new pallets
for CHEP, with additional non-CHEP production sold to general industrial
accounts.
SMARR, GEORGIA The Smarr facility was established in 1992 and is on the
site of a lumber mill which provides raw material for its operations as well as
lumber for the Bartow facility. The plant employs approximately 83 workers and
sells production both to local industrial customers as well as to the Company's
Florida customers during peak produce and citrus harvesting seasons.
EAST ST. LOUIS, ILLINOIS. The Company established its East St. Louis
operation in 1995 as a CHEP repair facility. The facility employs approximately
51 workers and the Company anticipates adding non-CHEP repair operations to the
facility in the future.
WALTERBORO, SOUTH CAROLINA. The Company's Walterboro plant employs
approximately 79 workers and provides new pallets to local industrial accounts
and also supplements the Bartow facility's sales to agricultural and industrial
customers during peak seasons. The facility has been recently updated to
manufacture CHEP pallets.
HORN LAKE, MISSISSIPPI. The Company opened the Horn Lake facility (located
in the Memphis, Tennessee metropolitan area) in October 1996 and employs
approximately 16 workers. This facility serves as both a CHEP depot and repair
and recycling facility for non-CHEP pallets. The facility's customers are
primarily manufacturing facilities in and around Memphis.
AMARILLO, TEXAS. The Company produces new and remanufactured pallets in
its Amarillo facility which was established in 1976 and which employs
approximately 23 workers. The Amarillo facility's primary customers are the
manufacturing and beef packing industries of North Texas.
BIG SPRING, TEXAS. The Company's Big Spring facility initiated operations
in 1977 and employs approximately 55 workers, primarily in the production of new
pallets. The facility services several West Texas oil and chemical companies.
FORT WORTH, TEXAS. The Company's facility in Fort Worth opened in February
1996 and employs approximately 85 workers. The Fort Worth facility was
established to provide CHEP depot and repair operations. The Company currently
anticipates expanding into non-CHEP pallet repairs in the future.
NEW BOSTON, TEXAS. The New Boston location opened in 1994 as the Company's
largest facility in Texas and has approximately 215 employees. The New Boston
facility manufactures new and repaired pallets. The plant serves customers in
Texas, Oklahoma, Arkansas and Louisiana.
SAN ANTONIO, TEXAS. The Company supplies its South Texas customers from
its location in San Antonio. This facility, opened in 1995, is a CHEP depot and
repair facility and also repairs pallets for a large regional grocery chain. The
plant employs approximately 57 people.
TEMPLE, TEXAS. The Temple location was established in 1995 and employs
approximately 23 workers. The Temple facility serves as a CHEP depot and repair
facility as well as a repair facility for Wal-
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Mart pallets. The facility also repairs pallets for sale to central Texas
grocery, manufacturing and medical industry customers.
RICHMOND, VIRGINIA. The Company employs approximately 60 workers in two
facilities located in Richmond, Virginia. Repair and recycling of used pallets
constitutes a significant portion of the operations of these facilities which
also offer pallet management systems to local industrial customers. The Richmond
facilities are also engaged in the manufacture of landscape mulch, playground
surfaces and other innovative applications of pallet by-products.
The Company believes that its properties are generally adequate for its
present needs. Furthermore, the Company believes that suitable additional or
replacement space will be available when required.
OPERATIONS
The Company will centralize its consolidated financial reporting, cash
management, training, human resources, safety and merger and acquisition
activities. The Company intends to otherwise operate on a regional basis, with
the management of each operating location responsible for its day-to-day
operations, profitability and growth. Local management will utilize the
Company's "best practices" program which seeks to replicate the Founding
Companies' best practices throughout the entire Company with respect to new
pallet manufacturing, pallet repair and recycling techniques, transportation and
other logistical activities, worker training and participation programs,
financial controls and purchasing information in order to improve productivity,
lower operating costs and improve customer satisfaction to stimulate internal
growth.
SALES AND MARKETING
The Company currently sells to customers within its various geographic
locations. The primary sales and marketing activities involve direct selling by
the Company's 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. Since pricing is a function of
regional lumber and delivery costs, pricing is established at the regional
level.
Because many of the Company's customers have the need for similar services
on a national scale, the Company is developing a national sales and marketing
plan to provide such services at many locations throughout the U.S. The
Company's network of facilities will allow these customers to: (i) centralize
purchases of new and recycled pallets; (ii) obtain convenient and dependable
service and a consistent supply of uniform quality pallets; (iii) achieve
greater efficiencies in their pallet use; and (iv) meet corporate recycling
goals. The Company has developed relationships with several national customers
and intends to attempt to provide service to these and numerous other customers
on a local, regional and national basis. The pallet needs of national companies
are not uniform and the Company intends to tailor its national programs for each
customer. These programs include a combination of sourcing, retrieving,
repairing and recycling pallets according to individual customer requirements.
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. Customers include the automotive,
chemical, consumer products, grocery, produce and food production, 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 are
sold to the produce and citrus industries, the Company's sales volumes in
certain regions tend to be seasonal. During fiscal year ended November 30, 1996,
the Company sold pallets to over 1,200 customers, with CHEP accounting for
approximately 34% of the Company's pro forma combined revenues. No other single
customer accounted for 10% or more of the Company's pro forma combined revenues.
The Company enters into contracts with CHEP on a facility by facility basis and
the terms of such contracts vary in accordance with the service to be provided.
Depot agreements may be terminated with or without cause, while repair and
depot/repair agreements may only be terminated by CHEP for cause and have both
indefinite and fixed terms of between one and three years. All of the CHEP
contracts prohibit the Company's contracting facilities from competing with CHEP
during the term of the agreement and for a period of up to three years
thereafter in the pallet leasing business and from repairing pallets for other
pallet leasing companies. The CHEP contracts typically do not provide for fixed
volumes of repaired or new pallets.
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MANAGEMENT INFORMATION AND CONTROLS
The Company will centralize its consolidated accounting and financial
reporting activities at its operational headquarters in Bartow, Florida, while
basic accounting activities will be conducted at the regional level. The Company
believes that its current information systems hardware and software are adequate
to meet current and perceived needs for financial reporting and internal
management control information and other necessary information. The Company
believes this system will enhance its ability to: (i) monitor each regional
operation; (ii) prepare both operations and capital asset budgets and budget
variances; (iii) assimilate newly acquired operations into its network through
standard reporting mechanisms; (iv) implement operational and productivity
measurements and benchmarking; and (v) conduct individual customer profitability
analyses.
RAW MATERIALS
The primary raw materials used in new pallet manufacturing are lumber and
plywood. Fraser and Ridge have both developed long-term relationships with their
lumber and plywood vendors and the Company believes that these relationships, as
well as the Company's ability to pursue larger volume purchases, will help to
ensure adequate lumber supplies at competitive prices in the future. During the
fiscal year ended November 30, 1996, the Company purchased lumber and plywood
from over 200 vendors. Two of these vendors accounted for 13% and 11%,
respectively, of the Company's total pro forma combined lumber purchases during
the fiscal year ended November 30, 1996. The Company does not believe that the
loss of either of these vendors would materially adversely affect its financial
condition or results of operations. The Company 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, depressing pallet prices overall and
adversely affecting the Company's revenues and operating margins. While the
Company believes that it will benefit from strong relationships with multiple
lumber suppliers, there can be no assurance that the Company will be able to
secure adequate lumber supplies in the future. Lumber supplies and costs are
affected by many factors outside the Company's control, including weather,
governmental regulation of logging on public lands, lumber agreements between
Canada and the U.S. and competition from other industries that use similar
grades and types of lumber. The Company tries 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. The Company also is able to
buy low quality lumber and upgrade such lumber at its own plants. Though the
Company has studied the broad use of alternative materials for the manufacture
of pallets, such as plastic, it believes that there is not currently an
available alternative raw material that possesses the tensile strength,
recyclability and low cost of wood. The Company continues to evaluate
alternatives to wood and is receptive to their future use in pallet production.
The Company 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. The Company identifies these
sources through establishing relationships with pallet users, and by direct
solicitation, telemarketing and advertising. The Company generally achieves
timely pallet removal by placing a trailer at a source which loads unwanted
pallets onto the trailer. The Company then removes the load of pallets at the
same time it delivers recycled pallets to the pallet user. In some cases, the
Company is paid a tipping fee for hauling away the used pallets or is allowed to
take the pallets away at no charge, and, in other cases, the Company buys the
pallets.
COMPETITION
The Company believes that the principal competitive factors in the pallet
industry are price, quality of services and reliability. With over 3,600
industry participants, the pallet manufacturing industry has been and is
expected to remain extremely fragmented and highly competitive. While there are
several companies which have attempted to establish national pallet operations,
most of the Company's competitors are small, privately held companies that
operate in only one location and serve customers within a limited geographic
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radius. Competition on pricing is often intense and the Company may face
increasing competition from pallet leasing or other pallet systems providers,
which are marketed as less expensive alternatives to new pallet purchasers.
CHEP's pallet leasing system competes with new pallet sales 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 such businesses are
minimal. Certain other smaller competitors may have lower overhead costs and
consequently, may be able to manufacture or recycle pallets at lower costs than
the Company. Other companies with significantly greater capital and other
resources than the Company (including CHEP) may enter or expand their operations
in the pallet manufacturing and recycling businesses in the future, changing the
competitive dynamics of the industry. The Company has in the past and will
continue to compete with lumber mills in the sale of new pallets. The lumber
mills typically view pallet manufacturing as an opportunity to use the lower
grade lumber that would otherwise be waste for the mill. While the Company
estimates, based on industry sources, that non-wooden pallets currently account
for less than 10% of the pallet market, there can be no assurance that the
Company will not face increasing competition from pallets fabricated from
non-wooden components in the future. For example, Ridge currently sells
agricultural harvesting boxes. These products have recently faced increasing
competition from plastic agricultural containers which has reduced the number of
agricultural harvesting boxes sold by Ridge. The Company expects competition
with plastic agricultural containers to continue in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Interstate and its stockholder are parties to a non-competition agreement
which may restrict until January 14, 1998, Interstate's or such stockholder's
ability to engage in any activity or business enterprise or own an interest in
any entity which engages in any activity or business enterprise which competes
with an organization whose membership includes pallet recyclers and
manufacturers and was created to pursue the national and global marketing and
management of pallet systems, including the sale or leasing of pallets. The
Company has been notified by the organization that it intends to enforce the
terms of the non-compete agreement. The non-compete provision explicitly
excludes from its coverage any product or services sold by Interstate before
October 1995. Given the non-compete agreement's short duration and exclusion of
the business currently conducted by Interstate, the Company believes that such
agreement will not have a material adverse effect on its operations. There can
be no assurance, however, that a court would invalidate such provision if tested
and, if not invalidated, of the scope or nature of any attempted enforcement.
LITIGATION
Each of the Founding Companies has, from time to time, been a party to
litigation arising in the normal course of its business, most of which involves
claims for personal injury or property damage incurred in connection with its
operations. Management believes that none of these actions will have a material
adverse effect on the financial condition or results of operations of the
Company.
EMPLOYEES
At February 15, 1997, the Company had approximately 1,400 employees. The
Company is not a party to any collective bargaining agreements. The Company
believes that its relationship with its employees is satisfactory.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors, executive officers and certain key employees, and those persons who
will become directors and executive officers in connection with this Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- ------------------------------------------------
<S> <C>
Vance K. Maultsby, Jr................... 44 President and Chief Executive Officer
A. E. Holland, Jr....................... 47 Chief Operating Officer, Director
Troy L. Fraser.......................... 47 Chief Development Officer, Director
Casey A. Fletcher....................... 42 Chief Accounting Officer and Secretary
Stephen C. Sykes........................ 52 President -- Interstate Pallets, Director
Tucker S. Bridwell...................... 45 Director(1)(2)
John E. Drury........................... 52 Director(1)(2)
Sam W. Humphreys........................ 36 Director(1)(2)
</TABLE>
- ------------
(1) Member of audit committee.
(2) Member of compensation committee.
Directors are elected at each annual meeting of stockholders. All officers
serve at the discretion of the Board of Directors, subject to terms of their
employment agreement terms. See " -- Employment Agreements."
VANCE K. MAULTSBY, JR. became President and Chief Executive Officer of the
Company in December 1996. From 1993 to 1996, Mr. Maultsby was a partner with
Ernst & Young LLP in the Dallas, Texas office where he managed the Dallas office
of its Corporate Finance Group. From 1989 to 1992, Mr. Maultsby was chief
executive officer of Alemar Financial Company (later 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 thereto, 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.
A. E. HOLLAND, JR. will become Chief Operating Officer and a director of
the Company upon the closing of this Offering. Mr. Holland 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 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.
TROY L. FRASER will become Chief Development Officer and a director upon
the closing of this Offering. He became President of Fraser in 1975 when he
purchased the business with his two brothers from his father. 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. Mr. Fraser is
currently Vice President of the NWPCA and has served for two terms on the
NWPCA's Board of Directors.
CASEY A. FLETCHER will become Chief Accounting Officer and Secretary upon
the closing of this Offering. Mr. Fletcher has been employed by Ridge since 1983
where he has served as Controller and Chief Financial Officer. Prior to his
employment with Ridge, Mr. Fletcher was associated with Arthur Young from 1976
to 1979. From 1980 to 1983, he was in private industry as an accountant. Mr.
Fletcher is a Certified Public Accountant.
STEPHEN C. SYKES will become a director of the Company upon the closing of
this Offering. Mr. Sykes founded Interstate in 1979 and has served as President
and Chief Executive Officer from its inception. From
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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.
TUCKER S. BRIDWELL will become a director of the Company upon the closing
of this Offering. Since 1992, Mr. Bridwell has been President of Fred Hughes
Motors, Inc., the owner of ten new-car franchises in the Abilene, Texas area.
Mr. Bridwell is also the President of Topaz Exploration Company, an oil and gas
exploration company, a position he has held since 1980. 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 will become a director of the Company upon the closing of
this Offering. Mr. Drury is the Chairman and Chief Executive Officer of USA
Waste Services, Inc. ("USA Waste"), the third largest solid waste company in
North America. Mr. Drury has held these positions since May 1994, when USA Waste
and Envirofil, Inc. ("Envirofil") completed their merger. Following this
merger, USA Waste acquired publicly-held Chambers Development Company, Western
Waste Industries, Inc. and Sanifill, Inc., increasing its revenues from
approximately $100 million in 1993 to approximately $1.6 billion in 1996. 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. ("BFI"), where he was responsible for the worldwide
operations of BFI. Mr. Drury is a special limited partner in Main Street.
SAM W. HUMPHREYS has been a director of the Company since January 1996 and
will become non-executive Chairman of the Board upon the closing of this
Offering. He is the Vice Chairman of U.S. Delivery Systems, Inc. ("U.S.
Delivery"), the largest same-day local delivery company in the U.S. Mr.
Humphreys has held various executive positions with U.S. Delivery since April
1994. Since U.S. Delivery completed its initial public offering in May 1994, it
has completed 80 acquisitions and has grown from approximately $100 million to
approximately $800 million in annual revenues. Prior to joining U.S. Delivery,
Mr. Humphreys served from May 1993 until April 1994 as Senior Vice President and
General Counsel of Envirofil, which merged with USA Waste in April 1994. Prior
thereto, Mr. Humphreys was a partner at Andrews & Kurth L.L.P., where he was
engaged in the private practice of law for more than five years prior to joining
Envirofil. Mr. Humphreys is also a director of Aviation Sales Company, a New
York Stock Exchange listed Company and one of the world's largest providers of
aircraft spare parts. Mr. Humphreys is a partner in Main Street.
The Board of Directors has established an Audit Committee and Compensation
Committee. The Audit Committee recommends the appointment of auditors and
oversees the accounting and audit functions of the Company. The Compensation
Committee determines executive officers' and key employees' salaries and bonuses
and administers the Plan. Messrs. Bridwell, Drury and Humphreys will serve as
members of the Company's Compensation Committee and Audit Committee.
DIRECTORS' COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives a fee of $1,000 for attendance at each Board of Directors
meeting and $500 for each committee meeting (unless held on the same day as a
Board of Directors meeting). Directors of the Company are reimbursed for
out-of-pocket expenses incurred in attending meetings of the Board of Directors
or committees thereof, and for other expenses incurred in their capacity as
directors of the Company. Each non-employee director will receive stock options
to purchase 20,000 shares of Common Stock upon election to the Board of
Directors and an annual grant of 5,000 options. See " -- Stock Option Plan."
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EXECUTIVE COMPENSATION
The Company was incorporated in January 1996 and, prior to this Offering,
has not conducted any operations other than activities related to the
Acquisitions and this Offering. While the Company did not pay any compensation
to its executive officers prior to December 1996, in November 1996 PalEx
recognized a nonrecurring, non-cash charge of $300,000, representing the
difference between amounts paid for the 50,000 shares of Common Stock issued to
Mr. Maultsby and the estimated fair market value of such shares on the date of
the sale assuming the Acquisitions would be consummated. The Company anticipates
that during 1997 annualized base salaries of its most highly compensated
executive officers will be: Mr. Maultsby, $175,000; and $125,000 for each of
Messrs. Holland, Fletcher, Fraser and Sykes.
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements with each executive
officer and certain key employees of the Company which prohibits such individual
from disclosing the Company's confidential information and trade secrets and
generally restricts these individuals from competing with the Company for a
period of five years after the date of the Acquisitions. Each of the agreements
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 the Company
for "cause" upon ten days' written notice and without "cause" by either
party upon thirty days' written notice. All employment agreements provide that
if the officer's employment is terminated by the Company without "cause," such
officer will be entitled to receive a lump-sum severance payment at the
effective time of termination equal to the base salary at the rate then in
effect for the greater of (i) the time period remaining under the initial term
of the agreement or (ii) one year. In addition, all employment agreements
provide that in the event of termination without "cause," the time period
during which such officer is restricted from competing with the Company will be
shortened from five years to one year. The Company anticipates it will incur
lower selling, general and administrative expenses than the Founding Company on
a pro forma combined basis because the compensation to be paid to the executive
officers and employees by the Company is generally less than the compensation
previously paid by the Founding Companies. See "Selected Financial Data" and
"Unaudited Combined Pro Forma Financial Statements."
The employment agreements of Messrs. Maultsby, Holland, Fraser, Fletcher,
Sykes and certain key employees of the Founding Companies contain certain
provisions concerning a change-in-control of the Company, including the
following: (i) in the event five days' advance notice of the transaction giving
rise to the change in control is not received by the Company and such officer,
the change in control will be deemed a termination of the employment agreement
by the Company without "cause," and the provisions of the employment agreement
governing the same will apply, except that the severance amount otherwise
payable (discussed in the preceding paragraph) shall be tripled and the
provisions which restrict competition with the Company shall not apply; (ii) in
any change-of-control situation, such 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 the Company without "cause," and
the provisions of the employment agreement governing the same will apply, except
that the severance amount otherwise payable shall be doubled and the time period
during which such officer is restricted from competing with the Company will be
shortened from five years to two years; and (iii) the officer must be given
sufficient time and opportunity to elect whether to exercise all or any of his
options to purchase Common Stock, including any options with accelerated vesting
under the provisions of the Plan, such that the officer may acquire the Common
Stock at or prior to the closing of the transaction giving rise to the
change-in-control, if he so desires.
STOCK OPTION PLAN
The Board of Directors has adopted, and the stockholders of the Company
approved, the Plan. The purpose of the Plan is to provide directors, officers,
key employees and certain other persons who will be instrumental in the success
of the Company or its subsidiaries with additional incentives by increasing
their proprietary interest in the Company. The aggregate amount of Common Stock
with respect to which options
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may be granted may not exceed the greater of 1,800,000 shares (subject to
adjustment to reflect stock splits) or 15% of the Company's outstanding Common
Stock, as determined on each date an option is granted.
The Plan is administered by the Compensation Committee, which is composed
of non-employee directors (the "Committee"). Subject to the terms of the Plan,
the Committee generally determines to whom options will be granted and the terms
and conditions of option grants. Options granted under the 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 employee or
consultant may receive an option in any year to purchase more than 51,000 shares
of Common Stock. The 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 (as defined in the Plan) of the
Company.
The Plan also provides for automatic option grants to directors who are not
otherwise employed by the Company or its subsidiaries. Upon commencement of
service, a non-employee director will receive a non-qualified option to purchase
20,000 shares of Common Stock, and continuing non-employee directors annually
will receive options to purchase 5,000 shares of 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 Common
Stock under the Plan, of which 100,000 shares may be purchased at an exercise
price of $7.50 per share with the remainder of the options having an exercise
price equal to the initial public offering price. Mr. Maultsby's options vest
annually in 25% increments beginning in November 1997. The potential realizable
value of Mr. Maultsby's options, assuming 5% and 10% annual rates of
appreciation over ten years for the Company's Common Stock, is $1,507,790 and
$3,437,484, respectively. These potential realizable values were determined
based upon assumed rates of appreciation and are not intended to forecast the
possible future appreciation, if any, of the price or value of the Company's
Common Stock.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
PalEx was initially capitalized in January 1996 by Main Street. Sam W.
Humphreys, a director of the Company, is a partner in Main Street and John E.
Drury, a director of the Company, is a special limited partner in Main Street.
As a result of stock splits, the 1,000 shares of common stock initially issued
by PalEx to Main Street will total 1,021,389 shares of Common Stock immediately
prior to the closing of this Offering. Since early 1996, Main Street has
advanced funds to PalEx pursuant to a commitment to enable PalEx to pay various
expenses incurred in connection with its efforts to complete the Acquisitions
and effect this Offering.
Simultaneously with the closing of this Offering, each of the Founding
Companies will merge with a separate special purpose subsidiary of PalEx, at
which time each Founding Company will become a wholly owned subsidiary of the
Company. The aggregate consideration that will be paid by PalEx to acquire the
Founding Companies consists of (i) approximately $1.3 million in cash and (ii)
5,910,000 shares of Common Stock. In addition, the Company intends to repay
approximately $13.3 million of the estimated outstanding indebtedness of the
Founding Companies at the closing of the Offering (see " -- Transactions
Involving Certain Officers, Directors and Stockholders" below) and also will
issue 142,500 shares of Common Stock to the Founding Companies' profit sharing
plans.
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The following table sets forth for each Founding Company the approximate
consideration to be paid to the stockholders of the Founding Companies (i) in
cash and (ii) in shares of Common Stock, in each case subject to adjustments
through the date of the consummation of the Acquisition for changes in the
amount of debt outstanding and the amount of S Corporation earnings previously
taxed to stockholders of the Founding Companies and which will be distributed to
such stockholders.
SHARES OF
CASH COMMON STOCK
------------ ------------
Fraser............................... $ 117,000 2,796,894
Ridge................................ -- 2,718,691
Interstate........................... 1,200,000 394,415
------------ ------------
Total........................... $ 1,317,000 5,910,000
============ ============
In addition, immediately prior to consummation of the Acquisitions, the
Founding Companies will make distributions of approximately $11.0 million in the
aggregate, representing S Corporation earnings previously taxed to their
respective stockholders. The Founding Companies will also distribute certain
non-operating assets prior to consummation of the Acquisitions with an aggregate
net book value of approximately $175,000.
The consummation of each Acquisition is subject to customary conditions.
These conditions include, among others, the accuracy on the closing date of the
Acquisitions of the representations and warranties of the Founding Companies,
their stockholders and of the Company and the performance by each of the parties
of their respective covenants.
The agreements relating to the Acquisitions may be terminated under certain
circumstances prior to the consummation of this Offering. Specifically, the
agreements may be terminated (i) by the mutual consent of the board of directors
of the Company and each Founding Company; (ii) if this Offering and the
Acquisitions are not consummated by April 1, 1997; or (iii) if a material breach
or default under the agreements shall exist and is not cured or waived. There
can be no assurance that the conditions to the closing of the Acquisitions will
be satisfied or waived or that the agreements relating to the Acquisitions will
not be terminated prior to the closing.
Pursuant to the agreements relating to the Acquisitions, all stockholders
of each of the Founding Companies have agreed not to compete with the Company
for a period of five years commencing on the date of closing of the
Acquisitions.
Individuals who are or will become officers or directors of the Company
will receive the following consideration in the Acquisitions for their interests
in the Founding Companies, subject to adjustments as described above.
