UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly period ending March 2, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition period from ________ to _________
Commission File Number: 000-22237
PALEX, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0520673
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3555 TIMMONS LANE, SUITE 610
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-626-9711
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to filed such reports), and (2) has been subject to such
filing requirements for the past 30 days.
Yes [X]* No [ ]
* The Registrant became subject to the reporting requirements of
Section 13 of the Securities Exchange Act of 1934 on March 19, 1997.
The number of shares of Common Stock of the Registrant, par value $.01
per share, outstanding at April 22, 1997 was 10,537,889.
<PAGE>
PALEX, INC.
FORM 10-Q FOR THE THREE MONTH PERIOD ENDING MARCH 2, 1997
INDEX
Part I - Financial Information
Item 1 - Financial Statements
General Information ................................................... 3
Balance Sheets - PalEx, Inc. as of November 30, 1996 and March 2,
1997 and Pro Forma as of March 2, 1997 .............................. 4
Statements of Income - PalEx, Inc. for the Three Month Periods
ended February 29, 1996 and March 2, 1997 and Pro Forma for the
Three Month Periods ended February 29, 1996 and March 2, 1997 ....... 5
Statements of Cash Flows - PalEx, Inc.for the Three Month Periods
ended February 29, 1996 and March 2, 1997 ........................... 6
Notes to the Financial Statements ..................................... 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 12
Part II - Other Information
Item 1 - Legal Proceedings .............................................. 18
Item 2 - Recent Sales of Unregistered Securities ........................ 18
Signature ............................................................... 19
2
<PAGE>
PALEX, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
PalEx, Inc. ("PalEx" or the "Company") was founded in January 1996 to create
a nationwide provider of pallet products and related services, On March 25,
1997, PalEx and separate wholly owned subsidiaries acquired in separate
transactions (the "Acquisitions"), simultaneously with the closing of its
initial public offering (the "Offering") of its common stock, par value $.01 per
share (the "Common Stock"), three businesses: Fraser Industries, Inc.
("Fraser"), Ridge Pallets, Inc. ("Ridge") and Interstate Pallet Co., Inc. ("
Interstate" and, together with Fraser and Ridge, collectively referred to as the
"Founding Companies"). The consideration for the Acquisitions of the Founding
Companies consisted of a combination of cash and Common Stock. Because (i) the
stockholders of the Founding Companies owned a majority of the outstanding
shares of Common Stock following the Offering and the Acquisitions, and (ii) the
stockholders of Fraser received the greatest number of shares of Common Stock
among the stockholders of the Founding Companies, for financial statement
presentation purposes, Fraser has been identified as the accounting acquiror.
The acquisitions of Ridge and Interstate will be accounted for using the
purchase method of accounting. Therefore the accompanying historical financial
statements as of November 30, 1996 and March 2, 1997 and for the three month
periods ended February 29, 1996 and March 2, 1997 of Fraser are presented as the
historical financial statements of the registrant. Unless the context otherwise
requires, all references herein to the Company include PalEx and the Founding
Companies.
Operating results for interim periods are not necessarily indicative of the
results for full years. The financial statements included herein should be read
in conjunction with the Pro Forma Combined Financial Statements of the Company
and the related notes thereto, the Financial Statements of PalEx, Fraser and
Ridge and related notes thereto, and management's discussion and analysis of
financial condition and results of operations related thereto, all of which are
included in the Company's Registration Statement on Form S-1 (No. 333-18683), as
amended (the "Registration Statement"), filed with the SEC in connection with
the Offering.
3
<PAGE>
PALEX, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
NOVEMBER 30, MARCH 2, MARCH 2,
1996 1997 1997
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 4 $ 6 $ 346
Accounts receivable, net of
allowance of $57 .......................................... 2,852 3,406 8,500
Inventories ................................................. 2,750 3,431 8,503
Other current assets ........................................ -- -- 725
-------- -------- --------
Total current assets ........................... 5,606 6,843 18,074
PROPERTY, PLANT AND EQUIPMENT, net ............................... 7,279 7,280 14,126
GOODWILL ......................................................... -- -- 16,520
OTHER ASSETS ..................................................... 155 150 1,004
-------- -------- --------
Total assets ................................... $ 13,040 $ 14,273 $ 49,724
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit .............................................. $ 455 $ 1,105 $ --
Current Maturities of long-term debt ........................ 737 655 50
Accrued profit sharing contribution ......................... -- 375 268
Accounts payable ............................................ 1,487 1,912 3,084
Accrued expenses ............................................ 1,478 1,064 2,888
-------- -------- --------
Total current liabilities ...................... 4,157 5,111 6,290
LONG-TERM DEBT, net of current maturities ........................ 1,262 957 6,750
DEFERRED INCOME .................................................. 336 329 329
DEFERRED INCOME TAXES ............................................ 49 43 1,466
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value,
5,000,000 shares authorized, no
shares issued
Common stock, $.01 par value,
30,000,000 shares authorized and
10,123,889 outstanding ..................................... -- -- 100
Common stock, $1 par value;
200,000 shares authorized and 11,000
shares outstanding ........................................ 11 11 --
Additional paid-in capital .................................. 67 67 36,448
Retained earnings ........................................... 7,249 7,846 (1,659)
-------- -------- --------
7,327 7,924 34,889
less - 1,000 shares of common stock
in treasury, at cost ...................................... (91) (91) --
-------- -------- --------
7,236 7,833 34,889
-------- -------- --------
Total liabilities and
stockholders' equity ......................... $ 13,040 $ 14,273 $ 49,724
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PALEX, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-----------------------------------------------------------------------
HISTORICAL PRO FORMA
---------------------------------- ------------------------
FEBRUARY 29, MARCH 2, FEBRUARY 29, MARCH 2,
1996 1997 1996 1997
------------ ------------ ------- --------
<S> <C> <C> <C> <C>
REVENUES .......................................... $ 10,767 $ 12,405 $24,541 $ 28,117
COST OF GOODS SOLD ................................ 8,507 10,543 19,929 23,906
------------ ------------ ------- --------
Gross profit ............................. 2,260 1,862 4,612 4,211
SELLING, GENERAL AND ADMINISTRATIVE ............... 791 801 1,898 1,710
SUPPLEMENTAL PROFIT SHARING CONTRIBUTION .......... -- 375 -- 1,069
------------ ------------ ------- --------
Income from operations ................... 1,469 686 2,714 1,432
INTEREST EXPENSE .................................. 119 63 81 81
GOODWILL AMORTIZATION ............................. -- -- 139 139
OTHER INCOME (EXPENSE) ............................ (2) (26) 29 (27)
------------ ------------ ------- --------
INCOME BEFORE INCOME TAXES ........................ 1,348 597 2,523 1,185
PROVISION FOR INCOME TAXES ........................ -- -- 1,002 468
------------ ------------ ------- --------
NET INCOME ........................................ $ 1,348 $ 597 $ 1,521 $ 717
============ ============ ======= ========
EARNINGS PER SHARE ................................ $ .15 $ .07(1)
WEIGHTED AVERAGE SHARES OUTSTANDING ............... 10,123,889 10,123,889
</TABLE>
The accompanying notes are an integral part of these financial statements.
(1) Excluding the effect of the supplemental profit sharing contribution of $1.1
million ($637,000 net of tax), pro forma net income and pro forma earnings
per share would have been $1.4 million and $.13 per share respectively. See
Note 8 in Notes to the Financial Statements.
5
<PAGE>
PALEX, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED
----------------------------
FEBRUARY 29, MARCH 2,
1996 1997
------- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .................................................................. $ 1,348 $ 597
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization ...................................... 223 317
(Gain) loss on sale of assets ...................................... (4) 24
Changes in operating assets and liabilities -
Accounts receivable ............................................ 419 (554)
Inventories .................................................... (763) (681)
Other current assets ........................................... (15) --
Accounts payable and accrued expenses .......................... (252) 380
Other assets ................................................... 151 5
Deferred income ................................................ 21 (7)
------- -----
Net cash provided by operating activities .............................. 1,128 81
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ................................... (830) (375)
Proceeds from sale of equipment ............................................. 19 33
------- -----
Net cash used in investing activities .................................. (811) (342)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on)
short term borrowings net .............................................. (275) 650
Proceeds from (payments on)
long-term debt net ..................................................... (157) (387)
------- -----
Net cash used in financing activities .................................. (432) 263
------- -----
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................................ (115) 2
CASH AND CASH EQUIVALENTS --
beginning of three month period ............................................. 115 4
------- -----
CASH AND CASH EQUIVALENTS -
end of three month period ................................................... $ 0 $ 6
======= =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for -
Interest ............................................................... 119 63
Income taxes ........................................................... -- --
</TABLE>
The accompany notes are an integral part of these financial statements.
6
<PAGE>
PALEX, INC
NOTES TO FINANCIAL STATEMENTS
MARCH 2, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
PalEx was formed in January, 1996 to create a national provider of pallets
and related services. On March 25, 1997, PalEx acquired the Founding Companies
for consideration consisting of cash and Common Stock. The closing of the
Offering also occurred on that date.
For financial statement purposes, Fraser, one of the Founding Companies, has
been identified as the accounting acquiror. Accordingly, the historical
financial statements represent those of Fraser prior to the Acquisitions and the
Offering. The Acquisitions were accounted for using the purchase method of
accounting. The allocations of the purchase price to the assets acquired and
liabilities assumed of the Founding Companies has been initially assigned and
recorded based on preliminary estimates of fair value and may be revised as
additional information concerning the valuation of such assets and liabilities
becomes available.
The accompanying unaudited interim financial statements are prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and footnotes required by generally accepted accounting
principles for complete financial statements are not included herein. The
Company believes all adjustments necessary for a fair presentation of these
interim statements have been included and are of a normal and recurring nature.
The interim statements should be read in conjunction with the financial
statements and notes thereto included in the Registration Statement.
The pro forma financial information for the three month periods ended
February 29, 1996 and March 2, 1997 includes the results of PalEx combined with
the Founding Companies as if the Acquisitions had occurred at the beginning of
each respective three month period. The proforma combined financial information
includes the effects of (i) the Acquisitions (ii) the Offering (iii) certain
reductions in salaries and benefits to the former owners of the Founding
Companies to which they have agreed prospectively (iv) the distribution or sale
of certain assets prior to the Acquisitions to the former owners of the Founding
Companies and expenses related thereto (v) amortization of goodwill resulting
from the Acquisitions and (vi) advances under the Credit Facility (see Note 3 to
the Financial Statements) including decreases in interest expense resulting from
the repayment or refinancing
7
<PAGE>
of the Founding Companies' debt. The pro forma financial information may not be
comparable to and may not be indicative of the Company's post-Acquisition
results of operations because (i) the Founding Companies were not under common
control or management and (ii) the Company will use the purchase method to
establish a new basis of accounting to record the Acquisitions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective with the three month period ending March 2, 1997, the Company
maintains its accounting records using a 52/53 week year ending on the last
Sunday in November. Each quarter contains thirteen weeks and ends on a Sunday.
There has been no significant change in the accounting policies of the
Company during the periods presented. For a description of these policies, refer
to Note 2 of Notes to Financial Statements of PalEx and Fraser included in the
Financial Statements in the Company's Registration Statement.
3. CREDIT FACILITY
On March 25, 1997, the Company entered into a credit agreement with Bank
One, Texas, N.A. (the "Credit Facility"). The Credit Facility provides the
Company with an unsecured revolving line of credit of up to $35 million, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies, future acquisitions,
capital expenditures and working capital. Advances under the Credit Facility
bear interest at such bank's designated variable rate plus margins ranging from
0 to 25 basis points, depending on the ratio of the Company's interest bearing
debt to its pro forma trailing earnings before interest, taxes, depreciation and
amortization for the previous four quarters. At the Company's option, the loans
may bear interest based on a designated London interbank offering rate plus a
margin ranging from 75 to 175 basis points, depending on the same ratio.
Commitment fees of 25 basis points per annum are payable on the unused portion
of the line of credit. The Credit Facility contains a limit for standby letters
of credit up to $10.0 million. The Credit Facility prohibits the payment of
dividends by the Company, restricts the Company's incurring or assuming other
indebtedness and requires the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable March 25, 2004. The Company's
subsidiaries have guaranteed the repayment of all amounts due under the Credit
Facility. On the date of the Offering, the Company borrowed $6.2 million under
the Credit Facility at an interest rate of 8.25%. Subsequent to March 2, 1997,
the Company repaid $1.2 million with cash generated from operations and
converted the remaining $5.0 million of the borrowings to loans based on the
London interbank offering rate bearing various interest rates averaging
approximately 6.5%. The approximate level of available borrowings under the
Credit Facility at May 1, 1997 was $30.0 million.
8
<PAGE>
4. CAPITAL STOCK
On March 25, 1997, PalEx completed the Offering, which involved the sale by
PalEx of 3,000,000 shares of Common Stock at a price to the public of $7.50 per
share. The net proceeds to PalEx from the Offering (after deducting underwriting
discounts, commissions and offering expenses) were approximately $20.1 million.
Of this amount, $3.4 million was used to pay the cash portion of the purchase
prices relating to the acquisitions of the Founding Companies with the remainder
being used to pay certain indebedness of the Founding Companies.
On April 22, 1997, the Company sold an additional 450,000 shares of Common
Stock at a price to the public of $7.50 per share (generating net proceeds to
the Company of $3,138,750 after underwriting discounts and commissions) pursuant
to an over-allotment option granted by the Company to the underwriters in
connection with the Offering. The net proceeds were used to repay indebtedness
under the Credit Facility in the amounts of $2.0 million and $1.0 million on
April 22, 1997 and May 2, 1997, respectively.
5. EARNINGS PER SHARE
The historical periods presented represent the results of operations of
Fraser under its historical capital structure. Accordingly, earnings per share
of Fraser are not presented as they are not meaningful. The computation of pro
forma net income per share for the three month periods ended February 29, 1996
and March 2, 1997 is based on 10,123,889 shares of Common Stock outstanding,
which includes shares:
Issued in consideration for acquisition of Founding Companies .. 5,910,000
Sold pursuant to the Offering .................................. 3,000,000
Held by Main Street Capital Partners, L. P ..................... 1,021,389
Issued to profit sharing plans of Founding Companies ........... 142,500
Issued to management ........................................... 50,000
----------
10,123,889
The computation excludes options for 925,000 shares granted to management,
directors and key employees at the Offering date and the 450,000 shares sold on
April 22, 1997 pursuant to the exercise of the underwriters' over-allotment
option.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share", revising the methodology to be used in computing
earnings per share ("EPS") requiring that the computations required for primary
and fully diluted EPS be replaced with "basic" and "diluted" EPS. The Company
will adopt SFAS No. 128 effective November 30, 1997 and will restate EPS for all
periods presented. The Company anticipates that the amount reported for basic
EPS for the three month period ending March 2, 1997 will be unchanged.
9
<PAGE>
6. INCOME TAXES
Prior to the Acquisitions, the stockholders of Fraser elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, Fraser did not pay federal and certain state income taxes as
Fraser's stockholders paid income taxes on their proportionate share of
Fraser's earnings. Commencing with the Acquisitions, the Company will be taxed
at applicable federal and state income tax rates.
The Company intends to file a consolidated federal income tax return which
includes the operations of the Founding Companies for periods subsequent to the
acquisition date. The Founding Companies will each file a "short period" federal
income tax return through their respective acquisition dates.
The provision for income taxes included in the Pro Forma Statements of
Income for the three month periods ended February 29, 1996 and March 2, 1997
assumes the application of statutory federal and state income taxes rates and
the non-deductibility of goodwill amortization.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. While it is not possible to predict the outcome of
such proceedings with certainty, in the opinion of the Company, all such
proceedings are either adequately covered by insurance or, if not so covered
should not ultimately result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company 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 as operating leases.
Minimum future rental payments under the noncancelable operating leases as
of November 30, 1996 are as follows (in 000s):
Fiscal Years Ending
November 30, 1997 ................................ $ 746
November 29, 1998 ................................ 449
November 28, 1999 ................................ 251
November 26, 2000 ................................ 6
------
$1,452
======
10
<PAGE>
The leases provide for payment of taxes and other expenses by the Company.
Rent expense for operating leases was approximately $214,000, $324,000 in the
three-months ended February 29, 1996 and March 2, 1997, respectively.
8. SUPPLEMENTAL PROFIT SHARING CONTRIBUTION
During the three month period ended March 2, 1997, the Founding Companies
made supplemental contributions totaling $1.1 million to their respective profit
sharing plans. In connection with the Acquisitions, PalEx agreed to satisfy the
supplemental profit sharing obligations through the issuance of shares of PalEx
Common Stock.
11
<PAGE>
PALEX, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
INTRODUCTION
The following discussion should be read in conjunction with the Pro Forma
Financial Statements of the Company and related notes thereto, the Financial
Statements of PalEx, Fraser and Ridge and related notes thereto which are
included in the Company's Registration Statement. Statements contained in this
discussion regarding future financial performance and results and other
statements that are not historical facts are forward-looking statements. The
forward-looking statements are subject to numerous risks and uncertainties to
the Company, including but not limited to the availability of attractive
acquisitions opportunities, the successful integration and profitable management
of acquired businesses, improvement of operating efficiencies, the availability
of working capital and financing for future acquisitions, the Company's ability
to grow internally through expansion of services and customer bases and
reduction of overhead, conditions in lumber markets, seasonality, weather
conditions and other risk factors discussed in the Registration Statement.
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 the sum of the revenues,
cost of sales, gross profit, selling, general and administrative expenses and
supplementary profit sharing contributions for the individual Founding Companies
and PalEx on a historical basis and exclude the effects of proforma 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 and capital
structures during the periods presented and (ii) the Company will use the
purchase method to establish a new basis of accounting to record the
Acquisitions.
Quarterly results may also be materially affected by the timing and
magnitude of acquisitions, assimilation costs, costs of opening new facilities,
gain or loss of a material customer, variation in product mix and weather
conditions. Accordingly, the operating results for any three-month period are
not necessarily indicative of the results that may be achieved for any
subsequent three month period or for a full fiscal year.
12
<PAGE>
THREE MONTH PERIODS ENDED FEBRUARY 29, 1996 AND MARCH 2, 1997
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
THREE MONTH PERIOD ENDED
----------------------------------
FEBRUARY 29, 1996 MARCH 2, 1997
----------------- ---------------
Revenues ................................... $24,541 100.0 $28,117 100.0
Cost of Sales .............................. 19,954 81.3 23,930 85.1
------- ----- ------- -----
Gross Profit ...................... 4,587 18.7 4,187 14.9
Selling, general and administrative ........ 1,844 7.5 1,912 6.8
Supplemental profit sharing contribution ... -- -- 1,069 3.8
Combined revenues increased 14.6% from $24.5 million to $28.1 million. This
increase was partially attributable to an increase in the average sales price of
new pallets, an increase which reflects higher raw material costs, a portion of
which were passed on to customers in the form of higher sales prices. Sales to
CHEP, the Company's largest customer, increased from 29.3% of revenues in 1996
to 40.5% of revenues in 1997 as a result of increased orders. The increase in
orders from CHEP assisted the Company in partially offsetting a reduction in the
demand for pallets from the produce industry in south Florida during February
1997 as a result of freezing weather conditions occurring in late January, 1997.
Combined unit sales of new pallets increased from approximately 1.8 million
to 1.9 million and repaired and used pallet units increased from approximately
1.3 million to 1.7 million. Unit sales of agricultural harvesting boxes and
specialty bins decreased from 11,000 to 2,600 as a result of continued
competitive pressures from plastic boxes and bins.
Combined gross profit declined from approximately $4.6 million to $4.2
million and as a percentage of revenues from 18.7% to 14.9%, primarily as a
result of higher raw material costs resulting from the impact of wet weather
conditions on the harvesting of both hardwood and pine timber during the
three-month period ended March 2, 1997. Such conditions generally restricted the
supply of lumber and increased its cost. The Company believes that the increases
in the cost of pine lumber were also influenced by the operation of lumber
agreements between Canada and the U.S. and competition from other industries
that use similar grades and types of lumber. The Company has experienced some
delay in passing these higher raw material costs on to customers in the form of
higher sales prices due to competitive pressures.
Combined selling, general and administrative costs exclusive of supplemental
profit sharing contributions increased from approximately $1.8 million in 1996
to $1.9 million in 1997 and were 7.5% and 6.8% of revenues respectively. In
addition to recurring selling, general and administrative costs, the Founding
Companies made supplemental contributions to their respective profit sharing
plans of approximately $1.1 million during the three month period ended March 2,
1997.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - COMBINED
During the three month period ended March 2, 1997, net cash provided by
operating activities was $708,000, capital expenditures were $598,000 and net
repayment of debt amounted to $305,000. The Company anticipates capital
expenditures (exclusive of acquisitions and the construction of new market
facilities, if any) of approximately $2.5 million during the remainder of 1997,
primarily for the recurring replacement of machinery and equipment, and for the
improvements and expansion or relocation of existing facilities.
On March 25, 1997, PalEx completed the Offering, which involved the sale by
PalEx of 3,000,000 shares of Common Stock at a price to the public of $7.50 per
share. The net proceeds to PalEx from the Offering (after deducting underwriting
discounts, commissions and offering expenses) were approximately $20.1 million.
Of this amount, $3.4 million was used to pay the cash portion of the purchase
prices relating to the acquisitions of the Founding Companies with the remainder
being used to repay certain indebtedness of the Founding Companies.
On April 22, 1997, the Company sold an additional 450,000 shares of Common
Stock at a price to the public of $7.50 per share (generating net proceeds to
the Company of $3,138,750 after underwriting discounts and commissions) pursuant
to an over-allotment option granted by the Company to the underwriters in
connection with the Offering. The net proceeds were used to repay debt borrowed
under the Credit Facility in the amounts of $2.0 million and $1.0 million on
April 22, 1997 and May 2, 1997 respectively.
On March 25, 1997, the Company entered into a credit agreement with Bank
One, Texas, N.A. (the "Credit Facility"). The Credit Facility provides the
Company with an unsecured revolving line of credit of up to $35 million, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies, future acquisitions,
capital expenditures and working capital. Advances under the Credit Facility
bear interest at such bank's designated variable rate plus margins ranging from
0 to 25 basis points, depending on the ratio of the Company's interest bearing
debt to its pro forma trailing earnings before interest, taxes, depreciation and
amortization for the previous four quarters. At the Company's option, the loans
may bear interest based on a designated London interbank offering rate plus a
margin ranging from 75 to 175 basis points, depending on the same ratio.
Commitment fees of 25 basis points per annum are payable on the unused portion
of the line of credit. The Credit Facility contains a limit for standby letters
of credit up to $10.0 million. The Credit Facility prohibits the payment of
dividends by the Company, restricts the Company's incurring or assuming other
indebtedness and requires the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable March 25, 2004. The Company's
subsidiaries have guaranteed the repayment of all amounts due under
14
<PAGE>
the Credit Facility. On the date of the Offering, the Company borrowed $6.2
million under the Credit Facility, at an interest rate of 8.25%. Subsequent
to March 2, 1997, the Company repaid $1.2 million of such indebtedness with cash
generated from operations and converted the remaining $5.0 million of the
borrowings to loans based on the London interbank offering rate bearing various
interest rates averaging approximately 6.5%. The approximate level of available
borrowings available under the Credit Facility at May 1, 1997 was $30.0 million.
The Company intends to pursue acquisitions. The timing, size or success of
any acquisitions and the resulting additional capital commitments are
unpredictable. The Company expects to fund future acquisitions primarily through
a combination of issuances of aditional equity, working capital, cash flow from
operations and borrowings, including the unused portion of the Credit Facility.
There can be no assurance that the Company can secure such additional financing
if and when it is needed or on terms deemed acceptable to the Company.
SEASONALITY
The pallet manufacturing business can be subject to seasonal variations in
operations and demand. The Company has a significant number of agricultural
customers in the southeastern United States and typically experiences the
greatest demand for new pallets from these customers during the citrus and
produce harvesting seasons (generally October through May) with significantly
lower demand in the summer months. Yearly results can fluctuate significantly in
this region depending on the size of the citrus and produce harvest, which, in
turn, largely depend on the occurrence and severity of freezing weather.
Facilities in the southwestern United States supplying agricultural customers
can experience similar fluctuations. The Company's locations serving
predominantly manufacturing and industrial customers experience less
seasonality. Management believes that the effects of such seasonality will
diminish as the Company grows and expands it's customer base both internally and
through acquisition.
Adverse weather conditions may affect the Company's ability to obtain
adequate supplies of lumber at a reasonable cost. For example, the Company
experienced higher lumber costs resulting from the impact of wet weather on the
harvesting of both hardwood and pine timber during the three-month period ended
March 2, 1997. Additionally, freezing weather conditions in South Florida during
January, 1997 adversely impacted the produce harvest thereby reducing the demand
for pallets.
15
<PAGE>
RESULTS OF OPERATIONS - PALEX
The following table sets forth certain selected financial data for PalEx
(Fraser as the accounting acquiror) as a percentage of revenues for the periods
indicated:
THREE MONTH PERIODS ENDED
---------------------------------------
FEBRUARY 29, 1996 MARCH 2, 1997
----------------- -------------
Revenues ........................... $10,767 100.0 $12,405 100.0
Cost of Sales ...................... 8,507 79.0 10,543 85.0
------- ----- ------- -----
Gross Profit ................... 2,260 21.0 1,862 15.0
Selling, general and
administrative ................... 791 7.4 801 6.5
Supplemental profit
sharing contribution ............. -- -- 375 3.0
------- ----- ------- -----
Income from operations ......... 1,469 13.6 686 5.5
Interest expense ................... 119 1.1 63 .5
Other expense ...................... 2 -- 26 .2
------- ----- ------- -----
Income before tax .................. 1,348 12.5 597 4.8
Provision for income tax ........... -- -- -- --
------- ----- ------- -----
Net income ......................... $ 1,348 12.5 $ 597 4.8
======= ===== ======= =====
THREE MONTH PERIOD ENDING FEBRUARY 29, 1996 COMPARED TO MARCH 2, 1997
Revenue increased 15.2% from approximately $10.8 million to $12.4 million.
This increase is attributable to both the increase in overall volume of units
and to an increase in the average sales price. The increase in the average sales
price reflects higher raw material costs, a portion of which were passed on to
customers.
Gross profit as a percentage of revenues declined from approximately 21.0%
to 15.0%, primarily as a result of higher raw material costs resulting from the
impact of wet weather conditions on the harvesting of both hardwood and pine
timber during the three-month period ended March 2, 1997. See "Results of
Operations - Combined". A portion of the decline in gross profit is also
attributable to lost production time at the Company's New Boston, Texas
facility, resulting from the installation of new equipment during December 1996.
Selling, general and administrative expenses remained stable at
approximately $800,000.
Interest expense declined from $119,000 to $63,000 as the result of net
repayments of debt.
Net income declined from $1.3 million to $597,000.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - PALEX
During the three month period ending March 2, 1997, net cash provided by
operating activities was $81,000, capital expenditures were $375,000 and net
proceeds from debt borrowed under Fraser's credit facilities amounted to
$263,000. Increases in accounts receivable, inventory and accounts payable
occurred as a result of increased sales during the period. See "Liquidity
and Capital Resources - Combined" for discussion of the liquidity and capital
resources of the Company.
17
<PAGE>
PALEX, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
Subsidiaries of PalEx are involved in various legal proceedings that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty, in the opinion of the Company,
all such proceedings are either adequately covered by insurance or, if not so
covered should not ultimately result in any liability which would have a
material adverse effect on the financial position, liquidity or results of
operations of the Company.
Interstate and its shareholder are parties to non-competition agreements
which may restrict until January 14, 1998, Interstate's, Interstate's
affiliates, or such stockholder's ability to engage in any activity or business
enterprise or own an interest in any entity with engages in any active or
business enterprise which competes with First Alliance Logistics Management,
L.L.C. (the "Alliance"), an organization whose membership includes pallet
recyclers and manufacturers and was created to pursue the national global
marketing and management of pallets systems, including the sale or leasing of
pallets. The Company has been notified by the Alliance that it intends to
enforce the terms of the non-compete agreements as it deems appropriate,
although the Alliance has not to date commenced legal proceedings and the
Company does not know when, if ever, such proceedings would commence. The
agreements explicitly exclude from their coverage any product or services
offered or sold by Interstate before October, 1995, which are the same products
or services currently offered by Interstate. Because of the noncompete
provisions' short duration and exclusion of business currently conducted by
Interstate, the Company believes that such agreements will not have a material
adverse effect on its operations.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities by
the Company during the three month period ended March 2, 1997 that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
On March 25, 1997, the Company issued 5,910,000 shares of Common Stock to
the 13 stockholders of the Founding Companies as part of the consideration for
the Acquisitions. The Company also issued a total of 142,500 shares of Common
Stock to the Founding Companies' profit sharing plans. These shares of Common
Stock were issued without registration under the Securities Act in reliance on
the exemption provided by Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.1 -- Amended and Restated Agreement and Plan of Reorganization and
Merger dated as of December 20, 1996 between PalEx, Inc. and Ridge
Pallets, Inc.
10.2 -- Amended and Restated Agreement and Plan of Reorganization and
Merger dated as of December 20, 1996 between PalEx, Inc. and
Fraser Industries, Inc.
10.3 -- Amended and Restated Agreement and Plan of Reorganization and
Merger dated as of December 20, 1996 between PalEx, Inc. and
Interstate Pallet Co., Inc.
27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PALEX, INC.
Dated: May 2, 1997 By: /s/ CASEY A. FLETCHER
Casey A. Fletcher
Chief Accounting Officer
19
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION AND
MERGER (this "Agreement") is made effective as of the 20th day of December 1996,
by and among PalEx, Inc., a Delaware corporation ("PalEx"), Main Street Capital
Partners, L.P., a Texas limited partnership ("Main Street"), Ridge Resource
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
PalEx ("Subsidiary"), Ridge Pallets, Inc., a Florida corporation (the
"Company"), and the individual stockholders of the Company identified on
Schedule A to this Agreement (the "Stockholders").
WITNESSETH:
WHEREAS, the respective stockholders and Boards of Directors of
Subsidiary and the Company (collectively referred to as the "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that Subsidiary merge (the
"Merger") with and into the Company;
WHEREAS, the parties hereto have previously entered into an Agreement
and Plan of Reorganization and Merger effective as of December 20, 1996, and the
parties desire to amend and restate such agreement in its entirety;
WHEREAS, PalEx is entering into other agreements substantially similar
to this Agreement with each of Fraser Industries, Inc., a Texas corporation
("Fraser"), and Interstate Pallet, Co., a Virginia corporation ("Interstate"
and, together with the Company and Fraser, collectively referred to as the
"Founding Companies"), which agreements provide for the merger of subsidiaries
of PalEx with and into Fraser and Interstate simultaneously with the Merger; and
WHEREAS, the Boards of Directors of PalEx, Subsidiary and the Company
have approved and adopted this Agreement and intend the exchange of common stock
of the Company for common stock of PalEx to qualify under the provisions of
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, for and in consideration of the premises and of the
mutual representations, warranties, covenants and agreements contained in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
<PAGE>
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2), Subsidiary
shall be merged with and into the Company in accordance with the Delaware
General Corporation Law ("DGCL") and the Florida Business Corporation Act and
the separate existence of Subsidiary shall cease. The Company shall be the
surviving party in the Merger and is hereinafter sometimes referred to as the
"Surviving Corporation." The Merger will be effected in a single transaction.
SECTION 1.2. EFFECTIVE TIME OF MERGER. The Merger shall become effective
(the "Effective Time") at such time as shall be stated in Certificate of Merger
and Articles of Merger (collectively, the "Certificates of Merger") to be filed
with the Secretary of State of the States of Delaware and Florida, respectively.
The Constituent Corporations will cause the Certificates of Merger to be
executed and delivered to the Secretary of State of the State of Delaware and
the Secretary of State of the State of Florida on or before the Closing Date (as
defined in Article III).
SECTION 1.3. CERTIFICATE OF INCORPORATION, BY-LAWS, BOARD OF DIRECTORS
AND OFFICERS OF SURVIVING CORPORATION; BOARD OF DIRECTORS AND OFFICERS OF PALEX.