SHARES OF
CASH(1) COMMON STOCK
------------ ------------
Ridge
A. E. Holland, Jr............... $ -- 329,013
Casey A. Fletcher............... -- 329,013
Fraser
Troy L. Fraser.................. 57,330 1,332,158
Interstate
Stephen C. Sykes................ 1,200,000 394,415
- ------------
(1) Excludes distributions representing previously taxed S Corporation earnings
to be made to each of the persons listed above. The anticipated amount of
such distributions to the former owners of the Founding Companies
aggregates approximately $11.0 million.
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TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
In August 1994, Ridge purchased its pallet and box manufacturing business
in a management buyout from Resources, a predecessor company owned by A. E.
Holland, Jr., Chief Operating Officer and a director of the Company, and two
other employees of Ridge. As consideration for this purchase, Ridge issued the
Ridge Notes for a total of approximately $12.6 million to Resources and assumed
approximately $1.8 million of Resources' liabilities. Resources subsequently
distributed an interest in a portion of its note receivable from Ridge directly
to Mr. Holland and the other two stockholders. The Ridge Notes mature in January
2000 and pay interest at the prime rate (8.25% at November 30, 1996). Ridge paid
approximately $909,000 and $982,000 in interest expense under the Ridge Notes
during fiscal 1995 and 1996, respectively. The Ridge Notes will be repaid with a
portion of the proceeds of the Offering. The amount anticipated to be paid from
the proceeds is $1.75 million to Resources and $1.75 million each to Mr. Holland
and the other two stockholders. Resources maintains a lumber and fastener
brokerage business as well as other businesses.
Fraser has notes outstanding to certain affiliates in the total amount of
approximately $70,000. The notes bear interest at 14.0% per annum, mature in
January 2005 and are expected to be repaid with a portion of the proceeds of the
Offering.
Prior to consummation of the Offering, Troy Fraser will purchase an
airplane from Fraser for its net book value of $210,000.
Certain stockholders of certain of the Founding Companies, who will be
directors, executive officers or key employees of the Company, have guaranteed
indebtedness and other obligations of each of their respective Founding
Companies. These guarantees are expected to be terminated after the completion
of this Offering.
Main Street has agreed to pay up to $1.25 million of the Company's
expenses, including legal and accounting fees, incurred in connection with the
Offering and the Acquisitions. The Company will pay from the proceeds of the
Offering any expenses which exceed such amount.
In connection with the Acquisitions, the Company has agreed to issue
82,500, 50,000 and 10,000 shares of Common Stock to the Ridge Pallets, Inc.
Profit Sharing Plan, the Fraser Industries, Inc. Profit Sharing Plan and the
Interstate Pallet Co., Inc. Profit Sharing Plan, respectively. The plans will
distribute the Common Stock in accordance with the terms of such plans. Certain
officers and directors of the Company are participants in these plans and will
benefit from the contribution of the Common Stock under the terms of such plans.
In fiscal years 1994, 1995 and 1996, Ridge sold approximately $977,000,
$484,000 and $666,000, respectively, of lumber to Sunbelt Forest Products
Corporation ("Sunbelt"), a chemical wood preserving company, which is owned by
Mr. Holland and two other employees of Ridge. During fiscal year 1994 Ridge
recorded $193,000 of interest income from loans made to Sunbelt. Mr. Fletcher is
a director of Sunbelt. Additionally, Ridge purchased from Resources
approximately $199,000 and $421,000 of fasteners during fiscal years 1995 and
1996, respectively. The sales prices charged Sunbelt and the purchase prices
paid by Ridge were competitive with those charged or paid to unaffiliated third
parties. In addition, Ridge provides certain accounting, human resource and
managerial services to Sunbelt and received as payment therefor $135,000,
$75,000 and $55,000 for the fiscal years 1994, 1995 and 1996, respectively. The
Company intends to continue to transact business with Sunbelt in the future on
terms which are comparable to those that would be available from an unaffiliated
third party.
Mr. Bridwell, who will be a member of the Company's Board of Directors upon
the closing of this Offering, will receive a payment from the Company of $50,000
and options to purchase 20,000 shares of Common Stock, exercisable at the
initial public offering price per share pursuant to the Plan, for providing
advice to Fraser in connection with the Acquisitions. Mr. Bridwell will also
receive options to purchase 20,000 shares of Common Stock in connection with his
election to the Company's Board of Directors exercisable at the initial public
offering price. See "Principal Stockholders."
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Mr. Maultsby acquired 50,000 shares of Common Stock in connection with the
formation of the Company. In connection with this issuance, PalEx recognized a
nonrecurring, non-cash charge of $300,000 in November 1996, representing the
difference between amounts paid for the 50,000 shares of Common Stock issued to
Mr. Maultsby and the estimated fair market value of such shares on the date of
the sale asasuming the Acquisitions would be consummated.
Interstate leases its operating facilities and certain equipment from Mr.
Sykes. The Company intends to use a portion of the proceeds of the Offering to
purchase the leased equipment for its estimated fair market value of
approximately $88,000 and to continue to lease the property from Mr. Sykes at
market rates. Mr. Sykes has the right to require the Company to purchase the
property at its appraised value, estimated to be between $1.0 million and $1.4
million. This right can be exercised during the period beginning six months and
ending 12 months after the closing of the Offering.
COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved by a majority of the Board of Directors, including a majority of
disinterested members of the Board of Directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock, after giving effect to the issuance of
shares of Common Stock in connection with the Acquisitions and after giving
effect to the Offering, by (i) all persons known to the Company to be the
beneficial owner of 5% or more thereof, (ii) each director and nominee for
director, (iii) each executive officer and (iv) all executive officers,
directors and director nominees as a group. Unless otherwise indicated, the
address of each such person is c/o PalEx, Inc., 3555 Timmons Lane, Suite 610,
Houston, Texas 77027. All persons listed have sole voting and investment power
with respect to their shares unless otherwise indicated.
PERCENTAGE OWNED
--------------------
BEFORE AFTER
SHARES OFFERING OFFERING
----------- -------- --------
Vance K. Maultsby, Jr.(1)............... 50,000 0.7% 0.5%
A. E. Holland, Jr....................... 329,013 4.6 3.2
Troy L. Fraser.......................... 1,370,478 19.2 13.5
Stephen C. Sykes........................ 394,415 5.5 3.9
Casey A. Fletcher....................... 329,013 4.6 3.2
Tucker S. Bridwell(2)................... 40,000 0.6 0.4
John E. Drury(3)........................ 45,000 0.6 0.4
Sam W. Humphreys(4)..................... 1,021,389 14.3 10.1
Main Street Capital Partners, L.P....... 1,021,389 14.3 10.1
R. Stephen Fraser(5).................... 839,068 11.8 8.3
Joe D. Elmore(6)........................ 587,348 8.2 5.8
All executive officers, directors and
director nominees
as a group (8 persons)(7)............. 3,579,308 50.2% 35.4%
- ------------
(1) Excludes options to purchase 100,000 shares at an exercise price of $7.50
per share and options to purchase 100,000 shares at the initial public
offering price granted under the Plan. Such options vest at 25% a year over
the four-year period with the first vesting period ending November 1997 and
the final vesting period ending November 2001.
(2) Includes 40,000 shares which may be acquired upon the exercise of options to
be granted under the Plan upon the consummation of the Offering.
(3) Includes 20,000 shares which may be acquired upon the exercise of options to
be granted under the Plan upon the consummation of the Offering and 25,000
shares deemed to be beneficially owned by Mr. Drury as a special limited
partner in Main Street.
(4) Includes 1,021,389 shares issued to Main Street. Mr. Humphreys is a partner
in Main Street.
(5) Mr. Fraser's address is 111 East 7th Street, Big Spring, Texas 79720.
(6) Mr. Elmore's address is 1020 Highway 82 West, New Boston, Texas 75570.
(7) Includes 260,000 shares subject to options which become exercisable during
the four-year period ending November 2000.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred
Stock, par value $0.01 per share. After giving effect to the Acquisitions, there
were 7,123,889 shares of Common Stock outstanding which were held of record by
15 stockholders, and no shares of Preferred Stock outstanding. After the closing
of the Offering, 10,123,889 shares of Common Stock will be issued and
outstanding, assuming no exercise of the Underwriters' over-allotment option.
The following summary of the terms and provisions of the Company's capital stock
does not purport to be complete and is qualified in its entirety by reference to
the Company's Amended and Restated Certificate of Incorporation and By-laws,
which have been filed as exhibits to the Company's registration statement, of
which this Prospectus is a part, and applicable law.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Holders of Common Stock are
entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of any Preferred Stock then outstanding. The holders of Common Stock have
no preemptive rights to purchase shares of stock of the Company. Shares of
Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company. All outstanding shares of
Common Stock are, and the shares of Common Stock to be sold by the Company in
the Offering when payment is received therefor will be, fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Amended and Restated Certificate of Incorporation and
limitations prescribed by law, the Board of Directors is expressly authorized to
adopt resolutions to issue the shares, to fix the number of shares and to change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares constituting
any class or series of the Preferred Stock, in each case without any further
action or vote by the stockholders. The Company has no current plans to issue
any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for the Common Stock at a premium or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not
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engage in any of a broad range of business combinations with a person or an
affiliate, or associate of such person, who is an "interested stockholder" for
a period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person becoming an
interested stockholder, or the business combination, is approved by the Board of
Directors of the corporation before the person becomes an interested
stockholder, (ii) the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
such person an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans), or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is (i) the owner of 15%
or more of the outstanding voting stock of the corporation or (ii) an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage. The Company has not adopted
such an amendment to its Amended and Restated Certificate of Incorporation or
By-laws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Amended and Restated Certificate of Incorporation
and under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of the duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit. The Company has entered into indemnification agreements with
each of its directors and executive officers which indemnify such person to the
fullest extent permitted by its Amended and Restated Certificate of
Incorporation, its By-laws and the Delaware General Corporation Law. The Company
also intends to obtain directors' and officers' liability insurance.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Bank and
Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market. As of February
20, 1997, 1,071,389 shares of Common Stock were issued and outstanding. All of
the 3,000,000 shares sold in the Offering, except for shares acquired by
affiliates of the Company, will be freely tradeable.
Simultaneously with the closing of the Offering, the stockholders of the
Founding Companies will receive, in the aggregate, 5,910,000 shares of Common
Stock as a portion of the consideration for their businesses. In addition,
142,500 shares of Common Stock will be issued to the Founding Companies' profit
sharing plans. As of the date of this Prospectus, certain other stockholders of
the Company held, in the aggregate, an additional 1,071,389 shares of Common
Stock. None of these 7,123,889 shares was issued in a transaction registered
under the Securities Act, and, accordingly, such shares may not be sold except
in transactions registered under the Securities Act or pursuant to an exemption
from registration, including the exemption contained in Rule 144 under the
Securities Act.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned his or her shares for at
least two years but not more than three years, or a person who may be deemed an
"affiliate" of the Company who has beneficially owned shares for at least
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two years, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Common Stock or the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the date on which notice of the proposed sale
is sent to the Securities and Exchange Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. A person who is
not deemed to have been an affiliate of the Company at any time for 90 days
preceding a sale and who has beneficially owned his shares for at least three
years would be entitled to sell such shares under Rule 144 without regard to the
volume limitations, manner of sale provisions, notice requirements or the
availability of current public information about the Company.
The Company has authorized the issuance of 1,800,000 shares of its Common
Stock in accordance with the terms of the Plan. Options to purchase 200,000
shares have been granted to Mr. Maultsby under the Plan and it is anticipated
that 725,000 shares of Common Stock will be granted upon closing of the Offering
to certain employees of the Founding Companies. A total of 1,800,000 shares will
be issuable under the Plan. The Company intends to file a registration statement
on Form S-8 under the Securities Act registering the issuance and resale of
shares subject to these options granted under the Plan. As a result, such shares
will be eligible for resale in the public market.
The Company currently intends to file a registration statement covering up
to an additional 4,000,000 shares of Common Stock under the Securities Act for
its use in connection with future acquisitions. These shares generally will be
freely tradeable after their issuance by persons not affiliated with the Company
unless the Company contractually restricts their resale.
The Company has agreed that it will not offer, sell or issue any shares of
Common Stock or options, rights or warrants to acquire any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated, except for the grant of employee
stock options and for shares issued (i) in connection with acquisitions and (ii)
pursuant to the exercise of options granted under the Plan. Further, the
Company's directors, officers and certain stockholders who beneficially own
7,123,889 shares in the aggregate have agreed not to directly or indirectly
offer for sale, sell or otherwise dispose of any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated. In addition, the owners of the Founding
Companies have agreed not to sell, contract to sell or otherwise dispose of any
shares of Common Stock received as consideration in the Acquisitions for a
period of two years following receipt thereof.
Prior to this Offering, there has been no established trading market for
the Common Stock, and no predictions can be made as to the effect that sales of
Common Stock under Rule 144, pursuant to a registration statement, or otherwise,
or the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common Stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Such sales may also make it more difficult
for the Company to issue or sell equity securities or equity-related securities
in the future at a time and price that it deems appropriate. See "Risk
Factors -- Shares Eligible for Future Sale."
The former stockholders of the Founding Companies and certain officers,
directors and stockholders holding in the aggregate 6,981,389 shares of Common
Stock are entitled to certain rights with respect to the registration of their
shares of Common Stock under the Securities Act. None of such persons has
registration rights to include shares of Common Stock for sale in this Offering.
If the Company proposes to register any of its securities under the Securities
Act, such stockholders are entitled to notice of such registration and are
entitled to include, at the Company's expense, all or a portion of their shares
therein, subject to certain conditions.
43
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Montgomery Securities, have severally agreed
to purchase from the Company the following respective number of shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------- -----------
Alex. Brown & Sons Incorporated.........
Montgomery Securities...................
-----------
Total................................... 3,000,000
===========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
price offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After commencement of
the initial public offering, the offering price and other selling terms may be
changed by the Representatives.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 3,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,000,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed that it will not offer, sell or issue any shares of
Common Stock or options, rights or warrants to acquire any Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated, except for the grant of employee
stock options and for shares issued (i) in connection with acquisitions and (ii)
pursuant to the exercise of options granted under the Plan. Further, the
Company's directors, officers and certain stockholders who beneficially own
7,123,889 shares in the aggregate have agreed not to directly or indirectly
offer for sale, sell or otherwise dispose of any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated. In addition, the owners of the Founding
Companies have agreed not to directly or indirectly offer to sell, sell,
contract to sell or otherwise dispose of any shares of Common Stock received as
consideration in the Acquisitions for a period of two years following receipt
thereof.
44
<PAGE>
Raymond James & Associates ("Raymond James") provided financial advisory
services to Ridge in connection with the Company's acquisition of Ridge. For
these services, the Company will pay Raymond James a fee of up to $468,000 upon
the closing of the Acquisitions.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives.
Among the factors considered in such negotiations were prevailing market
conditions, the results of operations of the Founding Companies in recent
periods, the market capitalization and stages of development of other companies
which the Company and the Representatives believed to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "PALX".
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Andrews & Kurth L.L.P., Houston,
Texas and for the Underwriters by McDermott, Will & Emery, Chicago, Illinois.
EXPERTS
The audited financial statements of Fraser and Ridge included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is included as part of the Registration Statement, does not
contain all the information contained in the Registration Statement, certain
portions of which have been omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
the exhibits and schedules thereto. Statements made in the Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto may be inspected, without charge, at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Room 1400,
Chicago, IL 60661, and 7 World Trade Center, Suite 1300, New York, NY 10048 or
on the Internet at http://www.sec.gov. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined by an independent public
accounting firm for each fiscal year.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Unaudited Pro Forma Combined
Financial Statements
Basis of Presentation........... F-2
Pro Forma Combined Balance Sheet
as of November 30, 1996......... F-3
Pro Forma Combined Statement of
Income for the Year Ended
November 30, 1996............. F-4
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-5
Historical Financial Statements
Fraser Industries, Inc.
Report of Independent
Public Accountants........... F-8
Balance Sheets............. F-9
Statements of Income....... F-10
Statements of Changes in
Stockholders' Equity......... F-11
Statements of Cash Flows... F-12
Notes to Financial
Statements................... F-13
Ridge Pallets, Inc.
Report of Independent
Public Accountants......... F-19
Balance Sheets............. F-20
Statements of Income
(Loss)....................... F-21
Statements of Changes in
Stockholders' Equity....... F-22
Statements of Cash Flows... F-23
Notes to Financial
Statements................... F-24
PalEx, Inc.
Report of Independent
Public Accountants......... F-31
Balance Sheet.............. F-32
Statement of Income........ F-33
Statement of Changes in
Stockholders' Equity....... F-34
Notes to Financial
Statements................. F-35
F-1
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED)
The following unaudited pro forma combined financial statements give effect
to the acquisitions by PalEx, Inc. ("PalEx" or the "Company") of the
outstanding capital stock of Fraser Industries, Inc. ("Fraser"), Ridge
Pallets, Inc. ("Ridge") and Interstate Pallet Company, Inc. ("Interstate")
(together, the "Founding Companies"). These acquisitions (the
"Acquisitions") will occur simultaneously with the closing of PalEx's initial
public offering (the "Offering") and will be accounted for using the purchase
method of accounting. Fraser, one of the Founding Companies, has been identified
as the accounting acquiror for financial statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on November 30, 1996. The
unaudited pro forma combined statement of income gives effect to these
transactions as if they had occurred on December 1, 1995.
The Company has preliminarily analyzed the savings that it expects to be
realized by consolidating certain operational and general and administrative
functions. The Company has not and cannot quantify these savings until
completion of the combination of the Founding Companies. It is anticipated that
these savings will be partially offset by the costs of being a publicly-held
company and the incremental increase in costs related to the Company's new
management. However, these costs, like the savings that they offset, cannot be
quantified accurately. Neither the anticipated savings nor the anticipated costs
have been included in the pro forma financial information of PalEx.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The pro forma financial data does not purport to represent
what the Company's financial position or results of operations would actually
have been if such transactions in fact had occurred on those dates or to project
the Company's financial position or results of operations for any future period.
Since the Founding Companies were not under common control or management,
historical combined results may not be comparable to, or indicative of, future
performance. The unaudited pro forma combined financial statements should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this Prospectus. See "Risk Factors" included elsewhere
herein.
F-2
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
PRO FORMA COMBINED BALANCE SHEET -- NOVEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA POST MERGER
PALEX FRASER RIDGE INTERSTATE ADJUSTMENTS PRO FORMA ADJUSTMENTS
----- --------- --------- ---------- ----------- --------- -----------
(NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........... $ 1 $ 4 $ 758 $ 122 $ (396) $ 489 $ 2,945
Accounts receivable, net of
allowance......................... -- 2,852 3,742 478 -- 7,072 --
Inventories......................... -- 2,750 4,653 35 -- 7,438 --
Other current assets................ -- -- 137 57 -- 194 --
----- --------- --------- ---------- ----------- --------- -----------
Total current assets............ 1 5,606 9,290 692 (396) 15,193 2,945
PROPERTY, PLANT AND EQUIPMENT, net...... -- 7,279 6,803 415 (297) 14,200 --
GOODWILL................................ -- -- -- -- 25,998 25,998 --
OTHER ASSETS............................ 300 155 1,000 -- -- 1,455 --
----- --------- --------- ---------- ----------- --------- -----------
Total assets.................... $301 $ 13,040 $ 17,093 $1,107 $25,305 $56,846 $ 2,945
===== ========= ========= ========== =========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit...................... $-- $ 455 $ -- $-- $-- $ 455 $ (455)
Current maturities of long-term
debt.............................. -- 737 1,650 16 -- 2,403 (2,353)
Accounts payable.................... -- 1,487 1,263 32 -- 2,782 --
Accrued expenses.................... -- 1,478 1,129 169 -- 2,776 --
Pro forma cash consideration and S
Corporation distributions due to
Founding Companies................ -- -- -- -- 12,328 12,328 (12,328)
----- --------- --------- ---------- ----------- --------- -----------
Total current liabilities....... -- 4,157 4,042 217 12,328 20,744 (15,136)
LONG-TERM DEBT, net of current
maturities............................ -- 1,262 8,550 57 -- 9,869 (9,319)
OTHER LONG-TERM LIABILITIES............. -- 385 -- -- 1,424 1,809 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock........................ 11 11 550 10 (511) 71 30
Additional paid-in capital.......... 599 67 496 -- 24,248 25,410 27,370
Retained earnings................... (309 ) 7,249 3,455 823 (12,275) (1,057) --
Treasury stock...................... -- (91) -- -- 91 -- --
----- --------- --------- ---------- ----------- --------- -----------
Total stockholders' equity...... 301 7,236 4,501 833 11,553 24,424 27,400
----- --------- --------- ---------- ----------- --------- -----------
Total liabilities and
stockholders' equity.......... $301 $ 13,040 $ 17,093 $1,107 $25,305 $56,846 $ 2,945
===== ========= ========= ========== =========== ========= ===========
</TABLE>
AS
ADJUSTED
--------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........... $ 3,434
Accounts receivable, net of
allowance......................... 7,072
Inventories......................... 7,438
Other current assets................ 194
--------
Total current assets............ 18,138
PROPERTY, PLANT AND EQUIPMENT, net...... 14,200
GOODWILL................................ 25,998
OTHER ASSETS............................ 1,455
--------
Total assets.................... $59,791
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit...................... $ --
Current maturities of long-term
debt.............................. 50
Accounts payable.................... 2,782
Accrued expenses.................... 2,776
Pro forma cash consideration and S
Corporation distributions due to
Founding Companies................ --
--------
Total current liabilities....... 5,608
LONG-TERM DEBT, net of current
maturities............................ 550
OTHER LONG-TERM LIABILITIES............. 1,809
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock........................ 101
Additional paid-in capital.......... 52,780
Retained earnings................... (1,057 )
Treasury stock...................... --
--------
Total stockholders' equity...... 51,824
--------
Total liabilities and
stockholders' equity.......... $59,791
========
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-3
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED NOVEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA POST MERGER
PALEX FRASER RIDGE INTERSTATE ADJUSTMENTS PRO FORMA ADJUSTMENTS
------- --------- --------- ---------- ----------- --------- ------------
(NOTE 4) (NOTE 4)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................................ $ -- $ 49,282 $ 48,464 $4,284 $-- $102,030 $ --
COST OF GOODS SOLD...................... -- 41,509 41,328 3,341 -- 86,178 --
------- --------- --------- ---------- ----------- --------- ------------
Gross profit........................ -- 7,773 7,136 943 -- 15,852 --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 300 3,171 3,864 84 (966)(a) 7,320 --
867(b)
------- --------- --------- ---------- ----------- --------- ------------
Income (loss) from operations....... (300) 4,602 3,272 859 99 8,532 --
INTEREST (EXPENSE), AND OTHER INCOME,
net................................... -- (540) (756) 3 -- (1,293 ) 1,308(c)
------- --------- --------- ---------- ----------- --------- ------------
INCOME (LOSS) BEFORE INCOME TAXES....... (300) 4,062 2,516 862 99 7,239 1,308
PROVISION FOR INCOME TAXES.............. -- 216 75 52 2,743(d) 3,086 507(d)
------- --------- --------- ---------- ----------- --------- ------------
NET INCOME (LOSS)....................... $ (300) $ 3,846 $ 2,441 $ 810 $(2,644) $ 4,153 $ 801
======= ========= ========= ========== =========== ========= ============
NET INCOME PER SHARE....................
SHARES USED IN COMPUTING NET INCOME PER
SHARE.................................
</TABLE>
AS
ADJUSTED
----------
REVENUES................................ $ 102,030
COST OF GOODS SOLD...................... 86,178
----------
Gross profit........................ 15,852
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 7,320
----------
Income (loss) from operations....... 8,532
INTEREST (EXPENSE), AND OTHER INCOME,
net................................... 15
----------
INCOME (LOSS) BEFORE INCOME TAXES....... 8,547
PROVISION FOR INCOME TAXES.............. 3,593
----------
NET INCOME (LOSS)....................... $ 4,954
==========
NET INCOME PER SHARE.................... $ .49
==========
SHARES USED IN COMPUTING NET INCOME PER
SHARE................................. 10,123,889(e)
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-4
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
PalEx, Inc. was formed to create a national provider of pallet products and
services, including the manufacture and distribution of new pallets, the repair
and remarketing of used pallets, and the processing and marketing of various
wood-based by-products derived from pallets. PalEx has conducted no operations
to date and will acquire the Founding Companies concurrently with the
consummation of the Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The periods
included in these financial statements for the individual Founding Companies are
as follows: Fraser -- as of November 30, 1996, and the twelve months ended
November 30, 1996; Ridge -- as of December 1, 1996, and the twelve months ended
December 1, 1996; and Interstate -- as of August 31, 1996, and the twelve months
ended August 31, 1996. The audited historical financial statements included
elsewhere herein have been included in accordance with Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrent with the closing of the Offering, PalEx will acquire all of the
outstanding capital stock of the Founding Companies. The acquisitions will be
accounted for using the purchase method of accounting with Fraser being treated
as the accounting acquiror.
The following table sets forth the consideration to be paid (a) in cash and
(b) in shares of Common Stock to the common stockholders of each of the Founding
Companies. The table does not reflect (i) the distribution of S Corporation
Accumulated Adjustment Accounts prior to the merger estimated to be $11 million
and (ii) approximately 142,500 shares of Common Stock to be issued by PalEx to
the Founding Companies' profit sharing plans upon completion of the Acquisitions
and Offering.
COMMON STOCK
-----------------------
VALUE OF
CASH SHARES SHARES(1)
--------- --------- --------
(DOLLARS IN THOUSANDS)
Fraser............................... $ 117 2,796,894 $ 20,977
Ridge................................ -- 2,718,691 20,390
Interstate........................... 1,200 394,415 2,958
--------- --------- --------
$ 1,317 5,910,000 $ 44,325
========= ========= ========
- ------------
(1) Value is determined using the estimated initial offering price of $10 per
share, less a discount of 25 percent based on restrictions on the sale and
transferability of the shares issued.
The estimated purchase price for the acquisitions is based upon preliminary
estimates and is subject to certain purchase price adjustments at and following
closing.
F-5
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
The following tables summarize unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
--------- --------- ---------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............ $ -- $ 122 $ -- $ (518) $ -- -- $ (396)
Property, plant and equipment, net... (297) (297)
Goodwill............................. 24,837 468 693 25,998
Pro forma cash consideration and
Accumulated Adjustment Account due
to Founding Companies'
stockholders....................... (11,011) (1,317) (12,328)
Other long-term liabilities.......... (1,424) (1,424)
Common stock......................... 513 (2) 511
Additional paid-in capital........... (23,182) (1,066) (24,248)
Retained earnings.................... 11,011 175 (760) 50 375 1,424 12,275
Treasury stock....................... (91) (91)
--------- --------- ---------- --------- --------- --------- -----------
$ -- $ -- $ -- $ -- $ -- $ -- $ --
========= ========= ========== ========= ========= ========= ===========
POST
MERGER
(G) (H) (I) ADJUSTMENTS
---------- ---------- ---------- -----------
Cash and cash equivalents............ $ 27,400 $ (12,127) $ (12,328) $ 2,945
Line of credit....................... 455 455
Current maturities of long-term
debt............................... 2,353 2,353
Pro forma cash consideration and
Accumulated Adjustment Account due
to Founding Companies'
stockholders....................... 12,328 12,328
Long-term debt, net of current
maturities......................... 9,319 9,319
Common stock......................... (30) (30)
Additional paid-in capital........... (27,370) (27,370)
---------- ---------- ---------- -----------
$ -- $ -- $ -- $ --
========== ========== ========== ===========
</TABLE>
a. Reflects distribution of S Corporation Accumulated Adjustment Accounts
of the Founding Companies.
b. Reflects the distribution of certain non-operating assets with a net
book value of $175,000 to certain stockholders of the Founding Companies, the
sale of a non-operating asset to a stockholder at its net book value of
$210,000, and the purchase of certain operating equipment from a stockholder at
its estimated fair value of $88,000.
c. Reflects the acquisition of the Founding Companies including the
liability for the cash consideration to be paid and the issuance of 5,910,000
shares of Common Stock to the stockholders of the Founding Companies in
connection with the Acquisitions.
d. Reflects the payment of financial advisory fees incurred by the
Founding Companies in connection with the Acquisitions.
e. Reflects the issuance of 142,500 shares of common stock to the Founding
Companies' profit sharing plans.
F-6
<PAGE>
PALEX, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
f. Reflects the deferred income tax liability attributable to the
temporary differences between financial reporting and income tax bases of assets
and liabilities currently held in S Corporations.
g. Reflects the proceeds from the issuance of 3,000,000 shares of Common
Stock, net of estimated offering costs (based on an assumed initial public
offering price of $10 per share). Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and printing
expenses.
h. Reflects the repayment of certain debt obligations with proceeds from
the Offering.
i. Reflects the cash portion of the purchase price of the Founding
Companies and the distribution of the S Corporation Accumulated Adjustment
Accounts.
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME ADJUSTMENTS:
a. Adjusts compensation to the level the owners of the Founding Companies
have agreed to receive subsequent to the Acquisitions and revisions to certain
lease agreements between a shareholder and a Founding Company. In addition, the
adjustment eliminates from the pro forma income statement the nonrecurring,
noncash charge of $300,000 representing the difference between the amounts paid
for the shares issued to the Company's Chief Executive Officer and their
estimated fair value on the date of the sale as if the Acquisitions had
occurred.
b. Reflects the amortization of goodwill using a 30-year estimated life.
c. Reflects the reduction in interest expense attributed to obligations
retired with proceeds from the Offering.
d. Reflects the incremental provision for federal and state income taxes
relating to the other income statement adjustments and for income taxes on S
Corporation income.
e. Includes: (i) 1,071,389 shares issued by PalEx prior to the Offering,
(ii) 5,910,000 shares to be issued to the stockholders of the Founding Companies
in connection with the Acquisitions, (iii) 142,500 shares to be issued to
satisfy the obligations of the Founding Companies to their respective
profit-sharing plans and (iv) 3,000,000 shares to be issued in connection with
the Offering. Excludes 725,000 shares of Common Stock subject to options to be
granted in connection with the Offering at an exercise price equal to the
initial public offering price, and 200,000 shares of Common Stock subject to
options, 100,000 of which were granted at $7.50 per share and 100,000 of which
were granted at the initial public offering price.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fraser Industries, Inc.:
We have audited the accompanying balance sheets of Fraser Industries, Inc.
(a Texas corporation), as of November 30, 1995 and 1996, and the related
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended November 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fraser Industries, Inc., as
of November 30, 1995 and 1996, the results of its operations and its cash flows
for each of the three years in the period ended November 30, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 3, 1997
F-8
<PAGE>
FRASER INDUSTRIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30,
--------------------
1995 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 115 $ 4
Accounts receivable, net of
allowance of $30 and $57....... 3,169 2,852
Inventories..................... 3,289 2,750
Other current assets............ 150 --
--------- ---------
Total current assets....... 6,723 5,606
PROPERTY, PLANT AND EQUIPMENT, net... 5,215 7,279
OTHER ASSETS......................... 357 155
--------- ---------
Total assets............... $ 12,295 $ 13,040
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................. $ 2,950 $ 455
Current maturities of long-term
debt........................... 608 737
Accounts payable................ 1,314 1,487
Accrued expenses................ 854 1,478
--------- ---------
Total current
liabilities.................. 5,726 4,157
LONG-TERM DEBT, net of current
maturities......................... 2,362 1,262
DEFERRED INCOME...................... 360 336
DEFERRED INCOME TAXES................ 37 49
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value;
authorized 200,000 shares;
issued and outstanding 11,000
shares......................... 11 11
Capital in excess of par
value........................... 67 67
Retained earnings............... 3,823 7,249
--------- ---------
3,901 7,327
Less -- 1,000 shares of common
stock in treasury, at cost..... (91) (91)
--------- ---------
3,810 7,236
--------- ---------
Total liabilities and
stockholders' equity......... $ 12,295 $ 13,040
========= =========
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
FRASER INDUSTRIES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED NOVEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
REVENUES................................ $ 23,114 $ 30,135 $ 49,282
COST OF GOODS SOLD...................... 20,755 25,559 41,509
--------- --------- ---------
Gross profit....................... 2,359 4,576 7,773
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,761 2,131 3,171
--------- --------- ---------
Income from operations............. 598 2,445 4,602
INTEREST EXPENSE........................ (335) (450) (387)
OTHER INCOME (EXPENSE), net............. (9) 19 (153)
--------- --------- ---------
INCOME BEFORE INCOME TAXES.............. 254 2,014 4,062
PROVISION FOR INCOME TAXES.............. 6 91 216
--------- --------- ---------
NET INCOME.............................. $ 248 $ 1,923 $ 3,846
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
FRASER INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
CAPITAL STOCK
COMMON IN EXCESS RETAINED IN
SHARES STOCK OF PAR EARNINGS TREASURY TOTAL
------ ------ --------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, November 30, 1993 .......... 11 $11 $67 $ 1,652 $(91) $ 1,639
Net income ..................... -- -- -- 248 -- 248
-- --- --- ------- ---- -------
BALANCE, November 30, 1994 .......... 11 11 67 1,900 (91) 1,887
Net income ..................... -- -- -- 1,923 -- 1,923
-- --- --- ------- ---- -------
BALANCE, November 30, 1995 .......... 11 11 67 3,823 (91) 3,810
Net income ..................... -- -- -- 3,846 -- 3,846
Distributions .................. -- -- -- (420) -- (420)
-- --- --- ------- ---- -------
BALANCE, November 30, 1996 .......... 11 $11 $67 $ 7,249 $(91) $ 7,236
== === === ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
FRASER INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED NOVEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 248 $ 1,923 $ 3,846
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and
amortization............... 736 956 1,192
Loss on sale of assets........ 1 10 146
Deferred income tax........... 6 21 12
Changes in operating assets
and liabilities --
Accounts receivable...... (854) (772) 317
Inventories.............. (257) (925) 539
Prepaid expenses......... 123 60 150
Other assets............. (86) (104) 190
Accounts payable and
accrued expenses...... 416 295 797
Deferred income.......... 385 (25) (24)
--------- --------- ---------
Net cash provided by (used in)
operating activities....... 718 1,439 7,165
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment........................ (2,974) (1,497) (3,513)
Proceeds from sale of equipment.... 15 13 123
--------- --------- ---------
Net cash used in investing
activities................. (2,959) (1,484) (3,390)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt......... 2,237 740 2,180
Payments on long-term debt......... -- (607) (5,646)
Distribution to stockholders....... -- -- (420)
--------- --------- ---------
Net cash provided by (used in)
financing activities....... 2,237 133 (3,886)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (4) 88 (111)
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 31 27 115
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 27 $ 115 $ 4
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest...................... $ 354 $ 446 $ 402
Income taxes.................. 6 3 34
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BUSINESS AND ORGANIZATION:
Fraser Industries, Inc. (the "Company"), is a manufacturer and recycler
of wood pallets. Services the Company provides include pallet manufacturing,
repair, sorting, storage and transportation. The Company is headquartered in Big
Spring, Texas and has fifteen plants located primarily in Texas and Arkansas.
Sales are primarily made in the Southwest and California.
The Company and its stockholders intend to enter into a definitive
agreement with PalEx, Inc. ("PalEx"), pursuant to which all outstanding shares
of the Company's common stock will be exchanged for cash and shares of PalEx
common stock concurrent with the consummation of the initial public offering
(the "Offering") of the common stock of PalEx.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
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
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. Leased property under capital leases is amortized over the lives of the
respective leases or over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for state tax purposes.
Expenditures for maintenance and repairs are charged to operating 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 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.
INCOME TAXES
The stockholders of the Company have elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under these provisions,
the Company does not pay federal and certain state income taxes. Instead, the
Company's stockholders pay income taxes on their proportionate shares of the
Company's net earnings. The provision for income taxes is composed entirely of
state income taxes.
REVENUE RECOGNITION
The Company recognizes revenue upon delivery of the product to the
customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets
F-13
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
and liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued 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."
This statement establishes the recognition and measurement standards related to
the impairment of long-lived assets. The Company will adopt this standard
December 1, 1996. It is the opinion of management that the adoption of this
standard will not have a material effect on the Company's financial position or
results of operations.
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. The Company received
approximately 14 percent and 17 percent of its lumber purchases from one
supplier in 1995 and 1996, respectively.
MARKETS -- Markets for pallet manufacturing and repair services are highly
fragmented and competitive. Pallet manufacturing and recycling operations are
not capital-intensive; therefore, barriers to entry in such businesses are
minimal.
CUSTOMERS -- The Company sells to customers with local, regional and
national operations in many different industries and geographical locations. Of
such customers, one customer accounted for approximately 24 percent and 47
percent of the Company's revenues in 1995 and 1996, respectively. As of November
30, 1996, this customer had an outstanding accounts receivable balance which
represented approximately 27 percent of the Company's total accounts receivable.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
ESTIMATED
USEFUL NOVEMBER 30,
LIVES --------------------
IN YEARS 1995 1996
--------- --------- ---------
Land.................................... -- $ 41 $ 41
Machinery and equipment................. 5 - 7 8,000 10,666
Buildings............................... 15 938 1,065
Furniture and fixtures.................. 7 393 393
--------- ---------
9,372 12,165
Less -- Accumulated depreciation........ (4,157) (4,886)
--------- ---------
Property, plant and equipment,
net.............................. $ 5,215 $ 7,279
========= =========
F-14
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
NOVEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
Balance at beginning of year............ $ -- $ -- $ 30
Additions charged to costs and
expenses.............................. 22 57 27
Deductions for uncollectible receivables
written off........................... (22) (27) --
--------- --------- ---------
$ -- $ 30 $ 57
========= ========= =========
The major components of inventories are as follows:
NOVEMBER 30,
--------------------
1995 1996
--------- ---------
Lumber, hardware and fasteners.......... $ 3,197 $ 2,359
Finished goods.......................... 92 391
--------- ---------
$ 3,289 $ 2,750
========= =========
Accrued expenses consist of the following:
NOVEMBER 30,
--------------------
1995 1996
--------- ---------
Accrued compensation and benefits....... $ 574 $ 1,014
Accrued taxes........................... 127 203
Other accrued expenses.................. 153 261
--------- ---------
$ 854 $ 1,478
========= =========
F-15
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
5. DEBT:
The Company's borrowings under a $3,000,000 revolving line of credit with a
bank bear interest, payable monthly, at prime (8.25 percent at November 30,
1996) and mature in April 1997. The line of credit is secured by inventory,
machinery and equipment. At November 30, 1995 and 1996, borrowings outstanding
under the line of credit were approximately $2,950,000 and $455,000,
respectively.
Long-term debt consists of the following:
NOVEMBER 30,
--------------------
1995 1996
--------- ---------
Note payable to a bank, bearing interest
at prime (8.25% at November 30, 1996),
payable monthly, principal payments of
$50,000 per month through maturity in
April 1998. Secured by substantially
all assets of the Company and
personally guaranteed by the
stockholders.......................... $ 2,250 $ 1,650
Notes payable to related parties,
bearing interest at 14% per annum,
payable monthly, through maturity in
January 2005.......................... 65 60
Notes payable to stockholders, bearing
interest at 8% to 10% per annum,
payable annually, through maturities
ranging from December 1996 to December
1997.................................. 641 279
Capital leases.......................... 14 10
--------- ---------
2,970 1,999
Less -- Current maturities.............. (608) (737)
--------- ---------
$ 2,362 $ 1,262
========= =========
Future maturities of long-term obligations at November 30, 1996, are as
follows:
Year ending November 30 --
1997............................... $ 737
1998............................... 1,215
1999............................... 8
2000............................... 8
2001............................... 8
Thereafter......................... 23
---------
$ 1,999
=========
6. INCOME TAXES:
State income taxes are as follows:
YEAR ENDED NOVEMBER 30,
-------------------------------
1994 1995 1996
--------- --- ---------
State --
Current............................ $ -- $ 70 $ 204
Deferred........................... 6 21 12
--------- --- ---------
$ 6 $ 91 $ 216
========= === =========
F-16
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
For the years ended November 30, 1994, 1995 and 1996, income tax expense is
primarily computed by applying a blended state tax rate of 5.2 percent to income
before income tax.
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences for the periods ended
November 30, 1995 and 1996, result principally from the following:
NOVEMBER 30,
--------------------
1995 1996
--- ---------
Deferred income tax liabilities --
Depreciation and amortization...... $ 35 $ 67
Accruals and reserves not
deductible until paid............. 14 17
Deferred income tax assets --
Inventory.......................... (4) (7)
Other assets....................... (8) (28)
--- ---------
Total deferred income tax liabilities... $ 37 $ 49
=== =========
7. GRANT RECEIVABLE:
The Company entered into an agreement with New Boston Special Industrial
Development Corporation of New Boston, Texas, in August 1993 in which the
Company is to receive a $200,000 grant (building grant) in exchange for building
a production facility and $200,000 grant (employment grant) for providing 100
full-time jobs for 10 years at the facility. In the event that a monthly average
of 90 full-time jobs are not maintained for the 10 years, the Company is
required to refund a portion of the grant. The refund calculation will be
performed at the end of five years and 10 years. The Company received the entire
$200,000 of the building grant in January 1994 and, through November 30, 1996,
the Company has received $120,000 of the employment grant, with $40,000 to be
received each August 1 through 1998. The building grant is recorded as deferred
income and is recognized in the statements of income as a reduction in
depreciation expense over the life of the facility using the straight-line
method. The employment grant is recorded as deferred income and is recognized in
the statements of income as a reduction in salaries expense over the 10-year
contractual life using the straight-line method.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies during the periods presented in the
accompanying financial statements.
OPERATING LEASE AGREEMENTS
The Company conducts a portion of its operations and warehouses certain of
its products in leased facilities classified as operating leases.
F-17
<PAGE>
FRASER INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
Minimum future rental payments under the noncancelable operating leases as
of November 30, 1996, are as follows:
Year Ending November 30 --
1997............................ $ 746
1998............................ 449
1999............................ 251
2000............................ 6
---------
$ 1,452
=========
The leases provide for payment of taxes and other expenses by the Company.
Rent expense for operating leases was approximately $294,000, $477,000 and
$726,000 in 1994, 1995 and 1996, respectively.
9. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments",
and SFAS 119, "Disclosure 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.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
The Company and its shareholders have entered into a definitive agreement
with PalEx providing for the acquisition of the Company by PalEx.
The Company intends to declare a contribution to its defined contribution
profit-sharing plan in an amount currently estimated to be approximately
$375,000. In connection with the acquisition, PalEx has agreed to satisfy the
Company's profit-sharing obligation through the issuance of approximately 50,000
shares of PalEx common stock. In addition, prior to the closing of the
acquisition, the Company will make distributions in respect of the Company's
estimated S Corporation Accumulated Adjustment Account at the time of closing in
the amount of approximately $7.1 million. The Company also expects to sell a
non-operating asset at its net book value of approximately $210,000 to a
shareholder prior to the merger with PalEx.
The Company is liable to a director of PalEx for an amount up to $50,000
for advisory services, which amount is payable upon completion of the
acquisition of the Company by PalEx.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ridge Pallets, Inc.:
We have audited the accompanying balance sheets of Ridge Pallets, Inc. (a
Florida corporation) (the "Company"), as of July 30, 1995 and July 28, 1996, and
the related statements of income, changes in stockholders' equity and cash flows
for the years then ended, and the statement of income, changes in stockholders'
equity and cash flows of the Predecessor Company (as defined in Note 1) for the
year ended July 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ridge Pallets, Inc. as of
July 30, 1995 and July 28, 1996, and the results of its operations and cash
flows for the years then ended, and the results of the Predecessor Company's
operations and cash flows for the year ended July 31, 1994, in conformity with
generally accepted accounting principles.
As explained in Note 1 to the financial statements, controlling ownership
of the Predecessor Company was acquired by stockholders of Ridge Pallets, Inc.
in a purchase transaction effective for accounting purposes as of August 1,
1994. The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets and liabilities of the Predecessor
Company based on their estimated fair values at August 1, 1994. Accordingly, the
financial statements of Ridge Pallets, Inc. are not comparable to those of the
Predecessor Company.
ARTHUR ANDERSEN LLP
Houston, Texas
December 8, 1996
F-19
<PAGE>
RIDGE PALLETS, INC.
BALANCE SHEETS -- JULY 30, 1995, JULY 28, 1996, AND OCTOBER 29, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
JULY 30, JULY 28, OCTOBER 29,
1995 1996 1996
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 4,259 $ 1,250 $ 34
Accounts receivable, net of
allowance of $155, $123 and
$88.............................. 2,560 3,376 3,735
Inventories........................ 4,228 3,687 4,722
Other current assets............... 350 144 120
--------- --------- -----------
Total current assets.......... 11,397 8,457 8,611
PROPERTY, PLANT AND EQUIPMENT, net...... 5,211 6,151 6,626
OTHER ASSETS............................ 1,055 1,101 824
--------- --------- -----------
Total assets.................. $ 17,663 $ 15,709 $16,061
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt............................. $ 1,050 $ 1,050 $ 1,650
Accounts payable................... 338 796 868
Accrued expenses................... 780 1,003 946
Dividends payable.................. 1,050 -- --
--------- --------- -----------
Total current liabilities..... 3,218 2,849 3,464
LONG-TERM DEBT, net of current
maturities............................ 12,221 8,600 8,600
--------- --------- -----------
Total liabilities............. 15,439 11,449 12,064
--------- --------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value,
5,000,000 shares authorized;
483,000 shares and 549,500 shares
issued and outstanding for 1995
and 1996, respectively........... 483 550 550
Additional paid-in capital......... 179 496 496
Retained earnings.................. 1,562 3,214 2,951
--------- --------- -----------
Total stockholders' equity.... 2,224 4,260 3,997
--------- --------- -----------
Total liabilities and
stockholders' equity....... $ 17,663 $ 15,709 $16,061
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED JULY 31, 1994, JULY 30, 1995, AND JULY 28, 1996
AND FOR THE THREE MONTHS ENDED OCTOBER 27, 1995 AND OCTOBER 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
THE --------------------------------------------------
PREDECESSOR THREE MONTHS ENDED
COMPANY --------------------------
JULY 31, JULY 30, JULY 28, OCTOBER 27, OCTOBER 29,
1994 1995 1996 1995 1996
----------- -------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $47,946 $ 54,450 $ 48,341 $10,499 $10,059
COST OF GOODS SOLD...................... 40,606 46,388 40,540 9,024 9,171
----------- -------- -------- ----------- -----------
Gross profit....................... 7,340 8,062 7,801 1,475 888
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 4,018 3,826 3,825 1,033 985
----------- -------- -------- ----------- -----------
Income from operations............. 3,322 4,236 3,976 442 (97)
INTEREST EXPENSE........................ (80) (962) (1,032) (267) (192)
OTHER INCOME (EXPENSE), net............. 922 101 199 64 20
----------- -------- -------- ----------- -----------
INCOME BEFORE INCOME TAXES.............. 4,164 3,375 3,143 239 (269)
PROVISION (BENEFIT) FOR INCOME TAXES.... 99 83 76 6 (6)
----------- -------- -------- ----------- -----------
NET INCOME.............................. $ 4,065 $ 3,292 $ 3,067 $ 233 $ (263)
=========== ======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1994, JULY 30, 1995, AND JULY 28, 1996
AND THROUGH OCTOBER 27, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
THE PREDECESSOR COMPANY:
Balance, July 26, 1993.......... 1,875 $ 1,875 $-- $ 13,402 $ 15,277
Stock issued.................... 27 27 64 -- 91
Net income...................... -- -- -- 4,065 4,065
Dividends....................... -- -- -- (1,503) (1,503)
Stock redemption................ (27) (27) (64) (131) (222)
--------- --------- ---------- --------- ---------
Balance, July 31, 1994.......... 1,875 $ 1,875 $-- $ 15,833 $ 17,708
========= ========= ========== ========= =========
THE COMPANY:
Balance -- initial
capitalization, August 1,
1994.......................... 350 $ 350 $-- $ -- $ 350
Stock issued.................... 133 133 179 -- 312
Net income...................... -- -- -- 3,292 3,292
Dividends....................... -- -- -- (1,730) (1,730)
--------- --------- ---------- --------- ---------
Balance, July 30, 1995.......... 483 483 179 1,562 2,224
Stock issued.................... 67 67 317 -- 384
Net income...................... -- -- -- 3,067 3,067
Dividends....................... -- -- -- (1,415) (1,415)
--------- --------- ---------- --------- ---------
Balance, July 28, 1996.......... 550 550 496 3,214 4,260
Net loss (unaudited)............ -- -- -- (263) (263)
--------- --------- ---------- --------- ---------
Balance, October 27, 1996
(unaudited)................... 550 $ 550 $ 496 $ 2,951 $ 3,997
========= ========= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1994, JULY 30, 1995, AND JULY 28, 1996
AND FOR THE THREE MONTHS ENDED OCTOBER 27, 1995 AND OCTOBER 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY
THE -------------------------------------------------
PREDECESSOR THREE MONTHS ENDED
COMPANY -------------------------
JULY 31, JULY 30, JULY 28, OCTOBER 27, OCTOBER 29,
1994 1995 1996 1995 1996
----------- -------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)................... $ 4,065 $3,292 $ 3,067 $ 233 $ (263)
----------- -------- -------- ----------- -----------
Additions (deductions) for noncash
activities --
Depreciation and
amortization................. 1,182 605 734 166 200
(Gain) loss on sale of
property, plant and
equipment.................... (6) 13 -- -- --
Deferred income taxes.......... 4 45 (2 ) -- --
Changes in assets and
liabilities --
Accounts receivable........ (646) 1,340 (816 ) (1,140) (359)
Inventories................ 103 167 541 (1,700) (1,035)
Prepaid expenses and other
current assets........... (115) 10 206 24 24
Other assets............... (415) (275) (49 ) 32 103
Accounts payable........... 75 (229) 458 298 73
Accrued expenses........... (899) 35 229 182 116
----------- -------- -------- ----------- -----------
(717) 1,711 1,301 (2,138) (878)
----------- -------- -------- ----------- -----------
Net cash provided by
(used in) operating
activities.......... 3,348 5,003 4,368 (1,905) (1,141)
----------- -------- -------- ----------- -----------
CASH FROM INVESTING ACTIVITIES:
Proceeds from sale of property,
plant and equipment............... 64 223 90 -- --
Proceeds from redemption of
insurance policies................ 669 -- -- -- --
Purchase of property, plant and
equipment......................... (892) (899) (1,765 ) (308) (675)
----------- -------- -------- ----------- -----------
Net cash used in
investing
activities.......... (159) (676) (1,675 ) (308) (675)
----------- -------- -------- ----------- -----------
CASH FROM FINANCING ACTIVITIES:
Issuance of common stock............ 91 312 384 (1,147) --
Dividends paid...................... (1,540) (680) (2,465 ) (1,010) --
Payment of long-term debt........... (50) (50) (3,621 ) -- --
Redemption of common stock.......... (222) -- -- -- --
Net borrowings on line of credit.... -- -- -- -- 600
Other............................... (59) -- -- -- --
----------- -------- -------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... (1,780) (418) (5,702 ) (2,157) 600
----------- -------- -------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 1,409 3,909 (3,009 ) (4,370) (1,216)
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 2,263 350 4,259 4,259 1,250
----------- -------- -------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 3,672 $4,259 $ 1,250 $ (111) $ 34
=========== ======== ======== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest....................... $ 37 $ 816 $ 1,018 $ 237 $ 199
Income taxes................... 66 69 90 6 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
On August 1, 1994, The FMP Group, Inc., purchased from Ridge Pallets, Inc.