At the Effective Time of the Merger:
(a) Amended and Restated Articles of Incorporation with substantially
the same provisions as the Company's Articles of Incorporation then in effect
shall be filed and shall become the Articles of Incorporation of the Surviving
Corporation, and subsequent to the Effective Time, such Articles of
Incorporation shall be the Articles of Incorporation of the Surviving
Corporation until amended as provided by law;
(b) The By-laws of the Company then in effect shall become the By-laws
of the Surviving Corporation, and subsequent to the Effective Time, such By-laws
shall be the By-laws of the Surviving Corporation until they shall thereafter be
duly amended;
(c) The Boards of Directors of PalEx and the Surviving Corporation shall
consist of the persons identified on SCHEDULE 1.3(c) hereto. The Boards of
Directors of PalEx and the Surviving Corporation shall hold office subject to
the laws of the applicable state of incorporation and of the respective Articles
or Certificate of Incorporation and By-laws of such corporation; and
(d) The officers of PalEx and the Surviving Corporation shall be the
persons identified on SCHEDULE 1.3(d) hereto, each of such officers to serve
until such officer's successor is duly elected and qualified, subject to the
provisions of the Articles or
-2-
<PAGE>
Certificate of Incorporation and By-laws of PalEx or the Surviving Corporation,
as applicable, and the terms of any employment agreement executed by any such
officer.
SECTION 1.4. EFFECT OF MERGER. The identity, existence, purposes,
powers, objects, franchises, privileges, rights and immunities of the Company
shall continue unaffected and unimpaired by the Merger and the corporate
franchises, existence and rights of Subsidiary shall be merged with and into the
Company, as the Surviving Corporation. At the Effective Time of the Merger, the
separate existence of Subsidiary shall cease and, in accordance with the terms
of this Agreement, the Surviving Corporation shall possess all the rights,
privileges, immunities and franchises, of a public as well as of a private
nature, and all property, real, personal and mixed, and all debts due on
whatever account, including subscriptions for shares, all taxes, including those
due and owing and those accrued, and all other choses in action, and all and
every other interest of or belonging to or due to the Company and Subsidiary
shall be taken and deemed to be transferred to, and vested in, the Surviving
Corporation without further act or deed; and all property, rights and
privileges, powers and franchises and all and every other interest shall be
thereafter as effectually the property of the Surviving Corporation as they were
of the Company and Subsidiary; and the title to any real estate, or interest
therein, whether by deed or otherwise, under the laws of the state of
incorporation vested in the Company or Subsidiary, shall not revert or be in any
way impaired by reason of the Merger. Except as otherwise provided in this
Agreement, following the Merger the Surviving Corporation shall be responsible
and liable for all the liabilities and obligations of Subsidiary and PalEx and
any claim existing, or action or proceeding pending, by or against the Company
or Subsidiary may be prosecuted as if the Merger had not taken place, or the
Surviving Corporation may be substituted in their place. Neither the rights of
creditors nor any liens upon the property of the Company or Subsidiary shall be
impaired by the Merger, and all debts, liabilities and duties of the Company and
Subsidiary shall attach to the Surviving Corporation and may be enforced against
such Surviving Corporation to the same extent as if said debts, liabilities and
duties had been incurred or contracted by such Surviving Corporation.
ARTICLE II
CONVERSION OF STOCK
SECTION 2.1. MANNER OF CONVERSION. At the Effective Time, by virtue of
the Merger and without any action on the part of PalEx, Subsidiary, the Company
or any of the Stockholders:
(a) The shares of common stock, par value $1.00 per share, of the
Company (the "Company Stock") that are issued and outstanding immediately prior
to the Effective Time, automatically shall be deemed to represent the right to
receive that number of shares of common stock, par value $.01 per share, of
PalEx ("PalEx Common Stock") set
-3-
<PAGE>
forth in SCHEDULE 2.1. As of the Effective Time, all shares of Company Stock
shall no longer be outstanding and shall automatically be canceled and retired
and shall cease to exist, and each holder of a certificate representing any such
shares of Company Stock shall cease to have any rights with respect thereto,
except the right to receive that number of shares of PalEx Common Stock to be
issued in consideration therefore upon surrender of such certificate in
accordance with Section 2.2.
(b) All shares of Company Stock that are held by the Company as treasury
stock, if any, shall be canceled and retired and no shares of PalEx Common Stock
or other consideration shall be delivered or paid in exchange therefor.
(c) Each share of capital stock of Subsidiary issued and outstanding and
owned by PalEx shall, by virtue of the Merger and without any action on the part
of PalEx, be converted into one share of common stock, $.01 par value, of the
Company, as the Surviving Corporation.
SECTION 2.2. EXCHANGE OF CERTIFICATES FOR CONSIDERATION. At the Closing
(as defined in Article III), the Stockholders shall deliver to PalEx the
original certificates representing the Company Stock, duly endorsed in blank by
the Stockholders or accompanied by blank stock powers. The Stockholders agree
promptly to cure any deficiencies with respect to the endorsement of the
certificates or other documents of conveyance with respect to such Company
Stock. Upon surrender of such certificates, the Stockholders shall be entitled
to receive certificates representing the number of shares of PalEx Common Stock,
which shall be delivered on the Consummation Date (as defined in Article III).
ARTICLE III
THE CLOSING AND CONSUMMATION DATE
On the date of execution of the underwriting agreement (the
"Underwriting Agreement") relating to the initial public offering of PalEx
Common Stock (the "IPO"), the parties shall take all actions necessary (i) to
effect the Merger (including, if permitted by applicable state law, the filing
with the appropriate state authorities of the Certificates of Merger which shall
become effective on the Consummation Date (as defined below)) and (ii) to effect
the conversion and delivery of shares referred to in Section 2.2 (hereinafter
referred to as the "Closing"); PROVIDED, HOWEVER, that such actions shall not
include the actual completion of the Merger or the conversion and delivery of
the shares referred to in Article II, which actions shall be taken on the
Consummation Date. The Closing shall take place at a location mutually agreeable
to the Company and PalEx. The date on which the Closing shall occur shall be
referred to as the "Closing Date." On the Consummation Date, the Certificates of
Merger shall be filed with the appropriate state authorities, or if already
filed shall become effective, and all transactions contemplated by this
Agreement
-4-
<PAGE>
shall occur and be deemed to be completed. The Consummation Date shall be the
date on which the closing of the IPO occurs. During the period from the Closing
Date to the Consummation Date, this Agreement may only be terminated by the
parties if the Underwriting Agreement is terminated pursuant to the terms of
such agreement or as otherwise expressly provided herein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
The Company and Stockholders represent and warrant to PalEx as follows:
SECTION 4.1. ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Florida and has the requisite corporate power and authority to
own, lease and operate its assets and properties and to carry on its business as
it is now being conducted. The Company is qualified to do business and is in
good standing in each jurisdiction in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in good
standing will not, when taken together with all other such failures, have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of the
Company (a "Company Material Adverse Effect"). True, accurate and complete
copies of the Company's Articles of Incorporation and By-laws, in each case as
in effect on the date hereof, including all amendments thereto, have heretofore
been delivered to PalEx.
SECTION 4.2. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 5,000,000
shares of Company Stock and no shares of preferred stock. As of December 20,
1996, 549,500 shares of Company Stock and no shares of preferred stock were
issued and outstanding. All of such issued and outstanding shares are validly
issued and are fully paid, nonassessable and free of preemptive rights. The
Stockholders own beneficially and of record all of the shares of the Company
Stock, which constitutes all of the outstanding shares of capital stock of the
Company, and, except as described in SCHEDULE 4.2, such Company Stock is owned
free and clear of all liens, claims or encumbrances of any nature. As a result
of the Merger, the Stockholders will convey and transfer to PalEx good and
marketable title to the Company Stock owned by them.
(b) Except as set forth on SCHEDULE 4.2 attached hereto, as of the date
hereof there were no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement
-5-
<PAGE>
to issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of the capital stock of the Company or obligating the Company to grant,
extend or enter into any such agreement or commitment or obligating any of the
Stockholders to convey or transfer any Company Stock. There are no voting
trusts, proxies or other agreements or understandings to which the Company or
any of the Stockholders is a party or is bound with respect to the voting of any
shares of capital stock of the Company.
SECTION 4.3. NO SUBSIDIARIES. The Company has no subsidiaries and,
except as set forth on SCHEDULE 4.3, it does not own any capital stock of any
corporation or any interest in any partnership, joint venture or limited
liability company.
SECTION 4.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. This
Agreement has been approved by the Board of Directors of the Company and by the
Stockholders, and no other corporate proceedings on the part of the Company are
necessary to authorize the execution and delivery of this Agreement or the
consummation by the Company of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Company and the
Stockholders, and, assuming the due authorization, execution and delivery hereof
by PalEx and Main Street, constitutes a valid and legally binding agreement of
the Company and the Stockholders, enforceable against the Company and the
Stockholders in accordance with its terms, except that such enforcement may be
subject to (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting or relating to enforcement of creditors' rights generally
and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by each of the Company
and the Stockholders do not violate, conflict with or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
the Company under any of the terms, conditions or provisions of (i) the articles
of incorporation or by-laws of the Company (ii) any statute, law, ordinance,
rule, regulation, judgment, decree, order, injunction, writ, permit or license
of any court or governmental authority applicable to the Company or any of its
properties or assets, or (iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which the Company or any of
the Stockholders is now a party or by which any of the Stockholders or the
Company or any of its properties or assets may be bound or affected. The
consummation by the Company and the Stockholders of the transactions
contemplated hereby will not result in any violation, conflict, breach, right of
termination or acceleration or creation of
-6-
<PAGE>
liens under any of the terms, conditions or provisions of the items described in
clauses (i) through (iii) of the preceding sentence, subject, in the case of the
terms, conditions or provisions of the items described in clause (iii) above, to
obtaining (prior to the Effective Time) consents required from commercial
lenders, lessors or other third parties. Excluded from the foregoing sentences
of this paragraph (b), insofar as they apply to the terms, conditions or
provisions of the items described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, reasonably be expected
to have a Company Material Adverse Effect.
(c) Except for (i) the filing in connection with the IPO of a
registration statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission ("SEC") pursuant to the Securities Act of
1933 (the "1933 Act"), (ii) the declaration of the effectiveness thereof by the
SEC and filings with various state blue sky authorities, and (iii) the making of
the Merger Filings with the Secretary of State of the State of Delaware and the
Secretary of State of the State of Florida in connection with the Merger, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and delivery of this Agreement by the Company and
the Stockholders or the consummation by the Company and the Stockholders of the
transactions contemplated hereby.
SECTION 4.5. FINANCIAL STATEMENTS. The audited financial statements for
the fiscal year ended July 28, 1996 and unaudited interim financial statements
of the Company for the three months ended October 27, 1996 (collectively, the
"Company Financial Statements") have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and fairly present the financial
position of the Company as of the dates thereof and the results of its
operations and changes in financial position for the periods then ended,
subject, in the case of the unaudited interim financial statements, to normal
year-end and audit adjustments and any other adjustments described therein.
SECTION 4.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in
SCHEDULE 4.6 attached hereto, the Company did not have at October 27, 1996, nor
has it incurred since that date, any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except (a)
liabilities, obligations or contingencies (i) which are accrued or reserved
against in the Company Financial Statements or reflected in the notes thereto or
(ii) which were incurred after October 27, 1996 and were incurred in the
ordinary course of business and consistent with past practices, and (b)
liabilities and obligations which are of a nature not required to be reflected
in the Company Financial Statements prepared in accordance with generally
accepted accounting principles consistently applied and which were incurred in
the normal course of business and are described on SCHEDULE 4.6. SCHEDULE 4.6
includes a reasonable
-7-
<PAGE>
estimate by the Company and the Stockholders of the maximum amount which may
become payable with respect to any such liabilities which are contingent.
SECTION 4.7. ACCOUNTS AND NOTES RECEIVABLE. SCHEDULE 4.7 sets forth an
accurate list of the accounts and notes receivable of the Company as of December
19, 1996, including any such amounts which are not reflected in the Company's
balance sheet. Receivables from and advances to employees, the Stockholders and
any entities or persons related to or affiliated with the Stockholders are
separately identified on SCHEDULE 4.7. SCHEDULE 4.7 also sets forth an accurate
aging of all accounts and notes receivable as of November 30, 1996 showing
amounts due in 30-day aging categories. The trade and other accounts receivable
of the Company which are classified as current assets on the October 27, 1996
balance sheet are bona fide receivables, were acquired in the ordinary course of
business, are stated in accordance with generally accepted accounting principles
and, subject to the reserve for doubtful accounts, need not be written-off as
uncollectible.
SECTION 4.8. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since July 28, 1996,
there has not been any material adverse change in the business, operations,
properties, assets, liabilities, condition (financial or other), results of
operations or prospects of the Company, nor, except as disclosed in SCHEDULE 4.8
has there been:
(i) any damage, destruction or loss (whether or not covered by
insurance) alone or in the aggregate, materially adversely
affecting the properties or business of the Company;
(ii) any change in the authorized capital stock of the Company or in
its securities outstanding or any change in the Stockholders'
ownership interests or any grant of any options, warrants, calls,
conversion rights or commitments;
(iii) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect
redemption, purchase or other acquisition of any of the capital
stock of the Company;
(iv) any increase in the compensation payable or to become payable by
the Company to the Stockholders or any of its officers,
directors, employees, consultants or agents, except for ordinary
and customary bonuses and salary increases for employees in
accordance with past practice;
(v) any work interruptions, labor grievances or claims filed, or any
proposed law, regulation or event or condition of any character
materially adversely affecting the business or future prospects
of the Company;
-8-
<PAGE>
(vi) any sale or transfer, or any agreement to sell or transfer, any
material assets, properties or rights of the Company to any
person, including, without limitation, the Stockholders and their
affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company;
(viii) any increase in the Company's indebtedness, other than accounts
payable incurred in the ordinary course of business;
(ix) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets,
property or rights of the Company or requiring consent of any
party to the transfer and assignment of any such assets, property
or rights;
(x) any purchase or acquisition of, or agreement, plan or arrangement
to purchase or acquire, any property, rights or assets outside of
the ordinary course of the Company's business;
(xi) any waiver of any material rights or claims of the Company;
(xii) any material breach, amendment or termination of any material
contract, agreement, license, permit or other right to which the
Company is a party or any of its property is subject; or
(xiii) any transaction by the Company outside the ordinary course of
business.
SECTION 4.9. LITIGATION. Except as disclosed in the SCHEDULE 4.9
attached hereto, there are no claims, suits, actions or proceedings pending or,
to the knowledge of the Company or any of the Stockholders, threatened against,
relating to or affecting the Company or any of the Stockholders, before any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator that seek to restrain the consummation of the
Merger or which could reasonably be expected, either alone or in the aggregate
with all such claims, actions or proceedings, to have a Company Material Adverse
Effect. Except as disclosed in SCHEDULE 4.9 attached hereto, neither the Company
nor any of the Stockholders is not subject to any judgment, decree, injunction,
rule or order of any court, governmental department, commission, agency,
instrumentality or authority, or any arbitrator which prohibits or restricts the
consummation of the transactions contemplated hereby or would have a Company
Material Adverse Effect.
SECTION 4.10. REGISTRATION STATEMENT. To the best of the Company's and
Stockholders' knowledge and belief, none of the information to be supplied by
the Company for inclusion in the Registration Statement will contain any untrue
statement of
-9-
<PAGE>
a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
SECTION 4.11. NO VIOLATION OF LAW. Except as disclosed in SCHEDULE 4.11
attached hereto, the Company is not in violation of nor has it been given notice
or been charged with any violation of, any law, statute, order, rule,
regulation, ordinance or judgment (including, without limitation, any applicable
environmental law, ordinance or regulation) of any governmental or regulatory
body or authority, except for violations which, in the aggregate, could not
reasonably be expected to have a Company Material Adverse Effect. Except as
disclosed in SCHEDULE 4.11 attached hereto, as of the date of this Agreement, no
investigation or review by any governmental or regulatory body or authority is
pending or, to the knowledge of the Company, threatened, nor has any
governmental or regulatory body or authority indicated an intention to conduct
the same, other than, in each case, those the outcome of which, as far as
reasonably can be foreseen, will not have a Company Material Adverse Effect. The
Company has all permits, licenses, franchises, variances, exemptions, orders and
other governmental authorizations, consents and approvals necessary to conduct
their businesses as presently conducted (collectively, the "Company Permits"),
except for permits, licenses, franchises, variances, exemptions, orders,
authorizations, consents and approvals the absence of which, alone or in the
aggregate, would not have a Company Material Adverse Effect. The Company is not
in violation of the terms of any Company Permit, except for delays in filing
reports or violations which, alone or in the aggregate, would not have a Company
Material Adverse Effect.
SECTION 4.12. COMPLIANCE WITH AGREEMENTS. Except as disclosed in
SCHEDULE 4.12 attached hereto, the Company is not in breach or violation of or
in default in the performance or observance of any term or provision of, and no
event has occurred which, with lapse the of time or action by a third party,
could result in a default under, (a) the charter, by-laws or similar
organizational instruments of the Company or (b) any contract, commitment,
agreement, indenture, mortgage, loan agreement, note, lease, bond, license,
approval or other instrument to which the Company is a party or by which it is
bound or to which any of its property is subject, which breaches, violations and
defaults, in the case of clause (b) of this SECTION 4.12, would have, in the
aggregate, a Company Material Adverse Effect.
SECTION 4.13. TAXES.
(a) The Company has (i) duly filed with the appropriate governmental
authorities or will have when due all Tax Returns required to be filed for all
periods ending on or prior to the Effective Time, other than those Tax Returns
the failure of which to file would not have a Company Adverse Effect and such
Tax Returns are true, correct and complete in all material respects, and (ii)
duly paid in full or made adequate provision for the payment
-10-
<PAGE>
of all Taxes for all periods ending at or prior to the Effective Time. The
liabilities and reserves for Taxes reflected in the Company Financial Statements
are adequate to cover all Taxes for all periods ending at or prior to the
Effective Time and there are no material liens for Taxes upon any property or
asset of the Company thereof, except for liens for Taxes not yet due. There are
no unresolved issues of law or fact arising out of a notice of deficiency,
proposed deficiency or assessment from the IRS or any other governmental taxing
authority with respect to Taxes of the Company which, if decided adversely,
singly or in the aggregate, would have a Company Material Adverse Effect. The
Company is not a party to any agreement providing for the allocation or sharing
of Taxes with any entity that is not, directly or indirectly, a wholly-owned
corporate subsidiary of Company. Neither the Company nor any of its corporate
subsidiaries has, with regard to any assets or property held, acquired or to be
acquired by any of them, filed a consent to the application of Section 341(f) of
the Code. The Company made a valid election under Section 1362(a) of the Code,
effective May 23, 1994, to be taxed as an S corporation under the Code. As of
immediately prior to the Closing, the Company will qualify as an S corporation
within the meaning of Subchapter S of the Code.
(b) For purposes of this Agreement, the term "Taxes" shall mean all
taxes, including, without limitation, income, gross receipts, excise, property,
sales, employment, withholding, social security, occupation, use, service,
service use, license, payroll, franchise, transfer and recording taxes, fees and
charges, windfall profits, severance, customs, import, export, employment or
similar taxes, charges, fees, levies or other assessments imposed by the United
States, or any state, local or foreign government or subdivision or agency
thereof, whether computed on a separate, consolidated, unitary, combined or any
other basis, and such term shall include any interest, fines, penalties or
additional amounts and any interest in respect of any additions, fines or
penalties attributable or imposed or with respect to any such taxes, charges,
fees, levies or other assessments.
(c) For purposes of this Agreement, the term "Tax Return" shall mean any
return, report or other document or information required to be supplied to a
taxing authority in connection with any Taxes.
SECTION 4.14. EMPLOYEE BENEFIT PLANS; ERISA.
(a) Except as set forth in SCHEDULE 4.14 attached hereto, at the date
hereof, the Company does not maintain or contribute to any material employee
benefit plans, programs, arrangements and practices (such plans, programs,
arrangements and practices of the Company being referred to as the "COMPANY
PLANS"), including employee benefit plans within the meaning set forth in
Section 3(3) of ERISA, or other similar material arrangements for the provision
of benefits (excluding any "MULTI-EMPLOYER PLAN" within the meaning of Section
3(37) of ERISA or a "MULTIPLE EMPLOYER PLAN" within the meaning of Section
413(c) of the Code). SCHEDULE 4.14(A) attached hereto lists all Multi-employer
-11-
<PAGE>
Plans and Multiple Employer Plans which the Company maintains or to which it
makes contributions. The Company does not have any obligation to create any
additional such plan or to amend any such plan so as to increase benefits
thereunder, except as required under the terms of the Company Plans, under
existing collective bargaining agreements or to comply with applicable law.
(b) Except as disclosed in SCHEDULE 4.14 attached hereto, (i) there have
been no prohibited transactions within the meaning of Section 406 or 407 of
ERISA or Section 4975 of the Code with respect to any of the Company Plans that
could result in penalties, taxes or liabilities which, singly or in the
aggregate, could have a Company Material Adverse Effect, (ii) except for
premiums due, there is no outstanding material liability, whether measured alone
or in the aggregate, under Title IV of ERISA with respect to any of the Company
Plans, (iii) neither the Pension Benefit Guaranty Corporation nor any plan
administrator has instituted proceedings to terminate any of the Company Plans
subject to Title IV of ERISA other than in a "STANDARD TERMINATION" described in
Section 4041(b) of ERISA, (iv) none of the Company Plans has incurred any
"ACCUMULATED FUNDING DEFICIENCY" (as defined in Section 302 of ERISA and Section
412 of the Code), whether or not waived, as of the last day of the most recent
fiscal year of each of the Company Plans ended prior to the date of this
Agreement, (v) the current present value of all projected benefit obligations
under each of the Company Plans which is subject to Title IV of ERISA did not,
as of its latest valuation date, exceed the then current value of the assets of
such plan allocable to such benefit liabilities, based upon reasonable actuarial
assumptions currently utilized for such Company Plan, (vi) each of the Company
Plans has been operated and administered in all material respects in accordance
with applicable laws during the period of time covered by the applicable statute
of limitations, (vii) each of the Company Plans which is intended to be
"QUALIFIED" within the meaning of Section 401(a) of the Code has been determined
by the Internal Revenue Service to be so qualified and such determination has
not been modified, revoked or limited by failure to satisfy any condition
thereof or by a subsequent amendment thereto or a failure to amend, except that
it may be necessary to make additional amendments retroactively to maintain the
"QUALIFIED" status of such Company Plans, and the period for making any such
necessary retroactive amendments has not expired, (viii) with respect to
Multi-employer Plans, the Company has not made or suffered a "COMPLETE
WITHDRAWAL" or a "PARTIAL WITHDRAWAL," as such terms are respectively defined in
Sections 4203, 4204 and 4205 of ERISA and, to the best knowledge of the Company,
no event has occurred or is expected to occur which presents a material risk of
a complete or partial withdrawal under said Sections 4203, 4204 and 4205, (ix)
to the best knowledge of the Company, there are no material pending, threatened
or anticipated claims involving any of the Company Plans other than claims for
benefits in the ordinary course, and (x) the Company has no current material
liability, whether measured alone or in the aggregate, for plan termination or
complete withdrawal or partial withdrawal under Title IV of ERISA based on any
plan to which any entity that would be deemed one employer with the Company
under Section 4001 of ERISA or Section 414 of the Code contributed during the
period of time
-12-
<PAGE>
covered by the applicable statute of limitations (the "COMPANY CONTROLLED GROUP
PLANS"), and the Company does not reasonably anticipate that any such liability
will be asserted against the Company. None of the Company Controlled Group Plans
has an "ACCUMULATED FUNDING DEFICIENCY" (as defined in Section 302 of ERISA and
412 of the Code).
(c) SCHEDULE 4.14 attached hereto contains a true and complete summary
or list of or otherwise describes all employment contracts and employee benefit
arrangements with all employees of the Company.
SECTION 4.15. LABOR MATTERS. Except as set forth in SCHEDULE 4.15
attached hereto, (a) there are no significant controversies pending or, to the
knowledge of the Company, threatened between the Company and any of its
employees, (b) none of the Company's employees is represented by a labor union
or covered by a collective bargaining agreement, and to the knowledge of the
Company, there are no organizational efforts and no campaign is under way to
establish such representation or coverage, (c) the Company has, to the knowledge
of the Company, complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (d) no person has, to the knowledge of the
Company, asserted that the Company is liable in any material amount for any
arrears of wages or any taxes or penalties for failure to comply with any of the
foregoing, except for such controversies, organizational efforts, non-compliance
and liabilities which, singly or in the aggregate, could not reasonably be
expected to have a Company Material Adverse Effect.
SECTION 4.16. ENVIRONMENTAL MATTERS.
(a) To the best of the Company's and Stockholders' knowledge and belief,
except as set forth in SCHEDULE 4.16 attached hereto, (i) the Company has
conducted its businesses in compliance with all 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, (ii) none of the properties owned by the Company contain
any Hazardous Substance as a result of any activity of the Company in amounts
exceeding the levels permitted by applicable Environmental Laws, (iii) the
Company has not 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 may be in violation of, or liable under, any
Environmental Law in connection with the ownership or operation of its business,
(iv) there are no civil, criminal or administrative actions, suits, demands,
claims, hearings, investigations or proceedings pending or threatened, against
the Company relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be filed,
by the Company concerning the release of any Hazardous Substance or the
threatened or actual violation of any Environmental Law, (vi) no Hazardous
Substance has been disposed of, released or transported in violation of any
-13-
<PAGE>
applicable Environmental Law from any properties owned by the Company as a
result of any activity of the Company during the time such properties were
owned, leased or operated by the Company, (vii) 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 relating to the activities of the
Company which are not listed on SCHEDULE 4.16 attached hereto prior to the date
hereof, (viii) there are no underground storage tanks on, in or under any
properties owned by the Company 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, (ix) there is no asbestos or
asbestos containing material present in any of the properties owned by the
Company, and no asbestos has been removed from any of such properties during the
time such properties were owned, leased or operated by the Company, and (x)
neither the Company nor any of its 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 (i) through (x) that, singly or in the aggregate, would
not reasonably be expected to have a Company Material Adverse Effect.
(b) 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
(x) 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 (y) 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, (i) 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 (ii) 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.
-14-
<PAGE>
(c) 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
government 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, radioactive material, asbestos or
asbestos containing material, urea formaldehyde foam insulation, lead or
polychlorinated biphenyls.
SECTION 4.17. TITLE TO ASSETS. The Company has good and marketable title
in fee simple to all its real property and good title to all its leasehold
interests and other properties, as reflected in the most recent balance sheet
included in the Company Financial Statements, except for the assets which are to
be sold or dividended to the Stockholders pursuant to Section 6.4 and properties
and assets that have been disposed of in the ordinary course of business since
the date of such balance sheet, free and clear of all mortgages, liens, pledges,
charges or encumbrances of any nature whatsoever, except (i) the lien for
current taxes, payments of which are not yet delinquent, (ii) such imperfections
in title and easements and encumbrances, if any, as are not substantial in
character, amount or extent and do not materially detract from the value, or
interfere with the present use of the property subject thereto or affected
thereby, or otherwise materially impair the Company's business operations (in
the manner presently carried on by the Company), and (iii) except for such
matters which, singly or in the aggregate, could not reasonably be expected to
have a Company Material Adverse Effect. All leases under which the Company
leases any substantial amount of real or personal property have been delivered
to PalEx and are in good standing, valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event which with notice or lapse of time or both would become a
default other than defaults under such leases which in the aggregate will not
cause a Company Material Adverse Effect
SECTION 4.18. INSURANCE. SCHEDULE 4.18 sets forth an accurate list as of
September 30, 1996 of all insurance policies carried by the Company and of all
insurance claims or losses in excess of $50,000 or material workmen's
compensation claims received for the past five (5) policy years. Also attached
to SCHEDULE 4.18 are true, complete and correct copies of all of the Company's
insurance policies, covering at least the past three years. None of such
policies is a "claims made" policy. The insurance policies set forth on SCHEDULE
4.18 provide adequate coverage against the risks involved in the Company's
business. Such policies are currently in full force and effect.
SECTION 4.19. INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY
TRANSACTIONS. Except as described on SCHEDULE 4.19, no Stockholder, officer,
director or affiliate of the Company (i) possesses, directly or indirectly, any
financial interest in, or
-15-
<PAGE>
is a director, officer, employee or affiliate of, any corporation, firm,
association or business organization that is a client, supplier, customer,
lessor, lessee or competitor of the Company, or (ii) is a party to an agreement
or relationship, that involves the receipt by such person of compensation or
property from the Company other than through a customary employment
relationship.
SECTION 4.20. BUSINESS RELATIONS. SCHEDULE 4.20 contains an accurate
list of all customers of the Company representing five percent (5%) or more of
the Company's revenues for the twelve (12) months ended July 28, 1996 and the
three (3) months ended October 27, 1996. Except as set forth on SCHEDULE 4.20,
since July 30, 1995, none of the Company's significant customers has canceled or
substantially reduced its purchases from the Company, nor are any of such
customers threatening to do so. Except as set forth on SCHEDULE 4.20, since July
30, 1995, the Company has not experienced any difficulties in obtaining any
inventory items necessary to the operation of its business, and, to the
knowledge of the Company and the Stockholders, no such shortage of supply of
inventory items is threatened or pending. To the knowledge of the Company and
the Stockholders, no customer or supplier of the Company will cease to do
business with, or substantially reduce its purchases from, the Company after the
consummation of the transactions contemplated hereby, which cessation or
reduction would reasonably be expected to have a Company Material Adverse
Effect. The Company is not required to provide any bonding or other financial
security arrangements in any material amount in connection with any transactions
with any of its customers or suppliers.
SECTION 4.21. DISCLOSURE. The Stockholders have fully provided PalEx
with all the information that PalEx has requested in analyzing whether to
consummate the Merger. To the best of the Company's and Stockholders' knowledge
and belief, none of the information so provided nor any representation or
warranty of the Stockholders contained in this Agreement contains any untrue
statement regarding a material fact or omits to state a material fact necessary
in order to make the statements made herein or in the information provided, in
light of the circumstances under which they were made, not misleading.
SECTION 4.22. TRADEMARKS AND INTELLECTUAL PROPERTY COMPLIANCE. Company
owns or has the right to use, without any material payment to any other party,
all of its patents, trademarks (registered or unregistered), trade names,
service marks, copyrights and applications ("Intellectual Property Rights") and
the consummation of the transactions contemplated hereby will not alter or
impair such rights in any material respect. To the best of the Company's and
Stockholders' knowledge and belief, no claims are pending by any person with
respect to the ownership, validity, enforceability or use of any such
Intellectual Property Rights challenging or questioning the validity or
effectiveness of any of the foregoing which claims could reasonably be expected
to have a Company Material Adverse Effect.
-16-
<PAGE>
SECTION 4.23. NO IMPLIED REPRESENTATIONS. Notwithstanding anything
contained in this Article or any other provision of this Agreement or any of the
related documents, it is the explicit understanding of each party hereto that
the Company and the Stockholders are not making any representation or warranty
whatsoever, express or implied, other than those representations and warranties
of the Company and the Stockholders in this Agreement and the related documents.
It is understood that any estimates, projections or other predictions which
otherwise have been provided to PalEx are not and shall not be deemed to be
representations or warranties of the Company or the Stockholders, but as the
good faith estimates and assumptions of the Company and the Stockholders
intended to be reasonable at the time made concerning the most likely course of
the Company and its businesses. The Company, the Stockholders and PalEx
acknowledge that there are uncertainties inherent in attempting to make such
estimates, projections and other predictions, that the Company, the Stockholders
and PalEx are familiar with such uncertainties, that the Company, the
Stockholders and PalEx are taking full responsibility for making their own
evaluation of the adequacy and accuracy of all estimates, projections and other
predictions so furnished to them, and that neither PalEx, the Stockholders nor
any of the Founding Companies shall have any claim against anyone with respect
thereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES of PalEx and SUBSIDIARY
PalEx and Subsidiary represent and warrant to the Company as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION.
(a) PalEx is a corporation duly organized, validly existing and in good
standing under the laws of the state of Delaware and has the requisite power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. True, accurate and complete copies of
each of PalEx's Certificate of Incorporation and By-laws, as in effect on the
date hereof, including all amendments thereto, have heretofore been delivered to
the Company.