(the "Predecessor Company"), substantially all of its assets used in the
pallet and bin manufacturing business and the name "Ridge Pallets, Inc.," for
notes payable of approximately $12,600,000 and the assumption of approximately
$1,800,000 in liabilities. Simultaneously with the transaction, the seller
changed its name to Ridge Resources, Inc., and The FMP Group, Inc., changed its
name to Ridge Pallets, Inc. (the "Company"). The statements of income,
stockholders' equity and cash flows for the year ended July 31, 1994, represent
those of the Predecessor Company prior to the purchase by the Company. As a
result of the transaction, the cost bases of the Predecessor Company and the
Company are different, as discussed further below. References to the Company
hereinafter may also include periods prior to August 1, 1994.
The Company is a manufacturer of wooden pallets and agricultural harvesting
boxes and bins. Manufacturing facilities are located in Florida, Georgia and
South Carolina, with the Company's headquarters located in Bartow, Florida.
Sales of the Company's products are primarily in Florida and the Southeastern
United States. The Company's customer base is approximately 40 percent
agricultural, with the balance comprised of the cement, roof and tile, auto,
grocery, beverage and seafood industries.
The Company and its stockholders intend to enter into a definitive
agreement with PalEx, Inc. ("PalEx"), pursuant to which all outstanding shares
of the Company's common stock will be exchanged for cash and shares of PalEx
common stock concurrent with the consummation of the initial public offering of
the common stock of PalEx.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR
The fiscal year of the Company is a 52-week or 53-week period that ends on
the last Sunday in July. The years ended July 31, 1994, July 30, 1995, and July
28, 1996, were 53-, 52- and 52-week periods, respectively.
INTERIM FINANCIAL INFORMATION
The interim financial statements 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 only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the consolidated interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
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 material, direct labor and overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation for the
year ended July 31, 1994, was calculated using an accelerated method.
Depreciation for the years ended July 30, 1995, and July 28, 1996, is provided
on the straight-line method based upon the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to operating 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 and equipment, the cost and related accumulated
depreciation are
F-24
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
eliminated from the respective accounts and the resulting gain or loss is
included in other income (expense), net.
INCOME TAXES
The stockholders of the Company have elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under these provisions,
the Company does not pay federal and certain state income taxes. Instead, the
Company's stockholders pay income taxes on their proportionate shares of the
Company's net earnings. The provision for income taxes is composed entirely of
state income taxes.
CASH EQUIVALENTS
For purposes of the statements of cash flows and balance sheets, the
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
NONCASH ACTIVITIES
In fiscal year 1995, the Company issued notes payable of approximately
$12,600,000 and assumed approximately $1,800,000 of liabilities in connection
with the acquisition of the pallet and bin manufacturing business of Ridge
Resources, Inc. The assets acquired were recorded at fair value as follows:
(IN THOUSANDS)
--------------
Property, plant and equipment........ $ 5,372
Inventories.......................... 4,394
Accounts receivable.................. 3,899
Other assets......................... 720
Goodwill............................. 23
--------------
$ 14,408
==============
In addition, dividends of $1,050,000 were included in dividends payable at
July 30, 1995. Accordingly, these noncash investing and financing activities
have been excluded from the accompanying statements of cash flows.
The Predecessor Company maintained deferred compensation agreements with
shareholders and key members of management through July 31, 1994. The agreements
were terminated in connection with the formation of the Company. The Predecessor
Company recognized a gain of approximately $631,000 upon cancellation of the
deferred compensation liability, which has been reflected in other income
(expense), net for the year ended July 31, 1994.
REVENUE RECOGNITION
The Company recognizes revenues upon delivery of the product to the
customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived
F-25
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Assets to Be Disposed Of." This statement establishes the recognition and
measurement standards related to the impairment of long-lived assets. The
Company will be required to adopt this standard during fiscal 1997. It is the
opinion of management that the adoption of this standard will not have a
material effect on the Company's financial position or results of operations.
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. The Company received
approximately 40 percent, 39 percent and 46 percent of its lumber purchases from
two suppliers in 1994, 1995 and 1996, respectively.
MARKETS -- Markets for pallet manufacturing and repair services are highly
fragmented and competitive. Pallet manufacturing and recycling operations are
not capital-intensive; therefore, barriers to entry in such businesses are
minimal.
CUSTOMERS -- The Company's sales are made to customers with local, regional
and national operations in many different industries and geographical locations.
Of such customers, one customer accounted for approximately 17 percent, 22
percent and 21 percent of revenues in 1994, 1995 and 1996. As of July 28, 1996,
the customer had an outstanding accounts receivable balance which represented
approximately 10 percent of total accounts receivable.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
ESTIMATED
USEFUL
LIVES JULY 30, JULY 28,
IN YEARS 1995 1996
----------- -------- --------
(IN THOUSANDS)
Land.................................... - $ 721 $ 721
Machinery and equipment................. 7 - 10 2,033 2,675
Vehicles and rolling stock.............. 5 694 1,141
Buildings and building improvements..... 15 - 40 2,229 2,608
Furniture and fixtures.................. 5 - 10 124 277
Less -- Accumulated depreciation........ (590) (1,271)
-------- --------
Property, plant and equipment, net...... $ 5,211 $ 6,151
======== ========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
The major components of inventories are as follows:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Lumber, hardware and fasteners....... $ 3,701 $ 3,054
Work in process...................... 88 85
Finished goods....................... 439 548
--------- ---------
$ 4,228 $ 3,687
========= =========
F-26
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the Company's allowance for doubtful accounts consists of the
following:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Balance at beginning of the year..... $ 35 $ 155
Additions charged to expense
(recoveries)......................... 120 (5)
Deductions for uncollectible
receivables written off.............. -- (27)
--------- ---------
$ 155 $ 123
========= =========
Other assets are as follows:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Certificate of deposit, restricted... $ 535 $ 554
Cash surrender value of officers'
life insurance....................... 130 146
Notes receivable..................... 131 90
Other assets......................... 259 311
--------- ---------
$ 1,055 $ 1,101
========= =========
Accrued expenses consist of the following:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Accrued workers' compensation........ $ 250 $ 250
Accrued salaries and benefits........ 90 378
Accrued interest payable............. 140 133
Accrued taxes........................ 110 81
Other accrued expenses............... 190 161
--------- ---------
$ 780 $ 1,003
========= =========
5. DEBT:
The Company maintains a $4 million line of credit which expires in June
1997. There were no borrowings on the line as of July 30, 1995, and July 28,
1996. Provisions of the line of credit contain certain restrictive covenants,
the most restrictive of which requires the Company to maintain a net worth of at
least $250,000. The borrowings are collateralized by the personal guarantees of
six of the Company's shareholders. The interest rate is at prime (prime rate was
8.25 percent at July 28, 1996).
F-27
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consisted of the following:
JULY 30, JULY 28,
1995 1996
--------- ---------
(IN THOUSANDS)
Notes payable to Ridge Resources,
Inc. and its shareholders, at
prime, interest due quarterly,
principal due in annual
installments totaling $1,000,000 to
$1,500,000, maturing January 3,
2000, and collateralized by
property, plant, equipment,
receivables and inventory and
secured by shares of the Company
held by six shareholders........... $ 12,571 $ 9,000
Industrial development bond, interest
variable, approximating 80 percent
of prime, interest due monthly,
$50,000 principal due annually;
collateralized by property, plant
and equipment and a standby letter
of credit from a bank in the amount
of $695,000........................ 700 650
--------- ---------
13,271 9,650
Less -- Current portion.............. (1,050) (1,050)
--------- ---------
Total long-term debt............ $ 12,221 $ 8,600
========= =========
The aggregate principal maturities for each of the next five fiscal years
are as follows (in thousands):
Fiscal year ending --
1997............................ $ 1,050
1998............................ 1,550
1999............................ 1,550
2000............................ 5,050
2001............................ 50
Thereafter...................... 400
---------
$ 9,650
=========
6. INCOME TAXES:
State income taxes are as follows:
JULY 31, JULY 30, JULY 28,
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
State --
Current......................... $ 95 $ 38 $ 78
Deferred........................ 4 45 (2)
--- --- ---
$ 99 $ 83 $ 76
=== === ===
For the years ended 1994, 1995 and 1996, actual income tax expense is
primarily computed by applying the blended state tax rate of 2.4 percent to
income before income taxes.
F-28
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences for the years ended
1995 and 1996 result principally from the following:
JULY 30, JULY 28,
1995 1996
-------- --------
(IN THOUSANDS)
Deferred income tax liabilities --
Depreciation and amortization...... $ 3 $ 9
Fiscal year-end deferral........... 48 44
Deferred income tax assets --
Inventory.......................... (3) (3)
Other assets....................... (4) (7)
--- ---
Net current deferred income
tax liabilities........... $ 44 $ 43
=== ===
7. RELATED-PARTY TRANSACTIONS:
The Company is related to Sunbelt Forest Products Corporation ("Sunbelt")
and Ridge Resources, Inc., through certain common ownership, officers and
directors.
The following amounts are included in the statements of income:
YEARS ENDED
----------------------------------
JULY 31, JULY 30, JULY 28,
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
Sales to Sunbelt........................ $ 977 $ 484 $ 666
Purchases from Sunbelt.................. -- -- 11
Accounting and managerial services
revenue from Sunbelt.................. 135 75 55
Purchases from Ridge Resources, Inc..... -- 199 421
Interest income from Sunbelt............ 193 -- --
Interest expense to Ridge Resources,
Inc................................... -- 909 982
The following amounts are included in the balance sheets:
JULY 30, JULY 28,
1995 1996
-------- --------
(IN THOUSANDS)
Accounts receivable from Sunbelt........ $ 7 $ 6
Due from Ridge Resources, Inc........... 5 1
Note payable to Ridge Resources, Inc.... 12,571 9,000
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company has a workers' compensation and general liability policy,
subject to a $250,000 deductible. As such, any claim within the first $250,000
per incident would be the financial obligation of the Company. In addition, the
policy limits coverage to $850,000 per year. The Company maintains a
F-29
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
certificate of deposit as security in the amount of approximately $554,000,
which is included in other assets at July 28, 1996.
The accrued insurance claims payable represents management's estimate of
the Company's potential claims costs in satisfying the deductible provisions of
the insurance policy for claims occurring through July 28, 1996. The accrual is
based upon known facts and historical trends, and management believes such
accrual to be adequate.
The Company self-insures its employees' health insurance program. A trust
was established in July 1983 to administer this program. Effective August 1,
1994, the Company became the new trust sponsor. By agreement between the Company
and the trust, the Company must contribute sufficient funds to the trust to
ensure that the trust has sufficient monies to pay claims as provided in the
employee health insurance plan document. The Company contributed $205,000,
$185,000 and $145,000 in fiscal years 1994, 1995 and 1996, respectively. Health
insurance expense was $198,000, $192,000 and $145,000 in fiscal years 1994, 1995
and 1996, respectively.
The trust obtained tax-exempt status from the Internal Revenue Service
during 1985. Its trustees are employees of the Company.
9. PROFIT-SHARING PLAN:
The Company maintains a qualified profit-sharing plan. Company
contributions are voluntary and at the discretion of the board of directors.
Annual contributions, in order to be deductible for income tax purposes by the
Company, cannot exceed 15 percent of salaries and wages.
Effective January 1, 1995, the Company amended the Plan to qualify under
Internal Revenue Code Section 401(k). In accordance with the Plan, the Company
will match 50 percent of employee 401(k) contributions, not to exceed 4 percent
of the employee's qualified compensation related to the Plan.
Total profit-sharing and 401(k) expense was $400,000 for fiscal years 1994,
1995 and 1996.
10. DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments",
and SFAS 119, "Disclosure 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.
11. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
The Company and its shareholders have entered into a definitive agreement
with PalEx providing for the acquisition of the Company by PalEx.
The Company intends to declare a contribution to its defined contribution
profit-sharing plan in an amount currently estimated to be approximately
$619,000. In connection with the acquisition, PalEx has agreed to satisfy the
Company's profit-sharing obligation through the issuance of approximately 82,500
shares of PalEx common stock. In addition, prior to the closing of the
acquisition, the Company will make distributions in respect of the Company's
estimated S Corporation Accumulated Adjustment Account at the time of closing in
the amount of approximately $2.5 million. The Company will also distribute non-
operating assets with a net book value of approximately $175,000 to its
shareholders prior to the merger with PalEx.
The Company is also liable to an investment banking firm for an amount up
to $468,000 for financial advisory services upon the completion of the
acquisition of the Company by PalEx.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PalEx, Inc.:
We have audited the accompanying balance sheet of PalEx, Inc. (a Delaware
corporation), as of November 30, 1996, and the related statement of income and
statement of changes in stockholders' equity for the period from inception
(January 8, 1996) to November 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PalEx, Inc., as of November
30, 1996, and the results of its operations for the period from inception
(January 8, 1996) to November 30, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 3, 1997
F-31
<PAGE>
PALEX, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30,
1996
------------
ASSETS
CASH AND CASH EQUIVALENTS............... $ 1
OTHER ASSETS............................ 300
------------
Total assets.................. $ 301
============
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value,
5,000,000 shares authorized, no
shares issued..................... $--
Common stock, $.01 par value,
30,000,000 shares authorized and
1,071,389 shares issued........... 11
Additional paid-in capital......... 599
Retained deficit................... (309)
------------
Total stockholders' equity.... $ 301
============
The accompanying notes are an integral part of this financial statement.
F-32
<PAGE>
PALEX, INC.
STATEMENT OF INCOME
FROM INCEPTION (JANUARY 8, 1996) TO NOVEMBER 30, 1996
(IN THOUSANDS)
REVENUES................................ $ --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 300,000
------------
LOSS BEFORE INCOME TAXES................ (300,000)
INCOME TAX BENEFIT...................... --
------------
NET LOSS................................ $ (300,000)
============
The accompanying notes are an integral part of this financial statement.
F-33
<PAGE>
PALEX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 8, 1996)
THROUGH NOVEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Initial Capitalization.................. 1,021 $ 10 $ -- $ (9) $ 1
Offering Costs incurred by
Stockholder........................... -- -- 300 -- 300
Issuance of Management Shares........... 50 1 299 -- 300
Net Loss................................ -- -- -- (300) (300)
------ ------ ---------- -------- ------
BALANCE, NOVEMBER 30, 1997.............. 1,071 $ 11 $ 599 $ (309) $ 301
====== ====== ========== ======== ======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-34
<PAGE>
PALEX, INC.
NOTES TO 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. PalEx
intends to acquire three U.S. pallet businesses (the "Acquisitions"), complete
an initial public offering (the "Offering") of its common stock and,
subsequent to the Offering, continue to acquire, through merger or purchase,
similar companies to expand its national operations.
PalEx has not conducted any operations, and all activities to date have
related to the acquisitions and the initial public offering ("IPO"). Cash of
$1,000 was generated from the initial capitalization of the Company (see Note
2). All other expenditures to date have been funded by the majority stockholder,
Main Street Capital Partners, L.P. ("Main Street"), on behalf of the Company.
Accordingly, changes in stockholder's equity and cash flows would not provide
meaningful information and have been omitted. There is no assurance that the
pending acquisitions discussed below will be completed and that PalEx will be
able to generate future operating revenues. Main Street has committed to fund
the first $1.25 million of offering costs. PalEx will treat these costs as
deferred costs and contributed capital as incurred by Main Street. As of
November 30, 1996, costs of approximately $300,000 had been incurred by Main
Street in connection with the IPO. PalEx is dependent upon the IPO to execute
the pending acquisitions and future operations.
2. STOCKHOLDER'S EQUITY:
In connection with the organization and initial capitalization of PalEx,
the Company issued 1,000 shares of common stock for $1,000 (see Note 3).
In November 1996, the Company issued 50,000 shares (after reflecting the
stock dividend discussed in Note 3) of its common stock to the Chief Executive
Officer at an aggregate price of $500. The Company recorded a nonrecurring,
noncash charge of approximately $300,000 representing the difference between the
amounts paid for the shares and the estimated fair value of the shares on the
date of the sale as if the Acquisitions were completed.
3. SUBSEQUENT EVENTS:
In December 1996, PalEx declared a stock dividend of approximately 1,021
shares of common stock for each share of common stock then outstanding. In
addition, PalEx increased the number of authorized shares of common stock to
30,000,000 shares and authorized 5,000,000 shares of $.01 par value preferred
stock. The effects of the common stock dividend and the increase in the number
of common shares authorized have been retroactively reflected on the balance
sheet and in the accompanying notes.
PalEx and separate wholly owned subsidiaries have signed definitive
agreements to acquire by merger three companies ("Founding Companies") to be
effective with the IPO. The companies to be acquired are Fraser Industries, Inc.
("Fraser"), Ridge Pallets, Inc. ("Ridge"), and Interstate Pallets, Inc.
("Interstate"). Consideration that will be paid by PalEx to acquire the
Founding Companies is approximately $45.6 million (unaudited) (based upon an
offering price of $10 per share (unaudited), net of a 25 percent discount)
consisting of a combination of cash and common stock.
On December 24, 1996, PalEx filed a registration statement on Form S-1 for
the sale of its common stock. See "Risk Factors" included elsewhere herein.
In connection with the Acquisitions, PalEx will assume certain obligations
of the Founding Companies. Additionally, in connection with the Acquisitions,
PalEx has agreed to satisfy the Founding Companies profit sharing obligations
totalling approximately $1.1 million through the issuance of approximately
142,500 shares of PalEx common stock.
F-35
<PAGE>
PALEX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has recently received a commitment letter from a bank to
provide a credit facility which would be available upon the closing of the
Offering. According to the proposed terms, the Company would have an unsecured
revolving line of credit of up to $35.0 million, which may be used for general
corporate purposes, including post-Offering acquisitions, capital expenditures
and working capital. It is anticipated that such facility will require the
Company to comply with various affirmative and negative covenants including, but
not limited to (i) maintenance of certain financial ratios, (ii) a restriction
on additional indebtedness and (iii) restrictions on liens, guarantees,
advances, dividends and business activities unrelated to its existing
operations. Failure to comply with such covenants and restrictions would
constitute an event of default under the proposed facility. The ability of the
Company to secure the credit facility is subject to completion of negotiations
with the bank as well as the satisfaction of certain conditions, including the
execution of appropriate loan documentation.
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," allows entities to choose between a
new fair value based method of accounting for employee stock options or similar
equity instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
The Company has authorized the issuance of 1,800,000 shares of its common
stock in accordance with its stock option plan. The Company intends to file a
registration statement on Form S-8 under the Securities Act registering the
issuance of shares upon exercise of options granted under the Plan. The Company
expects to grant options to purchase a total of 725,000 shares of common stock
at the initial public offering price upon consummation of the Offering. The
Chief Executive Officer was also granted 200,000 options to purchase PalEx
common stock, 100,000 of which may be purchased at $7.50 per share and the
remaining 100,000 which may be purchased at the IPO price.
F-36
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary...................... 3
Risk Factors............................ 8
The Company............................. 13
Use of Proceeds......................... 14
Dividend Policy......................... 14
Capitalization.......................... 15
Dilution................................ 16
Selected Financial Data................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 19
Business................................ 26
Management.............................. 33
Certain Transactions.................... 36
Principal Stockholders.................. 40
Description of Capital Stock............ 41
Shares Eligible for Future Sale......... 42
Underwriting............................ 44
Legal Matters........................... 45
Experts................................. 45
Additional Information.................. 45
Index to Financial Statements........... F-1
------------------
UNTIL , 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
3,000,000 SHARES
[Logo]
COMMON STOCK
_________________
PROSPECTUS
_________________
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
SEC Registration Fee................. $ 11,500
NASD Filing Fee...................... 4,295
Nasdaq National Market Listing Fee... 46,809
Accounting Fees and Expenses......... 775,000
Legal Fees and Expenses.............. 350,000
Printing Expenses.................... 200,000
Transfer Agent's Fees................ 7,500
Miscellaneous........................ 354,896
------------
Total........................... $ 1,750,000
============
- ------------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated. Main Street has agreed to pay up to $1,250,000 of these
expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of section 145 of the General Corporation Law of the State
of Delaware (the "DGCL") empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising
II-1
<PAGE>
out of his status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
Section 102(b)(7) of the DGCL of the State of Delaware provides that a
certificate of incorporation may contain a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit.
Article Eighth of the Company's Amended and Restated Certificate of
Incorporation states that:
"No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article Eighth
shall not eliminate or limit the liability of a director to the extent provided
by applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of this Article
Eighth shall apply to, or have any effect on, the liability or alleged liability
of any director of the Corporation for or with respect to any acts or omissions
of such director occurring prior to such amendment or repeal. If the DGCL is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended."
In addition, Article VI of the Company's Bylaws further provides that the
Company shall indemnify its officers, directors and employees to the fullest
extent permitted by law.
The Company intends to enter into indemnification agreements with each of
its executive officers and directors which indemnifies such person to the
fullest extent permitted by its Amended and Restated Certificate of
Incorporation, its Bylaws and the DGCL. The Company also intends to obtain
directors and officers liability insurance.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify, under certain
conditions, the Company, its officers and directors, and persons who control the
Company within the meaning of the Securities Act of 1933, as amended, against
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company during the past three years that were not registered under the
Securities Act of 1933. The description presented below gives effect to the
Company's recent reorganization and accompanying 1,021.389 for one stock split
on December 20, 1996.
(a) On January 8, 1996, the Company issued 1,021,389 shares of its
Common Stock for an aggregate price of $1,000 to Main Street Capital
Partners, L.P. in connection with the formation of the Company.