(b) Subsidiary is a corporation duly organized, validly existing and
good standing under the laws of the State of Delaware and has the requisite
power and authority to own, lease and operate its assets and properties and to
carry on its business as it is now being conducted. Subsidiary is qualified to
do business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so qualified
and in good standing will not, when taken together with all other such failures,
have a material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of
Subsidiary. True,
-17-
<PAGE>
accurate and complete copies of each of Subsidiary's Certificate of
Incorporation and By-laws, as in effect on the date hereof, including all
amendments thereto, have heretofore been delivered to the Company.
SECTION 5.2. CAPITALIZATION.
(a) The authorized capital stock of PalEx consists of (i) 30,000,000
shares of PalEx Common Stock, of which 1,071,389 shares were outstanding as of
December 20, 1996, and (ii) 5,000,000 shares of preferred stock, par value $.01
per share, none of which was issued and outstanding as of December 20, 1996. All
of the issued and outstanding shares of PalEx Common Stock are validly issued
and are fully paid, nonassessable and free of preemptive rights.
(b) Except as set forth on SCHEDULE 5.2 attached hereto, as of the date
hereof, there are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement obligating PalEx to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of the capital stock of
PalEx or obligating PalEx to grant, extend or enter into any such agreement or
commitment, except that PalEx declared a stock split prior to executing this
Agreement which resulted in Main Street owning 1,021,389 shares and Vance K.
Maultsby, Jr. owning 50,000 shares of PalEx Common Stock. There are no voting
trusts, proxies or other agreements or understandings to which PalEx is a party
or is bound with respect to the voting of any shares of capital stock of PalEx.
The shares of PalEx Common Stock issued to stockholders of the Company in the
Merger will be at the Effective Time duly authorized, validly issued, fully paid
and nonassessable and free of preemptive rights.
SECTION 5.3. NO SUBSIDIARIES. Except as set forth on SCHEDULE 5.3, PalEx
has no subsidiaries and it does not own any capital stock of any corporation or
any interest in any partnership, joint venture or limited liability company.
SECTION 5.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) PalEx and Subsidiary have full corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been approved by the Board of Directors and
stockholders of PalEx and Subsidiary, and no other corporate proceedings on the
part of PalEx or Subsidiary are necessary to authorize the execution and
delivery of this Agreement or the consummation by PalEx and Subsidiary of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by PalEx and Subsidiary, and, assuming the due authorization,
execution and delivery hereof by the Company and the Stockholders, constitutes a
valid and legally binding agreement of PalEx and Subsidiary enforceable
-18-
<PAGE>
against each of them in accordance with its terms, except that such enforcement
may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting or relating to enforcement of creditors' rights
generally and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by PalEx and Subsidiary
does not violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of PalEx or
Subsidiary under any of the terms, conditions or provisions of (i) the charter
or by-laws of PalEx or Subsidiary, as applicable, (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to PalEx or
Subsidiary or any of their respective properties or assets or (iii) any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which PalEx or Subsidiary is now a party or by which PalEx or Subsidiary
or any of their respective properties or assets may be bound or affected. The
consummation by PalEx and Subsidiary of the transactions contemplated hereby
will not result in any violation, conflict, breach, right of termination or
acceleration or creation of liens under any of the terms, conditions or
provisions of the items described in clauses (i) through (iii) of the preceding
sentence, subject, in the case of the terms, conditions or provisions of the
items described in clause (ii) above, to obtaining (prior to the Effective Time)
PalEx Required Statutory Approvals (as defined in Section 5.4(c)) and, in the
case of the terms, conditions or provisions of the items described in clause
(iii) above, to obtaining (prior to the Effective Time) consents required from
commercial lenders, lessors or other third parties. Excluded from the foregoing
sentences of this paragraph (b), insofar as they apply to the terms, conditions
or provisions of the items described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, have a material
adverse effect on the business, operations, properties, assets, condition
(financial or other), results of operations or prospects of PalEx or Subsidiary
(a "PalEx Material Adverse Effect").
(c) Except for (i) the filing of the Registration Statement the SEC
pursuant to the 1933 Act, (ii) the declaration of the effectiveness thereof by
the SEC and filings with various state blue sky authorities, and (iii) the
making of the Merger Filing with the Secretary of State of the State of Delaware
and the Secretary of State of the State of Florida in connection with the
Merger, the filings and approvals referred to in clauses (i) through (iii) are
collectively referred to as the "PALEX REQUIRED STATUTORY APPROVALS", no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any governmental or regulatory body or authority is
necessary for the execution and
-19-
<PAGE>
delivery of this Agreement by PalEx or Subsidiary or the consummation by PalEx
or Subsidiary of the transactions contemplated hereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in the
aggregate, have a PalEx Material Adverse Effect.
SECTION 5.5. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed to
the Company in writing, neither PalEx nor Subsidiary have incurred any
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
of any nature, except those incurred in connection with the Merger, this
Agreement, the agreements with the other Founding Companies and the IPO. Except
as contemplated by the foregoing, PalEx and Subsidiary have not engaged in any
business activities of any type or kind whatsoever, nor entered into any
agreements nor is it bound by any obligation or undertaking.
SECTION 5.6. LITIGATION. There are no claims, suits, actions or
proceedings pending or, to the knowledge of PalEx or Subsidiary, threatened
against, relating to or affecting PalEx or Subsidiary, before any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that seek to restrain or enjoin the consummation of the Merger or
the IPO or which could reasonably be expected, either alone or in the aggregate
with all such claims, actions or proceedings, to have a PalEx Material Adverse
Effect.
SECTION 5.7. NO VIOLATION OF LAW. PalEx is not in violation of, nor has
it been given notice or been charged with any violation of, any law, statute,
order, rule, regulation, ordinance, or judgment (including, without limitation,
any applicable environmental law, ordinance or regulation) of any governmental
or regulatory body or authority.
SECTION 5.8. AFFILIATE TRANSACTIONS. Except for the ownership by Main
Street of shares of PalEx Common Stock and Main Street's obligations and rights
under Section 7.3, no transaction has occurred and no transaction is now
proposed to which PalEx is or will be a party, in which any current affiliate of
Main Street has a direct or indirect material interest.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.
Except as otherwise contemplated by this Agreement, after the date hereof and
prior to the Closing Date or earlier termination of this Agreement, unless PalEx
shall otherwise agree in writing, the Company shall:
-20-
<PAGE>
(a) conduct its businesses in the ordinary and usual course and
consistent with past practice;
(b) not (i) amend or propose to amend its charter or by-laws, (ii)
split, combine or reclassify its outstanding capital stock or (iii) declare, set
aside or pay any dividend or distribution payable in cash, stock, property or
otherwise, except for the payment of dividends or distributions described in
SCHEDULE 6.1;
(c) not, except for shares issued to the Ridge Pallets, Inc. Profit
Sharing Plan in connection with the transaction described in Section 7.13
hereof, issue, sell, pledge or dispose of, or agree to issue, sell, pledge or
dispose of, any additional shares of, or any options, warrants or rights of any
kind to acquire any shares of, its capital stock of any class or any debt or
equity securities convertible into or exchangeable for such capital stock.
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (A) borrowings in the ordinary course
of business, (B) borrowings to refinance existing indebtedness on terms
comparable with or better than those at the date hereof, or (C) borrowings to
fund distributions to Stockholders of the accumulated adjustment account, (ii)
redeem, purchase, acquire or offer to purchase or acquire any shares of its
capital stock or any options, warrants or rights to acquire any of its capital
stock or any security convertible into or exchangeable for its capital stock,
(iii) take or fail to take any action which action or failure would cause the
Company or the Stockholders (except to the extent of non-stock consideration, if
any, received in the Merger) to recognize gain or loss for federal income tax
purposes as a result of the consummation of the Merger, (iv) sell, pledge,
dispose of or encumber any assets or businesses other than sales in the ordinary
course of business or (v) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(e) use all reasonable efforts to preserve intact its business
organizations and goodwill, keep available the services of its present officers
and key employees, and preserve the goodwill and business relationships with
customers and others having business relationships with it and not engage in any
action, directly or indirectly, with the intent to adversely impact the
transactions contemplated by this Agreement;
(f) confer on a regular and frequent basis with one or more
representatives of PalEx to report operational matters of materiality and the
general status of ongoing operations;
(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees, except
in the ordinary course and consistent with past practice;
-21-
<PAGE>
(h) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law or in the ordinary course of
business and consistent with past practices; and
(i) maintain with financially responsible insurance companies insurance
on its tangible assets and its businesses in such amounts and against such risks
and losses as are consistent with past practice.
SECTION 6.2. CONTROL OF THE COMPANY'S OPERATIONS. Nothing contained in
this Agreement shall give to PalEx, directly or indirectly, rights to control or
direct the Company's operations prior to the Effective Time. Prior to the
Effective Time, the Company shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision of its
operations.
SECTION 6.3. NO - SHOP.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, the Company and the Stockholders shall not, and
the Company shall use its best efforts to cause any officer, director or
employee of, or any attorney, accountant, investment banker, financial advisor
or other agent retained by it not to, initiate, solicit, negotiate, encourage or
provide non-public or confidential information to facilitate, any proposal or
offer to acquire all or any substantial part of the business and properties of
the Company or any capital stock of the Company, whether by merger, purchase of
assets or otherwise, whether for cash, securities or any other consideration or
combination thereof, or enter into any joint venture or partnership or similar
arrangement.
(b) The Company and the Stockholders (i) acknowledge that a breach of
any of their covenants contained in this Section 6.3 will result in irreparable
harm to PalEx which will not be compensable in money damages; and (ii) agree
that such covenant shall be specifically enforceable and that specific
performance and injunctive relief shall be a remedy properly available to the
other party for a breach of such covenant.
SECTION 6.4. DIVIDEND OR SALE OF NONPRODUCTIVE ASSETS. The Company
shall, prior to the Closing Date, either dividend to the Stockholders or sell
for cash the assets listed on SCHEDULE 6.4. If the Company sells such assets, it
shall apply the proceeds from such sale to the reduction of outstanding debt.
Any such dividend shall not affect the total consideration due the Stockholders
hereunder; any such sale and reduction of the Company's debt shall affect the
allocation of the consideration to be received by the Stockholders in the Merger
in the manner described in SCHEDULE 2.1.
-22-
<PAGE>
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1. ACCESS TO INFORMATION.
(a) The Company shall afford to PalEx and Subsidiary and their
accountants, counsel, financial advisors and other representatives (the "PALEX
REPRESENTATIVES") and PalEx and Subsidiary shall afford to the Company and its
accountants, counsel, financial advisors and other representatives (the "COMPANY
REPRESENTATIVES") full access during normal business hours throughout the period
prior to the Effective Time to all of their respective properties, books,
contracts, commitments and records (including, but not limited to, financial
statements and Tax Returns) and, during such period, shall furnish promptly to
one another all due diligence information requested by the other party. PalEx
and Subsidiary shall hold and shall use their reasonable best efforts to cause
the PalEx Representatives to hold, and the Company shall hold and shall use its
reasonable best efforts to cause the Company Representatives to hold, in strict
confidence all non-public information furnished to it in connection with the
transactions contemplated by this Agreement, except that each of PalEx,
Subsidiary and the Company may disclose any information that it is required by
law or judicial or administrative order to disclose.
(b) In the event that this Agreement is terminated in accordance with
its terms, each party shall promptly redeliver to the other all non-public
written material provided pursuant to this Section 7.1 and shall not retain any
copies, extracts or other reproductions of such written material. In the event
of such termination, all documents, memoranda, notes and other writings prepared
by PalEx and Subsidiary or the Company based on the information in such material
shall be destroyed (and PalEx, Subsidiary and the Company shall use their
respective reasonable best efforts to cause their advisors and representatives
to similarly destroy their documents, memoranda and notes), and such destruction
(and reasonable best efforts) shall be certified in writing by an authorized
officer supervising such destruction.
(c) The Company shall promptly advise PalEx in writing of any change or
the occurrence of any event after the date of this Agreement having, or which,
insofar as can reasonably be foreseen, in the future may have, any Company
Material Adverse Effect.
SECTION 7.2. REGISTRATION STATEMENT. PalEx and the Founding Companies
shall file with the SEC as soon as is reasonably practicable after the date
hereof the Registration Statement and shall use all reasonable efforts to have
the Registration Statement declared effective by the SEC as promptly as
practicable. PalEx shall also take any action required to be taken under
applicable state blue sky or securities laws in connection with the issuance of
PalEx Common Stock. PalEx and the Company shall promptly furnish to each other
all information, and take such other actions, as may
-23-
<PAGE>
reasonably be requested in connection with making such filings. The information
provided and to be provided by PalEx and the Company, respectively, for use in
the Registration Statement shall be true and correct in all material respects
without omission of any material fact which is required to make such information
not false or misleading as of the date thereof and in light of the circumstances
under which given or made.
SECTION 7.3. EXPENSES AND FEES. Main Street shall pay the fees and
expenses of the independent public accountants and legal counsel to PalEx and
all filing, printing and other reasonable, documented fees and expenses
associated with the IPO up to $1,250,000. PalEx shall pay or reimburse Main
Street from the proceeds of the IPO for such fees and expenses in excess of
$1,250,000. Neither the Company nor the Stockholders will be liable for any
portion of the above expenses in the event the IPO is not closed. PalEx shall
also pay (i) the underwriting discounts and commissions payable in connection
with the sale of PalEx Common Stock in the IPO, (ii) the fees payable to Raymond
James & Associates and Mr. Tucker Bridwell, as detailed on SCHEDULE 7.3 and
(iii) the fees and expenses incurred in delivering the tax opinion set forth in
Section 9.2(d). All other costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
SECTION 7.4. AGREEMENT TO COOPERATE. Subject to the terms and conditions
herein provided, each of the parties hereto shall use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
SECTION 7.5. PUBLIC STATEMENTS. Except as may require by law, no party
hereto shall issue any press release or any written public statement with
respect to this Agreement or the transactions contemplated hereby without the
prior written consent of PalEx and the Company.
SECTION 7.6. NOTIFICATION OF CERTAIN MATTERS. Each of the Company, the
Stockholders and PalEx agrees to give prompt notice to each of the others of,
and to use their respective reasonable best efforts to prevent or promptly
remedy, (i) the occurrence or failure to occur or the impending or threatened
occurrence or failure to occur, of any event which occurrence or failure to
occur would be likely to cause any of its representations or warranties in this
Agreement to be untrue or inaccurate in any material respect at any time from
the date hereof to the Effective Time, or any of the information supplied by it
for use in the Registration Statement to be untrue in any material respect or to
omit any material fact, at any time from the date hereof until 25 days following
the Closing, and (ii) any material failure on its part to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; PROVIDED, HOWEVER, that the delivery of any notice pursuant to this
Section 7.6 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
-24-
<PAGE>
SECTION 7.7. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) After the Effective Time, PalEx shall, to the fullest extent
permitted under applicable law, indemnify and hold harmless, each present and
former director, officer and agent of the Company (each, together with such
person's heirs, executors or administrators, an "INDEMNIFIED PARTY" and
collectively, the "INDEMNIFIED PARTIES") against any costs or expenses
(including reasonable attorneys fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of, relating to or in connection
with any action or omission of PalEx occurring prior to the Effective Time
(including, without limitation, acts or omissions in connection with such
persons serving as an officer, director or other fiduciary in any entity if such
service was at the request or for the benefit of the Company). In the event of
any such claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), (i) PalEx shall pay the reasonable fees and
expenses of counsel selected by the indemnified parties, which counsel shall be
reasonably satisfactory to PalEx, promptly after statements therefor are
received, (ii) PalEx will cooperate in the defense of any such matter, and (iii)
any determination required to be made with respect to whether an indemnified
party's conduct complies with the standards set forth under the DGCL or other
applicable statutes and PalEx's or the Surviving Corporation's respective
Certificates of Incorporation or By-Laws shall be made by independent legal
counsel acceptable to PalEx as the case may be, and the indemnified party;
PROVIDED, HOWEVER, that PalEx shall not be liable for any settlement effected
without its written consent (which consent shall not be unreasonably withheld).
(b) In the event that PalEx or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in each such case, proper provisions shall be made so that the
successors and assigns of PalEx shall assume the obligations set forth in this
Section 7.7.
SECTION 7.8. CORRECTIONS TO THE REGISTRATION STATEMENT. Prior to the
effectiveness of the IPO, and until the expiration of the 25th day thereafter,
each of the Company, the Stockholders and PalEx shall correct promptly any
information provided by it to be used specifically in the Registration Statement
that shall have become false or misleading in any material respect and shall
take all steps necessary to file with the SEC and have declared effective or
cleared by the SEC any amendment or supplement to the Registration Statement so
as to correct the same and to cause the Prospectus included within such
Registration Statement as so corrected to be disseminated to the extent required
by applicable law.
-25-
<PAGE>
SECTION 7.9. PREPARATION AND FILING OF TAX RETURNS.
(a) Each party hereto shall, and shall cause its affiliates to, provide
to each of the other parties hereto such cooperation and information as any of
them reasonably may request in filing any return, amended return or claim for
refund, determining a liability for Taxes or a right to refund of Taxes or in
conducting any audit or other proceeding in respect of Taxes. Such cooperation
and information shall include providing copies at no cost to the requesting
party of all relevant portions of relevant returns, together with relevant
accompanying schedules and relevant work papers, relevant documents relating to
rulings or other determinations by taxing authorities and relevant records
concerning the ownership and tax basis of property, which such party may
possess. Each party shall make its employees reasonably available on a mutually
convenient basis at its cost to provide explanation of any documents or
information so provided. Subject to the preceding sentence, each party required
to file returns pursuant to this Agreement shall bear all costs of filing such
returns.
(b) Each of the Company, PalEx and the Stockholders shall comply with
the tax reporting requirements of Section 1.351-3 of the Treasury Regulations
promulgated under the Code, and shall treat the exchange of Company Common Stock
for PalEx Common Stock as an exchange under Section 351 of the Code unless
otherwise required by law. The parties have independently determined and hereby
agree that such exchange is an exchange as described under Section 351 of the
Code and specifically that:
(i) Neither the Company nor PalEx is an investment company as
defined in Section 351(e) of the Code or Section 1.351-1(c)(1)(i) of the
Treasury Regulations.
(ii) The fair market value of the assets of the Company exceeds
the sum of its liabilities, plus the amount of liabilities, if any, to
which the assets are subject.
(iii) The Company is not under jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the
Code.
(iv) The fair market value of the PalEx Common Stock and other
consideration, if any, received by the Stockholders, will be
approximately equal to the fair market value of the Company Stock
surrendered in the Merger.
(v) There is no intercorporate indebtedness existing between
PalEx and the Company that was issued, acquired, or will be settled at a
discount.
(vi) None of the compensation received by any
Stockholder-employee of the Company after the Merger will be separate
consideration for, or allocable to, any of their securities of the
Company. None of the shares of PalEx Common Stock
-26-
<PAGE>
received by the Stockholders in the Merger will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to the Stockholders in their capacity as employees
including, but not limited to, amounts paid pursuant to the employment
agreements between the Company and the Stockholders and incentive
compensation in the form of stock options, will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services.
(vii) The proposed Merger is effected through the laws of the
United States, a State thereof or the District of Columbia.
(viii) The proposed Merger is being undertaken for reasons
germane to the business of the Company.
SECTION 7.10. COVENANTS CONCERNING TAXES.
(a) (i) The Stockholders shall pay (and shall indemnify, defend and
hold harmless PalEx, as the Surviving Corporation, from and against liability
with respect to) any and all Taxes, interest, penalties and additions to Taxes
that are imposed on them or the Company: (i) attributable to the taxable income
of the Company for all taxable periods during which the Company was an S
corporation (the "S Corporation Period"); and (ii) as a result of the Company's
S election being treated as invalid or ineffective for any reason or such
election being revoked or terminated prior to the Merger.
(ii) The Surviving Corporation, shall pay or cause to be paid
(and shall indemnify, defend and hold harmless the Stockholders from and against
liability with respect to) any and all Taxes, interest, penalties and additions
to Taxes attributable to the taxable income of the Surviving Corporation for the
period after the Merger (the "C Corporation Period").
(b) If the Stockholders receive notice of an intention by a taxing
authority to audit any return of the Stockholders that includes any item of
income, gain, deduction, loss or credit reported by the Company with respect to
the S Corporation Period that the Stockholders have reason to believe may affect
the Surviving Corporation's tax returns during the C Corporation Period, the
Stockholders shall inform the Surviving Corporation, in writing, of the audit
promptly after receipt of such notice. If the Stockholders receive notice from a
taxing authority of any proposed adjustment for which the Surviving Corporation
may be required to indemnify hereunder (a "Proposed Adjustment"), the
Stockholders shall give notice to the Surviving Corporation of the Proposed
Adjustment promptly after receipt of such notice from a taxing authority. Within
twenty (20) days following its receipt of such notice, the Surviving Corporation
shall give notice to the Stockholders of its determination as to whether it
desires the Stockholders to contest such Proposed Adjustment. Upon such request
the Stockholders, at their option and upon
-27-
<PAGE>
written notice to the Surviving Corporation within ten (10) days after their
receipt of the notice described in the preceding sentence, shall (i) contest the
Proposed Adjustment at the Surviving Corporation's expense and permit the
Surviving Corporation to participate in (but not to control) such proceedings,
or (ii) permit the Surviving Corporation to contest the Proposed Adjustment
(including pursuing all administrative and judicial appeals and demands). The
Surviving Corporation shall pay to the Stockholders on demand all reasonable
costs and expenses (including reasonable attorneys' and accountants' fees) that
the Stockholders may incur in contesting such Proposed Adjustments. The
Stockholders shall not make, accept or enter into a settlement or other
compromise, with respect to any Taxes indemnified hereunder, or forego or
terminate any proceeding undertaken hereunder without the consent of the
Surviving Corporation, which consent shall not be unreasonably withheld. The
Stockholders will reasonably assist if the Surviving Corporation contests any
Proposed Adjustment.
(c) If the Surviving Corporation receives notice of an intention by a
taxing authority to audit any return of the Surviving Corporation that includes
any item of income, gain, deduction, loss or credit reported by the Surviving
Corporation with respect to the C Corporation Period that the Surviving
Corporation has reason to believe may affect the Stockholders' tax returns
during the S Corporation Period, the Surviving Corporation shall inform the
Stockholders in writing, of the audit promptly after receipt of such notice. If
the Surviving Corporation receives notice from a taxing authority of any
proposed adjustment for which the Stockholders may be required to indemnify the
Surviving Corporation hereunder (a "Surviving Corporation Proposed Adjustment"),
the Surviving Corporation shall give notice to the Stockholders of the Surviving
Corporation Proposed Adjustment promptly after receipt of such notice from a
taxing authority. Upon receipt of such notice from the Surviving Corporation,
the Stockholders may, by in turn giving prompt written notice to the Surviving
Corporation, request that the Surviving Corporation contest such Surviving
Corporation Proposed Adjustment. If the Stockholders request that any Surviving
Corporation Proposed Adjustment be contested, then the Surviving Corporation
shall contest the Surviving Corporation Proposed Adjustment (including pursuing
all administrative and judicial appeals and processes) at the Stockholders'
expense and shall permit the Stockholders to participate in (but not to control)
such proceeding.
(d) The parties shall cooperate fully with each other in all matters
relating to Taxes and in the determination of amounts payable hereunder. In the
case of disagreement as to the course of action to be pursued in dealing with
taxing authorities (including, without limitation, matters with respect to
preparation and filing of tax returns, conduct of audits, and proceedings in
courts), the decision of the party (the Surviving Corporation, on the one hand,
or the Stockholders, on the other hand) who will economically benefit from or be
burdened by the course of action (or in the case both parties benefit and/or are
burdened, the decision of the party with the greatest benefit or burden) shall
control.
-28-
<PAGE>
SECTION 7.11. REGISTRATION RIGHTS.
(a) If at any time or times after the date hereof but prior to the third
anniversary of the Effective Time, PalEx shall determine to register any of its
securities (for itself or for any holder of securities of PalEx) under the 1933
Act or any successor legislation (other than the Registration Statement or a
registration relating to stock option plans, employee benefit plans or a
transaction pursuant to Rule 145 under the Act), and in connection therewith
PalEx may lawfully register the PalEx Common Stock held by the Stockholders and
Main Street, PalEx will promptly give written notice thereof to the Stockholders
and Main Street and will include in such registration and effect the
registration under the 1933 Act of all Registrable Securities (as hereinafter
defined )that the Stockholders and Main Street may request in writing by notice
delivered to PalEx within 20 days after receipt by the Stockholders and Main
Street of the notice given by PalEx; PROVIDED, HOWEVER, that in connection with
any such offering by PalEx of any of its securities, no such registration of
Registrable Securities shall be required if the managing underwriter, if any,
for PalEx advises it in writing that including all or part of the Registrable
Shares in such offering will materially adversely affect the proposed offering
and jeopardize PalEx 's ability to sell its own securities in such offering. If
such managing underwriter advises PalEx that, in its opinion, part of the
Registrable Securities may be included in such offering without materially
adversely affecting the proposed offering, then PalEx shall be obligated to
include such lesser number of Registrable Securities in such offering, which
shares shall be taken from those owned and held by a group consisting of the
Stockholders, Main Street and other holders of PalEx Common Stock having
registration rights that are PARI PASSU with those of the Stockholders and Main
Street, and such limitation shall be imposed upon the Stockholders and such
other holders pro rata on the basis of the total number of shares of PalEx
Common Stock owned by the Stockholders, Main Street and such other holders or
obtainable by them upon the exercise of rights with respect to other securities
owned by them. All expenses of such registration and offering shall be borne by
the Company, except that the Stockholders and Main Street shall bear
underwriting commissions and discounts attributable to their Registrable
Securities being registered and the fees and expenses of separate counsel, if
any, for such Stockholders and Main Street. The Stockholders and Main Street
shall be entitled to an unlimited number of registrations under this Section
7.11.
(b) For the purposes of this Section 7.11, the term "Registrable
Securities" shall mean (i) the PalEx Common Stock currently held by Main Street,
(ii) PalEx Common Stock to be issued in connection with the Merger, and (iii)
any PalEx Common Stock issued or issuable with respect to the shares identified
in (i) and (ii) above by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization.
-29-
<PAGE>
(c) Whenever, under the preceding paragraphs of this Section 7.11, PalEx
is required hereunder to register Registrable Securities, PalEx shall as
expeditiously as possible:
(i) Prepare and file with the SEC a registration statement with
respect to the Registrable Securities that complies with all
requirements of the Act;
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Act with
respect to the sale of securities covered by such registration statement
for the period necessary to complete the proposed public offering (but
in no event for a period in excess of ninety (90) days);
(iii) Furnish to each Stockholder such copies of each preliminary
and final prospectus and such other documents as each such Stockholder
may reasonably request to facilitate the disposition of such
Stockholder's Registrable Securities;
(iv) Enter into an underwriting agreement with customary terms
and provisions as reasonably agreed by PalEx and the proposed
underwriter, if any, of the offering,
(v) Use its best efforts to register and qualify the Registrable
Securities covered by such registration statement under applicable state
securities or "blue-sky" laws, provided that PalEx shall not be required
in connection therewith or as a condition thereto to qualify to do
business as a foreign corporation in any such jurisdiction wherein it is
not so qualified; and
(vi) Furnish to each selling Stockholder a signed counterpart,
addressed to the Stockholders, of
(A) an opinion of counsel to PalEx, and
(B) comfort letter(s) signed by the independent public
accountants who have certified PalEx's financial
statements included in the registration statement,
in each case, covering substantially the same matters with respect to the
registration statement (and the prospectus included therein) and (in the case of
the accountant's letter) with respect to events subsequent to the date of the
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountant's letters delivered to the underwriters in underwritten public
offerings of securities.
-30-
<PAGE>
(d) PalEx shall have the right to select the managing underwriter or
underwriters for any underwritten offering made pursuant to a registration under
this Section 7.11.
(e) In connection with any underwritten offering by PalEx in which the
Stockholders participate, the Stockholders shall, if requested by the managing
underwriter or underwriters thereof, agree not to sell any of their Registrable
Securities or any other securities of PalEx owned by such Stockholders in any
transaction other than pursuant to such underwritten offering for a period
beginning 60 days prior to the date PalEx and the underwriter reasonably expect
the registration statement to become effective, and for such period after the
effective date of the registration statement as is agreed upon by the
underwriters and PalEx (not to exceed 180 days), provided that the PalEx's
officers and directors and each holder of 5% or more of PalEx's issued and
outstanding PalEx Common Stock also agree to such limitations.
(f) PalEx may delay any underwritten offering pursuant to Section 7.11
when a condition or pending transaction exists the disclosure of which would
reasonably be expected to have a material adverse effect on the proposed
offering.
(g) PalEx will indemnify each Stockholder, each of its officers,
directors and partners, and each other person, if any, who controls such
Stockholder within the meaning of the Section 15 of the 1933 Act, against any
losses, claims, damages, expenses, or liabilities to which such persons may
become subject under the 1933 Act or otherwise, insofar as such losses, claims,
damages or liabilities (or action in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement or any preliminary prospectus or final
prospectus or amendment or supplement thereto on the effective date thereof, or
arise out of or are based upon 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 such persons for any legal
or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that PalEx 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 such registration statement, or any preliminary prospectus or final
prospectus or amendment or supplement thereto, in reliance upon and in
conformity with written information furnished to PalEx through an instrument
duly executed by such person specifically for use in the preparation thereof.
It shall be a condition precedent to the obligation of PalEx to include
in any registration statement any Registrable Securities then held by a
Stockholder that PalEx shall have received an undertaking, satisfactory to it
and the managing underwriter or underwriters, from each Stockholder to indemnify
and hold harmless (in the same manner and to the same extent as set forth in the
preceding paragraph) PalEx, each director of
-31-
<PAGE>
PalEx, each officer of PalEx who shall sign such registration statement and the
managing underwriter or underwriters and any person who controls such
Underwriters or PalEx within the meaning of the 1933 Act, with respect to any
statement or omission from such registration statement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, if such statement or omission was made in reliance upon and in
conformity with information furnished to PalEx through an instrument duly
executed by the Stockholder specifically for use in the preparation of such
registration statement, preliminary prospectus or final prospectus or such
amendment or supplement thereto.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs in this Section 7.11, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to the latter of the commencement of such action. In case any such action is
brought against an indemnified party, the indemnifying party will be entitled to
participate in and to assumed the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses incurred by the latter in connection with the
defense thereof.
SECTION 7.12. RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the SEC that may permit the sale of
PalEx Common Stock to the public without registration, PalEx agrees to use its
best efforts to:
(i) make and keep public information regarding PalEx available as those
terms are understood and defined in Rule 144 under the 1933 Act, at all times
from and after 90 days following the effective date of the first registration
under the 1933 Act filed by PalEx for an offering of its securities to the
general public;
(ii) file with the SEC in a timely manner all reports and other
documents required of PalEx under the 1933 Act and the 1934 Act at any time
after it has become subject to such reporting requirements; and
(iii) so long as a Stockholder owns any restricted PalEx Common Stock,
furnish to each Stockholder forthwith upon written request a written statement
by PalEx as to its compliance with the reporting requirements of Rule 144 (at
any time from and after 90 days following the effective date of the first
registration statement filed by PalEx for an offering of its securities to the
general public), and of the 1933 Act and the 1934 Act (at any time after it has
become subject to such reporting requirements), a copy of the most recent annual
or quarterly report of PalEx, and such other reports and documents so filed as a
Stockholder may reasonably request in availing itself of any rule or regulation
of the SEC allowing a Stockholder to sell any such shares without registration.
-32-
<PAGE>
SECTION 7.13. REPAYMENT OF CERTAIN COMPANY DEBT. Upon the consummation
of the Merger and closing of the IPO, PalEx shall, on the Consummation Date, use
a portion of the proceeds from the IPO to repay in full certain indebtedness of
the Company as listed in SCHEDULE 7.13.
SECTION 7.14 CONTRIBUTION TO COMPANY PROFIT SHARING PLAN. PalEx shall
make a one-time contribution of PalEx Common Stock to the Ridge Pallets Inc.
Profit Sharing Plan (the "Plan") concurrently with the consummation of the IPO.
PalEx shall contribute that number of shares of PalEx Common Stock with a value
equal to $618,750 based on a price per share of PalEx Common Stock equal to the
mid-point of the estimated pricing range as set forth in the preliminary
prospectus relating to the IPO, adjusted to reflect a discount of 25%. The
contribution of PalEx Common Stock shall be allocated among the Company's
employees based on the terms of the Plan.
ARTICLE VIII
INDEMNIFICATION
The Stockholders and PalEx each make the following covenants:
SECTION 8.1. PALEX LOSSES.
(a) The Stockholders agree to indemnify and hold harmless PalEx and its
directors, officers, employees, representatives, agents and attorneys from,
against and in respect of any and all PalEx Losses (as defined below) suffered,
sustained, incurred or required to be paid by any of them by reason of (i) any
representation or warranty made by the Company or the Stockholders in or
pursuant to this Agreement being untrue or incorrect in any respect; (ii) any
failure by the Company or the Stockholders to observe or perform their covenants
and agreements set forth in this Agreement or any other agreement or document
executed by them in connection with the transactions contemplated hereby; and
(iii) any liability under the 1933 Act, the 1934 Act or other Federal or state
law or regulation, at common law or otherwise, arising out of or based upon any
untrue statement or alleged untrue statement of a material fact relating to the
Company or the Stockholders contained in any preliminary prospectus, relating to
the IPO, the Registration Statement or any prospectus forming a part thereof, or
any amendment thereof or supplement thereto, or arising out of or based upon any
omission to state therein a material fact relating to the Company or the
Stockholders required to be stated therein or necessary to make the statements
therein not misleading, and not provided to PalEx or its counsel by the Company
or the Stockholders; PROVIDED, HOWEVER, that such indemnity shall not inure to
the benefit of PalEx to the extent that such untrue statement (or alleged untrue
statement) was made in, or omission (or alleged omission) occurred in, any
preliminary prospectus and the Stockholders provided, in writing, corrected
information
-33-
<PAGE>
to PalEx or its counsel for inclusion in the final prospectus prior to
distributing such prospectus, and such information was not so included. This
Section 8.1 is intended to indemnify PalEx and its directors, officers,
employees, representatives, agents and attorneys from the results of their
negligence. The Stockholders' obligations pursuant to this Section 8.1 shall
expire one (1) year after the Closing, except with respect to (x) obligations
under Sections 4.13 and 7.10 hereof, which shall survive until the earlier of
(A) the expiration of the applicable periods (including any extensions) of the
respective statutes of limitation applicable to the payment of the Taxes or (B)
the completion of the final audit and determinations by the applicable taxing
authority and final disposition of any deficiency resulting therefrom; and (y)
solely to the extent that PalEx actually incurs liability under the 1933 Act or
the 1934 Act, the obligations under clause (iii) above shall survive until the
expiration of any applicable statute of limitations with respect to such claims.
(b) "PalEx Losses" shall mean all damages (including, without
limitation, amounts paid in settlement with the Stockholders' consent, which
consent may not be unreasonably withheld), losses, obligations, liabilities,
claims, deficiencies, costs and expenses (including, without limitation,
reasonable attorneys' fees), penalties, fines, interest and monetary sanctions,
including, without limitation, reasonable attorneys' fees and costs incurred to
comply with injunctions and other court and agency orders, and other costs and
expenses incident to any suit, action, investigation, claim or proceeding or to
establish or enforce the rights of PalEx or such other persons to
indemnification hereunder.
SECTION 8.2. STOCKHOLDERS LOSSES.
(a) PalEx agrees to indemnify and hold harmless the Stockholders, for
and in respect of any and all Stockholders Losses (as defined below) suffered,
sustained, incurred or required to be paid by the Stockholders by reason of (i)
any representation or warranty made by PalEx in or pursuant to this Agreement
being untrue or incorrect in any respect; (ii) any failure by PalEx to observe
or perform its covenants and agreements set forth in this Agreement or any other
agreement or document executed by it in connection with the transactions
contemplated hereby; or (iii) any liability under the 1933 Act, the 1934 Act or
other Federal or state law or regulation, at common law or otherwise, arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact relating to PalEx or any of the Founding Companies other than the
Company contained in any preliminary prospectus, the Registration Statement or
any prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact relating to PalEx or any of the Founding Companies
other than the Company required to be stated therein or necessary to make the
statements therein not misleading. This Section 8.2 is intended to indemnify the
Stockholders from the results of their negligence. PalEx's obligations under
this Section 8.2 shall expire one year after Closing, except that, if the
Stockholders actually incur liability under the 1933 Act or the 1934 Act, the
obligations under clause (iii) above
-34-
<PAGE>
shall survive until the expiration of any applicable statute of limitations with
respect to such claims.
(b) "Stockholder's Losses" shall mean all damages (including, without
limitation, amounts paid in settlement with the consent of PalEx, which consent
may not be reasonably withheld), losses, obligations, liabilities, claims,
deficiencies, costs and expenses (including, without limitation, reasonable
attorneys' fees), penalties, fines, interest and monetary sanctions, including,
without limitation, reasonable attorneys' fees and costs incurred to comply with
injunctions and other court and agency orders, and other costs and expenses
incident to any suit, action, investigation, claim or proceeding or to establish
or enforce the right of the Stockholders to indemnification hereunder.
SECTION 8.3. NOTICE OF LOSS. A notice setting forth in reasonable detail
the breach or other matter which is asserted shall be promptly given to the
Indemnifying Party (as defined below) and, if such matter arises out of a suit,
action, investigation, proceeding or claim, such notice shall be given within
thirty (30) days after the Indemnified Party (as defined below) has knowledge of
the matter. The failure of the Indemnified Party to give notice hereunder shall
not release the Indemnifying Party from its obligations under this Article VIII,
except to the extent the Indemnifying Party is actually prejudiced by such
failure to give prompt notice. With respect to PalEx Losses, the Stockholders
shall be the Indemnifying Party and PalEx and its respective directors,
officers, employees, representatives, agents and attorneys shall be the
Indemnified Parties. With respect to Stockholders Losses, PalEx shall be the
Indemnifying Party and the Stockholders shall be the Indemnified Party.
SECTION 8.4. RIGHT TO DEFEND. Upon receipt of notice of any matter for
which indemnification might be claimed by an Indemnified Party, the Indemnifying
Party shall be entitled to defend, contest or otherwise protect against any such
matter at its own cost and expense, and the Indemnified Party must cooperate in
any such defense or other action. The Indemnified Party shall have the right,
but not the obligation, to participate at its own expense in defense thereof by
counsel of its own choosing, but the Indemnifying Party be entitled to control
the defense unless the Indemnified Party has relieved the Indemnifying Party
from liability with respect to the particular matter or the Indemnifying Party
fails to assume defense of the matter. In the event the Indemnifying Party shall
fail to defend, contest or otherwise protect in a timely manner against any
matter, the Indemnified Party shall have the right, but not the obligation,
thereafter to defend, contest or otherwise protect against the same and make any
compromise or settlement thereof and recover the reasonable cost thereof from
the Indemnifying Party including, without limitation, reasonable attorneys'
fees, disbursements and all amounts paid as a result of such suit, action,
investigation, claim or proceeding or the compromise or settlement thereof;
provided, however, that the Indemnified Party must send a written notice to the
Indemnifying Party of any such proposed settlement or compromise, which
settlement or compromise the Indemnifying Party may reject, in its reasonable
judgment, within ten (10)
-35-
<PAGE>
days of receipt of such notice. Failure to reject such notice within such ten
(10) day period shall be deemed an acceptance of such settlement or compromise.
The Indemnified Party shall have the right to effect a settlement or compromise
over the objection of the Indemnifying Party; provided, that if (i) the
Indemnifying Party is contesting such claim in good faith or (ii) the
Indemnifying Party has assumed the defense from the Indemnified Party, the
Indemnified Party waives any right to indemnity therefor. If the Indemnifying
Party undertakes the defense of such matters, the Indemnified Party shall not,
so long as the Indemnifying Party does not abandon the defense thereof, be
entitled to recover from the Indemnifying Party any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof other than the reasonable costs of investigation undertaken by the
Indemnified Party with the prior written consent of the Indemnifying Party.
SECTION 8.5. COOPERATION. Each of PalEx, the Company and the
Stockholders and each of their affiliates, successors and assigns shall
cooperate with each other in the defense of any suit, action, investigation,
proceeding or claim by a third party and, during normal business hours, shall
afford each other access to their books and records and employees relating to
such suit, action, investigation, proceeding or claim and shall furnish each
other all such further information that they have the right and power to furnish
as may reasonably be necessary to defend such suit, action, investigation,
proceeding or claim.
SECTION 8.6. EXCLUSIVE REMEDY. The indemnification provided for in this
Section 8 shall be the exclusive remedy in any action seeking damages or any
other form of monetary relief brought by any party to this Agreement against
another party, provided that, nothing herein shall be construed to limit the
right of a party, in a proper case, to seek injunctive relief for a breach of
this Agreement.
SECTION 8.7. LIMITATION UPON INDEMNITY.
(a) Neither the Stockholders nor PalEx shall be entitled to
indemnification from the other under the provisions of this Article VIII until
such time as the claims subject to indemnification by such party exceed, in the
aggregate, Three Hundred Sixty Thousand Dollars ($360,000) (the "Indemnity
Deductible").
(b) The aggregate indemnification obligations of the Stockholders under
Article VIII shall be limited to the obligations in excess of the Indemnity
Deductible but not more than Thirty-Six Million Dollars ($36,000,000); PROVIDED,
HOWEVER, if the per share price of the PalEx Common Stock is less than the per
share price of the PalEx Common Stock issued in the IPO, the foregoing limit on
indemnity obligations shall be reduced by the difference in such prices
multiplied by the number of shares of PalEx Common Stock issued to the
Stockholders pursuant to this Agreement.
-36-
<PAGE>
ARTICLE IX
CLOSING CONDITIONS
SECTION 9.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger shall be subject
to the fulfillment at or prior to the Closing Date and continued fulfillment as
of the Consummation Date of the following conditions:
(a) the Underwriting Agreement related to the IPO shall have been
executed;
(b) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding for
that purpose shall have been instituted by the SEC or any state regulatory
authorities;
(c) no preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the IPO or the
Merger shall have been issued and remain in effect;
(d) no action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency in the United States which would prevent the consummation of the Merger
or make the consummation of the Merger illegal; and
(e) all material governmental and third party waivers, consents, orders
and approvals required for the consummation of the Merger and the transactions
contemplated hereby shall have been obtained and be in effect.
SECTION 9.2. CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. Unless waived by the Company, the obligation of the Company to effect
the Merger shall be subject to the fulfillment at or prior to the Closing Date
and continued fulfillment as of the Consummation Date of the following
additional conditions:
(a) PalEx and Subsidiary shall have performed in all material respects
its agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of PalEx and
Subsidiary contained in this Agreement shall be true and correct in all material
respects on and as of the date made and on and as of the Closing Date as if made
at and as of such date, and the Company shall have received a certificate of the
chief executive officer of PalEx and Subsidiary to that effect;
-37-
<PAGE>
(b) no governmental authority shall have promulgated any statute, rule
or regulation which, when taken together with all such promulgations, would
materially impair the value to the Stockholders of the Merger;
(c) the Company shall have received an opinion from the legal or
accounting advisors to PalEx, at the expense of PalEx, that the Merger will
constitute a tax-free transaction under Section 351 of the Code to the extent of
PalEx Common Stock received by the Stockholders, in which regard the Company and
the Stockholders shall provide representations reasonably required by such
advisors in providing such opinion;
(d) All conditions to the merger of the other Founding Companies, on
substantially the same terms as provided herein, with subsidiaries of PalEx
shall have been satisfied or waived by the applicable party.
SECTION 9.3. CONDITIONS TO OBLIGATIONS OF PALEX TO EFFECT THE MERGER.
Unless waived by PalEx, the obligations of PalEx to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the additional
following conditions:
(a) the Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of the Company contained
in this Agreement shall be true and correct in all material respects on and as
of the date made and on and as of the Closing Date as if made at and as of such
date, and PalEx shall have received a Certificate of the President or Vice
President - Finance of the Company to that effect;
(b) the Stockholders shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of the Stockholders
contained in this Agreement shall be true and correct in all material respects
on and as of the date made and on and as of the Closing Date as if made at and
as of such date, and PalEx shall have received a Certificate of each Stockholder
to that effect;
(c) PalEx shall have received an opinion governed by, and interpreted in
accordance with, the Legal Opinion Accord of the ABA Section of Business Law
(1991) from Holland & Knight, special counsel to the Company, dated the Closing
Date, reasonably satisfactory to PalEx and Subsidiary or their counsel;
(d) PalEx shall have received "COMFORT" letters in customary form from
the Company's independent public accountants, dated the effective date of the
Registration Statement and the Closing Date (or such other date reasonably
acceptable to PalEx) with respect to certain financial statements and other
financial information included in the Registration Statement and any subsequent
changes in specified balance sheet and
-38-
<PAGE>
income statement items, including total assets, working capital, total
stockholders' equity, total revenues and the total and per share amounts of net
income; and
(e) no governmental authority shall have promulgated any statute, rule
or regulation which, when taken together with all such promulgations, would
materially impair the value to PalEx of the Merger.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1. TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date under the following conditions:
(a) The Company shall have the right to terminate this Agreement:
(i) if the Merger is not completed by April 1, 1997 otherwise
than on account of delay or default on the part of the Company or the
Stockholders or any of their affiliates or associates;
(ii) if the Merger is enjoined by a final, unappealable court
order not entered at the request or with the support of the Company or
any of the Stockholders or any of their affiliates or associates;
(iii) if PalEx or Subsidiary (A) fails to perform in any material
respect any of their respective material covenants in this Agreement and
(B) does not cure such default in all material respects within 30 days
after written notice of such default is given to PalEx and Subsidiary;
or
(iv) if PalEx fails to complete its acquisitions of Fraser or
Interstate.
(b) PalEx shall have the right to terminate this Agreement:
(i) if the Merger is not completed by April 1, 1997 otherwise
than on account of delay or default on the part of PalEx or any of its
stockholders or any of their affiliates or associates;
(ii) if the Merger is enjoined by a final, unappealable court
order not entered at the request or with the support of PalEx or any of
its 5% stockholders or any of their affiliates or associates;
-39-
<PAGE>
(iii) if the Company (A) fails to perform in any material respect
any of its material covenants in this Agreement and (B) does not cure
such default in all material respects within 30 days after written
notice of such default is given to the Company by PalEx;
(iv) if the Stockholders (A) fail to perform in any material
respect any of their material covenants in this Agreement and (B) do not
cure such default in all material respects within 30 days after written
notice of such default is given to the Stockholders by PalEx; or
(v) if PalEx fails to complete its acquisitions of Fraser or
Interstate.
SECTION 10.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either PalEx or the Company, as provided in Section 10.1, this
Agreement shall forthwith become void and there shall be no further obligation
on the part of the Company, Subsidiary, PalEx or their respective officers or
directors (except the obligations set forth in this Section 10.2 and in Sections
7.1, 7.3 and 7.5, all of which shall survive the termination). Nothing in this
Section 10.2 shall relieve any party from liability for any breach of this
Agreement.
SECTION 10.3. AMENDMENT. This Agreement may not be amended except by
action taken by the parties' respective Boards of Directors or duly authorized
committees thereof and then only by an instrument in writing signed on behalf of
each of the parties hereto and in compliance with applicable law.
SECTION 10.4. WAIVER. At any time prior to the Effective Time, the
parties hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE XI
SECURITIES ACT REPRESENTATIONS AND TRANSFER RESTRICTIONS
The PalEx Common Stock to be acquired by each of the Stockholders
pursuant to this Agreement is being acquired solely for such Stockholder's own
account, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution.
-40-
<PAGE>
SECTION 11.1. ECONOMIC RISK; SOPHISTICATION. Each of the Stockholders
represents and warrants to PalEx that he or she is an "accredited investor" as
defined in Regulation D promulgated under the 1933 Act (except the Stockholders
listed on SCHEDULE 11.1 who are not "accredited investors" within such
definition, which such Stockholders have been advised by an attorney, financial
advisor or other person experienced in transactions of this type, which advisor
is Raymond James & Associates, Inc.); that he or she is able to bear the
economic risk of an investment in the PalEx Common Stock acquired pursuant to
this Agreement and can afford to sustain a total loss of such investment and has
such knowledge and experience in financial and business matters that he or she
is capable of evaluating the merits and risks of the proposed investment in the
PalEx Common Stock; and that he has had an adequate opportunity to ask questions
and receive answers from the officers of PalEx concerning any and all matters
relating to the transactions described herein including, without limitation, the
background and experience of the current and proposed officers and directors of
PalEx, and the plans for the operations of the business of PalEx.
SECTION 11.2. TRANSFER RESTRICTIONS.
(a) Except for transfers to immediate family members who agree to be
bound by the restrictions set forth in this Section 11.2 (or trusts for the
benefit of the Stockholders or family members, the trustees of which so agree),
and except for sales in accordance with Section 7.11, for a period of two (2)
years from the Closing, the Stockholders shall not (a) sell, assign, exchange,
transfer, encumber, pledge, distribute or otherwise dispose of (i) any shares of
PalEx Common Stock received by the Stockholders in the Merger, or (ii) any
interest (including, without limitation, an option to buy or sell) in any such
shares of PalEx Common Stock, in whole or in part, and no such attempted
transfer shall be treated as effective for any purpose; or (b) engage in any
transaction, whether or not with respect to any shares of PalEx Common Stock or
any interest therein, the intent or effect of which is to reduce the risk of
owning the shares of PalEx Common Stock acquired pursuant to Section 2.2 hereof
(including, by way of example and not limitation, engaging in put, call,
short-sale, straddle or similar market transactions). The certificates
evidencing the PalEx Common Stock delivered to the Stockholders pursuant to
Section 2.2 of this Agreement will bear a legend substantially in the form set
forth below and containing such other information as PalEx may deem necessary or
appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
ENCUMBRANCE, PLEDGE, DISTRIBUTION OR OTHER DISPOSITION, PRIOR
TO_____________, 1999. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS
CERTIFICATE, THE ISSUER AGREES TO
-41-
<PAGE>
REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE
TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE.
(b) Main Street will execute an agreement to restrict the transfer of
its shares of PalEx Common Stock in a manner identical to the restrictions
included in this Article XI.
ARTICLE XII
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
At the Closing, each of the Stockholders shall execute and deliver an
employment and noncompetition agreement substantially in the form of Exhibit 12
and Main Street shall execute a noncompetition agreement with substantially the
same terms.
ARTICLE XIII
GENERAL PROVISIONS
SECTION 13.1. BROKERS. The Company represents and warrants that no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee (except for the fee described in SCHEDULE 13.1) or commission in
connection with the Merger or the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. PalEx represents
and warrants that no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of PalEx or its stockholders (other than underwriting discounts and
commission to be paid in connection with the IPO).
SECTION 13.2. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested) or sent via facsimile to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to PalEx or Subsidiary, to:
Vance K. Maultsby, Jr.
Chief Executive Officer
3555 Timmons Lane, Suite 610
Houston, Texas 77027
with a copy to:
John Wombwell, Esq.
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
-42-
<PAGE>
(b) If to the Company, to:
Ridge Pallets, Inc.
1470 Highway 17 South
Bartow, Florida 33830
Attention: A.E. Holland, Jr.
with a copy to:
William O.E. Henry, Esq.
Holland & Knight
Post Office Box 32092
Lakeland, Florida 33802-2092
92 Lake Wire
Lakeland, Florida 33815
SECTION 13.3. INTERPRETATION. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement, unless a contrary intention
appears, (i) the words "HEREIN", "HEREOF" and "HEREUNDER" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision and (ii) reference to any Article or
Section means such Article or Section hereof. No provision of this Agreement
shall be interpreted or construed against any party hereto solely because such
party or its legal representative drafted such provision.
SECTION 13.4. MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof and
(b) shall not be assigned by operation of law or otherwise, except that PalEx
may assign this Agreement to any other wholly-owned subsidiary of PalEx. THIS
AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION
AND EFFECT, BY THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS
EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE.
SECTION 13.5. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
SECTION 13.6. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and except as set forth in
Section 8.1(a), nothing in this Agreement, express or implied, is intended to
confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
-43-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
as of the date first written above.
MAIN STREET CAPITAL PALEX, INC.
PARTNERS, L.P.
By: Main Street Advisory Partners, L.P. By: __________________________
Name: Vance Maultsby
By: Main Street Merchant Partners, L.L.C. Title: Chief Executive Officer
By: ____________________________
Name: Sam W. Humphreys
Title: Managing Director
RIDGE ACQUISITION CORPORATION
By: __________________________
Name: Vance Maultsby
Title: Chief Executive Officer
RIDGE PALLETS, INC.
By: __________________________
Name: A. E. Holland, Jr.
Title: Chief Executive Officer
STOCKHOLDERS
______________________________
A. E. Holland, Jr., Trustee of the
Alfred Elton Holland, Jr.
Revocable Trust, dated September
14, 1994
______________________________
Douglas P. McLaulin, Jr., Trustee
of the Douglas P. McLaulin, Jr.
Revocable Trust dated December
30, 1994
-44-
<PAGE>
______________________________
A.H. King, III
______________________________
Byron L. Walker
______________________________
Casey A. Fletcher
______________________________
Daniel L. Helmick
______________________________
Howe Q. Wallace
______________________________
James H. Peterson
______________________________
Susan C. Waldron
-45-
<PAGE>
SCHEDULE 2.1
MANNER OF CONVERSION
At the Closing, the Stockholders shall receive the Ridge Stock Component
(as defined below). For purposes of the Agreement, the terms Reference Value
Offset Amount, Adjusted Indebtedness and Ridge Stock Component shall have the
following meanings:
(a) Reference Value Offset Amount with respect to each Founding Company
shall mean the sum of (i) the actual amount of any cash dividend paid on
or after the effective date of its merger agreement with PalEx and
Subsidiary by such Founding Company to its stockholders of record prior to
the Closing to the extent the payment thereof has not been funded by
indebtedness, (ii) the Adjusted Indebtedness and (iii) the amount of any
cash paid as merger consideration to stockholders of such Founding Company
pursuant to its merger agreement with PalEx and Subsidiary.
(b) Adjusted Indebtedness shall mean the result obtained by subtracting
from the Company's total indebtedness as of the Closing Date indebtedness
incurred and cash expenditures made after April 28, 1996 specifically to
fund capital expenditures after such date.
(c) Ridge Stock Component shall mean the number of shares of PalEx Common
Stock to be received by the Ridge Stockholders upon consummation of the
Merger, which shall be determined by applying the following formula:
Ridge Stock Reference Value
Ridge Stock Component = 6,000,000 x ---------------------------
Sum of Fraser, Ridge and
Interstate Stock Reference
Values
WHERE the Founding Companies Stock Reference Values will be
determined by subtracting from each Founding Company's Enterprise
Value ($36 million for Fraser and Ridge, $4.8 million for
Interstate) each Founding Company's Reference Value Offset Amount.
Each of the Founding Companies shall have the right to reduce their
respective Stock Component calculated above by returning shares of PalEx Common
Stock. The Founding Company shall receive 2.77778 options to purchase PalEx
Common Stock at the IPO price for each share of PalEx Common Stock returned. The
reduction of the Stock Component by a Founding Company shall not affect the
Stock Component of the other Founding Companies which shall be calculated as if
such reduction had not occurred.
A Founding Company shall exercise such right to return stock by written
notice to PalEx no later than three (3) days prior to the printing of the
Preliminary Prospectus in connection with the IPO.
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION AND
MERGER (this "Agreement") is made effective as of the 20th day of December 1996,
by and among PalEx, Inc., a Delaware corporation ("PalEx"), Main Street Capital
Partners, L.P., a Texas limited partnership ("Main Street"), Fraser Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of PalEx
("Subsidiary"), Fraser Industries, Inc., a Texas corporation (the "Company"),
and the individual stockholders of the Company identified on Schedule A to this
Agreement (the "Stockholders").
WITNESSETH:
WHEREAS, the respective stockholders and Boards of Directors of
Subsidiary and the Company (collectively referred to as the "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that Subsidiary merge (the
"Merger") with and into the Company;
WHEREAS, the parties hereto have previously entered into an Agreement
and Plan of Reorganization and Merger effective as of December 20, 1996, and the
parties desire to amend and restate such agreement in its entirety;
WHEREAS, PalEx is entering into other agreements substantially similar
to this Agreement with each of Ridge Pallets, Inc., a Florida corporation
("Ridge"), and Interstate Pallet, Co., a Virginia corporation ("Interstate" and,
together with the Company and Ridge, collectively referred to as the "Founding
Companies"), which agreements provide for the merger of subsidiaries of PalEx
with and into Ridge and Interstate simultaneously with the Merger; and
WHEREAS, the Boards of Directors of PalEx, Subsidiary and the Company
have approved and adopted this Agreement and intend the exchange of common stock
of the Company for common stock of PalEx to qualify as under the provisions of
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, for and in consideration of the premises and of the
mutual representations, warranties, covenants and agreements contained in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
<PAGE>
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2), Subsidiary
shall be merged with and into the Company in accordance with the Delaware
General Corporation Law ("DGCL") and the Texas Business Corporation Act and the
separate existence of Subsidiary shall cease. The Company shall be the surviving
party in the Merger and is hereinafter sometimes referred to as the "Surviving
Corporation." The Merger will be effected in a single transaction.
SECTION 1.2. EFFECTIVE TIME OF MERGER. The Merger shall become effective
(the "Effective Time") at such time as shall be stated in certificates of Merger
(the "Certificates of Merger") to be filed with the Secretary of State of the
States of Delaware and Texas. The Constituent Corporations will cause the
Certificates of Merger to be executed and delivered to the Secretary of State of
the State of Delaware and the Secretary of State of the State of Texas on or
before the Closing Date (as defined in Article III).
SECTION 1.3. CERTIFICATE OF INCORPORATION, BY-LAWS, BOARD OF DIRECTORS
AND OFFICERS OF SURVIVING CORPORATION; BOARD OF DIRECTORS AND OFFICERS OF PALEX.
At the Effective Time of the Merger:
(a) Amended and Restated Articles of Incorporation with substantially
the same provisions as Subsidiary's Certificate of Incorporation then in effect
shall be filed and shall become the Certificate of Incorporation of the
Surviving Corporation, and subsequent to the Effective Time, such Certificate of
Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation until amended as provided by law;
(b) The By-laws of Subsidiary then in effect shall become the By-laws of
the Surviving Corporation, and subsequent to the Effective Time, such By-laws
shall be the By-laws of the Surviving Corporation until they shall thereafter be
duly amended;
(c) The Boards of Directors of PalEx and the Surviving Corporation shall
consist of the persons identified on SCHEDULE 1.3(c) hereto. The Boards of
Directors of PalEx and the Surviving Corporation shall hold office subject to
the laws of the applicable state of incorporation and of the respective Articles
or Certificate of Incorporation and By-laws of such corporation; and
(d) The officers of PalEx and the Surviving Corporation shall be the
persons identified on SCHEDULE 1.3(d) hereto, each of such officers to serve
until such officer's successor is duly elected and qualified, subject to the
provisions of the Articles or
-2-
<PAGE>
Certificate of Incorporation and By-laws of PalEx or the Surviving Corporation,
as applicable, and the terms of any employment agreement executed by any such
officer.
SECTION 1.4. EFFECT OF MERGER. The identity, existence, purposes,
powers, objects, franchises, privileges, rights and immunities of the Company
shall continue unaffected and unimpaired by the Merger and the corporate
franchises, existence and rights of Subsidiary shall be merged with and into the
Company, as the Surviving Corporation. At the Effective Time of the Merger, the
separate existence of Subsidiary shall cease and, in accordance with the terms
of this Agreement, the Surviving Corporation shall possess all the rights,
privileges, immunities and franchises, of a public as well as of a private
nature, and all property, real, personal and mixed, and all debts due on
whatever account, including subscriptions for shares, all taxes, including those
due and owing and those accrued, and all other choses in action, and all and
every other interest of or belonging to or due to the Company and Subsidiary
shall be taken and deemed to be transferred to, and vested in, the Surviving
Corporation without further act or deed; and all property, rights and
privileges, powers and franchises and all and every other interest shall be
thereafter as effectually the property of the Surviving Corporation as they were
of the Company and Subsidiary; and the title to any real estate, or interest
therein, whether by deed or otherwise, under the laws of the state of
incorporation vested in the Company or Subsidiary, shall not revert or be in any
way impaired by reason of the Merger. Except as otherwise provided in this
Agreement, following the Merger the Surviving Corporation shall be responsible
and liable for all the liabilities and obligations of Subsidiary and PalEx and
any claim existing, or action or proceeding pending, by or against the Company
or Subsidiary may be prosecuted as if the Merger had not taken place, or the
Surviving Corporation may be substituted in their place. Neither the rights of
creditors nor any liens upon the property of the Company or Subsidiary shall be
impaired by the Merger, and all debts, liabilities and duties of the Company and
Subsidiary shall attach to the Surviving Corporation and may be enforced against
such Surviving Corporation to the same extent as if said debts, liabilities and
duties had been incurred or contracted by such Surviving Corporation.
ARTICLE II
CONVERSION OF STOCK
SECTION 2.1. MANNER OF CONVERSION. At the Effective Time, by virtue of
the Merger and without any action on the part of PalEx, Subsidiary, the Company
or any of the Stockholders:
(a) The shares of common stock, par value $1.00 per share, of the
Company (the "Company Stock") that are issued and outstanding immediately prior
to the Effective Time, automatically shall be deemed to represent (i) the right
to receive that number of shares of common stock, par value $.01 per share, of
PalEx ("PalEx Common Stock") set
-3-
<PAGE>
forth in SCHEDULE 2.1 and (ii) the right to receive the amount of cash set forth
in SCHEDULE 2.1. As of the Effective Time, all shares of Company Stock shall no
longer be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any such shares of
Company Stock shall cease to have any rights with respect thereto, except the
right to receive that number of shares of PalEx Common Stock and cash to be
issued in consideration therefore upon surrender of such certificate in
accordance with Section 2.2.
(b) All shares of Company Stock that are held by the Company as treasury
stock, if any, shall be canceled and retired and no shares of PalEx Common Stock
or other consideration shall be delivered or paid in exchange therefor.
(c) Each share of capital stock of Subsidiary issued and outstanding and
owned by PalEx shall, by virtue of the Merger and without any action on the part
of PalEx, be converted into one share of common stock, $.01 par value, of the
Company, as the Surviving Corporation.
SECTION 2.2. EXCHANGE OF CERTIFICATES FOR CONSIDERATION. At the Closing
(as defined in Article III), the Stockholders shall deliver to PalEx the
original certificates representing the Company Stock, duly endorsed in blank by
the Stockholders or accompanied by blank stock powers. The Stockholders agree
promptly to cure any deficiencies with respect to the endorsement of the
certificates or other documents of conveyance with respect to such Company
Stock. Upon surrender of such certificates, the Stockholders shall be entitled
to receive certificates representing the number of shares of PalEx Common Stock
and the amount of cash set forth in SCHEDULE 2.1, which shall be delivered on
the Consummation Date (as defined in Article III).
ARTICLE III
THE CLOSING AND CONSUMMATION DATE
On the date of execution of the underwriting agreement (the
"Underwriting Agreement") relating to the initial public offering of PalEx
Common Stock (the "IPO"), the parties shall take all actions necessary (i) to
effect the Merger (including, if permitted by applicable state law, the filing
with the appropriate state authorities of the Certificates of Merger which shall
become effective on the Consummation Date (as defined below)) and (ii) to effect
the conversion and delivery of shares referred to in Section 2.2 (hereinafter
referred to as the "Closing"); PROVIDED, HOWEVER, that such actions shall not
include the actual completion of the Merger or the conversion and delivery of
the shares referred to in Article II, which actions shall be taken on the
Consummation Date. The Closing shall take place at a location mutually agreeable
to the Company and PalEx. The date on which the Closing shall occur shall be
referred to as the "Closing Date." On the Consummation Date, the Certificates of
Merger shall be filed with the appropriate state authorities, or if
-4-
<PAGE>
already filed shall become effective, and all transactions contemplated by this
Agreement shall occur and be deemed to be completed. The Consummation Date shall
be the date on which the closing of the IPO occurs. During the period from the
Closing Date to the Consummation Date, this Agreement may only be terminated by
the parties if the Underwriting Agreement is terminated pursuant to the terms of
such agreement or as otherwise expressly provided herein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
The Company and Stockholders represent and warrant to PalEx as follows:
SECTION 4.1. ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas and has the requisite corporate power and authority to
own, lease and operate its assets and properties and to carry on its business as
it is now being conducted. The Company is qualified to do business and is in
good standing in each jurisdiction in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in good
standing will not, when taken together with all other such failures, have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other), results of operations or prospects of the
Company (a "Company Material Adverse Effect"). True, accurate and complete
copies of the Company's Certificate of Incorporation and By-laws, in each case
as in effect on the date hereof, including all amendments thereto, have
heretofore been delivered to PalEx.