(b) On November 6, 1996, the Company issued 50,000 shares of its
Common Stock to Vance Maultsby, Jr. for an aggregate price of $500 in
connection with his hiring by the Company. In connection with his hiring by
the Company, Mr. Maultsby received options to purchase 100,000 shares of
Common Stock at an exercise price of $7.50 per share and options to
purchase 100,000 shares of Common Stock at an exercise price equal to the
initial public offering price.
(c) See "Certain Transactions" for a discussion of the issuance of
shares of Common Stock and options to purchase shares of Common Stock in
connection with the Acquisitions.
II-2
<PAGE>
These transactions were completed without registration under the Securities
Act of 1933 in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
-------
* 1.1 -- Form of Underwriting Agreement.
* 3.1 -- Amended and Restated Certificate of Incorporation.
3.2 -- Bylaws.
* 4.1 -- Specimen Common Stock Certificate.
* 5.1 -- Opinion of Andrews & Kurth L.L.P. as to
the legality of the securities being
registered.
10.1 -- Agreement and Plan of Reorganization and
Merger dated as of December 20, 1996
between PalEx, Inc. and Ridge Pallets,
Inc.
10.2 -- Agreement and Plan of Reorganization and
Merger dated as of December 20, 1996
between PalEx, Inc. and Fraser
Industries, Inc.
10.3 -- Agreement and Plan or Reorganization and
Merger dated as of December 20, 1996
between PalEx, Inc. and Interstate
Pallet Co., Inc.
10.4 -- Form of Employment and Non-Competition
Agreement (the terms of each agreement
are identical except that each of
Messrs. Holland, Fletcher, Fraser and
Sykes will have an $125,000 annual
salary and Mr. Maultsby will have an
$175,000 annual salary).
* 10.5 -- Form of Officer and Director Indemnification Agreement.
* 10.6 -- PalEx, Inc. 1996 Stock Option Plan.
* 23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
* 23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of A. E. Holland, Jr. pursuant to Rule 438.
23.4 -- Consent of Troy L. Fraser pursuant to Rule 438.
23.5 -- Consent of Stephen C. Sykes pursuant to Rule 438.
23.6 -- Consent of Tucker S. Bridwell pursuant to Rule 438.
23.7 -- Consent of John E. Drury pursuant to Rule 438.
24.1 -- Powers of Attorney (included in signature page).
27 -- Financial Data Schedule
- ------------
* Filed herewith.
All other exhibits have been previously filed.
ITEM 17. UNDERTAKINGS
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 Act, 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, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
The undersigned registrant hereby undertakes:
(1) That 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) That 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
that time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON FEBRUARY 20, 1997.
PALEX, INC.
By: /s/ VANCE K. MAULTSBY, JR.
VANCE K. MAULTSBY, JR.,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ VANCE K. MAULTSBY, JR. President and Chief Executive February 20, 1997
VANCE K. MAULTSBY, JR. Officer (Principal Executive
Officer)
CASEY A. FLETCHER* Chief Accounting Officer February 20, 1997
CASEY A. FLETCHER (Principal Financial and
Accounting Officer)
SAM W. HUMPHREYS* Director February 20, 1997
SAM W. HUMPHREYS
*By /s/ VANCE K. MAULTSBY, JR.
VANCE K. MAULTSBY, JR.,
ATTORNEY-IN-FACT
II-5
EXHIBIT 1.1
3,000,000 Shares
PalEx, Inc.
Common Stock
($0.01 Par Value)
UNDERWRITING AGREEMENT
_______________, 1997
Alex. Brown & Sons Incorporated
Montgomery Securities
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
PalEx, Inc., a Delaware corporation (the "COMPANY"), proposes to sell to
the several underwriters (the "UNDERWRITERS") named in Schedule I hereto for
whom you are acting as representatives (the "REPRESENTATIVES") an aggregate of
3,000,000 shares of the Company's Common Stock, $0.01 par value (the "FIRM
SHARES"). The respective amounts of the Firm Shares to be so purchased by the
several Underwriters are set forth opposite their names in Schedule I hereto.
The Company also proposes to sell at the Underwriters' option an aggregate of up
to 450,000 additional shares of the Company's Common Stock (the "OPTION SHARES")
as set forth below.
As the Representatives, you have advised the Company that (a) you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) the several Underwriters are willing, acting severally and not jointly,
to purchase the numbers of Firm Shares set forth opposite their respective names
in Schedule I, plus their pro rata portion of the Option Shares if you elect to
exercise the over-allotment option in whole or in part for the accounts of the
several Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "SHARES."
Simultaneously with closing of the purchase of the Firm Shares by the
Underwriters, each of the Founding Companies (as hereinafter defined) will be
merged with a wholly-owned
<PAGE>
subsidiary of the Company (collectively, the "FOUNDING COMPANY MERGERS"), the
consideration for which will be a combination of cash and shares of the
Company's Common Stock as described in the Registration Statement (as
hereinafter defined).
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form S-1 (File No. 333-______) with
respect to the Shares has been carefully prepared by the Company and
conforms with the requirements of the Securities Act of 1933, as amended
(the "ACT"), and the Rules and Regulations (the "RULES AND REGULATIONS")
of the Securities and Exchange Commission (the "COMMISSION") thereunder
and has been filed with the Commission. Copies of such registration
statement, including any amendments thereto, the preliminary prospectuses
(meeting the requirements of the Rules and Regulations) contained therein
and the exhibits, financial statements and schedules, as finally amended
and revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462 (b) of the Act, herein referred to as the
"REGISTRATION STATEMENT," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as
of the date of this Agreement. "PROSPECTUS" means (a) the form of
prospectus first filed with the Commission pursuant to Rule 424(b) or (b)
the last preliminary prospectus included in the Registration Statement
filed prior to the time it becomes effective or filed pursuant to Rule
424(a) under the Act that is delivered by the Company to the Underwriters
for delivery to purchasers of the Shares, together with the term sheet or
abbreviated term sheet, if any, filed with the Commission pursuant to Rule
424(b)(7) under the Act. Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein
referred to as a "PRELIMINARY PROSPECTUS."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. Each of Ridge
Pallets, Inc., Fraser Industries, Inc. and Interstate Pallet Co.
(collectively, the "FOUNDING COMPANIES") has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement. As of the date hereof, the Company has no
subsidiaries except those listed on
01\26\97\36074\014\10UNDAGR.003 -2-
<PAGE>
Exhibit 21 to the Registration Statement. The Company and each of the
Founding Companies are duly qualified to transact business in all
jurisdictions in which the conduct of their respective businesses requires
such qualification, except where the failure to so qualify would not have
a material adverse effect upon the condition (financial or otherwise)
business, management, properties, assets, rights, operations, or prospects
of the Company. The outstanding shares of capital stock of each of the
Founding Companies have been duly authorized and validly issued, are fully
paid and non-assessable. As of the Closing Date (as hereinafter defined),
after giving effect to the Founding Company Mergers, all of the
outstanding shares of capital stock of each of the Founding Companies will
be owned 100% by the Company free and clear of all liens, encumbrances and
equities and claims; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in any of
the Founding Companies are outstanding.
(c) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
the Shares to be issued and sold by the Company have been duly authorized
and when issued and paid for as contemplated herein will be validly
issued, fully paid and non-assessable; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue and sale
thereof. Neither the filing of the Registration Statement nor the offering
or sale of the Shares as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock. Upon
completion of the Founding Company Mergers in the manner described in the
Registration Statement, the shares of Common Stock of the Company to be
issued in such mergers will be duly authorized, validly issued and fully
paid and non-assessable.
(d) The information set forth under the caption "CAPITALIZATION" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the requirements of the Delaware
General Corporation Law ("DGCL").
(e) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares
nor, to the best of the Company's knowledge, instituted proceedings for
that purpose. The Registration Statement contains, and the Prospectus and
any amendments or supplements thereto will contain, all statements which
are required to be stated therein by, and will conform, to the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain,
any untrue statement of a material fact and do not omit, and will not
omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus
and any amendments and supplements thereto do not contain, and will not
contain, any untrue statement of material fact; and do not
01\26\97\36074\014\10UNDAGR.003 -3-
<PAGE>
omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on
behalf of any Underwriter through the Representatives, specifically for
use in the preparation thereof.
(f) The financial statements of the Company and the separate
financial statements of the Founding Companies, in each case, together
with related notes and schedules, as set forth in the Registration
Statement, present fairly the financial position and the results of
operations and cash flows of the Company and each of the Founding
Companies, respectively, at the indicated dates and for the indicated
periods. Such financial statements and related schedules have been
prepared in accordance with generally accepted principles of accounting,
consistently applied throughout the periods involved, except as disclosed
herein, and all adjustments necessary for a fair presentation of results
for such periods have been made. The summary financial and statistical
data included in the Registration Statement present fairly the information
shown therein and such data have been compiled on a basis consistent with
the financial statements presented therein and the books and records of
the Company and the Founding Companies, as applicable. The pro forma
combined financial statements of the Company and the Founding Companies
(including supplemental pro forma information shown therein) together with
the related notes as set forth in the Registration Statement and the
Prospectus, present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, have been properly compiled on
the pro forma bases described therein and, in the opinion of the Company,
the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein.
(g) Arthur Andersen LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and
the Rules and Regulations.
(h) Other than as set forth in the Prospectus, there is no action,
suit, claim or proceeding pending or, to the knowledge of the Company,
threatened against the Company or any of the Founding Companies before any
court or administrative agency or otherwise which if determined adversely
to the Company or such Founding Company might result in any material
adverse change in the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company and of the Founding Companies or to prevent the consummation of
either the transactions contemplated hereby or the Founding Company
Mergers, in each case except as set forth in the Registration Statement.
01\26\97\36074\014\10UNDAGR.003 -4-
<PAGE>
(i) Each of the Company and the Founding Companies has good and
marketable title to all of the properties and assets reflected in the
financial statements (or as described in the Registration Statement)
hereinabove described, subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in such financial
statements (or as described in the Registration Statement) or which are
not material in amount. Each of the Company and the Founding Companies
occupies their leased properties under valid and binding leases conforming
in all material respects to the description thereof set forth in the
Registration Statement.
(j) Each of the Company and the Founding Companies have filed all
Federal, State, local and foreign income tax returns which have been
required to be filed and have paid all taxes indicated by said returns and
all assessments received by it or any of them to the extent that such
taxes have become due, except for any such returns which the Company or
any Founding Company is contesting in good faith. All tax liabilities have
been adequately provided for in the financial statements of the Company
and the Founding Companies, as applicable.
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise), or prospects of the Company and the Founding
Companies taken as a whole, whether or not occurring in the ordinary
course of business, and there has not been any material transaction
entered into or any material transaction that is probable of being entered
into by the Company or the Founding Companies, other than transactions in
the ordinary course of business and changes and transactions described in
the Registration Statement, as it may be amended or supplemented. Neither
the Company nor any of the Founding Companies has any material contingent
obligations, as applicable, not disclosed in the Company's or such
Founding Company's financial statements, as applicable, the Registration
Statement or the Prospectus.
(l) Neither the Company nor any of the Founding Companies is or with
the giving of notice or lapse of time or both, will be, in violation of or
in default under its charter or by-laws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a
party or by which it, or any of its properties, is bound and which
violation or default is of material significance in respect of the
condition (financial or otherwise) of the Company and the Founding
Companies taken as a whole, or the business, management, properties,
assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and the Founding Companies taken as a whole. The
Agreement and each of the Agreements and Plan of Reorganization and Merger
executed in connection with the Founding Company Mergers have been duly
authorized, executed and delivered by each of the parties hereto and
thereto in substantially the form filed as exhibits to the Registration
01\26\97\36074\014\10UNDAGR.003 -5-
<PAGE>
Statement. The execution and delivery of this Agreement and each of the
Agreements and Plan of Reorganization and Merger executed in connection
with the Founding Company Mergers and the consummation of the transactions
herein and therein contemplated and the fulfillment of the terms hereof
and thereof will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Company or any Founding Company is a party, or of the charter or by-laws
of the Company or any of the Founding Companies or any order, rule or
regulation applicable to the Company or any Founding Company of any court
or of any regulatory body or administrative agency or other governmental
body having jurisdiction. No consent, approval, authorization or order of,
or filing with, any court or governmental agency or body is required for
the consummation of the transactions contemplated by this Agreement in
connection with the issuance or sale of the securities by the Company,
except such as have been obtained under the Act and such as may be
required under state securities laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and each of the Agreements and Plan of
Reorganization and Merger and the consummation of the transactions herein
and therein contemplated (except for such additional steps as may be
required by the Commission, the National Association of Securities
Dealers, Inc. (the "NASD") or such additional steps as may be necessary to
qualify the Shares for public offering by the Underwriters under state
securities or Blue Sky laws) has been obtained or made and is in full
force and effect.
(n) Neither the Company nor, to the best of the Company's knowledge,
any of the Founding Companies has infringed any patents, patent rights,
trade names, trademarks or copyrights, which infringement is material to
the business of the Company or such Founding Company. The Company knows of
no material infringement by others of patents, patent rights, trade names,
trademarks or copyrights owned by or licensed to the Company or any of the
Founding Companies.
(o) Neither the Company, nor to the Company's best knowledge, any of
its affiliates or any of the Founding Companies or any of their
affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale
of the Shares.
(p) Neither the Company nor any of the Founding Companies is an
"INVESTMENT COMPANY" within the meaning of such term under the Investment
01\26\97\36074\014\10UNDAGR.003 -6-
<PAGE>
Company Act of 1940, as amended (the "1940 ACT") and the rules and
regulations of the Commission thereunder.
(q) The Company and each of the Founding Companies maintain a system
of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) The Company and each of the Founding Companies carry, or are
covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the value of
their respective properties and as is customary for companies engaged in
similar industries.
(s) The Company and each of the Founding Companies are in compliance
in all material respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no
"REPORTABLE EVENT" (as defined in ERISA) has occurred with respect to any
"PENSION PLAN" (as defined in ERISA) for which the Company or any of the
Founding Companies would have any liability; neither the Company nor any
of the Founding Companies has incurred and does not expect to incur
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "PENSION PLAN" or (ii) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "CODE"); and each "PENSION PLAN"
for which the Company or any of the Founding Companies would have any
liability that is intended to be qualified under Section 401(a) of the
Code is so qualified in all material respects and nothing has occurred,
whether by action or by failure to act, which would cause the loss of such
qualification.
(t) The Company confirms as of the date hereof that it and each of
the Founding Companies are in compliance with all provisions of Section 1
of Laws of Florida, Chapter 92-198, AN ACT RELATING TO DISCLOSURE OF DOING
BUSINESS WITH CUBA, and the Company further agrees that if it or any of
the Founding Companies commences engaging in business with the government
of Cuba or with any person or affiliate located in Cuba after the date the
Registration Statement becomes or has become effective with the Commission
or with the Florida Department of Banking and Finance (the "DEPARTMENT"),
whichever date is later, or if the information reported or incorporated by
reference in the Prospectus, if any, concerning the Company's business
with Cuba or with any person or affiliate located in Cuba changes
01\26\97\36074\014\10UNDAGR.003 -7-
<PAGE>
in any material way, the Company will provide the Department notice of
such business or change, as appropriate, in a form acceptable to the
Department.
(u) No labor dispute with the employees of the Company or any of the
Founding Companies exists or, to the knowledge of the Company, is
threatened other than such disputes which would not individually or in the
aggregate, have a material adverse effect upon the condition (financial or
otherwise) business, management, properties, assets, rights, operations or
prospects of the Company.
[(v) (i) To the best of the Company's knowledge and belief, except
as set forth in the Agreements and Plan of Reorganization and Merger, (A)
the Company and each of the Founding Companies has conducted its
businesses in compliance with applicable Environmental Laws, including,
without limitation, having all permits, licenses and other approvals and
authorizations necessary for the operation of their respective businesses
as presently conducted, (B) none of the properties owned by the Company or
the Founding Companies contain any Hazardous Substance as a result of any
activity of the Company or any of the Founding Companies in amounts
exceeding the levels permitted by applicable Environmental Laws, (C)
neither the Company nor any of the Founding Companies has received any
notices, demand letters or requests for information from any Federal,
state, local or foreign governmental entity or third party indicating that
the Company or any of the Founding Companies may be in violation of, or
liable under, any Environmental Law in connection with the ownership or
operation of its business, (D) there are no civil, criminal or
administrative actions, suits, demands, clams, hearings, investigations or
proceedings pending or threatened, against the Company or any of the
Founding Companies relating to any violation, or alleged violation, of any
Environmental Law, (E) no reports have been filed, or are required to be
filed, by the Company or any of the Founding Companies concerning the
release of any Hazardous Substance or the threatened or actual violation
of any Environmental Law, (F), no Hazardous Substance has been disposed
of, released or transported in violation of any applicable Environmental
Law from any properties owned by the Company or any of the Founding
Companies as a result of any activity of the Company or any of the
Founding Companies during the time such properties were owned, leased or
operated by the Company or any of the Founding Companies, (G) there have
been no environmental investigations, studies, audits, tests, reviews or
other analysis regarding compliance or non-compliance with any applicable
Environmental Law conducted by or which are in the possession of the
Company or any of the Founding Companies relating to the activities of the
Company or any of the Founding Companies which are not described in the
Agreements and Plan or Reorganization and Merger prior to the date hereof,
(H) there are no underground storage tanks on, in or under any properties
owned by the Company or any of the Founding Companies and no underground
storage tanks have been closed or removed from any of such properties
during the time such properties were owned, leased or operated by the
Company or any of the Founding Companies, (I) there is no asbestos or
asbestos containing material present in any of the properties owned by the
Company
01\26\97\36074\014\10UNDAGR.003 -8-
<PAGE>
or any of the Founding Companies, and no asbestos has been removed from
any of such properties during the time such properties were owned, leased
or operated by the Company or any of the Founding Companies, and (J)
neither the Company or any Founding Companies nor any of their respective
properties are subject to any material liabilities or expenditures (fixed
or contingent) relating to any suit, settlement, court order,
administrative order, regulatory requirement, judgment or claim asserted
or arising under any Environmental Law, except for violations of the
foregoing clauses (A) through (K) that, singly or in the aggregate, would
not reasonably be expected to have a material adverse effect on the
condition or (financial or otherwise) business, management, properties,
assets, rights, operations or prospects of the Company and the Founding
Companies taken as a whole.]
(ii) As used herein, "ENVIRONMENTAL LAW" means any Federal, state,
local or foreign law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, legal doctrine, order, judgment,
decree, injunction, requirement or agreement with any governmental entity
relating to (A) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface land, subsurface land,
plant and animal life or any other natural resource) or to human health or
safety or (B) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of Hazardous Substances, in each case as amended and
as in effect on the Closing Date. The term Environmental Law includes,
without limitation, (X) the Federal Comprehensive Environmental Response
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid
Waste Amendments thereto), the Federal Solid Waste Disposal and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide
and Rodenticide Act, the Federal Occupational Safety and Health Act of
1970, each as amended and as in effect on the Closing Date, and (Y) any
common law or equitable doctrine (including, without limitation,
injunctive relief and tort doctrines such as negligence, nuisance,
trespass and strict liability) that may impose liability or obligations
for injuries or damages due to , or threatened as a result of, the
presence of, effects of or exposure to any Hazardous Substance.
(iii) As used herein, "HAZARDOUS SUBSTANCE" means any substance
presently or hereafter listed, defined, designated or classified as
hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under
any Environmental Law. Hazardous Substance includes any substance to which
exposure is regulated by any governmental authority or any Environmental
Law including, without limitation, any toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste,
special waste, industrial substance or petroleum or any derivative or
by-product thereof, radon,
01\26\97\36074\014\10UNDAGR.003 -9-
<PAGE>
radioactive material, asbestos or asbestos containing material, urea,
formaldehyde, foam insulation, lead or polychlorinated biphenyls.
(w) Neither the Company nor any of the Founding Companies has
violated any federal or state law relating to discrimination in the
hiring, promotion or pay of employees nor any applicable federal or state
wages and hours laws, nor any provisions of the Employee Retirement Income
Security Act or the rules and regulations promulgated thereunder, which in
each case might result in any material adverse change in the business,
prospects, financial condition or results of operations of the Company and
the Founding Companies taken as a whole.
(x) The Company and each of the Founding Companies have such
permits, licenses, certificates, franchises and authorizations of
governmental or regulatory authorities ("PERMITS"), including, without
limitation, under any applicable Environmental Laws, as are necessary to
own, lease and operate its respective properties and to conduct their
respective businesses; the Company and each of the Founding Companies has
fulfilled and performed all of its material obligations with respect to
such permits and no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such
permit; and, except as described in the Prospectus, such permits contain
no restrictions that are materially burdensome to the Company or any of
the Founding Companies.
(y) In the ordinary course of their respective businesses, the
Company and each of the Founding Companies conducts a periodic review of
the effect of Environmental Laws on the business, operations and
properties of the Company and the Founding Companies, in the course of
which the Company and each Founding Company identifies and evaluates
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any
potential liabilities to third parties). On the basis of such review, the
Company has reasonably concluded that such associated costs and
liabilities would not, singly or in the aggregate, have a material adverse
effect on the Company and the Founding Companies.
(z) The Company has filed a registration statement pursuant to
Section 12(g) of the Exchange Act, to register the Common Stock, has filed
an application to list the Shares on the NASDAQ NMS, and has received
notification that the listing has been approved, subject to notice of
issuance of the Shares.
(aa) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
related to or entitling any person to purchase or otherwise to acquire any
shares of the capital stock of, or other ownership
01\26\97\36074\014\10UNDAGR.003 -10-
<PAGE>
interest in, the Company or any of the Founding Companies except as
otherwise disclosed in the Registration Statement.
(ab) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-K of the Commission.
(ac) There is (i) no significant unfair labor practice complaint
pending against the Company or any of the Founding Companies or, to the
best knowledge of the Company, threatened against any of them, before the
National Labor Relations Board or any state or local labor relations
board, and no significant grievance or more significant arbitration
proceeding arising out of or under any collective bargaining agreement is
so pending against the Company or any of the Founding Companies or, to the
best knowledge of the Company, threatened against any of them, and (ii) no
significant strike, labor dispute, slowdown or stoppage pending against
the Company or any of the Founding Companies or, to the best knowledge of
the Company, threatened against it or any of the Founding Companies except
for such actions specified in clause (i) or (ii) above, which, singly or
in the aggregate could not reasonably be expected to have a material
adverse effect on the Company and the Founding Companies, taken as a
whole.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $_____ per share,
the number of Firm Shares set forth opposite the name of each Underwriter
in Schedule I hereof, subject to adjustments in accordance with Section 9
hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made
in New York Clearing House funds by wire transfer of immediately available
funds to the order of the Company against delivery of certificates
therefor to the Representatives for the several accounts of the
Underwriters. Such payment and delivery are to be made at the offices of
Alex. Brown & Sons Incorporated, 1 South Street, Baltimore, Maryland, at
10:00 a.m., Baltimore time, on the fourth business day after the date of
this Agreement or at such other time and date not later than five business
days thereafter as you and the Company shall agree upon, such time and
date being herein referred to as the "CLOSING DATE." (As used herein,
"BUSINESS DAY" means a day on which the New York Stock Exchange is open
for trading and on which banks in New York are open for business and are
not permitted by law or executive order to be closed.) The certificates
for the Firm Shares will be delivered in such denominations and in such
registrations as the Representatives request in writing not later than the
01\26\97\36074\014\10UNDAGR.003 -11-
<PAGE>
second full business day prior to the Closing Date, and will be made
available for inspection by the Representatives at least one business day
prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the several Underwriters to
purchase the Option Shares at the price per share as set forth in
paragraph (a) of this Section 2. The option granted hereby may be
exercised in whole or in part by giving written notice (i) at any time
before the Closing Date and (ii) only once thereafter within 30 days after
the date of this Agreement, by you, as Representatives of the several
Underwriters, to the Company setting forth the number of Option Shares as
to which the several Underwriters are exercising the option, the names and
denominations in which the Option Shares are to be registered and the time
and date at which such certificates are to be delivered. The time and date
at which certificates for Option Shares are to be delivered shall be
determined by the Representatives but shall not be earlier than three nor
later than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein
referred to as the "OPTION CLOSING DATE"). If the date of exercise of the
option is three or more days before the Closing Date, the notice of
exercise shall set the Closing Date as the Option Closing Date. The number
of Option Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the
number of Firm Shares being purchased by such Underwriter bears to
3,000,000, adjusted by you in such manner as to avoid fractional shares.