SECTION 4.2. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 200,000
shares of Company Stock and no shares of preferred stock. As of December 20,
1996, 9,900 shares of Company Stock and no shares of preferred stock were issued
and outstanding. All of such issued and outstanding shares are validly issued
and are fully paid, nonassessable and free of preemptive rights. The
Stockholders own beneficially and of record all of the shares of the Company
Stock, which constitutes all of the outstanding shares of capital stock of the
Company, and such Company Stock is owned free and clear of all liens, claims or
encumbrances of any nature. As a result of the Merger, the Stockholders will
convey and transfer to PalEx good and marketable title to the Company Stock
owned by them.
(b) Except as set forth on SCHEDULE 4.2 attached hereto, as of the date
hereof there were no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of
-5-
<PAGE>
conversion or exchange under any outstanding security, instrument or other
agreement to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of the capital stock of the Company or obligating the Company
to grant, extend or enter into any such agreement or commitment or obligating
any of the Stockholders to convey or transfer any Company Stock. There are no
voting trusts, proxies or other agreements or understandings to which the
Company or any of the Stockholders is a party or is bound with respect to the
voting of any shares of capital stock of the Company.
SECTION 4.3. NO SUBSIDIARIES. The Company has no subsidiaries and,
except as set forth on SCHEDULE 4.3, it does not own any capital stock of any
corporation or any interest in any partnership, joint venture or limited
liability company.
SECTION 4.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. This
Agreement has been approved by the Board of Directors of the Company and by the
Stockholders, and no other corporate proceedings on the part of the Company are
necessary to authorize the execution and delivery of this Agreement or the
consummation by the Company of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Company and the
Stockholders, and, assuming the due authorization, execution and delivery hereof
by PalEx, Subsidiary and Main Street, constitutes a valid and legally binding
agreement of the Company and the Stockholders, enforceable against the Company
and the Stockholders in accordance with its terms, except that such enforcement
may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting or relating to enforcement of creditors' rights
generally and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by each of the Company
and the Stockholders do not violate, conflict with or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
the Company under any of the terms, conditions or provisions of (i) the charter
or by-laws of the Company (ii) any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any court or
governmental authority applicable to the Company or any of its properties or
assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which the Company or any of the Stockholders is now
a party or by which any of the Stockholders or the Company or any of its
properties or assets may be bound or affected. The consummation by the Company
and the Stockholders of the transactions contemplated hereby will not result in
any
-6-
<PAGE>
violation, conflict, breach, right of termination or acceleration or creation of
liens under any of the terms, conditions or provisions of the items described in
clauses (i) through (iii) of the preceding sentence, subject, in the case of the
terms, conditions or provisions of the items described in clause (iii) above, to
obtaining (prior to the Effective Time) consents required from commercial
lenders, lessors or other third parties. Excluded from the foregoing sentences
of this paragraph (b), insofar as they apply to the terms, conditions or
provisions of the items described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, reasonably be expected
to have a Company Material Adverse Effect.
(c) Except for (i) the filing in connection with the IPO of a
registration statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission ("SEC") pursuant to the Securities Act of
1933 (the "1933 Act"), (ii) the declaration of the effectiveness thereof by the
SEC and filings with various state blue sky authorities, and (iii) the making of
the Merger Filings with the Secretary of State of the State of Delaware and
Texas in connection with the Merger, no declaration, filing or registration
with, or notice to, or authorization, consent or approval of, any governmental
or regulatory body or authority is necessary for the execution and delivery of
this Agreement by the Company and the Stockholders or the consummation by the
Company and the Stockholders of the transactions contemplated hereby.
SECTION 4.5. FINANCIAL STATEMENTS. The audited financial statements for
the fiscal year ended August 31, 1996 and unaudited interim financial statements
of the Company for the three months ended November 30, 1996 (collectively, the
"Company Financial Statements") have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and fairly present the financial
position of the Company as of the dates thereof and the results of its
operations and changes in financial position for the periods then ended,
subject, in the case of the unaudited interim financial statements, to normal
year-end and audit adjustments and any other adjustments described therein.
SECTION 4.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in
SCHEDULE 4.6 attached hereto, the Company did not have at November 30, 1996, nor
has it incurred since that date, any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except (a)
liabilities, obligations or contingencies (i) which are accrued or reserved
against in the Company Financial Statements or reflected in the notes thereto or
(ii) which were incurred after November 30, 1996 and were incurred in the
ordinary course of business and consistent with past practices, and (b)
liabilities and obligations which are of a nature not required to be reflected
in the Company Financial Statements prepared in accordance with generally
accepted accounting principles consistently applied and which were incurred in
the normal course of business and are described on SCHEDULE 4.6. SCHEDULE 4.6
includes a reasonable
-7-
<PAGE>
estimate by the Company and the Stockholders of the maximum amount which may
become payable with respect to any such liabilities which are contingent.
SECTION 4.7. ACCOUNTS AND NOTES RECEIVABLE. SCHEDULE 4.7 sets forth an
accurate list of the accounts and notes receivable of the Company as of October
31, 1996, including any such amounts which are not reflected in the Company's
balance sheet at such date. Receivables from and advances to employees, the
Stockholders and any entities or persons related to or affiliated with the
Stockholders are separately identified on SCHEDULE 4.7. SCHEDULE 4.7 also sets
forth an accurate aging of all accounts and notes receivable as of November 30,
1996 showing amounts due in 30-day aging categories. The trade and other
accounts receivable of the Company which are classified as current assets on the
November 30, 1996 balance sheet are bona fide receivables, were acquired in the
ordinary course of business, are stated in accordance with generally accepted
accounting principles and, subject to the reserve for doubtful accounts, need
not be written-off as uncollectible.
SECTION 4.8. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since August 31,
1996, there has not been any material adverse change in the business,
operations, properties, assets, liabilities, condition (financial or other),
results of operations or prospects of the Company, nor, except as disclosed in
SCHEDULE 4.8 has there been:
(i) any damage, destruction or loss (whether or not covered by
insurance) alone or in the aggregate, materially adversely
affecting the properties or business of the Company;
(ii) any change in the authorized capital stock of the Company or in
its securities outstanding or any change in the Stockholders'
ownership interests or any grant of any options, warrants, calls,
conversion rights or commitments;
(iii) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect
redemption, purchase or other acquisition of any of the capital
stock of the Company;
(iv) any increase in the compensation payable or to become payable by
the Company to the Stockholders or any of its officers,
directors, employees, consultants or agents, except for ordinary
and customary bonuses and salary increases for employees in
accordance with past practice;
(v) any work interruptions, labor grievances or claims filed, or any
proposed law, regulation or event or condition of any character
materially adversely affecting the business or future prospects
of the Company;
-8-
<PAGE>
(vi) any sale or transfer, or any agreement to sell or transfer, any
material assets, properties or rights of the Company to any
person, including, without limitation, the Stockholders and their
affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company;
(viii) any increase in the Company's indebtedness, other than accounts
payable incurred in the ordinary course of business;
(ix) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets,
property or rights of the Company or requiring consent of any
party to the transfer and assignment of any such assets, property
or rights;
(x) any purchase or acquisition of, or agreement, plan or arrangement
to purchase or acquire, any property, rights or assets outside of
the ordinary course of the Company's business;
(xi) any waiver of any material rights or claims of the Company;
(xii) any material breach, amendment or termination of any material
contract, agreement, license, permit or other right to which the
Company is a party or any of its property is subject; or
(xiii) any transaction by the Company outside the ordinary course of
business.
SECTION 4.9. LITIGATION. Except as disclosed in the SCHEDULE 4.9
attached hereto, there are no claims, suits, actions or proceedings pending or,
to the knowledge of the Company or any of the Stockholders, threatened against,
relating to or affecting the Company or any of the Stockholders, before any
court, governmental department, commission, agency, instrumentality or
authority, or any arbitrator that seek to restrain the consummation of the
Merger or which could reasonably be expected, either alone or in the aggregate
with all such claims, actions or proceedings, to have a Company Material Adverse
Effect. Except as disclosed in SCHEDULE 4.9 attached hereto, neither the Company
nor any of the Stockholders is not subject to any judgment, decree, injunction,
rule or order of any court, governmental department, commission, agency,
instrumentality or authority, or any arbitrator which prohibits or restricts the
consummation of the transactions contemplated hereby or would have a Company
Material Adverse Effect.
SECTION 4.10. REGISTRATION STATEMENT. To the best of the Company's and
Stockholders' knowledge and belief, none of the information to be supplied by
the Company for inclusion in the Registration Statement will contain any untrue
statement of
-9-
<PAGE>
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
SECTION 4.11. NO VIOLATION OF LAW. To the best of the Company's and
Stockholders' knowledge and belief, except as disclosed in SCHEDULE 4.11
attached hereto, the Company is not in violation of nor has it been given notice
or been charged with any violation of, any law, statute, order, rule,
regulation, ordinance or judgment (including, without limitation, any applicable
environmental law, ordinance or regulation) of any governmental or regulatory
body or authority, except for violations which, in the aggregate, could not
reasonably be expected to have a Company Material Adverse Effect. Except as
disclosed in SCHEDULE 4.11 attached hereto, as of the date of this Agreement, no
investigation or review by any governmental or regulatory body or authority is
pending or, to the knowledge of the Company, threatened, nor has any
governmental or regulatory body or authority indicated an intention to conduct
the same, other than, in each case, those the outcome of which, as far as
reasonably can be foreseen, will not have a Company Material Adverse Effect. The
Company has all permits, licenses, franchises, variances, exemptions, orders and
other governmental authorizations, consents and approvals necessary to conduct
their businesses as presently conducted (collectively, the "Company Permits"),
except for permits, licenses, franchises, variances, exemptions, orders,
authorizations, consents and approvals the absence of which, alone or in the
aggregate, would not have a Company Material Adverse Effect. The Company is not
in violation of the terms of any Company Permit, except for delays in filing
reports or violations which, alone or in the aggregate, would not have a Company
Material Adverse Effect.
SECTION 4.12. COMPLIANCE WITH AGREEMENTS. Except as disclosed in
SCHEDULE 4.12 attached hereto, the Company is not in breach or violation of or
in default in the performance or observance of any term or provision of, and no
event has occurred which, with lapse the of time or action by a third party,
could result in a default under, (a) the charter, by-laws or similar
organizational instruments of the Company or (b) any contract, commitment,
agreement, indenture, mortgage, loan agreement, note, lease, bond, license,
approval or other instrument to which the Company is a party or by which it is
bound or to which any of its property is subject, which breaches, violations and
defaults, in the case of clause (b) of this Section 4.12, would have, in the
aggregate, a Company Material Adverse Effect.
SECTION 4.13. TAXES.
(a) The Company has (i) duly filed with the appropriate governmental
authorities or will file when due all Tax Returns required to be filed for all
periods ending on or prior to the Effective Time, other than those Tax Returns
the failure of which to file would not have a Company Material Adverse Effect
and such Tax Returns are true, correct and
-10-
<PAGE>
complete in all material respects, and (ii) duly paid in full or made adequate
provision for the payment of all Taxes for all periods ending at or prior to the
Effective Time. The liabilities and reserves for Taxes reflected in the Company
Financial Statements are adequate to cover all Taxes for all periods ending at
or prior to the Effective Time and there are no material liens for Taxes upon
any property or asset of the Company thereof, except for liens for Taxes not yet
due. There are no unresolved issues of law or fact arising out of a notice of
deficiency, proposed deficiency or assessment from the IRS or any other
governmental taxing authority with respect to Taxes of the Company which, if
decided adversely, singly or in the aggregate, would have a Company Material
Adverse Effect. The Company is not a party to any agreement providing for the
allocation or sharing of Taxes with any entity that is not, directly or
indirectly, a wholly-owned corporate subsidiary of Company. Neither the Company
nor any of its corporate subsidiaries has, with regard to any assets or property
held, acquired or to be acquired by any of them, filed a consent to the
application of Section 341(f) of the Code. The Company made a valid election
under Section 1362(a) of the Code, effective December 1, 1988 to be taxed as an
S corporation under the Code. As of immediately prior to the Closing, the
Company will qualify as an S corporation within the meaning of Subchapter S of
the Code.
(b) For purposes of this Agreement, the term "Taxes" shall mean all
taxes, including, without limitation, income, gross receipts, excise, property,
sales, employment, withholding, social security, occupation, use, service,
service use, license, payroll, franchise, transfer and recording taxes, fees and
charges, windfall profits, severance, customs, import, export, employment or
similar taxes, charges, fees, levies or other assessments imposed by the United
States, or any state, local or foreign government or subdivision or agency
thereof, whether computed on a separate, consolidated, unitary, combined or any
other basis, and such term shall include any interest, fines, penalties or
additional amounts and any interest in respect of any additions, fines or
penalties attributable or imposed or with respect to any such taxes, charges,
fees, levies or other assessments.
(c) For purposes of this Agreement, the term "Tax Return" shall mean any
return, report or other document or information required to be supplied to a
taxing authority in connection with any Taxes.
SECTION 4.14. EMPLOYEE BENEFIT PLANS; ERISA.
(a) Except as set forth in SCHEDULE 4.14 attached hereto, at the date
hereof, the Company does not maintain or contribute to any material employee
benefit plans, programs, arrangements and practices (such plans, programs,
arrangements and practices of the Company being referred to as the "COMPANY
PLANS"), including employee benefit plans within the meaning set forth in
Section 3(3) of ERISA, or other similar material arrangements for the provision
of benefits (excluding any "MULTI-EMPLOYER PLAN" within the meaning of Section
3(37) of ERISA or a "MULTIPLE EMPLOYER PLAN" within the meaning of
-11-
<PAGE>
Section 413(c) of the Code). SCHEDULE 4.14(A) attached hereto lists all
Multi-employer Plans and Multiple Employer Plans which the Company maintains or
to which it makes contributions. The Company does not have any obligation to
create any additional such plan or to amend any such plan so as to increase
benefits thereunder, except as required under the terms of the Company Plans,
under existing collective bargaining agreements or to comply with applicable
law.
(b) Except as disclosed in SCHEDULE 4.14 attached hereto, (i) there have
been no prohibited transactions within the meaning of Section 406 or 407 of
ERISA or Section 4975 of the Code with respect to any of the Company Plans that
could result in penalties, taxes or liabilities which, singly or in the
aggregate, could have a Company Material Adverse Effect, (ii) except for
premiums due, there is no outstanding material liability, whether measured alone
or in the aggregate, under Title IV of ERISA with respect to any of the Company
Plans, (iii) neither the Pension Benefit Guaranty Corporation nor any plan
administrator has instituted proceedings to terminate any of the Company Plans
subject to Title IV of ERISA other than in a "STANDARD TERMINATION" described in
Section 4041(b) of ERISA, (iv) none of the Company Plans has incurred any
"ACCUMULATED FUNDING DEFICIENCY" (as defined in Section 302 of ERISA and Section
412 of the Code), whether or not waived, as of the last day of the most recent
fiscal year of each of the Company Plans ended prior to the date of this
Agreement, (v) the current present value of all projected benefit obligations
under each of the Company Plans which is subject to Title IV of ERISA did not,
as of its latest valuation date, exceed the then current value of the assets of
such plan allocable to such benefit liabilities, based upon reasonable actuarial
assumptions currently utilized for such Company Plan, (vi) each of the Company
Plans has been operated and administered in all material respects in accordance
with applicable laws during the period of time covered by the applicable statute
of limitations, (vii) each of the Company Plans which is intended to be
"QUALIFIED" within the meaning of Section 401(a) of the Code has been determined
by the Internal Revenue Service to be so qualified and such determination has
not been modified, revoked or limited by failure to satisfy any condition
thereof or by a subsequent amendment thereto or a failure to amend, except that
it may be necessary to make additional amendments retroactively to maintain the
"QUALIFIED" status of such Company Plans, and the period for making any such
necessary retroactive amendments has not expired, (viii) with respect to
Multi-employer Plans, the Company has not made or suffered a "COMPLETE
WITHDRAWAL" or a "PARTIAL WITHDRAWAL," as such terms are respectively defined in
Sections 4203, 4204 and 4205 of ERISA and, to the best knowledge of the Company,
no event has occurred or is expected to occur which presents a material risk of
a complete or partial withdrawal under said Sections 4203, 4204 and 4205, (ix)
to the best knowledge of the Company, there are no material pending, threatened
or anticipated claims involving any of the Company Plans other than claims for
benefits in the ordinary course, and (x) the Company has no current material
liability, whether measured alone or in the aggregate, for plan termination or
complete withdrawal or partial withdrawal under Title IV of ERISA based on any
plan to which any entity that would be deemed one employer with the Company
under
-12-
<PAGE>
Section 4001 of ERISA or Section 414 of the Code contributed during the period
of time covered by the applicable statute of limitations (the "COMPANY
CONTROLLED GROUP PLANS"), and the Company does not reasonably anticipate that
any such liability will be asserted against the Company . None of the Company
Controlled Group Plans has an "ACCUMULATED FUNDING DEFICIENCY" (as defined in
Section 302 of ERISA and 412 of the Code).
(c) SCHEDULE 4.14 attached hereto contains a true and complete summary
or list of or otherwise describes all employment contracts and employee benefit
arrangements with all employees of the Company.
SECTION 4.15. LABOR MATTERS. Except as set forth in SCHEDULE 4.15
attached hereto, (a) there are no significant controversies pending or, to the
knowledge of the Company, threatened between the Company and any of its
employees, (b) none of the Company's employees is represented by a labor union
or covered by a collective bargaining agreement, and to the knowledge of the
Company, there are no organizational efforts and no campaign is under way to
establish such representation or coverage, (c) the Company has, to the knowledge
of the Company, complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (d) no person has, to the knowledge of the
Company, asserted that the Company is liable in any material amount for any
arrears of wages or any taxes or penalties for failure to comply with any of the
foregoing, except for such controversies, organizational efforts, non-compliance
and liabilities which, singly or in the aggregate, could not reasonably be
expected to have a Company Material Adverse Effect.
SECTION 4.16. ENVIRONMENTAL MATTERS.
(a) To the best of the Company's and Stockholders' knowledge and belief,
except as set forth in SCHEDULE 4.16 attached hereto, (i) the Company has
conducted its businesses in compliance with all 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, (ii) none of the properties owned by the Company contain
any Hazardous Substance as a result of any activity of the Company in amounts
exceeding the levels permitted by applicable Environmental Laws, (iii) the
Company has not 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 may be in violation of, or liable under, any
Environmental Law in connection with the ownership or operation of its business,
(iv) there are no civil, criminal or administrative actions, suits, demands,
claims, hearings, investigations or proceedings pending or threatened, against
the Company relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be filed,
by the Company concerning the release of any Hazardous
-13-
<PAGE>
Substance or the threatened or actual violation of any Environmental Law, (vi)
no Hazardous Substance has been disposed of, released or transported in
violation of any applicable Environmental Law from any properties owned by the
Company as a result of any activity of the Company during the time such
properties were owned, leased or operated by the Company, (vii) 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
relating to the activities of the Company which are not listed on SCHEDULE 4.16
attached hereto prior to the date hereof, (viii) there are no underground
storage tanks on, in or under any properties owned by the Company 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, (ix) there is no asbestos or asbestos containing material present in
any of the properties owned by the Company, and no asbestos has been removed
from any of such properties during the time such properties were owned, leased
or operated by the Company, and (x) neither the Company nor any of its
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 (i) through (x) that, singly or in the aggregate, would not reasonably
be expected to have a Company Material Adverse Effect.
(b) 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
(x) 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 (y) 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, (i) 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 (ii) 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.
-14-
<PAGE>
(c) 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
government 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, radioactive material, asbestos or
asbestos containing material, urea formaldehyde foam insulation, lead or
polychlorinated biphenyls.
SECTION 4.17. TITLE TO ASSETS. The Company has good and marketable title
in fee simple to all its real property and good title to all its leasehold
interests and other properties, as reflected in the most recent balance sheet
included in the Company Financial Statements, except for the assets which are to
be sold or dividended to the Stockholders pursuant to Section 6.4 and properties
and assets that have been disposed of in the ordinary course of business since
the date of such balance sheet, free and clear of all mortgages, liens, pledges,
charges or encumbrances of any nature whatsoever, except (i) the lien for
current taxes, payments of which are not yet delinquent, (ii) such imperfections
in title and easements and encumbrances, if any, as are not substantial in
character, amount or extent and do not materially detract from the value, or
interfere with the present use of the property subject thereto or affected
thereby, or otherwise materially impair the Company's business operations (in
the manner presently carried on by the Company), and (iii) except for such
matters which, singly or in the aggregate, could not reasonably be expected to
have a Company Material Adverse Effect. All leases under which the Company
leases any substantial amount of real or personal property have been delivered
to PalEx and are in good standing, valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event which with notice or lapse of time or both would become a
default other than defaults under such leases which in the aggregate will not
cause a Company Material Adverse Effect
SECTION 4.18. INSURANCE. SCHEDULE 4.18 sets forth an accurate list as of
September 30, 1996 of all insurance policies carried by the Company and of all
insurance claims or losses in excess of $50,000 or material workmen's
compensation claims received for the past five (5) policy years. The losses and
claims not list in SCHEDULE 4.18 will not, in the aggregate, result in a Company
Material Adverse Effect. Also attached to SCHEDULE 4.18 are true, complete and
correct copies of all of the Company's insurance policies, covering at least the
past three years. None of such policies is a "claims made" policy. The insurance
policies set forth on SCHEDULE 4.18 provide adequate coverage against the risks
involved in the Company's business. Such policies are currently in full force
and effect.
-15-
<PAGE>
SECTION 4.19. INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY
TRANSACTIONS. Except as described on SCHEDULE 4.19, no Stockholder, officer,
director or affiliate of the Company (i) possesses, directly or indirectly, any
financial interest in, or is a director, officer, employee or affiliate of, any
corporation, firm, association or business organization that is a client,
supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a
party to an agreement or relationship, that involves the receipt by such person
of compensation or property from the Company other than through a customary
employment relationship.
SECTION 4.20. BUSINESS RELATIONS. SCHEDULE 4.20 contains an accurate
list of all customers of the Company representing five percent (5%) or more of
the Company's revenues for the twelve (12) months ended August 31, 1996 and the
three (3) months ended November 30, 1996. Except as set forth on SCHEDULE 4.20,
since August 31, 1995, none of the Company's significant customers has canceled
or substantially reduced its purchases from the Company, nor are any of such
customers threatening to do so. Except as set forth on SCHEDULE 4.20, since
August 31, 1995, the Company has not experienced any difficulties in obtaining
any inventory items necessary to the operation of its business, and, to the
knowledge of the Company and the Stockholders, no such shortage of supply of
inventory items is threatened or pending. To the knowledge of the Company and
the Stockholders, no customer or supplier of the Company will cease to do
business with, or substantially reduce its purchases from, the Company after the
consummation of the transactions contemplated hereby, which cessation or
reduction would reasonably be expected to have a Company Material Adverse
Effect. The Company is not required to provide any bonding or other financial
security arrangements in any material amount in connection with any transactions
with any of its customers or suppliers.
SECTION 4.21. DISCLOSURE. The Stockholders have fully provided PalEx
with all the information that PalEx has requested in analyzing whether to
consummate the Merger. To the best of the Company's and Stockholders' knowledge
and belief, none of the information so provided nor any representation or
warranty of the Stockholders contained in this Agreement contains any untrue
statement regarding a material fact or omits to state a material fact necessary
in order to make the statements made herein or in the information provided, in
light of the circumstances under which they were made, not misleading.
SECTION 4.22. TRADEMARKS AND INTELLECTUAL PROPERTY COMPLIANCE. Company
owns or has the right to use, without any material payment to any other party,
all of its patents, trademarks (registered or unregistered), trade names,
service marks, copyrights and applications ("Intellectual Property Rights") and
the consummation of the transactions contemplated hereby will not alter or
impair such rights in any material respect. To the best of the Company's and
Stockholders' knowledge and belief, no claims are pending by any person with
respect to the ownership, validity, enforceability or use of any such
Intellectual Property Rights challenging or questioning the validity or
effectiveness of any
-16-
<PAGE>
of the foregoing which claims could reasonably be expected to have a Company
Material Adverse Effect.
SECTION 4.23. NO IMPLIED REPRESENTATIONS. Notwithstanding anything
contained in this Article or any other provision of this Agreement or any of the
related documents, it is the explicit understanding of each party hereto that
the Company and the Stockholders are not making any representation or warranty
whatsoever, express or implied, other than those representations and warranties
of the Company and the Stockholders in this Agreement and the related documents.
It is understood that any estimates, projections or other predictions which
otherwise have been provided to PalEx are not and shall not be deemed to be
representations or warranties of the Company or the Stockholders, but as the
good faith estimates and assumptions of the Company and the Stockholders
intended to be reasonable at the time made concerning the most likely course of
the Company and its businesses. The Company, the Stockholders and PalEx
acknowledge that there are uncertainties inherent in attempting to make such
estimates, projections and other predictions, that the Company, the Stockholders
and PalEx are familiar with such uncertainties, that the Company, the
Stockholders and PalEx are taking full responsibility for making their own
evaluation of the adequacy and accuracy of all estimates, projections and other
predictions so furnished to them, and that neither PalEx, the Stockholders nor
any of the Founding Companies shall have any claim against anyone with respect
thereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PALEX AND SUBSIDIARY
PalEx and Subsidiary represent and warrant to the Company as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION.
(a) PalEx is a corporation duly organized, validly existing and in good
standing under the laws of the state of Delaware and has the requisite power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. True, accurate and complete copies of
each of PalEx's Certificate of Incorporation and By-laws, as in effect on the
date hereof, including all amendments thereto, have heretofore been delivered to
the Company.
(b) Subsidiary is a corporation duly organized, validly existing and
good standing under the laws of the State of Delaware and has the requisite
power and authority to own, lease and operate its assets and properties and to
carry on its business as it is now being conducted. Subsidiary is qualified to
do business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of the
-17-
<PAGE>
business conducted by it makes such qualification necessary, except where the
failure to be so qualified and in good standing will not, when taken together
with all other such failures, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other), results of
operations or prospects of Subsidiary. True, accurate and complete copies of
each of Subsidiary's Certificate of Incorporation and By-laws, as in effect on
the date hereof, including all amendments thereto, have heretofore been
delivered to the Company.
SECTION 5.2. CAPITALIZATION.
(a) The authorized capital stock of PalEx consists of (i) 30,000,000
shares of PalEx Common Stock, of which 1,071,389 shares were outstanding as of
December 20, 1996, and (ii) 5,000,000 shares of preferred stock, par value $.01
per share, none of which was issued and outstanding as of December 20, 1996. All
of the issued and outstanding shares of PalEx Common Stock are validly issued
and are fully paid, nonassessable and free of preemptive rights.
(b) Except as set forth on SCHEDULE 5.2 attached hereto, as of the date
hereof, there are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement obligating PalEx to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of the capital stock of
PalEx or obligating PalEx to grant, extend or enter into any such agreement or
commitment, except that PalEx declared a stock split prior to executing this
Agreement which resulted in Main Street owning 1,021,389 shares and Vance K.
Maultsby, Jr. owning 50,000 shares of PalEx Common Stock. There are no voting
trusts, proxies or other agreements or understandings to which PalEx is a party
or is bound with respect to the voting of any shares of capital stock of PalEx.
The shares of PalEx Common Stock issued to stockholders of the Company in the
Merger will be at the Effective Time duly authorized, validly issued, fully paid
and nonassessable and free of preemptive rights.
SECTION 5.3. NO SUBSIDIARIES. Except as set forth on SCHEDULE 5.3, PalEx
has no subsidiaries and it does not own any capital stock of any corporation or
any interest in any partnership, joint venture or limited liability company.
SECTION 5.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) PalEx and Subsidiary have full corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been approved by the Board of Directors and
stockholders of PalEx and Subsidiary, and no other corporate proceedings on the
part of PalEx and Subsidiary are necessary to authorize the execution and
delivery of this Agreement or the consummation
-18-
<PAGE>
by PalEx and Subsidiary of the transactions contemplated hereby. This Agreement
has been duly executed and delivered by PalEx and Subsidiary, and, assuming the
due authorization, execution and delivery hereof by the Company and the
Stockholders, constitutes a valid and legally binding agreement of PalEx and
Subsidiary enforceable against each of them in accordance with its terms, except
that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles.
(b) The execution and delivery of this Agreement by PalEx and Subsidiary
does not violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the respective properties or assets of PalEx
and Subsidiary under any of the terms, conditions or provisions of (i) the
charter or by-laws of PalEx or Subsidiary, as applicable, (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to PalEx or
Subsidiary or any of their respective properties or assets or (iii) any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which PalEx or Subsidiary is now a party or by which PalEx or Subsidiary
or any of their respective properties or assets may be bound or affected. The
consummation by PalEx and Subsidiary of the transactions contemplated hereby
will not result in any violation, conflict, breach, right of termination or
acceleration or creation of liens under any of the terms, conditions or
provisions of the items described in clauses (i) through (iii) of the preceding
sentence, subject, in the case of the terms, conditions or provisions of the
items described in clause (ii) above, to obtaining (prior to the Effective Time)
PalEx Required Statutory Approvals (as defined in Section 5.4(c)) and, in the
case of the terms, conditions or provisions of the items described in clause
(iii) above, to obtaining (prior to the Effective Time) consents required from
commercial lenders, lessors or other third parties. Excluded from the foregoing
sentences of this paragraph (b), insofar as they apply to the terms, conditions
or provisions of the items described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, have a material
adverse effect on the business, operations, properties, assets, condition
(financial or other), results of operations or prospects of PalEx or Subsidiary
(a "PalEx Material Adverse Effect").
(c) Except for (i) the filing of the Registration Statement the SEC
pursuant to the 1933 Act, (ii) the declaration of the effectiveness thereof by
the SEC and filings with various state blue sky authorities, and (iii) the
making of the Merger Filing with the Secretary of State of the State of Delaware
and Texas in connection with the Merger, the
-19-
<PAGE>
filings and approvals referred to in clauses (i) through (iii) are collectively
referred to as the "PALEX REQUIRED STATUTORY APPROVALS", no declaration, filing
or registration with, or notice to, or authorization, consent or approval of,
any governmental or regulatory body or authority is necessary for the execution
and delivery of this Agreement by PalEx or Subsidiary or the consummation by
PalEx or Subsidiary of the transactions contemplated hereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in the
aggregate, have a PalEx Material Adverse Effect.
SECTION 5.5. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed to
the Company in writing, neither PalEx nor Subsidiary have incurred any
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
of any nature, except those incurred in connection with the Merger, this
Agreement, the agreements with the other Founding Companies and the IPO. Except
as contemplated by the foregoing, PalEx and Subsidiary have not engaged in any
business activities of any type or kind whatsoever, nor entered into any
agreements nor is it bound by any obligation or undertaking.
SECTION 5.6. LITIGATION. There are no claims, suits, actions or
proceedings pending or, to the knowledge of PalEx or Subsidiary, threatened
against, relating to or affecting PalEx or Subsidiary, before any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that seek to restrain or enjoin the consummation of the Merger or
the IPO or which could reasonably be expected, either alone or in the aggregate
with all such claims, actions or proceedings, to have a PalEx Material Adverse
Effect.
SECTION 5.7. NO VIOLATION OF LAW. PalEx is not in violation of, nor has
it been given notice or been charged with any violation of, any law, statute,
order, rule, regulation, ordinance, or judgment (including, without limitation,
any applicable environmental law, ordinance or regulation) of any governmental
or regulatory body or authority.