The option with respect to the Option Shares granted hereunder may be
exercised only to cover over-allotments in the sale of the Firm Shares by
the Underwriters. You, as Representatives of the several Underwriters, may
cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company. To the extent, if any, that
the option is exercised, payment for the Option Shares shall be made on
the Option Closing Date in New York Clearing House funds by wire transfer
of immediately available funds to the order of the Company against
delivery of certificates therefor at the offices of Alex. Brown & Sons
Incorporated, 1 South Street, Baltimore, Maryland.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the
public at the initial public offering price set forth in the Prospectus.
The Representatives may from time to time thereafter change the public
offering price and other selling terms. To the extent, if at all, that any
Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives
for the Underwriters in the offering and sale of the Shares in accordance
with a Master
01\26\97\36074\014\10UNDAGR.003 -12-
<PAGE>
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (i) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing
information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and
Regulations, and (ii) not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not
in compliance with the Rules and Regulations.
(b) The Company will advise the Representatives promptly (i) when
the Registration Statement or any post-effective amendment thereto shall
have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or
the use of the Prospectus or of the institution of any proceedings for
that purpose. The Company will use its best efforts to prevent the
issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if
issued.
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated
in writing and will make such applications, file such documents, and
furnish such information as may be reasonably required for that purpose,
provided the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction where it is not now so qualified or required to file such a
consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to
continue such qualifications in effect for so long a period as the
Representatives may reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is
01\26\97\36074\014\10UNDAGR.003 -13-
<PAGE>
required under the Act, as many copies of the Prospectus in final form, or
as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives and
their counsel at or before the Closing Date, three signed copies of the
Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representatives such number of
copies of the Registration Statement (including such number of copies of
the exhibits filed therewith that may reasonably be requested), and of all
amendments thereto, as the Representatives may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "EXCHANGE ACT"),
and the rules and regulations of the Commission thereunder, so as to
permit the completion of the distribution of the Shares as contemplated in
this Agreement and the Prospectus. If during the period in which a
prospectus is required by law to be delivered by an Underwriter or dealer,
any event shall occur as a result of which, in the judgment of the Company
or in the reasonable opinion of the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading, or, if it is
necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not,
in the light of the circumstances when it is so delivered, be misleading,
or so that the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of
the Rules and Regulations and will advise you in writing when such
statement has been so made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies
of all other documents, reports and information furnished by the Company
to its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act
or the Exchange Act. The Company will deliver to the Representatives
annual reports or reports furnished by the Company to its stockholders
with respect to significant subsidiaries, as that term is defined in the
Rules and Regulations, which are not consolidated in the Company's
financial statements.
01\26\97\36074\014\10UNDAGR.003 -14-
<PAGE>
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 180 days
after the date of the Prospectus, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of Alex. Brown
& Sons Incorporated except for grants of employee stock options under the
Company's 1996 Stock Option Plan and shares issued (i) in connection with
acquisitions and (ii) pursuant to the exercise of options granted under
the 1996 Stock Option Plan.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the NASDAQ NMS.
(j) The Company has caused each executive officer, director and
director nominee and stockholder of the Company to furnish to you, on or
prior to the date of this Agreement, a letter or letters, in form and
substance satisfactory to the Underwriters, pursuant to which each such
person shall agree not to offer, sell, sell short or otherwise dispose of
any shares of Common Stock of the Company or other capital stock of the
Company, or any other securities convertible, exchangeable or exercisable
for shares of Common Stock or derivative of shares of Common Stock owned
by such person (or as to which such person has the right to direct
disposition of) or request the registration for the offer or sale of any
of the foregoing for a period of 180 days after the date of the
Prospectus, directly or indirectly, except with the prior written consent
of Alex. Brown & Sons Incorporated ("LOCKUP AGREEMENTS").
(k) The Company will: (i) use its best efforts to satisfy all
conditions to consummation of the Founding Company Mergers as set forth in
the Agreements and Plan of Reorganization and Merger with respect thereto;
(ii) use its best efforts to cause each other party to such Agreements and
Plan of Reorganization and Merger to satisfy all conditions to the
consummation of the Founding Company Mergers; and (iii) promptly notify
the Representatives of the occurrence of any event which may result in the
non-consummation of any of the Founding Company Mergers on the Closing
Date.
(l) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463
under the Act.
(m) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Founding Companies to register as
an investment company under the 1940 Act.
01\26\97\36074\014\10UNDAGR.003 -15-
<PAGE>
(n) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for
the Common Stock.
(o) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any securities of the Company.
(p) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company
prior to the Closing Date or any Option Closing Date, as the case may be,
and to satisfy all conditions precedent to the delivery of the Shares.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement and in
connection with the Founding Company Mergers, including, without limiting
the generality of the foregoing, the following: accounting fees of the
Company; the fees and disbursements of counsel for the Company; the cost
of printing and delivering to, or as requested by, the Underwriters copies
of the Registration Statement, Preliminary Prospectuses, the Prospectus,
this Agreement, the Underwriters' Invitation Letter; the filing fees of
the Commission; the filing fees and expenses (including legal fees and
disbursements) incident to securing any required review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the
sale of the Shares; the Listing Fee of the NASDAQ NMS; and the expenses,
including the fees and disbursements of counsel for the Underwriters,
incurred in connection with the qualification of the Shares under State
securities or Blue Sky laws if any qualification is required. The Company
shall not, however, be required to pay for any of the Underwriters
expenses (other than those related to qualification under NASD regulation
and State securities or Blue Sky laws) except that, if this Agreement
shall not be consummated because the conditions in Section 6 hereof are
not satisfied, or because this Agreement is terminated by the
Representatives pursuant to Section 11 hereof, or by reason of any
failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with
any of the terms hereof on its part to be performed, unless such failure
to satisfy said condition or to comply with said terms be due to the
default or omission of any Underwriter, then the Company shall reimburse
the several Underwriters for reasonable out-of-pocket expenses, including
fees and disbursements of counsel, reasonably incurred in connection with
investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; but the Company
shall not in any event be liable to any of the several Underwriters for
damages on account of loss of anticipated profits from the sale by them of
the Shares.
01\26\97\36074\014\10UNDAGR.003 -16-
<PAGE>
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the
Option Closing Date, as the case may be, of the representations and
warranties of the Company contained herein, and to the performance by the
Company of its covenants and obligations hereunder and to the following
additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to
the knowledge of the Company, shall be contemplated by the Commission and
no injunction, restraining order, or order of any nature by a Federal or
state court of competent jurisdiction shall have been issued as of the
Closing Date, or the Option Closing Date, as the case may be, which would
prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Andrews &
Kurth L.L.P., counsel for the Company, dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters
(and stating that it may be relied upon by counsel to the Underwriters) to
the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement; each of the Company's subsidiaries has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation,
with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement;
the Company and each of the subsidiaries are duly qualified to
transact business in all jurisdictions in which the conduct of their
business requires such qualification, or in which the failure to
qualify would have a materially adverse effect upon the business of
the Company and the subsidiaries taken as a whole; the outstanding
shares of capital stock of each of the subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable and
are owned 100% by the Company; to the best of
01\26\97\36074\014\10UNDAGR.003 -17-
<PAGE>
such counsel's knowledge, after due inquiry, the outstanding shares
of capital stock of each of the Company's subsidiaries is owned free
and clear of all liens, encumbrances and equities and claims, and no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
any shares of capital stock of or ownership interests in the
Company's subsidiaries are outstanding; and upon completion of the
Founding Company Mergers, the outstanding shares of capital stock of
each of the Founding Companies will be owned 100% by the Company
and, to the best of such counsel's knowledge, after due inquiry,
upon completion of the Founding Company Mergers, the outstanding
shares of capital stock of each of the Founding Companies will be
owned by the Company free and clear of all liens, encumbrances and
equities and claims, and no options, warrants or other rights to
convert any obligations into any shares of capital stock of
ownership interests in any of the Founding Companies are
outstanding.
(ii) The Company has authorized and outstanding capital stock
as set forth under the caption "CAPITALIZATION" in the Prospectus;
the authorized shares of the Company's Preferred Stock and Common
Stock have been duly authorized; the outstanding shares of the
Company's Common Stock have been duly authorized and validly issued
and are fully paid and non-assessable; all of the Shares conform to
the description thereof contained in the Prospectus; the
certificates for the Shares, assuming they are in the form filed
with the Commission, are in due and proper form; the Shares to be
sold by the Company pursuant to this Agreement and the shares of
Common Stock of the Company to be issued in connection with the
Founding Company Mergers have been duly authorized and will be
validly issued, fully paid and non-assessable when issued and paid
for as contemplated by this Agreement, or upon consummation of the
Founding Company Mergers, as the case may be; and no preemptive
rights of stockholders exist with respect to any of the Shares or
the shares of Common Stock to be issued in the Founding Company
Mergers.
(iii) Except as described in or contemplated by the
Prospectus, to the best of the knowledge of such counsel, after due
inquiry, there are no outstanding securities of the Company
convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of capital stock of the Company and
there are no outstanding or authorized options, warrants or rights
of any character obligating the Company to issue any shares of its
capital stock or any securities convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of such
stock; and except as described in the
01\26\97\36074\014\10UNDAGR.003 -18-
<PAGE>
Prospectus, to the best knowledge of such counsel, after due
inquiry, no holder of any securities of the Company or any other
person has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale
of, any of the Shares or the right to have any shares of Common
Stock or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of
the Registration Statement, to require registration under the Act of
any shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending
or threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material
respects with the requirements of the Act and the Rules and
Regulations (except that such counsel need express no opinion as to
the financial statements and related schedules therein).
(vi) The statements under the captions "ManagementEmployment
Agreements," "- 1996 Stock Option Plan," "Certain Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future Sale"
in the Prospectus, insofar as such statements constitute a summary
of documents referred to therein or matters of law, are accurate
summaries thereof and fairly present in all material respects the
information called for with respect to such documents and matters.
(vii) This Agreement and each of the Agreements and Plan of
Reorganization and Merger with respect to the Founding Company
Mergers (which have been filed with the Commission as exhibits to
the Registration Statement) have been duly authorized, executed and
delivered by the Company and constitute the legal, valid and binding
obligations of the Company, except as such obligations may be
subject to or limited by bankruptcy, insolvency and general
principles of equity; the Certificate or Articles of Merger referred
to in such Agreements and the Plan of Reorganization and Merger,
assuming the due filing thereof with the appropriate regulatory
authorities, will cause the statutory merger of the respective
Company's subsidiaries with the Founding Companies that are parties
thereto.
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<PAGE>
(viii) The Company is not in violation of its charter or
by-laws and, to the best of such counsel's knowledge, after due
inquiry, the Company is not in default in the performance of any
obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other
agreement, indenture or instrument material to the conduct of the
business of the Company to which the Company is a party or by which
the Company or its property is bound.
(ix) To the best of such counsel's knowledge, after due
inquiry, except as otherwise set forth in the Prospectus all leases
to which the Company is a party are valid and binding and no default
has occurred or is continuing thereunder, which might result in any
material adverse change in the business, prospects, financial
condition or results of operations of the Company, and to the best
of such counsel's knowledge, after due inquiry, the Company enjoys
peaceful and undisturbed possession under all such leases to which
it is a party as lessee with such exceptions as do not materially
interfere with the use made by the Company.
(x) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are
not so filed or described as required.
(xi) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Founding Companies except as set forth in the Prospectus.
(xii) The execution and delivery of this Agreement and each of
the Agreements and Plan of Reorganization and Merger executed and
delivered in connection with the Founding Company Mergers and the
consummation of the transactions herein and therein contemplated do
not and will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any statute,
any rule, regulation or order of any governmental agency or body or
any court having jurisdiction over the Company or any of its
properties, known to such counsel, the charter or by-laws of the
Company, or any agreement or instrument known to such counsel to
which the Company is a party or by which the Company may be bound or
to which any of the properties of the Company is subject.
(xiii) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other
01\26\97\36074\014\10UNDAGR.003 -20-
<PAGE>
governmental body is necessary in connection with the execution and
delivery of this Agreement and each of the Agreements and Plan of
Reorganization and Merger and the consummation of the transactions
herein and therein contemplated (other than as may be required by
the NASD or as required by State securities and Blue Sky laws as to
which such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xiv) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the
Prospectus, an "INVESTMENT COMPANY" or an entity "CONTROLLED BY AN
INVESTMENT COMPANY", as such terms are defined under the 1940 Act.
(xv) All offer and sales of the Company's capital stock prior
to the date hereof were at all relevant times and the capital stock
to be issued by the Company in the Founding Company Mergers will be,
exempt from the registration requirements of the Act and were or
will be, as the case may be, duly registered or the subject of an
available exemption from the registration requirements of the
applicable State securities or blue sky laws.
In rendering such opinion Andrews & Kurth L.L.P. may rely as to
matters governed by the laws of states other than Delaware and Texas or
Federal laws on local counsel in such jurisdictions, provided that in each
case Andrews & Kurth L.L.P. shall state that they believe that they and
the Underwriters are justified in relying on such other counsel. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement,
at the time it became effective under the Act (but after giving effect to
any modifications incorporated therein pursuant to Rule 430A under the
Act) and as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading
(except that such counsel need express no view as to financial statements,
schedules and statistical information therein). With respect to such
statement, Andrews & Kurth L.L.P. may state that their belief is based
upon the procedures set forth therein, but is without independent check
and verification.
01\26\97\36074\014\10UNDAGR.003 -21-
<PAGE>
(c) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinions of
____________________, counsel for the Fraser, ___________________, counsel
for Ridge and ____________________, counsel for Interstate with respect to
each of their respective clients, each dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters
(and stating that it may be relied upon by counsel to the Underwriters) to
the effect that:
(i) The Founding Company has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement; each of the Founding
Company's subsidiaries has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Founding Company and
each of the subsidiaries are duly qualified to transact business in
all jurisdictions in which the conduct of their business requires
such qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Founding Company
and the subsidiaries taken as a whole; the outstanding shares of
capital stock of each of the subsidiaries have been duly authorized
and validly issued, are fully paid and non-assessable and are owned
100% by the Founding Company; and, to the best of such counsel's
knowledge, after due inquiry, the outstanding shares of capital
stock of each of the Founding Company's subsidiaries is owned free
and clear of all liens, encumbrances and equities and claims, and no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
any shares of capital stock of or ownership interests in the
Founding Company's subsidiaries are outstanding.
(ii) To the best of the knowledge of such counsel, after due
inquiry, there are no outstanding securities of the Founding Company
convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of capital stock of the Founding Company
and there are no outstanding or authorized options, warrants or
rights of any character obligating the Founding Company to issue or
sell any shares of its capital stock or any securities convertible
or exchangeable into or evidencing the right to purchase or
subscribe for any shares of such stock.
01\26\97\36074\014\10UNDAGR.003 -22-
<PAGE>
(iii) The Agreement and Plan of Reorganization and Merger with
respect to the Founding Company Mergers has been duly authorized,
executed and delivered by the Founding Company and constitutes the
legal, valid and binding obligations of the Founding Company, except
as such obligations may be subject to or limited by bankruptcy,
insolvency and general principles of equity; the Certificate or
Articles of Merger referred to in such Agreement and the Plan of
Reorganization and Merger, assuming the due filing thereof with the
appropriate regulatory authorities will cause the statutory merger
of the Company's subsidiary with the Founding Company.
(iv) The Founding Company is not in violation of its charter
or by-laws and, to the best of such counsel's knowledge, after due
inquiry, the Founding Company is not in default in the performance
of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any
other agreement, indenture or instrument material to the conduct of
the business of the Founding Company, to which the Founding Company
is a party or by which the Founding Company or its property is
bound.
(v) To the best of such counsel's knowledge, after due
inquiry, except as otherwise set forth in the Prospectus all leases
to which the Founding Company is a party are valid and binding and
no default has occurred or is continuing thereunder, which might
result in any material adverse change in the business, prospects,
financial condition or results of operations of the Founding
Company, and to the best of such counsel's knowledge, after due
inquiry, the Founding Company enjoys peaceful and undisturbed
possession under all such leases to which it is a party as lessee
with such exceptions as do not materially interfere with the use
made by the Founding Company.
(vi) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Founding Company
except as set forth in the Prospectus.
(vii) The execution and delivery of the Agreement and Plan of
Reorganization and Merger executed and delivered in connection with
the Founding Company Merger and the consummation of the transactions
therein contemplated do not and will not conflict with or result in
a breach of any of the terms or provisions of, or constitute a
default under, any statute, any rule, regulation or order of any
governmental agency or body or any court having jurisdiction over
the Company or any of its properties, known to such counsel, the
charter or by-laws of the Founding Company, or any agreement or
instrument
01\26\97\36074\014\10UNDAGR.003 -23-
<PAGE>
known to such counsel to which the Founding Company is a party or by
which the Founding Company may be bound or to which any of the
properties of the Founding Company is subject.
(viii) The Agreement and Plan of Organization and Merger has
been duly authorized, executed and delivered by the Founding
Company.
(ix) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the
execution and delivery of the Agreement and Plan of Reorganization
and Merger and the consummation of the transactions therein
contemplated, except such as have been obtained or made, specifying
the same.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention
of such counsel which leads them to believe that (i) the Registration
Statement, at the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant
to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to
make the statements, in the light of the circumstances under which they
are made, not misleading (except that such counsel need express no view as
to financial statements, schedules and statistical information therein).
With respect to such statement, such counsel may state that their belief
is based upon the procedures set forth therein, but is without independent
check and verification.
(d) The Representatives shall have received from McDermott, Will &
Emery, counsel for the Underwriters, an opinion dated the Closing Date or
the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iv) and (xii) of Paragraph (b) of this
Section 6, and that the Company is a validly existing corporation under
the laws of the State of Delaware. In rendering such opinion McDermott,
Will & Emery may rely as to all matters governed other than by the laws of
the State of Delaware or Federal laws on the opinion of counsel referred
to in Paragraph (b) of this Section 6. In addition to the matters set
forth above, such opinion shall also include a statement to the effect
that nothing has come to the attention of such counsel which leads them to
believe that (i) the Registration Statement, or any amendment thereto, as
of the time it became effective under the Act (but after giving effect to
any modifications incorporated therein pursuant to Rule
01\26\97\36074\014\10UNDAGR.003 -24-
<PAGE>
430A under the Act) as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant
to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact, necessary in order to
make the statements, in the light of the circumstances under which they
are made, not misleading (except that such counsel need express no view as
to financial statements, schedules and statistical information therein).
With respect to such statement, McDermott, Will & Emery may state that
their belief is based upon the procedures set forth therein, but is
without independent check and verification.
(e) The Representatives shall have received, on the date hereof, the
Closing Date and the Option Closing Date, as the case may be, letters
dated the date hereof, the Closing Date or the Option Closing Date, as the
case may be, in form and substance satisfactory to the Representatives, of
Arthur Andersen LLP confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating that in their opinion the
financial statements and schedules of the Company and the Founding
Companies examined by them and included in the Registration Statement
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations;
and containing such other statements and information as is ordinarily
included in accountants' "COMFORT LETTERS" to Underwriters with respect to
the financial statements and certain financial and statistical information
contained in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates
of the Chief Executive Officer and the Chief Accounting Officer of the
Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the
Registrations Statement has been issued, and, to his knowledge, no
proceedings for such purpose have been taken or are contemplated by
the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
01\26\97\36074\014\10UNDAGR.003 -25-
<PAGE>
(iv) He has carefully examined the Registration Statement and
the Prospectus and as of the effective date of the Registration
Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and
Prospectus did not omit to state a material fact required to be
stated therein or necessary in order to make the statements therein
not misleading, and since the effective date of the Registration
Statement, no event has occurred which should have been set forth in
a supplement to or an amendment of the Prospectus which has not been
so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not
been any material adverse change or any development involving a
prospective material adverse change in or affecting the condition
(financial or otherwise) of the Company or any of the Founding
Companies taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company or any of the Founding
Companies taken as a whole, whether or not arising in the ordinary
course of business.
(g) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters
as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been approved
for designation upon notice of issuance on the NASDAQ NMS.
(i) The Lockup Agreements described in Section 4(j) are in full
force and effect.
(j) Each of the Founding Company Mergers shall have been completed
upon the terms set forth in the Prospectus simultaneously with the closing
of the purchase of the Firm Shares by the Underwriters.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in
all material respects satisfactory to the Representatives and to
McDermott, Will & Emery, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled and such failure is not attributable to any action or omission
of the Underwriters, the obligations of the Underwriters hereunder may be
terminated by the Representatives by notifying
01\26\97\36074\014\10UNDAGR.003 -26-
<PAGE>
the Company of such termination in writing or by telegram at or prior to
the Closing Date or the Option Closing Date, as the case may be.
In such event, the Company and the Underwriters shall not be under
any obligation to each other (except to the extent provided in Sections 5
and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion of
the Shares required to be delivered as and when specified in this
Agreement are subject to the conditions that at the Closing Date or the
Option Closing Date, as the case may be, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and in
effect or proceedings therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities
to which such Underwriter or any such controlling person may become
subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in
connection with investigating or defending any such loss, claim, damage or
liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or not
such Underwriter or controlling person is a party to any action or
proceeding; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or such amendment
or supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically
for use in the preparation thereof. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities to which the
01\26\97\36074\014\10UNDAGR.003 -27-
<PAGE>
Company or any such director, officer or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under
which they were made; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability, action or proceeding; provided, however,
that each Underwriter will be liable in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission has been made in the Registration Statement,
any Preliminary Prospectus, the Prospectus or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically
for use in the preparation thereof; and provided further, that the Company
shall not be liable to the Underwriters under the indemnity agreement in
subsection (a) with respect to any Prospectus to the extent that any such
loss, claim, damage or liability of the Underwriters results from the fact
that such Underwriters sold Shares to a person as to whom it shall be
established that there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the Prospectus as then amended or
supplemented in any case where such delivery is required by the Act if the
Company had previously furnished copies thereof in sufficient quantities
to the Underwriters and the loss, claim, damage or liability of the
Underwriters results from an untrue statement or omission of a material
fact contained in the Prospectus which was identified in writing at such
time by the Company to the Underwriters and corrected in the Prospectus as
then amended or supplemented. This indemnity agreement will be in addition
to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to this Section 8, such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to
any party who shall fail to give notice as provided in this Section 8(c)
if the party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was materially prejudiced by the
failure to give such notice, but the failure to give such notice shall not
relieve the indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than
on account of the provisions of Section 8(a) or (b). In case any such
proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the
indemnifying party shall be
01\26\97\36074\014\10UNDAGR.003 -28-
<PAGE>
entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party
and shall pay as incurred the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party
shall have the right to retain its own counsel at its own expense.
Notwithstanding the foregoing, the indemnifying party shall pay as
incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them or (iii) the indemnifying party shall have failed
to assume the defense and employ counsel acceptable to the indemnified
party within a reasonable period of time after notice of commencement of
the action. It is understood that the indemnifying party shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant
to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for
any settlement of any proceeding effected without its written consent but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such settlement
or judgment. In addition, the indemnifying party will not, without the
prior written consent of the indemnified party, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim,
action or proceeding of which indemnification may be sought hereunder
(whether or not any indemnified party is an actual or potential party to
such claim, action or proceeding) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from
all liability arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other
from the offering of the Shares. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law then
each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on
the one hand
01\26\97\36074\014\10UNDAGR.003 -29-
<PAGE>
and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities,
(or actions or proceedings in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bears to the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined
by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above in this
Section 8(d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to above in this Section 8(d)
shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this
subsection (d), (i) no Underwriter shall be required to contribute any
amount in excess of the underwriting discounts and commissions applicable
to the Shares purchased by such Underwriter and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process
issuing from such court may be served upon him or it by any other
contributing party and consents to the service of such process and agrees
that any other contributing party may join him or it as an additional
defendant in any such proceeding in which such other contributing party is
a party.
(f) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified
party as such losses, claims,
01\26\97\36074\014\10UNDAGR.003 -30-
<PAGE>
damages, liabilities or expenses are incurred. The indemnity and
contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or
officers, or any person controlling the Company, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may
be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such
date (otherwise than by reason of any default on the part of the Company,
you, as Representatives of the Underwriters, shall use your reasonable
efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as
may be agreed upon and upon the terms set forth herein, the Firm Shares or
Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representatives, shall not have procured such other Underwriters, or any
others, to purchase the Firm Shares or Option Shares, as the case may be,
agreed to be purchased by the defaulting Underwriter or Underwriters, then
(a) if the aggregate number of shares with respect to which such default
shall occur does not exceed 10% of the Firm Shares or Option Shares, as
the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm
Shares or Option Shares, as the case may be, which they are obligated to
purchase hereunder, to purchase the Firm Shares or Option Shares, as the
case may be, which such defaulting Underwriter or Underwriters failed to
purchase, or (b) if the aggregate number of shares of Firm Shares or
Option Shares, as the case may be, with respect to which such default
shall occur exceeds 10% of the Firm Shares or Option Shares, as the case
may be, covered hereby, the Company or you as the Representatives of the
Underwriters will have the right, by written notice given within the next
36-hour period to the parties to this Agreement, to terminate this
Agreement without liability on the part of the non-defaulting Underwriters
or of the Company except to the extent provided in Section 8 hereof. In
the event of a default by any Underwriter or Underwriters, as set forth in
this Section 9, the Closing Date or Option Closing Date, as the case may
be, may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "UNDERWRITER" includes any person
substituted for a defaulting Underwriter. Any
01\26\97\36074\014\10UNDAGR.003 -31-
<PAGE>
action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter
under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Alex.
Brown & Sons Incorporated, 1 South Street, Baltimore, Maryland 21202-3220,
Attention: __________; with a copy to Alex. Brown & Sons Incorporated, 1
South Street, Baltimore, Maryland 21202-3220, Attention: General Counsel
and, if to the Company to PalEx, Inc., 3555 Timmons Lane, Suite 610,
Houston, Texas 77027, Attention: Vance K. Maultsby, Jr.; with a copy to
Andrews & Kurth L.L.P., Texas Commerce Tower, 600 Travis, Suite 4200,
Houston, Texas 77002, Attention: John F. Wombwell.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following
has occurred: (i) since the respective dates as of which information is
given in the Registration Statement and the Prospectus, any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition (financial or otherwise) of the
Company and the Founding Companies taken as a whole or the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Founding
Companies taken as a whole, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration
of war or national emergency or other national or international calamity
or crisis or change in economic or political conditions if the effect of
such outbreak, escalation, declaration, emergency, calamity, crisis or
change on the financial markets of the United States would, in your
reasonable judgment, make it impracticable to market the Shares or to
enforce contracts for the sale of the Shares, (iii) suspension of trading
in securities generally on the New York Stock Exchange or the American
Stock Exchange or limitation on prices (other than limitations on hours or
numbers of days of trading) for securities on either such Exchange, (iv)
the enactment, publication, decree or other promulgation of any statute,
regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects or may materially
and adversely affect the business or operations of the Company, (v)
declaration of a banking
01\26\97\36074\014\10UNDAGR.003 -32-
<PAGE>
moratorium by United States or New York State authorities; (vi) the
suspension of trading of the Company's Common Stock by the Commission on
the NASDAQ NMS or (vii) the taking of any action by any governmental body
or agency in respect of its monetary or fiscal affairs which in your
reasonable opinion has a material adverse effect on the securities markets
in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and
controlling persons referred to herein, and no other person will have any
right or obligation hereunder. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company
for inclusion in any Prospectus or the Registration Statement consists of
the information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), legends
required by Item 502(d) of Regulation S-K under the Act and certain
information under the caption "UNDERWRITING" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person of any
Underwriter, or by or on behalf of the Company or its directors or
officers or any person controlling the Company and (c) acceptance of the
Shares and payment therefor pursuant to this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Maryland.
01\26\97\36074\014\10UNDAGR.003 -33-
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
PALEX, INC.
By:
President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
ALEX. BROWN & SONS INCORPORATED
MONTGOMERY SECURITIES
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By:
Authorized Officer
01\26\97\36074\014\10UNDAGR.003 -34-
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
NUMBER OF FIRM
SHARES TO
UNDERWRITER BE PURCHASED
Alex. Brown & Sons Incorporated.........................
Montgomery Securities...................................
Total 3,000,000
01\26\97\36074\014\10UNDAGR.003 -35-
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PALEX, INC.
This Amended and Restated Certificate of Incorporation amends and
restates in its entirety the original Certificate of Incorporation of Pallet
Logistics, Inc., which was filed with the Secretary of State of the State of
Delaware on January 2, 1996 and amended and restated on December 20, 1996. This
Amended and Restated Certificate of Incorporation has been duly adopted in
accordance with the applicable provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
FIRST: The name of the corporation (hereinafter referred to as the
"Corporation") is: PalEX, Inc.
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington 19805, County of New
Castle. The name of the Corporation's registered agent at such address is The
Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware ("DGCL").
FOURTH: The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is 35,000,000, of which 5,000,000
shares shall be Preferred Stock, par value $0.01 per share, and 30,000,000
shares shall be Common Stock, par value $0.01 per share.
A. PREFERRED STOCK. (1) Preferred Stock may be issued from time to
time in one or more series and in such amounts as may be determined by
the Board of Directors. The voting powers, designations, preferences
and relative, participating, optional or other special rights, if any,
and the qualifications, limitations or restrictions thereof, if any,
of the Preferred Stock of each series shall be such as are fixed by
the Board of Directors, authority so to do being hereby expressly
granted, and as are stated and expressed in a resolution or
resolutions adopted by the Board of Directors providing for the issue
of such series of Preferred Stock (herein called the "Directors'
Resolution"). The Directors' Resolution as to any series shall (a)
establish the number of shares constituting, and the distinctive
designation of, that series, (b) fix the dividend rate, if any, of the
shares of such series, the payment dates for dividends on shares of
such series and the date or dates, or the method of determining the
date or dates, if any, from which dividends on shares of such series
shall be cumulative, (c) fix the amount or
<PAGE>
amounts payable on shares of such series upon voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Corporation, (d) state the price or prices or rate or rates, and
adjustments, if any, at which, the time or times and the terms and
conditions upon which, the shares of such series may be redeemed at
the option of the Corporation or at the option of the holder or
holders of shares of such series or upon the occurrence of a specified
event, and state whether such shares may be redeemed for cash,
property or rights, including securities of the Corporation or another
entity; and such Directors' Resolution may (i) limit the number of
shares of such series that may be issued, (ii) provide for a sinking
fund for the purchase or redemption of shares of such series and
specify the terms and conditions governing the operations of any such
fund, (iii) grant voting rights to the holders of shares of such
series, provided that each share shall not have more than one vote per
share, (iv) impose conditions or restrictions upon the creation of
indebtedness of the Corporation or upon the issuance of additional
Preferred Stock or other capital stock ranking on a parity therewith,
or prior thereto, with respect to dividends or distribution of assets
upon liquidation, (v) impose conditions or restrictions upon the
payment of dividends upon, or the making of other distributions to, or
the acquisition of, shares ranking junior to the Preferred Stock or to
any series thereof with respect to dividends or distributions of
assets upon liquidation, (vi) state the time or times, the price or
prices or the rate or rates of exchange and other terms, conditions
and adjustments upon which shares of any such series may be made
convertible into, or exchangeable for, at the option of the holder or
the Corporation or upon the occurrence of a specified event, shares of
any other class or classes or of any other series of Preferred Stock
or any other class or classes of stock or other securities of the
Corporation, and (vii) grant such other special rights and impose such
qualifications, limitations or restrictions thereon as shall be fixed
by the Board of Directors, to the extent not inconsistent with this
Article FOURTH and to the full extent now or hereafter permitted by
the laws of the State of Delaware.
(2) Except as by law expressly provided, or except as may be provided
in any Directors' Resolution, the Preferred Stock shall have no right
or power to vote on any question or in any proceeding or to be
represented at, or to receive notice of, any meeting of stockholders
of the Corporation.
(3) Preferred Stock that is redeemed, purchased or retired by the
Corporation shall assume the status of authorized but unissued
Preferred Stock and may thereafter, subject to the provisions of any
Directors' Resolution providing for the issue of any particular series
of Preferred Stock, be reissued in the same manner as authorized but
unissued Preferred Stock.
B. COMMON STOCK. All shares of the Common Stock of the Corporation
shall be identical and except as otherwise required by law or as
otherwise provided in the Directors' Resolution or Resolutions, if
any, adopted by the Board of Directors with respect to any series of
Preferred Stock, the holders of the Common Stock shall
-2-
<PAGE>
exclusively possess all voting power, and each share of Common Stock
shall have one vote.
FIFTH: The business and affairs of the Corporation shall be managed and
controlled by its Board of Directors. The number of directors constituting the
Board of Directors shall be fixed by the Board of Directors, but shall not be
less than one or more than 15.
At the expiration of the initial term of the directors, all of the directors
shall be elected to serve until the next annual meeting of stockholders and
until their successors are elected and qualified or until their earlier death,
resignation, removal or retirement. Any director elected or appointed to fill a
vacancy shall hold office for the remaining term. No decrease in the number of
directors constituting the Corporation's Board of Directors shall shorten the
term of any incumbent director. Any vacancy in the Board of Directors, whether
arising through death, resignation or removal of a director, or through an
increase in the number of directors, shall be filled by the majority vote of the
remaining directors.
A director of the Corporation may be removed only for cause and only upon the
affirmative vote of the holders of a majority of the outstanding capital stock
of the Corporation entitled to vote at an election of directors, subject to
further restrictions on removal, not inconsistent with this Article FIFTH, as
may be contained in the Bylaws.
Notwithstanding the foregoing, whenever the holders of any one or more classes
or series of Preferred Stock issued by the Corporation shall have the right,
voting separately by class or series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of this
Certificate of Incorporation applicable thereto, and such directors so elected
shall not be divided into classes unless expressly provided by such terms.
SIXTH: The following provisions are inserted for the management of the business
and the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stockholders:
A. The Board of Directors is authorized to alter, amend or repeal the
Bylaws or adopt new Bylaws of the Corporation. The stockholders shall
not repeal or change the Bylaws of the Corporation unless such repeal
or change is approved by the affirmative vote of the holders of not
less than 80% of the total voting power of all shares of stock of the
Corporation entitled to vote in the election of directors, considered
for the purposes of this paragraph A as a single class.
B. Election of directors need not be by written ballot unless the
Bylaws so provide.
C. In addition to the powers herein or by statute expressly conferred
upon the Corporation's directors, the Corporation's directors are
hereby empowered to exercise
-3-
<PAGE>
all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of
the statutes of Delaware, this Certificate of Incorporation, and any
Bylaws adopted by the stockholders; PROVIDED, HOWEVER, that no Bylaws
hereafter adopted shall invalidate any prior act of the directors
which would have been valid if such Bylaws had not been adopted.
D. No action shall be taken by the stockholders except at an annual or
special meeting with prior notice and a vote. No action shall be taken
by the stockholders by written consent.
SEVENTH: The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.
EIGHTH: No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; PROVIDED, HOWEVER, that this Article EIGHTH
shall not eliminate or limit the liability of a director to the extent provided
by applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of this Article
EIGHTH shall apply to, or have any effect on, the liability or alleged liability
of any director of the Corporation for or with respect to any acts or omissions
of such director occurring prior to such amendment or repeal. If the DGCL is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
NINTH: The provisions set forth in this Article NINTH and Articles FIFTH, SIXTH
and EIGHTH hereof may not be amended, altered, changed, repealed or rescinded in
any respect unless such action is approved by the affirmative vote of the
holders of not less than 80 percent of the total voting power of all shares of
stock of the Corporation entitled to vote in the election of directors,
considered for purposes of this Article NINTH as a single class. The voting
requirements contained in this Article NINTH and in Article SIXTH hereof shall
be in addition to voting requirements imposed by law, other provisions of this
Certificate of Incorporation or any designation of preferences in favor of
certain classes or series of shares of capital stock of the Corporation.
TENTH: Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under ss.291 of Title 8
of the DGCL or on the application of trustees in dissolution or of any receiver
or receivers appointed for this
-4-
<PAGE>
Corporation under ss.279 of Title 8 of the DGCL order a meeting of the creditors
or class of creditors, and/or of the stockholders or class of stockholders of
this Corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three-fourths in value of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been executed for and on behalf of the Corporation by its
officer thereunto duly authorized as of January 13th, 1997.
/s/ VANCE K. MAULTSBY, JR.
Vance K. Maultsby, Jr., Chief Executive Officer
-5-
EXHIBIT 4.1
SPECIMEN COMMON STOCK CERTIFICATE
The common stock certificate indicates that the corporation is
incorporated under the laws of the State of Delaware, the par value of the
shares is $.01 and that the shares are denominated Common Stock. The certificate
further states that it is transferable in New York, New York and lists the CUSIP
number. The certificate states that the shares are fully paid and non-asessable
shares, and the certificate bears the seal of the corporation along with the
signatures of the Chief Executive Officer and the Secretary of the corporation
and the countersignature of Harris Trust and Savings Bank, Transfer Agent and
Registrar.
The reverse side of the certificate is as follows:
PalEx, Inc.
Any shareholder may obtain, without charge, by request to the Office of
the Secretary of the Corporation, a statement of the rights, preferences,
powers, privileges and restrictions granted to or imposed upon each class or
series of shares authorized to be issued by the Corporation and upon the holders
thereof.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN END -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and
not as tenants in common
UNIF GIFT MIN ACT -- __________ Custodian ____________
(Cust) (Minor)
under Uniform Gift to Minors Act ___________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received _____________________________________________________________
hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
shares represented by the within Certificate and do hereby irrevocably
constitute and appoint Attorney to transfer the said
shares on the share register of the within-named Corporation, with full power of
substitution in the premises.
Dated ____________
NOTICE: The signature to this Assignment must correspond with the name(s) as
written upon the face of the certificate in every particular without
alteration or enlargement or any charge whatever.
_________________________________
SIGNATURE
ANDREWS & KURTH
L.L.P.
ATTORNEYS
TEXAS COMMERCE TOWER
OTHER OFFICES: 600 TRAVIS, SUITE 4200
WASHINGTON, D.C. HOUSTON, TEXAS 77002
DALLAS TELEPHONE: (713) 220-4200
LOS ANGELES TELECOPIER: (713) 220-4285
NEW YORK TELEX: 79-1208
THE WOODLANDS
LONDON
February 19, 1997
PalEX, Inc.
3555 Timmons Lane, Suite 610
Houston, Texas 77027
Gentlemen:
We have acted as counsel for PalEX, Inc., a Delaware corporation
(the "Company"), in connection with the Company's Registration Statement on Form
S-1 (the "Registration Statement") relating to the registration under the
Securities Act of 1933, as amended, of the offering and sale of up to an
aggregate of 3,450,000 shares (the "Shares") of common stock, $.01 par value per
share (the "Common Stock") of the Company. The Shares include 3,000,000 shares
being offered by the Company and 450,000 shares of Common Stock being offered
by the Company which may be sold pursuant to an over-allotment option granted to
the Underwriters named in the Registration Statement.
As the basis for the opinion hereinafter expressed, we have examined
such statutes, regulations, corporate records and documents, certificates of
corporate and public officials, and other instruments as we have deemed
necessary or advisable for the purposes of this opinion. In such examination we
have assumed the authenticity of all documents submitted to us as originals and
the conformity with the original documents of all documents submitted to us as
copies.
Based on the foregoing and on such legal considerations as we deem
relevant, we are of the opinion that the Shares to be issued and sold by the
Company will, when issued and paid for as described in the Registration
Statement, be validly issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and the reference to our firm under the caption "Legal
Matters" therein.
Very truly yours,
Andrews & Kurth L.L.P.
2325/2397/2691
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT is made as of December ___, 1996, and
is entered into by and between PalEx, Inc., a Delaware corporation (the
"Company"), and ________________ ("Indemnitee").
R E C I T A L S:
WHEREAS, the certificate of incorporation and bylaws of the Company
provide for the indemnification of its directors and executive officers to the
maximum extent permitted from time to time under applicable law and, along with
the Delaware General Corporation Law, contemplate that the Company may enter
into agreements with respect to such indemnification; and
WHEREAS, the Board of Directors of the Company has concluded that it
is reasonable, prudent and in the best interests of the Company's stockholders
for the Company to contractually obligate itself to indemnify certain of its
Authorized Representatives (defined below) so that they will serve or continue
to serve with greater certainty that they will be adequately protected.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires, the following terms
shall have the following respective meanings:
"Authorized Representative" means (i) a director, officer, employee,
agent or fiduciary of the Company or any Subsidiary and (ii) a person
serving at the request of the Company or any Subsidiary as a director,
officer, employee, fiduciary or other representative of another Enterprise.
"Enterprise" means any corporation, partnership, limited liability
company, association, joint venture, trust, employee benefit plan or other
entity.
"Expenses" means all expenses, including (without limitation)
reasonable fees and expenses of counsel.
"Liabilities" means all liabilities, including (without limitation)
the amounts of any judgments, fines, penalties, excise taxes and amounts
paid in settlement.
"Proceeding" means any threatened, pending or completed claim, action
(including any action by or in the right of the Company), suit or
proceeding (whether formal or informal, or
-1-
<PAGE>
civil, criminal, administrative, legislative, arbitrative or investigative)
in respect of which Indemnitee is, was or at any time becomes, or is
threatened to be made, a party, witness, subject or target, by reason of
the fact that Indemnitee is or was an Authorized Representative or a
prospective Authorized Representative.
"Subsidiary" means, at any time, (i) any corporation of which at least
a majority of the outstanding voting stock is owned by the Company at such
time, directly or indirectly through subsidiaries, and (ii) any other
Enterprise in which the Company, directly or indirectly, owns more than a
50% equity interest at such time.
2. INTERPRETATION. (a) In this Agreement, unless a clear contrary
intention appears:
(i) the singular number includes the plural number and VICE VERSA;
(ii) reference to any gender includes each other gender;
(iii) the words "HEREIN," "HEREOF" and "HEREUNDER" and other words of
similar import refer to this Agreement as a whole and not to any particular
Section or other subdivision;
(iv) unless the context indicates otherwise, reference to any Section
means such Section hereof; and
(v) the words "INCLUDING" (and with correlative meaning "INCLUDE")
means including, without limiting the generality of any description
preceding such term.
(b) The Section headings herein are for convenience only and shall not
affect the construction hereof.
(c) No provision of this Agreement shall be interpreted or construed
against any party solely because that party or its legal representative drafted
such provision.
(d) In the event of any ambiguity, vagueness or other similar matter
involving the interpretation or meaning of this Agreement, this Agreement shall
be liberally construed so as to provide to Indemnitee the full benefits
contemplated hereby.
(e) If the indemnification to which Indemnitee is entitled as respects
any aspect of any claim varies between two or more provisions of this Agreement,
that provision providing the most comprehensive indemnification shall apply.
3. LIMITATION ON PERSONAL LIABILITY. To the fullest extent permitted
by applicable law, Indemnitee shall not be personally liable to the Company or
its stockholders for monetary
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<PAGE>
damages for breach of fiduciary duty as a director of the Company, PROVIDED that
the foregoing shall not eliminate or limit the liability of Indemnitee (i) for
any breach of Indemnitee's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law relating to unlawful dividend payments and
unlawful stock purchases or redemptions or (iv) for any transaction from which
Indemnitee derived an improper personal benefit.
4. INDEMNITY. (a) Subject to the following provisions of this
Agreement, the Company shall hold harmless and indemnify Indemnitee against all
Expenses and Liabilities actually incurred by Indemnitee in connection with any
Proceeding; PROVIDED, HOWEVER, that no indemnity shall be paid by the Company
pursuant to this Agreement:
(i) for amounts actually paid to Indemnitee pursuant to one or more
policies of directors and officers liability insurance maintained by the
Company or pursuant to a trust fund, letter of credit or other security or
funding arrangement provided by the Company; PROVIDED, HOWEVER, that if it
should subsequently be determined that Indemnitee is not entitled to retain
any such amount, this clause (i) shall no longer apply to such amount;
(ii) in respect of remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that payment of
such remuneration was in violation of applicable law;
(iii) on account of Indemnitee's conduct which is finally adjudged to
constitute willful misconduct or to have been knowingly fraudulent,
deliberately dishonest or from which the Indemnitee derives an improper
personal benefit; or
(iv) on account of any suit in which final judgment is rendered
against Indemnitee for an accounting of profits made from the sale or
purchase by Indemnitee of securities of the Company pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as
amended.
(b) If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for only a portion (but not, however, for the
total amount) of any Expenses or Liabilities actually incurred by Indemnitee in
connection with any Proceeding, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses and Liabilities to which Indemnitee
is entitled. If the indemnification provided for herein in respect of any
Expenses or Liabilities actually incurred by Indemnitee in connection with any
Proceeding is finally determined by a court of competent jurisdiction to be
prohibited by applicable law, then the Company, in lieu of indemnifying
Indemnitee, shall contribute to the amount paid or payable by Indemnitee as a
result of such Expenses and Liabilities in such proportion as is appropriate to
reflect (i) the relative benefits received by the Company on the one hand and
Indemnitee on the other hand from the events, circumstances, conditions,
happenings, actions or transactions from which such Proceeding arose,
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<PAGE>
(ii) the relative fault of the Company (including its other Authorized
Representatives) on the one hand and of Indemnitee on the other hand in
connection with the events, circumstances and happenings which resulted in such
Expenses and Liabilities, such relative fault to be determined by reference to,
among other things, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent the events, circumstances
and/or happenings resulting in such Expenses and Liabilities, and (iii) any
other relevant equitable considerations, it being agreed that it would not be
just and equitable if such contribution were determined by pro rata or other
method of allocation which does not take into account the foregoing equitable
considerations.
(c) The indemnification provided herein shall be applicable only to
Proceedings commenced after the date hereof, regardless, however, of whether
they arise from acts, omissions, facts or circumstances occurring before or
after the date hereof.
(d) The indemnification provided herein shall be applicable whether or
not negligence of Indemnitee is alleged or proved, and regardless of whether
such negligence be contributory or sole.
(e) Amounts paid by the Company to Indemnitee under this Section 4 are
subject to refund by Indemnitee as provided in Section 8.
5. NOTIFICATION AND DEFENSE OF CLAIMS. (a) Promptly after the receipt
by Indemnitee of notice of the commencement of any Proceeding, Indemnitee will,
if a claim in respect thereof is to be made against the Company under this
Agreement, notify the Company of the commencement of such Proceeding; PROVIDED,
HOWEVER, that the omission to so notify the Company will not relieve the Company
(i) from any liability which it may have to Indemnitee under this Agreement
unless, and then only to the extent that, such omission results in insufficient
time being available to permit the Company or its counsel to effectively defend
against or make timely response to any loss, claim, damage, liability or expense
resulting from such Proceeding or otherwise has a material adverse effect on the
Company's ability to promptly deal with such loss, claim, damage, liability or
expense or (ii) from any liability which it may have to Indemnitee otherwise
than under this Agreement.
(b) The following provisions shall apply with respect to any such
Proceeding as to which Indemnitee notifies the Company of the commencement
thereof:
(i) The Company shall be entitled to participate therein at its own
expense.
(ii) Except as otherwise provided below, to the extent it may elect to
do so, the Company (jointly with any other indemnifying party similarly
notified) will be entitled to assume the defense thereof, with counsel of
its own selection reasonably satisfactory to Indemnitee. After notice from
the Company to Indemnitee of its election so to assume the defense thereof,
the Company will not be liable to Indemnitee under this Agreement for any
Expenses subsequently incurred by Indemnitee in connection with the defense
of such Proceeding other than reasonable costs of investigation or as
otherwise provided below.
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<PAGE>
Indemnitee shall have the right to employ separate counsel in such
Proceeding but the fees and expenses of such counsel incurred after notice
from the Company of its assumption of the defense thereof shall be at the
expense of Indemnitee unless (1) the employment of separate counsel by
Indemnitee has been authorized by the Company; (2) Indemnitee shall have
reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of the defense of such Proceeding; or
(3) the Company shall not in fact have employed counsel to assume the
defense of such Proceeding, in each of which cases the reasonable fees and
expenses of Indemnitee's counsel shall be borne by the Company. The Company
shall not be entitled to assume the defense of any Proceeding brought by or
on behalf of the Company or as to which Indemnitee shall have made the
conclusion provided for in (2) above. Nothing in this subparagraph (ii)
shall affect the obligation of the Company to indemnify Indemnitee against
Expenses and Liabilities paid in settlement for which it is otherwise
obligated hereunder.
(iii) The Company shall not be liable to indemnify Indemnitee under
this Agreement for any amounts paid in settlement of any Proceedings or
claims effected without its prior written consent. The Company shall not
settle any Proceeding or claim in any manner which would impose any penalty
or limitation on Indemnitee without Indemnitee's prior written consent.