SECTION 5.8. AFFILIATE TRANSACTIONS. Except for the ownership by Main
Street of shares of PalEx Common Stock and Main Street's obligations and rights
under Section 7.3, no transaction has occurred and no transaction is now
proposed to which PalEx is or will be a party, in which any current affiliate of
Main Street has a direct or indirect material interest.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.
Except as otherwise contemplated by this Agreement, after the date hereof and
prior to the
-20-
<PAGE>
Closing Date or earlier termination of this Agreement, unless PalEx shall
otherwise agree in writing, the Company shall:
(a) conduct its businesses in the ordinary and usual course and
consistent with past practice;
(b) not (i) amend or propose to amend its charter or by-laws, (ii)
split, combine or reclassify its outstanding capital stock or (iii) declare, set
aside or pay any dividend or distribution payable in cash, stock, property or
otherwise, except for the payment of dividends or distributions described in
SCHEDULE 6.1;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of, its capital stock of any class or
any debt or equity securities convertible into or exchangeable for such capital
stock.
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (A) borrowings in the ordinary course
of business, (B) borrowings to refinance existing indebtedness on terms
comparable with or better than those at the date hereof, or (C) borrowings to
fund distributions to Stockholders of the accumulated adjustment account, (ii)
redeem, purchase, acquire or offer to purchase or acquire any shares of its
capital stock or any options, warrants or rights to acquire any of its capital
stock or any security convertible into or exchangeable for its capital stock,
(iii) take or fail to take any action which action or failure would cause the
Company or the Stockholders (except to the extent of non-stock consideration, if
any, received in the Merger) to recognize gain or loss for federal income tax
purposes as a result of the consummation of the Merger, (iv) sell, pledge,
dispose of or encumber any assets or businesses other than sales in the ordinary
course of business or (v) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(e) use all reasonable efforts to preserve intact its business
organizations and goodwill, keep available the services of its present officers
and key employees, and preserve the goodwill and business relationships with
customers and others having business relationships with it and not engage in any
action, directly or indirectly, with the intent to adversely impact the
transactions contemplated by this Agreement;
(f) confer on a regular and frequent basis with one or more
representatives of PalEx to report operational matters of materiality and the
general status of ongoing operations;
(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or
-21-
<PAGE>
agreements with any directors, officers or key employees, except in the ordinary
course and consistent with past practice;
(h) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law or in the ordinary course of
business and consistent with past practices; and
(i) maintain with financially responsible insurance companies insurance
on its tangible assets and its businesses in such amounts and against such risks
and losses as are consistent with past practice.
SECTION 6.2. CONTROL OF THE COMPANY'S OPERATIONS. Nothing contained in
this Agreement shall give to PalEx, directly or indirectly, rights to control or
direct the Company's operations prior to the Effective Time. Prior to the
Effective Time, the Company shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision of its
operations.
SECTION 6.3. NO - SHOP.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, the Company and the Stockholders shall not, and
the Company shall use its best efforts to cause any officer, director or
employee of, or any attorney, accountant, investment banker, financial advisor
or other agent retained by it not to, initiate, solicit, negotiate, encourage or
provide non-public or confidential information to facilitate, any proposal or
offer to acquire all or any substantial part of the business and properties of
the Company or any capital stock of the Company, whether by merger, purchase of
assets or otherwise, whether for cash, securities or any other consideration or
combination thereof, or enter into any joint venture or partnership or similar
arrangement.
(b) The Company and the Stockholders (i) acknowledge that a breach of
any of their covenants contained in this Section 6.3 will result in irreparable
harm to PalEx which will not be compensable in money damages; and (ii) agree
that such covenant shall be specifically enforceable and that specific
performance and injunctive relief shall be a remedy properly available to the
other party for a breach of such covenant.
-22-
<PAGE>
SECTION 6.4. DIVIDEND OR SALE OF NONPRODUCTIVE ASSETS. The Company
shall, prior to the Closing Date, either dividend to the Stockholders or sell
for cash the assets listed on SCHEDULE 6.4. If the Company sells such assets, it
shall apply the proceeds from such sale to the reduction of outstanding debt.
Any such dividend shall not affect the total consideration due the Stockholders
hereunder; any such sale and reduction of the Company's debt shall affect the
allocation of the consideration to be received by the Stockholders in the Merger
in the manner described in Schedule 2.1.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1. ACCESS TO INFORMATION.
(a) The Company shall afford to PalEx and Subsidiary and their
accountants, counsel, financial advisors and other representatives (the "PALEX
REPRESENTATIVES") and PalEx and Subsidiary shall afford to the Company and its
accountants, counsel, financial advisors and other representatives (the "COMPANY
REPRESENTATIVES") full access during normal business hours throughout the period
prior to the Effective Time to all of their respective properties, books,
contracts, commitments and records (including, but not limited to, financial
statements and Tax Returns) and, during such period, shall furnish promptly to
one another all due diligence information requested by the other party. PalEx
and Subsidiary shall hold and shall use their reasonable best efforts to cause
the PalEx Representatives to hold, and the Company shall hold and shall use its
reasonable best efforts to cause the Company Representatives to hold, in strict
confidence all non-public information furnished to it in connection with the
transactions contemplated by this Agreement, except that each of PalEx,
Subsidiary and the Company may disclose any information that it is required by
law or judicial or administrative order to disclose.
(b) In the event that this Agreement is terminated in accordance with
its terms, each party shall promptly redeliver to the other all non-public
written material provided pursuant to this Section 7.1 and shall not retain any
copies, extracts or other reproductions of such written material. In the event
of such termination, all documents, memoranda, notes and other writings prepared
by PalEx and Subsidiary or the Company based on the information in such material
shall be destroyed (and PalEx , Subsidiary and the Company shall use their
respective reasonable best efforts to cause their advisors and representatives
to similarly destroy their documents, memoranda and notes), and such destruction
(and reasonable best efforts) shall be certified in writing by an authorized
officer supervising such destruction.
(c) The Company shall promptly advise PalEx in writing of any change or
the occurrence of any event after the date of this Agreement having, or which,
insofar as can reasonably be foreseen, in the future may have, any Company
Material Adverse Effect.
-23-
<PAGE>
SECTION 7.2. REGISTRATION STATEMENT. PalEx and the Founding Companies
shall file with the SEC as soon as is reasonably practicable after the date
hereof the Registration Statement and shall use all reasonable efforts to have
the Registration Statement declared effective by the SEC as promptly as
practicable. PalEx shall also take any action required to be taken under
applicable state blue sky or securities laws in connection with the issuance of
PalEx Common Stock. PalEx and the Company shall promptly furnish to each other
all information, and take such other actions, as may reasonably be requested in
connection with making such filings. The information provided and to be provided
by PalEx and the Company, respectively, for use in the Registration Statement
shall be true and correct in all material respects without omission of any
material fact which is required to make such information not false or misleading
as of the date thereof and in light of the circumstances under which given or
made.
SECTION 7.3. EXPENSES AND FEES. Main Street shall pay the fees and
expenses of the independent public accountants and legal counsel to PalEx and
all filing, printing and other reasonable, documented fees and expenses
associated with the IPO up to $1,250,000. PalEx shall pay or reimburse Main
Street from the proceeds of the IPO for such fees and expenses in excess of
$1,250,000. Neither the Company nor the Stockholders will be liable for any
portion of the above expenses in the event the IPO is not closed. PalEx shall
also pay (i) the underwriting discounts and commissions payable in connection
with the sale of PalEx Common Stock in the IPO, (ii) the fees payable to Raymond
James & Associates and Mr. Tucker Bridwell, as detailed on SCHEDULE 7.3 and
(iii) the fees and expenses incurred in delivering the tax opinion set forth in
Section 9.2(d). All other costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
SECTION 7.4. AGREEMENT TO COOPERATE. Subject to the terms and conditions
herein provided, each of the parties hereto shall use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
SECTION 7.5. PUBLIC STATEMENTS. Except as may require by law, no party
hereto shall issue any press release or any written public statement with
respect to this Agreement or the transactions contemplated hereby without the
prior written consent of PalEx and the Company.
SECTION 7.6. NOTIFICATION OF CERTAIN MATTERS. Each of the Company, the
Stockholders and PalEx agrees to give prompt notice to each of the others of,
and to use their respective reasonable best efforts to prevent or promptly
remedy, (i) the occurrence or failure to occur or the impending or threatened
occurrence or failure to occur, of any event which occurrence or failure to
occur would be likely to cause any of its representations or warranties in this
Agreement to be untrue or inaccurate in any material respect at any time from
the date hereof to the Effective Time, or any of the information supplied by it
for use in the Registration Statement to be untrue in any material
-24-
<PAGE>
respect or to omit any material fact, at any time from the date hereof until 25
days following the Closing, and (ii) any material failure on its part to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; PROVIDED, HOWEVER, that the delivery of any notice
pursuant to this Section 7.6 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
SECTION 7.7. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) After the Effective Time, PalEx shall, to the fullest extent
permitted under applicable law, indemnify and hold harmless, each present and
former director, officer and agent of the Company (each, together with such
person's heirs, executors or administrators, an "INDEMNIFIED PARTY" and
collectively, the "INDEMNIFIED PARTIES") against any costs or expenses
(including reasonable attorneys fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of, relating to or in connection
with any action or omission of PalEx occurring prior to the Effective Time
(including, without limitation, acts or omissions in connection with such
persons serving as an officer, director or other fiduciary in any entity if such
service was at the request or for the benefit of the Company). In the event of
any such claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), (i) PalEx shall pay the reasonable fees and
expenses of counsel selected by the indemnified parties, which counsel shall be
reasonably satisfactory to PalEx, promptly after statements therefor are
received, (ii) PalEx will cooperate in the defense of any such matter, and (iii)
any determination required to be made with respect to whether an indemnified
party's conduct complies with the standards set forth under the DGCL or other
applicable statutes and PalEx's or the Surviving Corporation's respective
Certificates of Incorporation or By-Laws shall be made by independent legal
counsel acceptable to PalEx as the case may be, and the indemnified party;
PROVIDED, HOWEVER, that PalEx shall not be liable for any settlement effected
without its written consent (which consent shall not be unreasonably withheld).
(b) In the event that PalEx or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in each such case, proper provisions shall be made so that the
successors and assigns of PalEx shall assume the obligations set forth in this
Section 7.7.
SECTION 7.8. CORRECTIONS TO THE REGISTRATION STATEMENT. Prior to the
effectiveness of the IPO, and until the expiration of the 25th day thereafter,
each of the Company, the Stockholders and PalEx shall correct promptly any
information provided by
-25-
<PAGE>
it to be used specifically in the Registration Statement that shall have become
false or misleading in any material respect and shall take all steps necessary
to file with the SEC and have declared effective or cleared by the SEC any
amendment or supplement to the Registration Statement so as to correct the same
and to cause the Prospectus included within such Registration Statement as so
corrected to be disseminated to the extent required by applicable law.
SECTION 7.9. PREPARATION AND FILING OF TAX RETURNS.
(a) Each party hereto shall, and shall cause its affiliates to, provide
to each of the other parties hereto such cooperation and information as any of
them reasonably may request in filing any return, amended return or claim for
refund, determining a liability for Taxes or a right to refund of Taxes or in
conducting any audit or other proceeding in respect of Taxes. Such cooperation
and information shall include providing copies at no cost to the requesting
party of all relevant portions of relevant returns, together with relevant
accompanying schedules and relevant work papers, relevant documents relating to
rulings or other determinations by taxing authorities and relevant records
concerning the ownership and tax basis of property, which such party may
possess. Each party shall make its employees reasonably available on a mutually
convenient basis at its cost to provide explanation of any documents or
information so provided. Subject to the preceding sentence, each party required
to file returns pursuant to this Agreement shall bear all costs of filing such
returns.
(b) Each of the Company, PalEx and the Stockholders shall comply with
the tax reporting requirements of Section 1.351-3 of the Treasury Regulations
promulgated under the Code, and shall treat the exchange of Company Common Stock
for PalEx Common Stock an exchange as under Section 351 of the Code unless
otherwise required by law. The parties have independently determined and hereby
agree that such an exchange is an exchange as described under Section 351 of the
Code and specifically that:
(i) Neither the Company nor PalEx is an investment company
as defined in Section 351(e) of the Code or Section 1.351-1(c)(1)(i) of the
Treasury Regulations.
(ii) The fair market value of the assets of the Company
exceeds the sum of its liabilities, plus the amount of liabilities, if any, to
which the assets are subject.
(iii) The Company is not under jurisdiction of a court in
a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Code.
-26-
<PAGE>
(iv) The fair market value of the PalEx Common Stock and
other consideration, if any, received by the Stockholders, will be approximately
equal to the fair market value of the Company Stock surrendered in the Merger.
(v) There is no intercorporate indebtedness existing
between PalEx and the Company that was issued, acquired, or will be settled at a
discount.
(vi) None of the compensation received by any
Stockholder-employee of the Company after the Merger will be separate
consideration for, or allocable to, any of their securities of the Company. None
of the shares of PalEx Common Stock received by the Stockholders in the Merger
will be separate consideration for, or allocable to, any employment agreement;
and the compensation paid to the Stockholders in their capacity as employees
including, but not limited to, amounts paid pursuant to the employment
agreements between the Company and the Stockholders and incentive compensation
in the form of stock options, will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length for
similar services.
(vii) The proposed Merger is effected through the laws of
the United States, a State thereof or the District of Columbia.
(viii) The proposed Merger is being undertaken for reasons
germane to the business of the Company.
SECTION 7.10. COVENANTS CONCERNING TAXES.
(a) (i) The Stockholders shall pay (and shall indemnify,
defend and hold harmless PalEx, as the Surviving Corporation, from and against
liability with respect to) any and all Taxes, interest, penalties and additions
to Taxes that are imposed on them or the Company: (i) attributable to the
taxable income of the Company for all taxable periods during which the Company
was an S corporation (the "S Corporation Period"); and (ii) as a result of the
Company's S election being treated as invalid or ineffective for any reason or
such election being revoked or terminated prior to the Merger.
(ii) The Surviving Corporation, shall pay or cause to be
paid (and shall indemnify, defend and hold harmless the Stockholders from and
against liability with respect to) any and all Taxes, interest, penalties and
additions to Taxes attributable to the taxable income of the Surviving
Corporation for the period after the Merger (the "C Corporation Period").
(b) If the Stockholders receive notice of an intention by a taxing
authority to audit any return of the Stockholders that includes any item of
income, gain, deduction, loss or credit reported by the Company with respect to
the S Corporation Period that the
-27-
<PAGE>
Stockholders have reason to believe may affect the Surviving Corporation's tax
returns during the C Corporation Period, the Stockholders shall inform the
Surviving Corporation, in writing, of the audit promptly after receipt of such
notice. If the Stockholders receive notice from a taxing authority of any
proposed adjustment for which the Surviving Corporation may be required to
indemnify hereunder (a "Proposed Adjustment"), the Stockholders shall give
notice to the Surviving Corporation of the Proposed Adjustment promptly after
receipt of such notice from a taxing authority. Within twenty (20) days
following its receipt of such notice, the Surviving Corporation shall give
notice to the Stockholders of its determination as to whether it desires the
Stockholders to contest such Proposed Adjustment. Upon such request the
Stockholders, at their option and upon written notice to the Surviving
Corporation within ten (10) days after their receipt of the notice described in
the preceding sentence, shall (i) contest the Proposed Adjustment at the
Surviving Corporation's expense and permit the Surviving Corporation to
participate in (but not to control) such proceedings, or (ii) permit the
Surviving Corporation to contest the Proposed Adjustment (including pursuing all
administrative and judicial appeals and demands). The Surviving Corporation
shall pay to the Stockholders on demand all reasonable costs and expenses
(including reasonable attorneys' and accountants' fees) that the Stockholders
may incur in contesting such Proposed Adjustments. The Stockholders shall not
make, accept or enter into a settlement or other compromise, with respect to any
Taxes indemnified hereunder, or forego or terminate any proceeding undertaken
hereunder without the consent of the Surviving Corporation, which consent shall
not be unreasonably withheld. The Stockholders will reasonably assist if the
Surviving Corporation contests any Proposed Adjustment.
(c) If the Surviving Corporation receives notice of an intention by a
taxing authority to audit any return of the Surviving Corporation that includes
any item of income, gain, deduction, loss or credit reported by the Surviving
Corporation with respect to the C Corporation Period that the Surviving
Corporation has reason to believe may affect the Stockholders' tax returns
during the S Corporation Period, the Surviving Corporation shall inform the
Stockholders in writing, of the audit promptly after receipt of such notice. If
the Surviving Corporation receives notice from a taxing authority of any
proposed adjustment for which the Stockholders may be required to indemnify the
Surviving Corporation hereunder (a "Surviving Corporation Proposed Adjustment"),
the Surviving Corporation shall give notice to the Stockholders of the Surviving
Corporation Proposed Adjustment promptly after receipt of such notice from a
taxing authority. Upon receipt of such notice from the Surviving Corporation,
the Stockholders may, by in turn giving prompt written notice to the Surviving
Corporation, request that the Surviving Corporation contest such Surviving
Corporation Proposed Adjustment. If the Stockholders request that any Surviving
Corporation Proposed Adjustment be contested, then the Surviving Corporation
shall contest the Surviving Corporation Proposed Adjustment (including pursuing
all administrative and judicial appeals and processes) at the Stockholders'
expense and shall permit the Stockholders to participate in (but not to control)
such proceeding.
-28-
<PAGE>
(d) The parties shall cooperate fully with each other in all matters
relating to Taxes and in the determination of amounts payable hereunder. In the
case of disagreement as to the course of action to be pursued in dealing with
taxing authorities (including, without limitation, matters with respect to
preparation and filing of tax returns, conduct of audits, and proceedings in
courts), the decision of the party (the Surviving Corporation, on the one hand,
or the Stockholders, on the other hand) who will economically benefit from or be
burdened by the course of action (or in the case both parties benefit and/or are
burdened, the decision of the party with the greatest benefit or burden) shall
control.
SECTION 7.11. REGISTRATION RIGHTS.
(a) If at any time or times after the date hereof but prior to the third
anniversary of the Effective Time, PalEx shall determine to register any of its
securities (for itself or for any holder of securities of PalEx) under the 1933
Act or any successor legislation (other than the Registration Statement or a
registration relating to stock option plans, employee benefit plans or a
transaction pursuant to Rule 145 under the Act), and in connection therewith
PalEx may lawfully register the PalEx Common Stock held by the Stockholders and
Main Street, PalEx will promptly give written notice thereof to the Stockholders
and Main Street and will include in such registration and effect the
registration under the 1933 Act of all Registrable Securities (as hereinafter
defined )that the Stockholders and Main Street may request in writing by notice
delivered to PalEx within 20 days after receipt by the Stockholders and Main
Street of the notice given by PalEx; PROVIDED, HOWEVER, that in connection with
any such offering by PalEx of any of its securities, no such registration of
Registrable Securities shall be required if the managing underwriter, if any,
for PalEx advises it in writing that including all or part of the Registrable
Shares in such offering will materially adversely affect the proposed offering
and jeopardize PalEx 's ability to sell its own securities in such offering. If
such managing underwriter advises PalEx that, in its opinion, part of the
Registrable Securities may be included in such offering without materially
adversely affecting the proposed offering, then PalEx shall be obligated to
include such lesser number of Registrable Securities in such offering, which
shares shall be taken from those owned and held by a group consisting of the
Stockholders, Main Street and other holders of PalEx Common Stock having
registration rights that are PARI PASSU with those of the Stockholders and Main
Street, and such limitation shall be imposed upon the Stockholders and such
other holders pro rata on the basis of the total number of shares of PalEx
Common Stock owned by the Stockholders, Main Street and such other holders or
obtainable by them upon the exercise of rights with respect to other securities
owned by them. All expenses of such registration and offering shall be borne by
the Company, except that the Stockholders and Main Street shall bear
underwriting commissions and discounts attributable to their Registrable
Securities being registered and the fees and expenses of separate counsel, if
any, for such Stockholders and Main Street. The Stockholders and Main Street
shall be entitled to an unlimited number of registrations under this Section
7.11.
-29-
<PAGE>
(b) For the purposes of this Section 7.11, the term "Registrable
Securities" shall mean (i) the PalEx Common Stock currently held by Main Street,
(ii) PalEx Common Stock to be issued in connection with the Merger, and (iii)
any PalEx Common Stock issued or issuable with respect to the shares identified
in (i) and (ii) above by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization.
(c) Whenever, under the preceding paragraphs of this Section 7.11, PalEx
is required hereunder to register Registrable Securities, PalEx shall as
expeditiously as possible:
(i) Prepare and file with the SEC a registration statement
with respect to the Registrable Securities that complies with all
requirements of the Act;
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Act with
respect to the sale of securities covered by such registration statement
for the period necessary to complete the proposed public offering (but
in no event for a period in excess of ninety (90) days);
(iii) Furnish to each Stockholder such copies of each
preliminary and final prospectus and such other documents as each such
Stockholder may reasonably request to facilitate the disposition of such
Stockholder's Registrable Securities;
(iv) Enter into an underwriting agreement with customary
terms and provisions as reasonably agreed by PalEx and the proposed
underwriter, if any, of the offering,
(v) Use its best efforts to register and qualify the
Registrable Securities covered by such registration statement under
applicable state securities or "blue-sky" laws, provided that PalEx
shall not be required in connection therewith or as a condition thereto
to qualify to do business as a foreign corporation in any such
jurisdiction wherein it is not so qualified; and
(vi) Furnish to each selling Stockholder a signed
counterpart, addressed to the Stockholders, of
(A) an opinion of counsel to PalEx, and
-30-
<PAGE>
(B) comfort letter(s) signed by the independent
public accountants who have certified
PalEx's financial statements included in the
registration statement,
in each case, covering substantially the same matters with respect to the
registration statement (and the prospectus included therein) and (in the case of
the accountant's letter) with respect to events subsequent to the date of the
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountant's letters delivered to the underwriters in underwritten public
offerings of securities.
(d) PalEx shall have the right to select the managing underwriter or
underwriters for any underwritten offering made pursuant to a registration under
this Section 7.11.
(e) In connection with any underwritten offering by PalEx in which the
Stockholders participate, the Stockholders shall, if requested by the managing
underwriter or underwriters thereof, agree not to sell any of their Registrable
Securities or any other securities of PalEx owned by such Stockholders in any
transaction other than pursuant to such underwritten offering for a period
beginning 60 days prior to the date PalEx and the underwriter reasonably expect
the registration statement to become effective, and for such period after the
effective date of the registration statement as is agreed upon by the
underwriters and PalEx (not to exceed 180 days), provided that the PalEx's
officers and directors and each holder of 5% or more of PalEx's issued and
outstanding PalEx Common Stock also agree to such limitations.
(f) PalEx may delay any underwritten offering pursuant to Section 7.11
when a condition or pending transaction exists the disclosure of which would
reasonably be expected to have a material adverse effect on the proposed
offering.
(g) PalEx will indemnify each Stockholder, each of its officers,
directors and partners, and each other person, if any, who controls such
Stockholder within the meaning of the Section 15 of the 1933 Act, against any
losses, claims, damages, expenses, or liabilities to which such persons may
become subject under the 1933 Act or otherwise, insofar as such losses, claims,
damages or liabilities (or action in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement or any preliminary prospectus or final
prospectus or amendment or supplement thereto on the effective date thereof, or
arise out of or are based upon 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 such persons for any legal
or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that PalEx 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
-31-
<PAGE>
such registration statement, or any preliminary prospectus or final prospectus
or amendment or supplement thereto, in reliance upon and in conformity with
written information furnished to PalEx through an instrument duly executed by
such person specifically for use in the preparation thereof.
It shall be a condition precedent to the obligation of PalEx to include
in any registration statement any Registrable Securities then held by a
Stockholder that PalEx shall have received an undertaking, satisfactory to it
and the managing underwriter or underwriters, from each Stockholder to indemnify
and hold harmless (in the same manner and to the same extent as set forth in the
preceding paragraph) PalEx, each director of PalEx, each officer of PalEx who
shall sign such registration statement and the managing underwriter or
underwriters and any person who controls such Underwriters or PalEx within the
meaning of the 1933 Act, with respect to any statement or omission from such
registration statement, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, if such statement or omission
was made in reliance upon and in conformity with information furnished to PalEx
through an instrument duly executed by the Stockholder specifically for use in
the preparation of such registration statement, preliminary prospectus or final
prospectus or such amendment or supplement thereto.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs in this Section 7.11, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to the latter of the commencement of such action. In case any such action is
brought against an indemnified party, the indemnifying party will be entitled to
participate in and to assumed the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses incurred by the latter in connection with the
defense thereof.
SECTION 7.12. CONTRIBUTION TO COMPANY PROFIT SHARING PLAN. PalEx shall
make a one-time contribution of PalEx Common Stock to the Fraser Industries,
Inc. Profit Sharing Plan (the "Plan") concurrently with the consummation of the
IPO. PalEx shall contribute that number of shares of PalEx Common Stock with a
value equal to $375,000 based on a price per share of PalEx Common Stock equal
to the mid-point of the estimated pricing range as set forth in the preliminary
prospectus relating to the IPO, adjusted to reflect a discount of 25%. The
contribution of PalEx Common Stock shall be allocated among the Company's
employees based on the terms of the Plan.
SECTION 7.13. RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the SEC that may permit the sale of
PalEx Common Stock to the public without registration, PalEx agrees to use its
best efforts to:
-32-
<PAGE>
(i) make and keep public information regarding PalEx available as those
terms are understood and defined in Rule 144 under the 1933 Act, at all times
from and after 90 days following the effective date of the first registration
under the 1933 Act filed by PalEx for an offering of its securities to the
general public;
(ii) file with the SEC in a timely manner all reports and other
documents required of PalEx under the 1933 Act and the 1934 Act at any time
after it has become subject to such reporting requirements; and
(iii) so long as a Stockholder owns any restricted PalEx Common Stock,
furnish to each Stockholder forthwith upon written request a written statement
by PalEx as to its compliance with the reporting requirements of Rule 144 (at
any time from and after 90 days following the effective date of the first
registration statement filed by PalEx for an offering of its securities to the
general public), and of the 1933 Act and the 1934 Act (at any time after it has
become subject to such reporting requirements), a copy of the most recent annual
or quarterly report of PalEx, and such other reports and documents so filed as a
Stockholder may reasonably request in availing itself of any rule or regulation
of the SEC allowing a Stockholder to sell any such shares without registration.
-33-
<PAGE>
ARTICLE VIII
INDEMNIFICATION
The Stockholders and PalEx each make the following covenants:
SECTION 8.1. PALEX LOSSES.
(a) The Stockholders agree to indemnify and hold harmless PalEx and its
directors, officers, employees, representatives, agents and attorneys from,
against and in respect of any and all PalEx Losses (as defined below) suffered,
sustained, incurred or required to be paid by any of them by reason of (i) any
representation or warranty made by the Company or the Stockholders in or
pursuant to this Agreement being untrue or incorrect in any respect; (ii) any
failure by the Company or the Stockholders to observe or perform their covenants
and agreements set forth in this Agreement or any other agreement or document
executed by them in connection with the transactions contemplated hereby; and
(iii) any liability under the 1933 Act, the 1934 Act or other Federal or state
law or regulation, at common law or otherwise, arising out of or based upon any
untrue statement or alleged untrue statement of a material fact relating to the
Company or the Stockholders contained in any preliminary prospectus, relating to
the IPO, the Registration Statement or any prospectus forming a part thereof, or
any amendment thereof or supplement thereto, or arising out of or based upon any
omission to state therein a material fact relating to the Company or the
Stockholders required to be stated therein or necessary to make the statements
therein not misleading, and not provided to PalEx or its counsel by the Company
or the Stockholders; PROVIDED, HOWEVER, that such indemnity shall not inure to
the benefit of PalEx to the extent that such untrue statement (or alleged untrue
statement) was made in, or omission (or alleged omission) occurred in, any
preliminary prospectus and the Stockholders provided, in writing, corrected
information to PalEx or its counsel for inclusion in the final prospectus prior
to distributing such prospectus, and such information was not so included. This
Section 8.1 is intended to indemnify PalEx and its directors, officers,
employees, representatives, agents and attorneys from the results of their
negligence. The Stockholders' obligations pursuant to this Section 8.1 shall
expire one (1) year after the Closing, except with respect to (x) obligations
under Sections 4.13 and 7.10 hereof, which shall survive until the earlier of
(A) the expiration of the applicable periods (including any extensions) of the
respective statutes of limitation applicable to the payment of the Taxes or (B)
the completion of the final audit and determinations by the applicable taxing
authority and final disposition of any deficiency resulting therefrom, and (y)
solely to the extent that PalEx actually incurs liability under the 1933 Act or
the 1934 Act, the obligations under clause (iii) above shall survive until the
expiration of any applicable statute of limitations with respect to such claims.
-34-
<PAGE>
(b) "PalEx Losses" shall mean all damages (including, without
limitation, amounts paid in settlement with the Stockholders' consent, which
consent may not be unreasonably withheld), losses, obligations, liabilities,
claims, deficiencies, costs and expenses (including, without limitation,
reasonable attorneys' fees), penalties, fines, interest and monetary sanctions,
including, without limitation, reasonable attorneys' fees and costs incurred to
comply with injunctions and other court and agency orders, and other costs and
expenses incident to any suit, action, investigation, claim or proceeding or to
establish or enforce the rights of PalEx or such other persons to
indemnification hereunder.
SECTION 8.2. STOCKHOLDERS LOSSES.
(a) PalEx agrees to indemnify and hold harmless the Stockholders, for
and in respect of any and all Stockholders Losses (as defined below) suffered,
sustained, incurred or required to be paid by the Stockholders by reason of (i)
any representation or warranty made by PalEx in or pursuant to this Agreement
being untrue or incorrect in any respect; (ii) any failure by PalEx to observe
or perform its covenants and agreements set forth in this Agreement or any other
agreement or document executed by it in connection with the transactions
contemplated hereby; or (iii) any liability under the 1933 Act, the 1934 Act or
other Federal or state law or regulation, at common law or otherwise, arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact relating to PalEx or any of the Founding Companies other than the
Company contained in any preliminary prospectus, the Registration Statement or
any prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact relating to PalEx or any of the Founding Companies
other than the Company required to be stated therein or necessary to make the
statements therein not misleading. This Section 8.2 is intended to indemnify the
Stockholders from the results of their negligence. PalEx's obligations under
this Section 8.2 shall expire one year after Closing, except that, if the
Stockholders actually incur liability under the 1933 Act or the 1934 Act, the
obligations under clause (iii) above shall survive until the expiration of any
applicable statute of limitations with respect to such claims.
(b) "Stockholder's Losses" shall mean all damages (including, without
limitation, amounts paid in settlement with the consent of PalEx, which consent
may not be reasonably withheld), losses, obligations, liabilities, claims,
deficiencies, costs and expenses (including, without limitation, reasonable
attorneys' fees), penalties, fines, interest and monetary sanctions, including,
without limitation, reasonable attorneys' fees and costs incurred to comply with
injunctions and other court and agency orders, and other costs and expenses
incident to any suit, action, investigation, claim or proceeding or to establish
or enforce the right of the Stockholders to indemnification hereunder.
-35-
<PAGE>
SECTION 8.3. NOTICE OF LOSS. A notice setting forth in reasonable detail
the breach or other matter which is asserted shall be promptly given to the
Indemnifying Party (as defined below) and, if such matter arises out of a suit,
action, investigation, proceeding or claim, such notice shall be given within
thirty (30) days after the Indemnified Party (as defined below) has knowledge of
the matter. The failure of the Indemnified Party to give notice hereunder shall
not release the Indemnifying Party from its obligations under this Article VIII,
except to the extent the Indemnifying Party is actually prejudiced by such
failure to give prompt notice. With respect to PalEx Losses, the Stockholders
shall be the Indemnifying Party and PalEx and its respective directors,
officers, employees, representatives, agents and attorneys shall be the
Indemnified Parties. With respect to Stockholders Losses, PalEx shall be the
Indemnifying Party and the Stockholders shall be the Indemnified Party.