Neither the Company nor Indemnitee will unreasonably withhold or delay its
consent to any proposed settlement.
6. ADVANCEMENT OF EXPENSES, ETC. If requested to do so by Indemnitee
with respect to any Proceeding, the Company shall advance to or for the benefit
of Indemnitee, prior to the final disposition of such Proceeding, the Expenses
actually incurred by Indemnitee in investigating, defending or appealing such
Proceeding. Any judgments, fines or amounts to be paid in settlement of any
Proceeding shall also be advanced by the Company upon request by Indemnitee.
Advances made by the Company under this Section 6 are subject to refund by
Indemnitee as provided in Section 8.
7. RIGHT OF INDEMNITEE TO BRING SUIT. (a) If a claim for
indemnification or a claim for an advance under this Agreement is not paid in
full by the Company within 30 days after receipt by the Company from Indemnitee
of a written request or demand therefor, Indemnitee may bring suit against the
Company to recover the unpaid amount of the claim. If, in any such action,
Indemnitee makes a prima facie showing of entitlement to indemnification under
this Agreement, the Company shall have the burden of proving that
indemnification is not required under this Agreement. The only defense to any
such action shall be that indemnification is not required by this Agreement.
(b) In the event that any action is instituted by Indemnitee to
enforce Indemnitee's rights or to collect monies due to Indemnitee under this
Agreement and if Indemnitee is successful in such action, the Company shall
reimburse Indemnitee for all Expenses incurred by Indemnitee with respect to
such action.
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<PAGE>
8. REPAYMENT OBLIGATION OF INDEMNITEE. If the Company advances or pays
any amount to Indemnitee under Section 4, 6 or 7 and if it shall thereafter be
finally adjudicated that Indemnitee was not entitled to be indemnified hereunder
for all or any portion of such amount, Indemnitee shall promptly repay such
amount or such portion thereof, as the case may be, to the Company. If the
Company advances or pays any amount to Indemnitee under Section 4, 6 or 7 and if
Indemnitee shall thereafter receive all or a portion of such amount under one or
more policies of directors and officers liability insurance maintained by the
Company or pursuant to a trust fund, letter of credit or other security or
funding arrangement provided by the Company, Indemnitee shall promptly repay
such amount or such portion thereof, as the case may be, to the Company.
9. CHANGES IN LAW. If any change after the date of this Agreement in
any applicable law, statute or rule expands the power of the Company to
indemnify Authorized Representatives, such change shall be within the purview of
Indemnitee's rights and the Company's obligations under this Agreement. If any
change after the date of this Agreement in any applicable law, statute or rule
narrows the right of the Company to indemnify an Authorized Representative, such
change shall, to the fullest extent permitted by applicable law, leave this
Agreement and the parties' rights and obligations hereunder unaffected.
10. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Company hereunder shall continue during the period Indemnitee is an Authorized
Representative, and shall continue after Indemnitee has ceased to occupy such
position or have such relationship so long as Indemnitee shall be subject to any
possible Proceeding.
11. NONEXCLUSIVITY. The indemnification and other rights provided by
any provision of this Agreement shall not be deemed exclusive of any other
rights to which Indemnitee may be entitled under (i) any statutory or common
law, (ii) the Company's certificate of incorporation, (iii) the Company's
bylaws, (iv) any other agreement or (v) any vote of stockholders or
disinterested directors or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while occupying any of the
positions or having any of the relationships referred to in this Agreement.
Nothing in this Agreement shall in any manner affect, impair or compromise any
indemnification Indemnitee has or may have by virtue of any agreement previously
entered into between Indemnitee and the Company.
12. SEVERABILITY. If any provision of this Agreement shall be held to
be invalid, illegal or unenforceable (i) the validity, legality or
enforceability of the remaining provisions of this Agreement shall not be in any
way affected or impaired thereby and (ii) to the fullest extent possible, the
provisions of this Agreement shall be construed so as to give effect to the
intent manifested by the provision held invalid, illegal or unenforceable. Each
provision of this Agreement is a separate and independent portion of this
Agreement.
13. MODIFICATION AND WAIVER. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties. No waiver of any of
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<PAGE>
the provisions of this Agreement shall be binding unless executed in writing by
the person making the waiver nor shall such waiver constitute a continuing
waiver.
14. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be addressed (i) if to the Company, at
its principal office address as shown on the signature page hereof or such other
address as it may have designated by written notice to Indemnitee for purposes
hereof, directed to the attention of the Secretary and (ii) if to Indemnitee, at
Indemnitee's address as shown on the signature page hereof or to such other
address as Indemnitee may have designated by written notice to the Company for
purposes hereof. Each such notice or other communication shall be deemed to have
been duly given if (a) delivered by hand and receipted for by the party to whom
said notice or other communication shall have been directed, (b) transmitted by
facsimile transmission, at the time that receipt of such transmission is
confirmed, or (c) mailed by certified or registered mail with postage prepaid,
on the third business day after the date on which it is so mailed.
15. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT
MADE UNDER, AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE INTERNAL LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.
16. HEIRS, SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding
upon, inure to the benefit of and be enforceable by (i) Indemnitee and
Indemnitee's personal or legal representatives, executors, administrators,
heirs, devisees and legatees and (ii) the Company and its successors and
assigns. This Agreement shall not inure to the benefit of any other person or
Enterprise.
(b) The Company agrees to require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used herein, the term "Company" shall include any successor
to its business and/or assets as aforesaid which executes and delivers the
assumption and agreement provided for in this Section 16 or which otherwise
becomes bound by all terms and provisions of this Agreement by operation of law.
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<PAGE>
ENTERED into on the day and year first above written.
THE COMPANY:
PALEX, INC.
By:
Name:
Title:
Address:
Telecopier:
INDEMNITEE:
Address:
Telecopier:
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PALLET LOGISTICS, INC.
1996 STOCK OPTION PLAN
Section 1. PURPOSE
The Pallet Logistics, Inc. 1996 Stock Option Plan (the "Plan") (i)
authorizes the Committee to grant to Employees and Consultants of the
Corporation and its Subsidiaries options to acquire Common Stock of the
Corporation; and (ii) provides for the automatic grant of options to Outside
Directors of the Corporation in accordance with the terms specified herein.
Section 2. DEFINITIONS
Unless the context clearly indicates otherwise, the following terms, when
used in this Plan, shall have the meanings set forth in this Section:
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Cause" shall mean (i) Grantee's willful, material and irreparable
breach of any agreement which governs the terms and conditions of his
employment; (ii) Grantee's gross negligence or gross incompetence in the
performance or intentional nonperformance (continuing for ten (10) days
after receipt of written notice of such negligence) of any of Grantee's
material duties and responsibilities; (iii) Grantee's dishonesty, fraud or
misconduct with respect to the business or affairs of the Corporation or
any Subsidiary; (iv) Grantee's conviction of a felony crime; or (v)
chronic alcohol abuse or illegal drug abuse by Grantee.
(c) A "Change in Control" of the Corporation shall occur when: (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the
Corporation representing 30% or more of the combined voting power of the
Corporation's then outstanding securities; (ii) as a result of, or in
connection with, any tender offer or exchange offer, merger or other
business combination (a "Transaction"), the persons who were directors of
the Corporation immediately before the Transaction shall cease to
constitute a majority of the Board of Directors of the Corporation or any
successor to the Corporation; (iii) the Corporation is merged or
consolidated with another corporation and as a result of the merger or
consolidation less than 75% of the outstanding voting securities of the
surviving or resulting corporation shall then be owned in aggregate by the
former stockholders of the Corporation; (iv) a tender offer or exchange
offer is made and consummated for the ownership of securities of the
Corporation representing 50% or more of the combined voting power of the
Corporation's then outstanding voting securities; or (v) the Corporation
transfers substantially all of its assets to another corporation which is
not controlled by the Corporation.
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(d) "Code" shall mean the Internal Revenue Code of 1986 as it may be
amended from time to time.
(e) "Committee" shall mean the Board, or any Committee of two or more
Directors that may be designated by the Board to administer the Plan. If a
Committee is designated by the Board, all of the Committee's members shall
be Non-Employee Directors.
(f) "Consultant" shall mean any person who is engaged to perform services
for the Corporation or its Subsidiaries, other than as an Employee or
Director.
(g) "Control Person" shall mean any person who, as of the date of grant of
an Option, owns (within the meaning of Section 422(b)(6) of the Code)
stock possessing more than ten percent (10%) of the total combined voting
power or value of all classes of stock of the Corporation or of any parent
or Subsidiary.
(h) "Corporation" shall mean Pallet Logistics, Inc., a Delaware
corporation.
(i) "Director" shall mean any member of the Board.
(j) "Employee" shall mean any full-time employee of the Corporation or its
Subsidiaries (including Directors who are otherwise employed on a
full-time basis by the Corporation or its Subsidiaries).
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934 as it
may be amended from time to time.
(l) "Fair Market Value" of the Stock on a given date shall be based upon:
(i) if the Stock is listed on a national securities exchange or quoted in
an interdealer quotation system, the last sales price or, if unavailable,
the average of the closing bid and asked prices per share of the Stock on
such date (or, if there was no trading or quotation in the Stock on such
date, on the next preceding date on which there was trading or quotation)
as provided by one of such organizations; or (ii) the Stock is not listed
on a national securities exchange or quoted in an interdealer quotation
system, as determined by the Board in good faith in its sole discretion;
provided, however, that the "fair market value" of Stock on the date on
which shares of Stock are first issued and sold pursuant to a registration
statement filed with and declared effective by the Securities and Exchange
Commission (the "Registration Statement") shall be the Initial Public
Offering price of the shares so issued and sold, as set forth in the first
final prospectus used in such offering.
(m) "Grantee" shall mean a person granted an Option under the Plan.
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<PAGE>
(n) "Initial Public Offering" shall mean the initial public offering of
shares of Stock in a firm commitment underwriting registered with the
Securities and Exchange Commission in compliance with the provisions of
the 1933 Act.
(o) "ISO" shall mean an Option granted pursuant to the Plan to purchase
shares of the Stock and intended to qualify as an incentive stock option
under Section 422 of the Code, as now or hereafter constituted.
(p) "1933 Act" shall mean the Securities Act of 1933, as amended.
(q) A "Non-Employee Director" shall mean a director who:
(i) Is not currently an officer (as defined in Rule 16a-1(f) under
the Exchange Act) of the Corporation or a Subsidiary, or otherwise
currently employed by the Corporation or Subsidiary;
(ii) Does not receive compensation, either directly or indirectly,
from the Corporation or Subsidiary, for services rendered as a
consultant or in any capacity other than as a director, except for
an amount that does not exceed the dollar amount for which
disclosure would be required pursuant to Item 404(a) of SEC
Regulation S-K;
(iii) Does not possess an interest in any other transaction for
which disclosure by the Corporation would be required pursuant to
Item 404(a) of SEC Regulation S-K; and
(iv) Is not engaged in a business relationship for which disclosure
by the Corporation would be required pursuant to Item 404(b) of SEC
Regulation S-K.
(r) "NQSO" shall mean an Option granted pursuant to the Plan to purchase
shares of the Stock that is not an ISO.
(s) "Option" or "Options" shall refer to one or more NQSOs and ISOs issued
under and subject to the Plan.
(t) "Parent" shall mean any parent corporation as defined in Section 424
of the Code.
(u) "SEC" means the United States Securities and Exchange Commission.
(v) "Plan" shall mean this 1996 Stock Option Plan as set forth herein and
as amended from time to time.
(w) "Stock" shall mean shares of the Common Stock of the Corporation.
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(x) "Subsidiary" shall mean any corporation with respect to which the
Corporation owns, directly or indirectly, 50% or more of the total
combined voting power of all classes of stock of such corporation.
Section 3. SHARES OF STOCK SUBJECT TO THE PLAN
Subject to the provisions of Section 10, the total amount of Stock with
respect to which Options may be granted under the plan shall not exceed the
greater of (i) 1,800,000 (subject to adjustment pursuant to Section 10) and (ii)
Fifteen Percent (15%) of the total numbers of shares of stock outstanding from
time to time. Stock issuable under the Plan may be authorized but unissued
shares or reacquired shares of Stock. If, prior to exercise, any Options are
forfeited, lapse or terminate for any reason, the Stock covered thereby may
again be available for Option grants under the Plan.
Section 4. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. Subject to the express
provisions of the Plan, the Committee shall have the authority to interpret the
Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan, to determine the terms and provisions of stock option agreements
thereunder and to make all other determinations necessary or advisable for the
administration of the Plan. Any controversy or claim arising out of or related
to this Plan or the Options granted thereunder shall be determined unilaterally
by, and at the sole discretion of, the Committee. To the extent necessary to
comply with Rule 16b-3 under the Exchange Act, determinations concerning Options
granted to any person who is a Director or officer shall be made by the
Committee.
Section 5. TYPES OF OPTIONS
Options granted under the Plan may be of two types: ISOs or NQSOs. The
Committee shall have the authority and discretion to grant to an eligible
Employee either ISOs, NQSOs or both, but shall clearly designate the nature of
each Option at the time of grant. Grantees who are not Employees of the
Corporation or a Subsidiary on the date an Option is granted shall only receive
NQSOs.
Section 6. GRANT OF OPTIONS TO EMPLOYEES AND CONSULTANTS
(a) Employees and Consultants of the Corporation and its Subsidiaries
shall be eligible to receive Options under the Plan.
(b) The exercise price per share of Stock subject to an Option granted to
an Employee or Consultant shall be determined by the Committee, provided,
however, that the exercise price of each share subject to an Option shall
be not less than 100% of the Fair Market
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<PAGE>
Value of a share of the Stock on the date such Option is granted, or, in
the case of an ISO granted to a Control Person, not less than 110% of such
Fair Market Value.
(c) The term of each Option granted to an Employee or Consultant shall be
determined by the Committee, provided further than no ISO granted to a
Control Person shall be exercisable more than five years from the date of
Option grant.
(d) The Committee shall determine and designate from time to time
Employees or Consultants who are to be granted Options, the nature of each
Option granted and the number of shares of Stock subject to each such
Option, provided, however, that in any calendar year, no Employee or
Consultant may be granted an Option to purchase more than 50 shares of
Stock (determined without regard to when such Option is exercisable),
subject to adjustment pursuant to Section 10.
(e) Notwithstanding any other provisions hereof, the aggregate Fair Market
Value (determined at the time the ISO is granted) of the Stock with
respect to which ISOs are exercisable for the first time by any Employee
during any calendar year under all plans of the Corporation and any Parent
or Subsidiary corporation shall not exceed $100,000. To the extent the
limitation set forth in the preceding sentence is exceeded, the Options
with respect to such excess shall be treated as NQSOs.
(f) The Committee, in its sole discretion, shall determine whether any
Option granted to an Employee or Consultant shall become exercisable in
one or more installments and specify the installment dates. The Committee
may also make such other provisions, not inconsistent with the terms of
this Plan, as it may deem desirable, including such provisions as it may
deem necessary to qualify any ISO under the provisions of Section 422 of
the Code. Notwithstanding any determination by the Committee regarding the
exercise period of any Option granted to an Employer or Consultant, all
such Options shall immediately become exercisable upon (i) the death of an
Employee or Consultant while in the employ of the Corporation or any
Subsidiary or, (ii) a Change in Control.
(g) The Committee may, at any time, grant new or additional options to any
eligible Employee or Consultant who has previously received Options under
this Plan, or options under other plans, whether such prior Options or
other options are still outstanding, have been exercised previously in
whole or in part, or have been canceled. The exercise price of such new or
additional Options may be established by the Committee, subject to Section
5(b) hereof, without regard to such previously granted Options or other
options.
Section 7. GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Non-Employee Directors of the Corporation shall be eligible to receive
Options under the Plan only pursuant to the provisions of this Section 7.
Each individual who agrees to become a Non-Employee Director prior to the
filing of the Registration Statement
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covering the Initial Public Offering shall receive, without the exercise
of the discretion of any person, an NQSO under the Plan relating to the
purchase of 20,000 shares of Stock. Each individual who agrees to become a
Non-Employee Director between the filing and effective date of the
Registration Statement covering the Initial Public Offering shall receive,
without the exercise of the discretion of any person, an NQSO under the
Plan relating to the purchase of 20,000 shares of stock at an exercise
price equal to the Initial Public Offering price per share. Thereafter,
each individual who agrees to become a NonEmployee Director within six
months following (i) the effective date of the Registration Statement
covering the Initial Public Offering or (ii) an annual meeting of the
Corporation's stockholders shall receive, without the exercise of the
discretion of any person, an NQSO under the Plan relating to the purchase
of 20,000 shares of Stock. In addition, on the day after the first annual
meeting of stockholders next following the date of the Initial Public
Offering, and the date after each subsequent annual meeting, each person
who is a continuing Non-Employee Director on any such date shall receive,
without the exercise of the discretion of any person, an NQSO under the
Plan relating to the purchase of 5,000 shares of Stock, and each person
who is a new, first-time Non-Employee Director on any such date and who
became a Non-Employee Director more than six months following (i) the
effective date of the Registration Statement covering the Initial Public
Offering or (ii) the immediately preceding annual meeting of the
Corporation's stockholders, shall receive, without the exercise of the
discretion of any person, an NQSO under the Plan relating to the purchase
of 20,000 shares of Stock. In the event that there are not sufficient
shares available under this Plan to allow for the grant to each
NonEmployee Director of an NQSO for the number of shares provided herein,
each NonEmployee Director shall receive an NQSO for his pro rata share of
the total number of shares of Stock available under the Plan.
(b) The exercise price of each share of Stock subject to an Option granted
to a NonEmployee Director shall equal the Fair Market Value of a share of
Stock on the date such Option is granted. Payment of the exercise price
for the shares being purchased shall be made in cash.
(c) Each Option granted to a Non-Employee Director shall become
exercisable six months from, and shall have a term of ten (10) years from,
the date of Option grant, or, if later, the date the Grantee becomes a
Non-Employee Director. Notwithstanding the exercise period of any Option
granted to a Non-Employee Director, all such Options shall immediately
become exercisable upon (i) the death of a Non-Employee Director while
serving as such or, (ii) a Change in Control.
Section 8. EXERCISE OF OPTIONS
(a) A Grantee shall exercise an Option by delivery of written notice to
the Corporation setting forth the number of shares with respect to which
the Option is to be exercised, together with cash, certified check, bank
draft of postal of express money order payable
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to the order of the Corporation for an amount equal to the Option price of
such shares and any income tax required to be withheld. The Committee may,
in its sole discretion, permit a Grantee to pay all or a portion of the
exercise price by a simultaneous sale of the shares of Stock to be issued
pursuant to such exercise pursuant to a brokerage or similar arrangement.
(b) Except as provided pursuant to Section 9(a), no Option granted to an
Employee or Consultant shall be exercised unless at the time of such
exercise the Grantee is then an Employee or Consultant of the Corporation
or a Subsidiary.
(c) Except as provided in Section 9(a), no Option granted to a
Non-Employee Director shall be exercised unless at the time of such
exercise the Grantee is then a Non-Employee Director.
(d) Before the Corporation issues Stock to a Grantee pursuant to the
exercise of an NQSO, the Corporation shall have the right to require that
the Grantee make such provision, or furnish the Corporation such
authorization, necessary or desirable so that the Corporation may satisfy
its obligation under applicable income tax laws, to withhold for income or
other taxes due upon or incident to such exercise.
Section 9. EXERCISE OF OPTIONS UPON TERMINATION
(a) Subject to Section 9 (c) hereof, upon the termination of a Grantee's
relationship with the Corporation and its Subsidiaries, the period during
which such Grantee may exercise any outstanding and then exercisable
installments of his Options shall not exceed: (i) if such termination is
due to death or permanent and total disability (within the meaning of
Section 22(e)(3) of the Code), one year from the date of such termination,
and (ii) in all other cases, three months (six months for Outside
Directors) from the date of such termination, provided, however, that in
no event shall the period extend beyond the expiration of the Option term.
Notwithstanding the foregoing, all Options shall immediately terminate
upon a termination of a Grantee's employment if the Committee determines,
in its sole discretion, that such termination is for Cause.
(b) In no event shall any Option be exercisable for more than the maximum
number of shares that the Grantee was entitled to purchase at the date of
termination of the relationship with the Corporation and its Subsidiaries;
provided, however, that in the case of Options granted prior to the
Initial Public Offering to a Grantee who at no time prior to the date of
termination of his relationship with the Corporation and its Subsidiaries
was subject to the provisions of Section 16(b) of the Exchange Act, any
member of the Board who had been the Grantee's immediate or ultimate
supervisor prior to the Initial Public Offering may, in the sole
discretion of such Board member, accelerate the exercisability of all or a
portion of such Option which is not then otherwise exercisable if (i) such
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Grantee is terminated by the Company or a Subsidiary without Cause or (ii)
the Subsidiary employing such Grantee is sold.
(c) The Committee may, in its discretion, extend the period of
exercisability set forth in clause (i) and (ii) in paragraph (a) above,
provided, however, that such period may not be extended for Options
granted to Outside Directors.
(d) Subject to Section 9(b) hereof, the sale of any Subsidiary shall be
treated as a termination of employment with respect to any Grantee
employed by such Subsidiary.
(e) Subject to the foregoing, in the event of death, Options may be
exercised by a Grantee's legal representative.
Section 10. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
If the Corporation shall effect a subdivision or consolidation of shares
or other increase or reduction of shares of Stock outstanding without receiving
compensation therefor in money, services or property, or any other change in
corporate capital structure shall occur, then (a) the number of shares subject
to outstanding Options shall be proportionately adjusted (without a change in
the total price applicable to any such Option, but with a corresponding
adjustment in the price per share), and (b) the number of shares available for
issuance under Sections 3, 6(d) and 7(a) shall be proportionately adjusted.
Section 11. RESTRICTIONS ON ISSUING SHARES
No Stock shall be issued or transferred under the Plan unless and until
all applicable legal requirements have been compiled with to the satisfaction of
the Committee. The Committee shall have the right to condition any Option on the
Grantee's undertaking in writing to comply with such restrictions on any
subsequent disposition of the shares of Stock issued or transferred thereunder
as the Committee shall deem necessary or advisable as a result of any applicable
law, regulation, official interpretation thereof, or any underwriting agreement,
and certificates representing such shares may be legended to reflect any such
restrictions.
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Section 12. EXERCISE OF OPTIONS UPON TERMINATION
(a) Each Option shall be evidenced by a written agreement containing such
terms and conditions, not inconsistent with this Plan, as the Committee
shall approve. The terms and provisions of such agreements may vary among
Grantees and among different Options granted to the same Grantee.
(b) The grant of an Option in any year shall not give the Grantee any
right to similar grants in future years, any right to continue such
Grantee's employment relationship with the Corporation or its
Subsidiaries, or, until such Option is exercised and share certificates
are issued, any rights as a Stockholder of the Corporation. All Grantees
shall remain subject to discharge to the same extent as if the Plan were
not in effect.
(c) No Grantee, and no beneficiary or other persons claiming under or
through the Grantee shall have any right, title or interest by reason of
any Option to any particular assets of the Corporation or its
Subsidiaries, or any shares of Stock allocated or reserved for the
purposes of the Plan or subject to any Option except as set forth herein.
The Corporation shall not be required to establish any fund or make any
other segregation of assets to assure the payment of any Option.
(d) No Option shall be subject to anticipation, sale, assignment, pledge,
encumbrance, or charge except by will or the laws of descent and
distribution, and an Option shall be exercisable during the Grantee's
lifetime only by the Grantee.
(e) The issuance of shares of Stock to Grantees or to their legal
representatives shall be subject to any applicable taxes and other laws or
regulations of the United States or of any state having jurisdiction
thereof.
Section 13. AMENDMENT OR TERMINATION
The Board may, at any time, alter, amend, suspend, discontinue or
terminate this Plan; provided, however, that no such action shall adversely
affect the rights of Grantees to Options previously granted hereunder and,
provided further, however, that any stockholder approval necessary or desirable
in order to comply with Rule 16b-3 under the Exchange Act or with Section 422 of
the Code (or other applicable law or regulation) shall be obtained in the manner
required therein. In addition, no plan provision, within the meaning of Rule
16b-3(c)(2)(i)(D), shall be amended more than once every six months, other than
to comport with changes in the Code or rules thereunder.
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Section 14. EFFECTIVE DATE OF PLAN
This Plan is effective upon its adoption by the Board and the
Stockholders. No ISO may be granted more than ten years after such date.
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EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1997