SECTION 8.4. RIGHT TO DEFEND. Upon receipt of notice of any matter for
which indemnification might be claimed by an Indemnified Party, the Indemnifying
Party shall be entitled to defend, contest or otherwise protect against any such
matter at its own cost and expense, and the Indemnified Party must cooperate in
any such defense or other action. The Indemnified Party shall have the right,
but not the obligation, to participate at its own expense in defense thereof by
counsel of its own choosing, but the Indemnifying Party be entitled to control
the defense unless the Indemnified Party has relieved the Indemnifying Party
from liability with respect to the particular matter or the Indemnifying Party
fails to assume defense of the matter. In the event the Indemnifying Party shall
fail to defend, contest or otherwise protect in a timely manner against any
matter, the Indemnified Party shall have the right, but not the obligation,
thereafter to defend, contest or otherwise protect against the same and make any
compromise or settlement thereof and recover the reasonable cost thereof from
the Indemnifying Party including, without limitation, reasonable attorneys'
fees, disbursements and all amounts paid as a result of such suit, action,
investigation, claim or proceeding or the compromise or settlement thereof;
provided, however, that the Indemnified Party must send a written notice to the
Indemnifying Party of any such proposed settlement or compromise, which
settlement or compromise the Indemnifying Party may reject, in its reasonable
judgment, within ten (10) days of receipt of such notice. Failure to reject such
notice within such ten (10) day period shall be deemed an acceptance of such
settlement or compromise. The Indemnified Party shall have the right to effect a
settlement or compromise over the objection of the Indemnifying Party; provided,
that if (i) the Indemnifying Party is contesting such claim in good faith or
(ii) the Indemnifying Party has assumed the defense from the Indemnified Party,
the Indemnified Party waives any right to indemnity therefor. If the
Indemnifying Party undertakes the defense of such matters, the Indemnified Party
shall not, so long as the Indemnifying Party does not abandon the defense
thereof, be entitled to recover from the Indemnifying Party any legal or other
expenses subsequently incurred by the Indemnified Party in connection with the
defense thereof other than the reasonable costs of investigation undertaken by
the Indemnified Party with the prior written consent of the Indemnifying Party.
-36-
<PAGE>
SECTION 8.5. COOPERATION. Each of PalEx, the Company and the
Stockholders and each of their affiliates, successors and assigns shall
cooperate with each other in the defense of any suit, action, investigation,
proceeding or claim by a third party and, during normal business hours, shall
afford each other access to their books and records and employees relating to
such suit, action, investigation, proceeding or claim and shall furnish each
other all such further information that they have the right and power to furnish
as may reasonably be necessary to defend such suit, action, investigation,
proceeding or claim.
SECTION 8.6. EXCLUSIVE REMEDY. The indemnification provided for in this
Section 8 shall be the exclusive remedy in any action seeking damages or any
other form of monetary relief brought by any party to this Agreement against
another party, provided that, nothing herein shall be construed to limit the
right of a party, in a proper case, to seek injunctive relief for a breach of
this Agreement.
SECTION 8.7. LIMITATION UPON INDEMNITY.
(a) Neither the Stockholders nor PalEx shall be entitled to
indemnification from the other under the provisions of this Article VIII until
such time as the claims subject to indemnification by such party exceed, in the
aggregate, Three Hundred Sixty Thousand Dollars ($360,000) (the "Indemnity
Deductible").
(b) The aggregate indemnification obligations of the Stockholders under
Article VIII shall be limited to the obligations in excess of the Indemnity
Deductible but not more than Thirty-Six Million Dollars ($36,000,000); PROVIDED,
HOWEVER, if the per share price of the PalEx Common Stock is less than the per
share price of the PalEx Common Stock issued in the IPO, the foregoing limit on
indemnity obligations shall be reduced by the difference in such prices
multiplied by the number of shares of PalEx Common Stock issued to the
Stockholders pursuant to this Agreement.
ARTICLE IX
CLOSING CONDITIONS
SECTION 9.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger shall be subject
to the fulfillment at or prior to the Closing Date and continued fulfillment as
of the Consummation Date of the following conditions:
(a) the Underwriting Agreement related to the IPO shall have been
executed;
-37-
<PAGE>
(b) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding for
that purpose shall have been instituted by the SEC or any state regulatory
authorities;
(c) no preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the IPO or the
Merger shall have been issued and remain in effect;
(d) no action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency in the United States which would prevent the consummation of the Merger
or make the consummation of the Merger illegal; and
(e) all material governmental and third party waivers, consents, orders
and approvals required for the consummation of the Merger and the transactions
contemplated hereby shall have been obtained and be in effect.
SECTION 9.2. CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. Unless waived by the Company, the obligation of the Company to effect
the Merger shall be subject to the fulfillment at or prior to the Closing Date
and continued fulfillment as of the Consummation Date of the following
additional conditions:
(a) PalEx and Subsidiary shall have performed in all material respects
its agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of PalEx and
Subsidiary contained in this Agreement shall be true and correct in all material
respects on and as of the date made and on and as of the Closing Date as if made
at and as of such date, and the Company shall have received a certificate of the
chief executive officer of PalEx and Subsidiary to that effect;
(b) no governmental authority shall have promulgated any statute, rule
or regulation which, when taken together with all such promulgations, would
materially impair the value to the Stockholders of the Merger;
(c) the Company shall have received an opinion from the legal or
accounting advisors to PalEx, at the expense of PalEx, that the Merger will
constitute a tax-free transaction under Section 351 of the Code to the extent of
PalEx Common Stock received by the Stockholders, in which regard the Company and
the Stockholders shall provide representations reasonably required by such
advisors in providing such opinion;
-38-
<PAGE>
(d) All conditions to the merger of the other Founding Companies, on
substantially the same terms as provided herein, with subsidiaries of PalEx
shall have been satisfied or waived by the applicable party.
SECTION 9.3. CONDITIONS TO OBLIGATIONS OF PALEX TO EFFECT THE MERGER.
Unless waived by PalEx, the obligations of PalEx to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the additional
following conditions:
(a) the Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of the Company contained
in this Agreement shall be true and correct in all material respects on and as
of the date made and on and as of the Closing Date as if made at and as of such
date, and PalEx shall have received a Certificate of the President or Vice
President - Finance of the Company to that effect;
(b) the Stockholders shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of the Stockholders
contained in this Agreement shall be true and correct in all material respects
on and as of the date made and on and as of the Closing Date as if made at and
as of such date, and PalEx shall have received a Certificate of each Stockholder
to that effect;
(c) PalEx shall have received an opinion from McMahon, Surovik, Suttle,
Buhrman, Hicks & Gill, special counsel to the Company, dated the Closing Date,
reasonably satisfactory to PalEx and covering the due incorporation of the
Company, the binding nature of this Agreement, the effectiveness of the Merger
and the validity of the Common Stock to be exchanged in the Merger and certain
other customary matters reasonably requested by PalEx or its counsel;
(d) PalEx shall have received "COMFORT" letters in customary form from
the Company's independent public accountants, dated the effective date of the
Registration Statement and the Closing Date (or such other date reasonably
acceptable to PalEx) with respect to certain financial statements and other
financial information included in the Registration Statement and any subsequent
changes in specified balance sheet and income statement items, including total
assets, working capital, total stockholders' equity, total revenues and the
total and per share amounts of net income; and
(e) no governmental authority shall have promulgated any statute, rule
or regulation which, when taken together with all such promulgations, would
materially impair the value to PalEx of the Merger.
-39-
<PAGE>
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1. TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date under the following conditions:
(a) The Company shall have the right to terminate this Agreement:
(i) if the Merger is not completed by April 1, 1997
otherwise than on account of delay or default on the part of the Company
or the Stockholders or any of their affiliates or associates;
(ii) if the Merger is enjoined by a final, unappealable
court order not entered at the request or with the support of the
Company or any of the Stockholders or any of their affiliates or
associates;
(iii) if PalEx or Subsidiary (A) fails to perform in any
material respect any of their respective material covenants in this
Agreement and (B) does not cure such default in all material respects
within 30 days after written notice of such default is given to PalEx
and Subsidiary; or
(iv) If PalEx fails to complete its acquisitions of Ridge
or Interstate.
(b) PalEx shall have the right to terminate this Agreement:
(i) if the Merger is not completed by April 1, 1997
otherwise than on account of delay or default on the part of PalEx or
any of its stockholders or any of their affiliates or associates;
(ii) if the Merger is enjoined by a final, unappealable
court order not entered at the request or with the support of PalEx or
any of its 5% stockholders or any of their affiliates or associates;
(iii) if the Company (A) fails to perform in any material
respect any of its material covenants in this Agreement and (B) does not
cure such default in all material respects within 30 days after written
notice of such default is given to the Company by PalEx;
(iv) if the Stockholders (A) fail to perform in any
material respect any of their material covenants in this Agreement and
(B) do not cure such default in all material respects within 30 days
after written notice of such default is given to the Stockholders by
PalEx; or
-40-
<PAGE>
(v) if PalEx fails to complete its acquisitions of Ridge
or Interstate.
SECTION 10.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either PalEx or the Company, as provided in Section 10.1, this
Agreement shall forthwith become void and there shall be no further obligation
on the part of the Company, Subsidiary, PalEx or their respective officers or
directors (except the obligations set forth in this Section 10.2 and in Sections
7.1, 7.3 and 7.5, all of which shall survive the termination). Nothing in this
Section 10.2 shall relieve any party from liability for any breach of this
Agreement.
SECTION 10.3. AMENDMENT. This Agreement may not be amended except by
action taken by the parties' respective Boards of Directors or duly authorized
committees thereof and then only by an instrument in writing signed on behalf of
each of the parties hereto and in compliance with applicable law.
SECTION 10.4. WAIVER. At any time prior to the Effective Time, the
parties hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE XI
SECURITIES ACT REPRESENTATIONS AND TRANSFER RESTRICTIONS
The PalEx Common Stock to be acquired by each of the Stockholders
pursuant to this Agreement is being acquired solely for such Stockholder's own
account, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution.
SECTION 11.1. ECONOMIC RISK; SOPHISTICATION. Each of the Stockholders
represents and warrants to PalEx that he or she is an "accredited investor" as
defined in Regulation D promulgated under the 1933 Act; that he or she is able
to bear the economic risk of an investment in the PalEx Common Stock acquired
pursuant to this Agreement and can afford to sustain a total loss of such
investment and has such knowledge and experience in financial and business
matters that he or she is capable of evaluating the merits and risks of the
proposed investment in the PalEx Common Stock; and that he has had an adequate
opportunity to ask questions and receive answers from the officers of PalEx
concerning any and all matters relating to the transactions described herein
including, without limitation, the background and experience of the current and
proposed
-41-
<PAGE>
officers and directors of PalEx, and the plans for the operations of the
business of PalEx.
SECTION 11.2. TRANSFER RESTRICTIONS.
(a) Except for transfers to immediate family members who agree to be
bound by the restrictions set forth in this Section 11.2 (or trusts for the
benefit of the Stockholders or family members, the trustees of which so agree),
and except for sales in accordance with Section 7.11, for a period of two (2)
years from the Closing, the Stockholders shall not (a) sell, assign, exchange,
transfer, encumber, pledge, distribute or otherwise dispose of (i) any shares of
PalEx Common Stock received by the Stockholders in the Merger, or (ii) any
interest (including, without limitation, an option to buy or sell) in any such
shares of PalEx Common Stock, in whole or in part, and no such attempted
transfer shall be treated as effective for any purpose; or (b) engage in any
transaction, whether or not with respect to any shares of PalEx Common Stock or
any interest therein, the intent or effect of which is to reduce the risk of
owning the shares of PalEx Common Stock acquired pursuant to Section 2.2 hereof
(including, by way of example and not limitation, engaging in put, call,
short-sale, straddle or similar market transactions). The certificates
evidencing the PalEx Common Stock delivered to the Stockholders pursuant to
Section 2.2 of this Agreement will bear a legend substantially in the form set
forth below and containing such other information as PalEx may deem necessary or
appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
ENCUMBRANCE, PLEDGE, DISTRIBUTION OR OTHER DISPOSITION, PRIOR TO
_____________, 1999. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS
CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND
ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED
ABOVE.
(b) Main Street will execute an agreement to restrict the transfer of
its shares of PalEx Common Stock in a manner identical to the restrictions
included in this Article XI.
ARTICLE XII
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
At the Closing, each of the Stockholders shall execute and deliver an
employment and noncompetition agreement substantially in the form of Exhibit 12
and Main Street shall execute a noncompetition agreement with substantially the
same terms.
-42-
<PAGE>
ARTICLE XIII
GENERAL PROVISIONS
SECTION 13.1. BROKERS. The Company represents and warrants that no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee (except for the fee described in SCHEDULE 13.1) or commission in
connection with the Merger or the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. PalEx represents
and warrants that no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of PalEx or its stockholders (other than underwriting discounts and
commission to be paid in connection with the IPO).
SECTION 13.2. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested) or sent via facsimile to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to PalEx or Subsidiary, to:
Vance K. Maultsby, Jr.
Chief Executive Officer
3555 Timmons Lane, Suite 610
Houston, Texas 77027
with a copy to:
John Wombwell, Esq.
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
(b) If to the Company, to:
Fraser Industries, Inc.
Horseshoe Bay Resort Airport, East
Horseshoe Bay, Texas 78657
Attention: Troy Fraser
-43-
<PAGE>
with a copy to:
Bob J. Surovik
McMahon, Surovik, Suttle, Buhrman, Hicks & Gill
Suite 800
400 Pine Street
Abilene, Texas 79601
SECTION 13.3. INTERPRETATION. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement, unless a contrary intention
appears, (i) the words "HEREIN", "HEREOF" and "HEREUNDER" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision and (ii) reference to any Article or
Section means such Article or Section hereof. No provision of this Agreement
shall be interpreted or construed against any party hereto solely because such
party or its legal representative drafted such provision.
SECTION 13.4. MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof and
(b) shall not be assigned by operation of law or otherwise, except that PalEx
may assign this Agreement to any other wholly-owned subsidiary of PalEx. THIS
AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION
AND EFFECT, BY THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS
EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE.
SECTION 13.5. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
SECTION 13.6. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and except as set forth in
Section 8.1(a), nothing in this Agreement, express or implied, is intended to
confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
-44-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
as of the date first written above.
MAIN STREET CAPITAL PALEX, INC.
PARTNERS, L.P.
By: Main Street Advisory Partners, L.P. By: ___________________________
Name: Vance K. Maultsby, Jr.
By: Main Street Merchant Partners, L.L.C. Title: Chief Executive Officer
By: ______________________
Name: Sam Humphreys FRASER ACQUISITION CORPORATION
Title: Managing Director
By: ___________________________
Name: Vance K. Maultsby, Jr.
Title: Chief Executive Officer
FRASER INDUSTRIES, INC.
By: ___________________________
Name: Troy Fraser
Title: Chief Executive Officer
_______________________________
Troy Fraser, Individually
_______________________________
Steve Fraser, Individually
_______________________________
Joe Elmore, Individually
-45-
<PAGE>
SCHEDULE 2.1
MANNER OF CONVERSION
At the Closing, the Stockholders shall receive the Cash Component (as
defined below) and the Fraser Stock Component (as defined below). For purposes
of the Agreement, the terms Reference Value Offset Amount, Adjusted
Indebtedness, Cash Component and Fraser Stock Component shall have the following
meanings:
(a) Reference Value Offset Amount shall mean (i) the Cash Component equal
to $7,200,000 payable to the Fraser Stockholders less the actual amount of
any cash dividend paid on or after the effective date of the Agreement to
the Fraser Stockholders, taken first from the amount in the accumulated
adjustments account then from the proceeds of the IPO, and (ii) assumption
of the Adjusted Indebtedness (defined below).
(b) Adjusted Indebtedness shall mean the result obtained by subtracting
from the Company's total indebtedness as of the Closing Date (i)
$1,650,000 and (ii) indebtedness incurred and cash expenditures made after
April 28, 1996 specifically to fund capital expenditures after such date
(including start-up costs associated with the Memphis facility and
feasibility studies with respect to plants considered for opening in
1997).
(c) Fraser Stock Component shall mean the number of shares of PalEx Common
Stock received by the Fraser Stockholders, which shall be determined by
applying the following formula:
Fraser Stock Reference Value
Fraser Stock Component = 6,000,000 x ----------------------------
Sum of Fraser, Ridge and
Interstate Stock Reference
Values
WHERE the Founding Companies Stock Reference Values will be
determined by subtracting from each Founding Company's Enterprise
Value ($36 million for Fraser and Ridge, $4.8 million for
Interstate) each Founding Company's Reference Value Offset Amount.
Each of the Founding Companies shall have the right to reduce their
respective Stock Component calculated above by returning shares of PalEx Common
Stock. The Founding Company shall receive 2.77778 options to purchase PalEx
Common Stock at the IPO price for each share of PalEx Common Stock returned. The
reduction of the Stock Component by a Founding Company shall not affect the
Stock Component of the other Founding Companies which shall be calculated as if
such reduction had not occurred.
A Founding Company shall exercise such right to return stock by written
notice to PalEx no later than three (3) days prior to the printing of the
Preliminary Prospectus in connection with the IPO.
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
(this "Agreement") is made effective as of the 20th day of December 1996, by and
among PalEx, Inc., a Delaware corporation ("PalEx"), Main Street Capital
Partners, L.P., a Texas limited partnership ("Main Street"), Interstate
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
PalEx ("Subsidiary"), Interstate Pallet Co., Inc., a Virginia corporation (the
"Company"), and the individual stockholder of the Company identified on Schedule
A to this Agreement (the "Stockholder").
WITNESSETH:
WHEREAS, the respective stockholders and Boards of Directors of Subsidiary
and the Company (collectively referred to as the "Constituent Corporations")
deem it advisable and in the best interests of the Constituent Corporations and
their respective stockholders that Subsidiary merge (the "Merger") with and into
the Company;
WHEREAS, the parties hereto have previously entered into an Agreement and
Plan of Reorganization and Merger effective as of December 20, 1996, and the
parties desire to amend and restate such agreement in its entirety;
WHEREAS, PalEx is entering into other agreements substantially similar to
this Agreement with each of Fraser Industries, Inc., a Texas corporation
("Fraser"), and Ridge Pallets, Inc., a Florida corporation ("Ridge" and,
together with the Company and Fraser, collectively referred to as the "Founding
Companies"), which agreements provide for the merger of subsidiaries of PalEx
with and into Fraser and Ridge simultaneously with the Merger; and
WHEREAS, the Boards of Directors of PalEx, Subsidiary and the Company have
approved and adopted this Agreement and intend the exchange of common stock of
the Company for common stock of PalEx to qualify under the provisions of Section
351 of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, for and in consideration of the premises and of the mutual
representations, warranties, covenants and agreements contained in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
<PAGE>
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2), Subsidiary
shall be merged with and into the Company in accordance with the Delaware
General Corporation Law ("DGCL") and the Virginia Business Corporation Act and
the separate existence of Subsidiary shall cease. The Company shall be the
surviving party in the Merger and is hereinafter sometimes referred to as the
"Surviving Corporation." The Merger will be effected in a single transaction.
SECTION 1.2. EFFECTIVE TIME OF MERGER. The Merger shall become effective
(the "Effective Time") at such time as shall be stated in certificates or
articles of merger (the "Certificates of Merger") to be filed with the Secretary
of State of the State of Delaware and the Clerk of the State Corporation
Commission of Virginia. The Constituent Corporations will cause the Certificates
of Merger to be executed and delivered to the Secretary of State of the State of
Delaware and the Clerk of the State Corporation Commission of Virginia on or
before the Closing Date (as defined in Article III).
SECTION 1.3. CERTIFICATE OF INCORPORATION, BY-LAWS, BOARD OF DIRECTORS AND
OFFICERS OF SURVIVING CORPORATION; BOARD OF DIRECTORS AND OFFICERS OF PALEX. At
the Effective Time of the Merger:
(a) Amended and Restated Articles of Incorporation with substantially the
same provisions as Subsidiary's Certificate of Incorporation then in effect
shall be filed and shall become the Certificate of Incorporation of the
Surviving Corporation, and subsequent to the Effective Time, such Certificate of
Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation until amended as provided by law;
(b) The By-laws of Subsidiary then in effect shall become the By-laws of
the Surviving Corporation, and subsequent to the Effective Time, such By-laws
shall be the By-laws of the Surviving Corporation until they shall thereafter be
duly amended;
(c) The Boards of Directors of PalEx and the Surviving Corporation shall
consist of the persons identified on SCHEDULE 1.3(c) hereto. The Boards of
Directors of PalEx and the Surviving Corporation shall hold office subject to
the laws of the applicable state of incorporation and of the respective Articles
or Certificate of Incorporation and By-laws of such corporation; and
(d) The officers of PalEx and the Surviving Corporation shall be the
persons identified on SCHEDULE 1.3(d) hereto, each of such officers to serve
until such officer's successor is duly elected and qualified, subject to the
provisions of the Articles or
-2-
<PAGE>
Certificate of Incorporation and By-laws of PalEx or the Surviving Corporation,
as applicable, and the terms of any employment agreement executed by any such
officer.
SECTION 1.4. EFFECT OF MERGER. The identity, existence, purposes, powers,
objects, franchises, privileges, rights and immunities of the Company shall
continue unaffected and unimpaired by the Merger and the corporate franchises,
existence and rights of Subsidiary shall be merged with and into the Company, as
the Surviving Corporation. At the Effective Time of the Merger, the separate
existence of Subsidiary shall cease and, in accordance with the terms of this
Agreement, the Surviving Corporation shall possess all the rights, privileges,
immunities and franchises, of a public as well as of a private nature, and all
property, real, personal and mixed, and all debts due on whatever account,
including subscriptions for shares, all taxes, including those due and owing and
those accrued, and all other choses in action, and all and every other interest
of or belonging to or due to the Company and Subsidiary shall be taken and
deemed to be transferred to, and vested in, the Surviving Corporation without
further act or deed; and all property, rights and privileges, powers and
franchises and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of the Company and
Subsidiary; and the title to any real estate, or interest therein, whether by
deed or otherwise, under the laws of the state of incorporation vested in the
Company or Subsidiary, shall not revert or be in any way impaired by reason of
the Merger. Except as otherwise provided in this Agreement, following the Merger
the Surviving Corporation shall be responsible and liable for all the
liabilities and obligations of Subsidiary and Company and any claim existing, or
action or proceeding pending, by or against the Company or Subsidiary may be
prosecuted as if the Merger had not taken place, or the Surviving Corporation
may be substituted in their place. Neither the rights of creditors nor any liens
upon the property of the Company or Subsidiary shall be impaired by the Merger,
and all debts, liabilities and duties of the Company and Subsidiary shall attach
to the Surviving Corporation and may be enforced against such Surviving
Corporation to the same extent as if said debts, liabilities and duties had been
incurred or contracted by such Surviving Corporation.
ARTICLE II
CONVERSION OF STOCK
SECTION 2.1. MANNER OF CONVERSION. At the Effective Time, by virtue of the
Merger and without any action on the part of PalEx, Subsidiary, the Company or
any of the Stockholder:
(a) The shares of common stock, par value $100.00 per share, of the
Company (the "Company Stock") that are issued and outstanding immediately prior
to the Effective Time, automatically shall be deemed to represent (i) the right
to receive that number of
-3-
<PAGE>
shares of common stock, par value $.01 per share, of PalEx ("PalEx Common
Stock") set forth in SCHEDULE 2.1 and (ii) the right to receive the amount of
cash set forth in SCHEDULE 2.1. As of the Effective Time, all shares of Company
Stock shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate representing
any such shares of Company Stock shall cease to have any rights with respect
thereto, except the right to receive that number of shares of PalEx Common Stock
and cash to be issued in consideration therefore upon surrender of such
certificate in accordance with Section 2.2.
(b) All shares of Company Stock that are held by the Company as treasury
stock, if any, shall be canceled and retired and no shares of PalEx Common Stock
or other consideration shall be delivered or paid in exchange therefor.
(c) Each share of capital stock of Subsidiary issued and outstanding and
owned by PalEx shall, by virtue of the Merger and without any action on the part
of PalEx, be converted into one share of common stock, $.01 par value, of the
Company, as the Surviving Corporation.
SECTION 2.2. EXCHANGE OF CERTIFICATES FOR CONSIDERATION. At the Closing
(as defined in Article III), the Stockholder shall deliver to PalEx the original
certificates representing the Company Stock, duly endorsed in blank by the
Stockholder or accompanied by blank stock powers. The Stockholder agrees
promptly to cure any deficiencies with respect to the endorsement of the
certificates or other documents of conveyance with respect to such Company
Stock. Upon surrender of such certificates, the Stockholder shall be entitled to
receive certificates representing the number of shares of PalEx Common Stock and
the amount of cash set forth in SCHEDULE 2.1, which shall be delivered on the
Consummation Date (as defined in Article III).
ARTICLE III
THE CLOSING AND CONSUMMATION DATE
On the date of execution of the underwriting agreement (the "Underwriting
Agreement") relating to the initial public offering of PalEx Common Stock (the
"IPO"), the parties shall take all actions necessary (i) to effect the Merger
(including, if permitted by applicable state law, the filing with the
appropriate state authorities of the Certificates of Merger which shall become
effective on the Consummation Date (as defined below)) and (ii) to effect the
conversion and delivery of shares referred to in Section 2.2 (hereinafter
referred to as the "Closing"); PROVIDED, HOWEVER, that such actions shall not
include the actual completion of the Merger or the conversion and delivery of
the shares referred to in Article II, which actions shall be taken on the
Consummation Date. The Closing shall take place at a location mutually agreeable
to the Company and PalEx. The date on which
-4-
<PAGE>
the Closing shall occur shall be referred to as the "Closing Date." On the
Consummation Date, the Certificates of Merger shall be filed with the
appropriate state authorities, or if already filed shall become effective, and
all transactions contemplated by this Agreement shall occur and be deemed to be
completed. The Consummation Date shall be the date on which the closing of the
IPO occurs. During the period from the Closing Date to the Consummation Date,
this Agreement may only be terminated by the parties if the Underwriting
Agreement is terminated pursuant to the terms of such agreement or as otherwise
expressly provided herein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDER
The Company and Stockholder represent and warrant to PalEx as follows:
SECTION 4.1. ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Virginia and has the requisite corporate power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted. The Company is qualified to do business and is in good
standing in each jurisdiction in which the properties owned, leased or operated
by it or the nature of the business conducted by it makes such qualification
necessary, except where the failure to be so qualified and in good standing will
not, when taken together with all other such failures, have a material adverse
effect on the business, operations, properties, assets, condition (financial or
other), results of operations or prospects of the Company (a "Company Material
Adverse Effect"). True, accurate and complete copies of the Company's Articles
of Incorporation and By-laws, in each case as in effect on the date hereof,
including all amendments thereto, have heretofore been delivered to PalEx.
SECTION 4.2. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 500 shares of
Company Stock. As of December 20, 1996, 100 shares of Company Stock were issued
and outstanding. All of such issued and outstanding shares are validly issued
and are fully paid, nonassessable and free of preemptive rights. The Stockholder
owns beneficially and of record all of the shares of the Company Stock, which
constitutes all of the outstanding shares of capital stock of the Company, and
such Company Stock is owned free and clear of all liens, claims or encumbrances
of any nature. As a result of the Merger, the Stockholder will convey and
transfer to PalEx good and marketable title to the Company Stock owned by him.
(b) Except as set forth on SCHEDULE 4.2 attached hereto, as of the date
hereof there were no outstanding subscriptions, options, calls, contracts,
commitments,
-5-
<PAGE>
understandings, restrictions, arrangements, rights or warrants, including any
right of conversion or exchange under any outstanding security, instrument or
other agreement to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of the capital stock of the Company or obligating the
Company to grant, extend or enter into any such agreement or commitment or
obligating the Stockholder to convey or transfer any Company Stock. There are no
voting trusts, proxies or other agreements or understandings to which the
Company or the Stockholder is a party or is bound with respect to the voting of
any shares of capital stock of the Company.
SECTION 4.3. NO SUBSIDIARIES. The Company has no subsidiaries and, except
as set forth on SCHEDULE 4.3, it does not own any capital stock of any
corporation or any interest in any partnership, joint venture or limited
liability company.
SECTION 4.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. This Agreement
has been approved by the Board of Directors of the Company and by the
Stockholder, and no other corporate proceedings on the part of the Company are
necessary to authorize the execution and delivery of this Agreement or the
consummation by the Company of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Company and the
Stockholder, and, assuming the due authorization, execution and delivery hereof
by PalEx, Subsidiary and Main Street, constitutes a valid and legally binding
agreement of the Company and the Stockholder, enforceable against the Company
and the Stockholder in accordance with its terms, except that such enforcement
may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting or relating to enforcement of creditors' rights
generally and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by each of the Company
and the Stockholder do not violate, conflict with or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
the Company under any of the terms, conditions or provisions of (i) the articles
of incorporation or by-laws of the Company (ii) any statute, law, ordinance,
rule, regulation, judgment, decree, order, injunction, writ, permit or license
of any court or governmental authority applicable to the Company or any of its
properties or assets, or (iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which the Company or the
Stockholder is now a party or by which the Stockholder or the Company or any of
its properties or assets may be bound or affected. The consummation by the
Company and
-6-
<PAGE>
the Stockholder of the transactions contemplated hereby will not result in any
violation, conflict, breach, right of termination or acceleration or creation of
liens under any of the terms, conditions or provisions of the items described in
clauses (i) through (iii) of the preceding sentence, subject, in the case of the
terms, conditions or provisions of the items described in clause (iii) above, to
obtaining (prior to the Effective Time) consents required from commercial
lenders, lessors or other third parties. Excluded from the foregoing sentences
of this paragraph (b), insofar as they apply to the terms, conditions or
provisions of the items described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, reasonably be expected
to have a Company Material Adverse Effect.
(c) Except as disclosed in SCHEDULE 4.4 and for (i) the filing in
connection with the IPO of a registration statement on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission ("SEC")
pursuant to the Securities Act of 1933 (the "1933 Act"), (ii) the declaration of
the effectiveness thereof by the SEC and filings with various state blue sky
authorities, and (iii) the making of the Merger Filings with the Secretary of
State of the State of Delaware and the Clerk of the State Corporation Commission
of Virginia in connection with the Merger, no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
governmental or regulatory body or authority is necessary for the execution and
delivery of this Agreement by the Company and the Stockholder or the
consummation by the Company and the Stockholder of the transactions contemplated
hereby.
SECTION 4.5. FINANCIAL STATEMENTS. The financial statements for the fiscal
year ended December 31, 1995 and unaudited interim financial statements of the
Company for the three months ended November 30, 1996 (collectively, the "Company
Financial Statements") have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and fairly present the financial position of
the Company as of the dates thereof and the results of its operations and
changes in financial position for the periods then ended, subject, in the case
of the unaudited interim financial statements, to normal year-end and audit
adjustments and any other adjustments described therein.
SECTION 4.6. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in
SCHEDULE 4.6 attached hereto, the Company did not have at November 30, 1996, nor
has it incurred since that date, any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except (a)
liabilities, obligations or contingencies (i) which are accrued or reserved
against in the Company Financial Statements or reflected in the notes thereto or
(ii) which were incurred after November 30, 1996 and were incurred in the
ordinary course of business and consistent with past practices, and (b)
liabilities and obligations which are of a nature not required to be reflected
in the Company Financial Statements prepared in accordance with generally
accepted
-7-
<PAGE>
accounting principles consistently applied and which were incurred in the normal
course of business and are described on SCHEDULE 4.6. SCHEDULE 4.6 includes a
reasonable estimate by the Company and the Stockholder of the maximum amount
which may become payable with respect to any such liabilities which are
contingent.
SECTION 4.7. ACCOUNTS AND NOTES RECEIVABLE. SCHEDULE 4.7 sets forth an
accurate list of the accounts and notes receivable of the Company as of December
20, 1996, including any such amounts which are not reflected in the Company's
balance sheet. Receivables from and advances to employees, the Stockholder and
any entities or persons related to or affiliated with the Stockholder are
separately identified on SCHEDULE 4.7. SCHEDULE 4.7 also sets forth an accurate
aging of all accounts and notes receivable as of November 30, 1996 showing
amounts due in 30-day aging categories. The trade and other accounts receivable
of the Company which are classified as current assets on the November 30, 1996
balance sheet are bona fide receivables, were acquired in the ordinary course of
business, are stated in accordance with generally accepted accounting principles
and, subject to the reserve for doubtful accounts, need not be written-off as
uncollectible.
SECTION 4.8. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since August 31, 1996,
there has not been any material adverse change in the business, operations,
properties, assets, liabilities, condition (financial or other), results of
operations or prospects of the Company, nor, except as disclosed in SCHEDULE 4.8
has there been:
(i) any damage, destruction or loss (whether or not covered by
insurance) alone or in the aggregate, materially adversely affecting
the properties or business of the Company;
(ii) any change in the authorized capital stock of the Company or in its
securities outstanding or any change in the Stockholder's ownership
interests or any grant of any options, warrants, calls, conversion
rights or commitments;
(iii) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect redemption,
purchase or other acquisition of any of the capital stock of the
Company;
(iv) any increase in the compensation payable or to become payable by the
Company to the Stockholder or any of its officers, directors,
employees, consultants or agents, except for ordinary and customary
bonuses and salary increases for employees in accordance with past
practice;
(v) any work interruptions, labor grievances or claims filed, or any
proposed law, regulation or event or condition of any character
materially adversely affecting the business or future prospects of
the Company;
-8-
<PAGE>
(vi) any sale or transfer, or any agreement to sell or transfer, any
material assets, properties or rights of the Company to any person,
including, without limitation, the Stockholder and their affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness or other
obligation owing to the Company;
(viii)any increase in the Company's indebtedness, other than accounts
payable incurred in the ordinary course of business;
(ix) any plan, agreement or arrangement granting any preferential rights
to purchase or acquire any interest in any of the assets, property
or rights of the Company or requiring consent of any party to the
transfer and assignment of any such assets, property or rights;
(x) any purchase or acquisition of, or agreement, plan or arrangement to
purchase or acquire, any property, rights or assets outside of the
ordinary course of the Company's business;
(xi) any waiver of any material rights or claims of the Company;
(xii) any material breach, amendment or termination of any material
contract, agreement, license, permit or other right to which the
Company is a party or any of its property is subject; or
(xiii)any material transaction by the Company outside the ordinary course
of business.
SECTION 4.9. LITIGATION. Except as disclosed in the SCHEDULE 4.9 attached
hereto, there are no claims, suits, actions or proceedings pending or, to the
knowledge of the Company or the Stockholder, threatened against, relating to or
affecting the Company or the Stockholder, before any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator
that seek to restrain the consummation of the Merger or which could reasonably
be expected, either alone or in the aggregate with all such claims, actions or
proceedings, to have a Company Material Adverse Effect. Except as disclosed in
SCHEDULE 4.9 attached hereto, neither the Company nor the Stockholder is subject
to any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator
which prohibits or restricts the consummation of the transactions contemplated
hereby or would have a Company Material Adverse Effect.
SECTION 4.10. REGISTRATION STATEMENT. To the best of the Company's and
Stockholders' knowledge and belief, none of the information to be supplied by
the
-9-
<PAGE>
Company for inclusion in the Registration Statement will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
SECTION 4.11. NO VIOLATION OF LAW. Except as disclosed in SCHEDULE 4.11
attached hereto, the Company is not in violation of nor has it been given notice
or been charged with any violation of, any law, statute, order, rule,
regulation, ordinance or judgment (including, without limitation, any applicable
environmental law, ordinance or regulation) of any governmental or regulatory
body or authority, except for violations which, in the aggregate, could not
reasonably be expected to have a Company Material Adverse Effect. Except as
disclosed in SCHEDULE 4.11 attached hereto, as of the date of this Agreement, no
investigation or review by any governmental or regulatory body or authority is
pending or, to the knowledge of the Company, threatened, nor has any
governmental or regulatory body or authority indicated an intention to conduct
the same, other than, in each case, those the outcome of which, as far as
reasonably can be foreseen, will not have a Company Material Adverse Effect. The
Company has all permits, licenses, franchises, variances, exemptions, orders and
other governmental authorizations, consents and approvals necessary to conduct
their businesses as presently conducted (collectively, the "Company Permits"),
except for permits, licenses, franchises, variances, exemptions, orders,
authorizations, consents and approvals the absence of which, alone or in the
aggregate, would not have a Company Material Adverse Effect. The Company is not
in violation of the terms of any Company Permit, except for delays in filing
reports or violations which, alone or in the aggregate, would not have a Company
Material Adverse Effect.
SECTION 4.12. COMPLIANCE WITH AGREEMENTS. Except as disclosed in SCHEDULE
4.12 attached hereto, the Company is not in breach or violation of or in default
in the performance or observance of any term or provision of, and no event has
occurred which, with lapse the of time or action by a third party, could result
in a default under, (a) the charter, by-laws or similar organizational
instruments of the Company or (b) any contract, commitment, agreement,
indenture, mortgage, loan agreement, note, lease, bond, license, approval or
other instrument to which the Company is a party or by which it is bound or to
which any of its property is subject, which breaches, violations and defaults,
in the case of clause (b) of this Section 4.12, would have, in the aggregate, a
Company Material Adverse Effect.
SECTION 4.13. TAXES.
(a) The Company has (i) duly filed with the appropriate governmental
authorities or will file when due all Tax Returns required to be filed for all
periods ending on or prior to the Effective Time, other than those Tax Returns
the failure of which to file would not have a Company Material Adverse Effect
and such Tax Returns are true, correct and
-10-
<PAGE>
complete in all material respects, and (ii) duly paid in full or made adequate
provision for the payment of all Taxes for all periods ending at or prior to the
Effective Time. The liabilities and reserves for Taxes reflected in the Company
Financial Statements are adequate to cover all Taxes for all periods ending at
or prior to the Effective Time and there are no material liens for Taxes upon
any property or asset of the Company thereof, except for liens for Taxes not yet
due. There are no unresolved issues of law or fact arising out of a notice of
deficiency, proposed deficiency or assessment from the IRS or any other
governmental taxing authority with respect to Taxes of the Company which, if
decided adversely, singly or in the aggregate, would have a Company Material
Adverse Effect. The Company is not a party to any agreement providing for the
allocation or sharing of Taxes with any entity that is not, directly or
indirectly, a wholly-owned corporate subsidiary of Company. Neither the Company
nor any of its corporate subsidiaries has, with regard to any assets or property
held, acquired or to be acquired by any of them, filed a consent to the
application of Section 341(f) of the Code. The Company made a valid election
under Section 1362(a) of the Code, effective November 1, 1992, to be taxed as an
S corporation under the Code. As of immediately prior to the Closing, the
Company will qualify as an S corporation within the meaning of Subchapter S of
the Code.
(b) For purposes of this Agreement, the term "Taxes" shall mean all taxes,
including, without limitation, income, gross receipts, excise, property, sales,
employment, withholding, social security, occupation, use, service, service use,
license, payroll, franchise, transfer and recording taxes, fees and charges,
windfall profits, severance, customs, import, export, employment or similar
taxes, charges, fees, levies or other assessments imposed by the United States,
or any state, local or foreign government or subdivision or agency thereof,
whether computed on a separate, consolidated, unitary, combined or any other
basis, and such term shall include any interest, fines, penalties or additional
amounts and any interest in respect of any additions, fines or penalties
attributable or imposed or with respect to any such taxes, charges, fees, levies
or other assessments.
(c) For purposes of this Agreement, the term "Tax Return" shall mean any
return, report or other document or information required to be supplied to a
taxing authority in connection with any Taxes.
SECTION 4.14. EMPLOYEE BENEFIT PLANS; ERISA.
(a) Except as set forth in SCHEDULE 4.14 attached hereto, at the date
hereof, the Company does not maintain or contribute to any material employee
benefit plans, programs, arrangements and practices (such plans, programs,
arrangements and practices of the Company being referred to as the "COMPANY
PLANS"), including employee benefit plans within the meaning set forth in
Section 3(3) of ERISA, or other similar material arrangements for the provision
of benefits (excluding any "MULTI-EMPLOYER PLAN" within the meaning of Section
3(37) of ERISA or a "MULTIPLE EMPLOYER PLAN" within the meaning of
-11-
<PAGE>
Section 413(c) of the Code). SCHEDULE 4.14(A) attached hereto lists all
Multi-employer Plans and Multiple Employer Plans which the Company maintains or
to which it makes contributions. The Company does not have any obligation to
create any additional such plan or to amend any such plan so as to increase
benefits thereunder, except as required under the terms of the Company Plans,
under existing collective bargaining agreements or to comply with applicable
law.
(b) Except as disclosed in SCHEDULE 4.14 attached hereto, (i) there have
been no prohibited transactions within the meaning of Section 406 or 407 of
ERISA or Section 4975 of the Code with respect to any of the Company Plans that
could result in penalties, taxes or liabilities which, singly or in the
aggregate, could have a Company Material Adverse Effect, (ii) except for
premiums due, there is no outstanding material liability, whether measured alone
or in the aggregate, under Title IV of ERISA with respect to any of the Company
Plans, (iii) neither the Pension Benefit Guaranty Corporation nor any plan
administrator has instituted proceedings to terminate any of the Company Plans
subject to Title IV of ERISA other than in a "STANDARD TERMINATION" described in
Section 4041(b) of ERISA, (iv) none of the Company Plans has incurred any
"ACCUMULATED FUNDING DEFICIENCY" (as defined in Section 302 of ERISA and Section
412 of the Code), whether or not waived, as of the last day of the most recent
fiscal year of each of the Company Plans ended prior to the date of this
Agreement, (v) the current present value of all projected benefit obligations
under each of the Company Plans which is subject to Title IV of ERISA did not,
as of its latest valuation date, exceed the then current value of the assets of
such plan allocable to such benefit liabilities, based upon reasonable actuarial
assumptions currently utilized for such Company Plan, (vi) each of the Company
Plans has been operated and administered in all material respects in accordance
with applicable laws during the period of time covered by the applicable statute
of limitations, (vii) each of the Company Plans which is intended to be
"QUALIFIED" within the meaning of Section 401(a) of the Code has been determined
by the Internal Revenue Service to be so qualified and such determination has
not been modified, revoked or limited by failure to satisfy any condition
thereof or by a subsequent amendment thereto or a failure to amend, except that
it may be necessary to make additional amendments retroactively to maintain the
"QUALIFIED" status of such Company Plans, and the period for making any such
necessary retroactive amendments has not expired, (viii) with respect to
Multi-employer Plans, the Company has not made or suffered a "COMPLETE
WITHDRAWAL" or a "PARTIAL WITHDRAWAL," as such terms are respectively defined in
Sections 4203, 4204 and 4205 of ERISA and, to the best knowledge of the Company,
no event has occurred or is expected to occur which presents a material risk of
a complete or partial withdrawal under said Sections 4203, 4204 and 4205, (ix)
to the best knowledge of the Company, there are no material pending, threatened
or anticipated claims involving any of the Company Plans other than claims for
benefits in the ordinary course, and (x) the Company has no current material
liability, whether measured alone or in the aggregate, for plan termination or
complete withdrawal or partial withdrawal under Title IV of ERISA based on any
plan to which any entity that would be deemed one employer with the Company
under
-12-
<PAGE>
Section 4001 of ERISA or Section 414 of the Code contributed during the period
of time covered by the applicable statute of limitations (the "COMPANY
CONTROLLED GROUP PLANS"), and the Company does not reasonably anticipate that
any such liability will be asserted against the Company . None of the Company
Controlled Group Plans has an "ACCUMULATED FUNDING DEFICIENCY" (as defined in
Section 302 of ERISA and 412 of the Code).
(c) SCHEDULE 4.14 attached hereto contains a true and complete summary or
list of or otherwise describes all employment contracts and employee benefit
arrangements with all employees of the Company.
SECTION 4.15. LABOR MATTERS. Except as set forth in SCHEDULE 4.15 attached
hereto, (a) there are no significant controversies pending or, to the knowledge
of the Company, threatened between the Company and any of its employees, (b)
none of the Company's employees is represented by a labor union or covered by a
collective bargaining agreement, and to the knowledge of the Company, there are
no organizational efforts and no campaign is under way to establish such
representation or coverage, (c) the Company has, to the knowledge of the
Company, complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (d) no person has, to the knowledge of the
Company, asserted that the Company is liable in any material amount for any
arrears of wages or any taxes or penalties for failure to comply with any of the
foregoing, except for such controversies, organizational efforts, non-compliance
and liabilities which, singly or in the aggregate, could not reasonably be
expected to have a Company Material Adverse Effect.
SECTION 4.16. ENVIRONMENTAL MATTERS.
(a) To the best of the Company's knowledge and belief, except as set forth
in SCHEDULE 4.16 attached hereto, (i) the Company has conducted its businesses
in compliance with all 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, (ii) none of the properties owned by the Company contain any
Hazardous Substance as a result of any activity of the Company in amounts
exceeding the levels permitted by applicable Environmental Laws, (iii) the
Company has not 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 may be in violation of, or liable under, any
Environmental Law in connection with the ownership or operation of its business,
(iv) there are no civil, criminal or administrative actions, suits, demands,
claims, hearings, investigations or proceedings pending or threatened, against
the Company relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be filed,
by the Company concerning the release of any Hazardous Substance or the
threatened or
-13-
<PAGE>
actual violation of any Environmental Law, (vi) no Hazardous Substance has been
disposed of, released or transported in violation of any applicable
Environmental Law from any properties owned by the Company as a result of any
activity of the Company during the time such properties were owned, leased or
operated by the Company, (vii) 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 relating to the activities of the Company which
are not listed on SCHEDULE 4.16 attached hereto prior to the date hereof, (viii)
there are no underground storage tanks on, in or under any properties owned by
the Company 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, (ix) there is no asbestos or asbestos containing
material present in any of the properties owned by the Company, and no asbestos
has been removed from any of such properties during the time such properties
were owned, leased or operated by the Company, and (x) neither the Company nor
any of its 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 (i) through (x) that, singly or in the aggregate, would not reasonably
be expected to have a Company Material Adverse Effect.
(b) 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
(x) 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 (y) 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, (i) 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 (ii) 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.
-14-
<PAGE>
(c) 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
government 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, radioactive material, asbestos or
asbestos containing material, urea formaldehyde foam insulation, lead or
polychlorinated biphenyls.
SECTION 4.17. TITLE TO ASSETS. The Company has good and marketable title
in fee simple to all its property and good title to all its leasehold interests
and other properties, as reflected in the most recent balance sheet included in
the Company Financial Statements, except for the assets which are to be sold or
dividended to the Stockholder pursuant to Section 6.4 and properties and assets
that have been disposed of in the ordinary course of business since the date of
such balance sheet, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except (i) the lien for current taxes,
payments of which are not yet delinquent, (ii) such imperfections in title and
easements and encumbrances, if any, as are not substantial in character, amount
or extent and do not materially detract from the value, or interfere with the
present use of the property subject thereto or affected thereby, or otherwise
materially impair the Company's business operations (in the manner presently
carried on by the Company), and (iii) except for such matters which, singly or
in the aggregate, could not reasonably be expected to have a Company Material
Adverse Effect. All leases under which the Company leases any substantial amount
of real or personal property have been delivered to PalEx and are in good
standing, valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any existing default or event which with
notice or lapse of time or both would become a default other than defaults under
such leases which in the aggregate will not cause a Company Material Adverse
Effect
SECTION 4.18. INSURANCE. SCHEDULE 4.18 sets forth an accurate list as of
November 30, 1996 of all insurance policies carried by the Company and of all
insurance claims or losses in excess of $50,000 or material workmen's
compensation claims received for the past five (5) policy years. The losses and
claims not listed in SCHEDULE 4.18 will not in the aggregate result in a Company
Material Adverse Effect. Also attached to SCHEDULE 4.18 are true, complete and
correct copies of all of the Company's insurance policies, covering at least the
past three years. None of such policies is a "claims made" policy. The insurance
policies set forth on SCHEDULE 4.18 provide adequate coverage against the risks
involved in the Company's business. Such policies are currently in full force
and effect.
-15-
<PAGE>
SECTION 4.19. INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY
TRANSACTIONS. Except as described on SCHEDULE 4.19, no Stockholder, officer,
director or affiliate of the Company (i) possesses, directly or indirectly, any
financial interest in, or is a director, officer, employee or affiliate of, any
corporation, firm, association or business organization that is a client,
supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a
party to an agreement or relationship, that involves the receipt by such person
of compensation or property from the Company other than through a customary
employment relationship.
SECTION 4.20. BUSINESS RELATIONS. SCHEDULE 4.20 contains an accurate list
of all customers of the Company representing five percent (5%) or more of the
Company's revenues for the twelve (12) months ended August 31, 1996 and the
three (3) months ended November 30, 1996. Except as set forth on SCHEDULE 4.20,
since August 31, 1995, none of the Company's significant customers has canceled
or substantially reduced its purchases from the Company, nor are any of such
customers threatening to do so. Except as set forth on SCHEDULE 4.20, since
August 31, 1995, the Company has not experienced any difficulties in obtaining
any inventory items necessary to the operation of its business, and, to the
knowledge of the Company and the Stockholder, no such shortage of supply of
inventory items is threatened or pending. To the knowledge of the Company and
the Stockholder, no customer or supplier of the Company will cease to do
business with, or substantially reduce its purchases from, the Company after the
consummation of the transactions contemplated hereby, which cessation or
reduction would reasonably be expected to have a Company Material Adverse
Effect. The Company is not required to provide any bonding or other financial
security arrangements in any material amount in connection with any transactions
with any of its customers or suppliers.
SECTION 4.21. DISCLOSURE. The Stockholder has fully provided PalEx with
all the information that PalEx has requested in analyzing whether to consummate
the Merger. To the best of the Company's and Stockholders' knowledge and belief,
none of the information so provided nor any representation or warranty of the
Stockholder contained in this Agreement contains any untrue statement regarding
a material fact or omits to state a material fact necessary in order to make the
statements made herein or in the information provided, in light of the
circumstances under which they were made, not misleading.
SECTION 4.22. TRADEMARKS AND INTELLECTUAL PROPERTY COMPLIANCE. Company
owns or has the right to use, without any material payment to any other party,
all of its patents, trademarks (registered or unregistered), trade names,
service marks, copyrights and applications ("Intellectual Property Rights") and
the consummation of the transactions contemplated hereby will not alter or
impair such rights in any material respect. To the best of the Company's and
Stockholder's knowledge and belief, no claims are pending by any person with
respect to the ownership, validity, enforceability or use of any such
Intellectual Property Rights challenging or questioning the validity or
effectiveness of any
-16-
<PAGE>
of the foregoing which claims could reasonably be expected to have a Company
Material Adverse Effect.
SECTION 4.23. NO IMPLIED REPRESENTATIONS. Notwithstanding anything
contained in this Article or any other provision of this Agreement or any of the
related documents, it is the explicit understanding of each party hereto that
the Company and the Stockholder are not making any representation or warranty
whatsoever, express or implied, other than those representations and warranties
of the Company and the Stockholder in this Agreement and the related documents.
It is understood that any estimates, projections or other predictions which
otherwise have been provided to PalEx are not and shall not be deemed to be
representations or warranties of the Company or the Stockholder, but as the good
faith estimates and assumptions of the Company and the Stockholder intended to
be reasonable at the time made concerning the most likely course of the Company
and its businesses. The Company, the Stockholder and PalEx acknowledge that
there are uncertainties inherent in attempting to make such estimates,
projections and other predictions, that the Company, the Stockholder and PalEx
are familiar with such uncertainties, that the Company, the Stockholder and
PalEx are taking full responsibility for making their own evaluation of the
adequacy and accuracy of all estimates, projections and other predictions so
furnished to them, and that neither PalEx, the Stockholder nor any of the
Founding Companies shall have any claim against anyone with respect thereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PALEX AND SUBSIDIARY
PalEx and Subsidiary represent and warrant to the Company as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION.
(a) PalEx is a corporation duly organized, validly existing and in good
standing under the laws of the state of Delaware and has the requisite power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. True, accurate and complete copies of
each of PalEx's Certificate of Incorporation and By-laws, as in effect on the
date hereof, including all amendments thereto, have heretofore been delivered to
the Company.
(b) Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of the state of Delaware and has the requisite
power and authority to own, lease and operate its assets and properties and to
carry on its business as it is now being conducted. Subsidiary is qualified to
do business and is in good standing in each jurisdiction in which the properties
owned, leased or operated by it or the nature of
-17-
<PAGE>
the business conducted by it makes such qualification necessary, except where
the failure to be so qualified and in good standing will not, when taken
together with all other such failures, have a material adverse effect on the
business, operations, properties, assets, condition (financial or other),
results of operations or prospects of Subsidiary. True, accurate and complete
copies of each of Subsidiary's Certificate of Incorporation and By-laws, as in
effect on the date hereof, including all amendments thereto, have heretofore
been delivered to the Company.
SECTION 5.2. CAPITALIZATION.
(a) The authorized capital stock of PalEx consists of (i) 30,000,000
shares of PalEx Common Stock, of which 1,071,389 shares were outstanding as of
December 20, 1996, and (ii) 5,000,000 shares of preferred stock, par value $.01
per share, none of which was issued and outstanding as of December 20, 1996. All
of the issued and outstanding shares of PalEx Common Stock are validly issued
and are fully paid, nonassessable and free of preemptive rights.
(b) Except as set forth on SCHEDULE 5.2 attached hereto, as of the date
hereof, there are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement obligating PalEx to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of the capital stock of
PalEx or obligating PalEx to grant, extend or enter into any such agreement or
commitment, except that PalEx declared a stock split prior to executing this
Agreement which resulted in Main Street owning 1,021,389 shares and Vance K.
Maultsby, Jr., owning 50,000 shares of PalEx Common Stock. There are no voting
trusts, proxies or other agreements or understandings to which PalEx is a party
or is bound with respect to the voting of any shares of capital stock of PalEx.
The shares of PalEx Common Stock issued to the stockholder of the Company in the
Merger will be at the Effective Time duly authorized, validly issued, fully paid
and nonassessable and free of preemptive rights.
SECTION 5.3. NO SUBSIDIARIES. Except as set forth on SCHEDULE 5.3, PalEx
has no subsidiaries and it does not own any capital stock of any corporation or
any interest in any partnership, joint venture or limited liability company.
SECTION 5.4. AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) PalEx and Subsidiary have full corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby. This
Agreement has been approved by the Board of Directors and stockholders of PalEx
and Subsidiary, and no other corporate proceedings on the part of PalEx or
Subsidiary are necessary to authorize the execution and delivery of this
Agreement or the consummation
-18-
<PAGE>
by PalEx and Subsidiary of the transactions contemplated hereby. This Agreement
has been duly executed and delivered by PalEx and Subsidiary, and, assuming the
due authorization, execution and delivery hereof by the Company and the
Stockholder, constitutes a valid and legally binding agreement of PalEx and
Subsidiary enforceable against each of them in accordance with its terms, except
that such enforcement may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles.
(b) The execution and delivery of this Agreement by PalEx and Subsidiary
does not violate, conflict with or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the respective properties or assets of PalEx
or Subsidiary under any of the terms, conditions or provisions of (i) the
charter or by-laws of PalEx or Subsidiary, as applicable, (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to PalEx or
Subsidiary or any of their respective properties or assets or (iii) any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which PalEx or Subsidiary is now a party or by which PalEx or Subsidiary
or any of their respective properties or assets may be bound or affected. The
consummation by PalEx and Subsidiary of the transactions contemplated hereby
will not result in any violation, conflict, breach, right of termination or
acceleration or creation of liens under any of the terms, conditions or
provisions of the items described in clauses (i) through (iii) of the preceding
sentence, subject, in the case of the terms, conditions or provisions of the
items described in clause (ii) above, to obtaining (prior to the Effective Time)
PalEx Required Statutory Approvals (as defined in Section 5.4(c)) and, in the
case of the terms, conditions or provisions of the items described in clause
(iii) above, to obtaining (prior to the Effective Time) consents required from
commercial lenders, lessors or other third parties. Excluded from the foregoing
sentences of this paragraph (b), insofar as they apply to the terms, conditions
or provisions of the items described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, have a material
adverse effect on the business, operations, properties, assets, condition
(financial or other), results of operations or prospects of PalEx or Subsidiary
(a "PalEx Material Adverse Effect").
(c) Except for (i) the filing of the Registration Statement the SEC
pursuant to the 1933 Act, (ii) the declaration of the effectiveness thereof by
the SEC and filings with various state blue sky authorities, and (iii) the
making of the Merger Filing with the Secretary of State of the State of Delaware
and the Clerk of the State Corporation
-19-
<PAGE>
Commission of Virginia in connection with the Merger, the filings and approvals
referred to in clauses (i) through (iii) are collectively referred to as the
"PALEX REQUIRED STATUTORY APPROVALS", no declaration, filing or registration
with, or notice to, or authorization, consent or approval of, any governmental
or regulatory body or authority is necessary for the execution and delivery of
this Agreement by PalEx or Subsidiary or the consummation by PalEx or Subsidiary
of the transactions contemplated hereby, other than such declarations, filings,
registrations, notices, authorizations, consents or approvals which, if not made
or obtained, as the case may be, would not, in the aggregate, have a PalEx
Material Adverse Effect.
SECTION 5.5. ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed to
the Company in writing, neither PalEx nor Subsidiary have incurred any
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
of any nature, except those incurred in connection with the Merger, this
Agreement, the agreements with the other Founding Companies and the IPO. Except
as contemplated by the foregoing, PalEx and Subsidiary have not engaged in any
business activities of any type or kind whatsoever, nor entered into any
agreements nor is it bound by any obligation or undertaking.
SECTION 5.6. LITIGATION. There are no claims, suits, actions or
proceedings pending or, to the knowledge of PalEx or Subsidiary, threatened
against, relating to or affecting PalEx or Subsidiary, before any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that seek to restrain or enjoin the consummation of the Merger or
the IPO or which could reasonably be expected, either alone or in the aggregate
with all such claims, actions or proceedings, to have a PalEx Material Adverse
Effect.
SECTION 5.7. NO VIOLATION OF LAW. PalEx is not in violation of, nor has it
been given notice or been charged with any violation of, any law, statute,
order, rule, regulation, ordinance, or judgment (including, without limitation,
any applicable environmental law, ordinance or regulation) of any governmental
or regulatory body or authority.
SECTION 5.8. AFFILIATE TRANSACTIONS. Except for the ownership by Main
Street of shares of PalEx Common Stock and Main Street's obligations and rights
under Section 7.3, no transaction has occurred and no transaction is now
proposed to which PalEx is or will be a party, in which any current affiliate of
Main Street has a direct or indirect material interest.
-20-
<PAGE>
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. Except
as otherwise contemplated by this Agreement, after the date hereof and prior to
the Closing Date or earlier termination of this Agreement, unless PalEx shall
otherwise agree in writing, the Company shall:
(a) conduct its businesses in the ordinary and usual course and consistent
with past practice;
(b) not (i) amend or propose to amend its charter or by-laws, (ii) split,
combine or reclassify its outstanding capital stock or (iii) declare, set aside
or pay any dividend or distribution payable in cash, stock, property or
otherwise, except for the payment of dividends or distributions described in
SCHEDULE 6.1;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell, pledge
or dispose of, any additional shares of, or any options, warrants or rights of
any kind to acquire any shares of, its capital stock of any class or any debt or
equity securities convertible into or exchangeable for such capital stock.
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (A) borrowings in the ordinary course
of business, (B) borrowings to refinance existing indebtedness on terms
comparable with or better than those at the date hereof, or (C) borrowings to
fund distributions to Stockholders of the accumulated adjustment account, (ii)
redeem, purchase, acquire or offer to purchase or acquire any shares of its
capital stock or any options, warrants or rights to acquire any of its capital
stock or any security convertible into or exchangeable for its capital stock,
(iii) take or fail to take any action which action or failure would cause the
Company or the Stockholder (except to the extent of non-stock consideration, if
any, received in the Merger) to recognize gain or loss for federal income tax
purposes as a result of the consummation of the Merger, (iv) sell, pledge,
dispose of or encumber any assets or businesses other than sales in the ordinary
course of business or (v) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(e) use all reasonable efforts to preserve intact its business
organizations and goodwill, keep available the services of its present officers
and key employees, and preserve the goodwill and business relationships with
customers and others having business relationships with it and not engage in any
action, directly or indirectly, with the intent to adversely impact the
transactions contemplated by this Agreement;
-21-
<PAGE>
(f) confer on a regular and frequent basis with one or more
representatives of PalEx to report operational matters of materiality and the
general status of ongoing operations;
(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees, except
in the ordinary course and consistent with past practice;
(h) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee or retiree, except as
required to comply with changes in applicable law or in the ordinary course of
business and consistent with past practices; and
(i) maintain with financially responsible insurance companies insurance on
its tangible assets and its businesses in such amounts and against such risks
and losses as are consistent with past practice.
SECTION 6.2. CONTROL OF THE COMPANY'S OPERATIONS. Nothing contained in
this Agreement shall give to PalEx, directly or indirectly, rights to control or
direct the Company's operations prior to the Effective Time. Prior to the
Effective Time, the Company shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision of its
operations.
SECTION 6.3. NO - SHOP.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, the Company and the Stockholder shall not, and
the Company shall use its best efforts to cause any officer, director or
employee of, or any attorney, accountant, investment banker, financial advisor
or other agent retained by it not to, initiate, solicit, negotiate, encourage or
provide non-public or confidential information to facilitate, any proposal or
offer to acquire all or any substantial part of the business and properties of
the Company or any capital stock of the Company, whether by merger, purchase of
assets or otherwise, whether for cash, securities or any other consideration or
combination thereof, or enter into any joint venture or partnership or similar
arrangement.
(b) The Company and the Stockholder (i) acknowledge that a breach of any
of their covenants contained in this Section 6.3 will result in irreparable harm
to PalEx which will not be compensable in money damages; and (ii) agree that
such covenant shall be specifically enforceable and that specific performance
and injunctive relief shall be a remedy properly available to the other party
for a breach of such covenant.
-22-
<PAGE>
SECTION 6.4. DIVIDEND OR SALE OF NONPRODUCTIVE ASSETS. The Company shall,
prior to the Closing Date, either dividend to the Stockholder or sell for cash
the assets listed on SCHEDULE 6.4. If the Company sells such assets, it shall
apply the proceeds from such sale to the reduction of outstanding debt. Any such
dividend shall not affect the total consideration due the Stockholder hereunder;
any such sale and reduction of the Company's debt shall affect the allocation of
the consideration to be received by the Stockholder in the Merger in the manner
described in Schedule 2.1.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1. ACCESS TO INFORMATION.
(a) The Company shall afford to PalEx and Subsidiary and their
accountants, counsel, financial advisors and other representatives (the "PALEX
REPRESENTATIVES") and PalEx and Subsidiary shall afford to the Company and its
accountants, counsel, financial advisors and other representatives (the "COMPANY
REPRESENTATIVES") full access during normal business hours throughout the period
prior to the Effective Time to all of their respective properties, books,
contracts, commitments and records (including, but not limited to, financial
statements and Tax Returns) and, during such period, shall furnish promptly to
one another all due diligence information requested by the other party. PalEx
and Subsidiary shall hold and shall use their reasonable best efforts to cause
the PalEx Representatives to hold, and the Company shall hold and shall use its
reasonable best efforts to cause the Company Representatives to hold, in strict
confidence all non-public information furnished to it in connection with the
transactions contemplated by this Agreement, except that each of PalEx,
Subsidiary and the Company may disclose any information that it is required by
law or judicial or administrative order to disclose.
(b) In the event that this Agreement is terminated in accordance with its
terms, each party shall promptly redeliver to the other all non-public written
material provided pursuant to this Section 7.1 and shall not retain any copies,
extracts or other reproductions of such written material. In the event of such
termination, all documents, memoranda, notes and other writings prepared by
PalEx and Subsidiary or the Company based on the information in such material
shall be destroyed (and PalEx, Subsidiary and the Company shall use their
respective reasonable best efforts to cause their advisors and representatives
to similarly destroy their documents, memoranda and notes), and such destruction
(and reasonable best efforts) shall be certified in writing by an authorized
officer supervising such destruction.
-23-
<PAGE>
(c) The Company shall promptly advise PalEx in writing of any change or
the occurrence of any event after the date of this Agreement having, or which,
insofar as can reasonably be foreseen, in the future may have, any Company
Material Adverse Effect.
SECTION 7.2. REGISTRATION STATEMENT. PalEx and the Founding Companies
shall file with the SEC as soon as is reasonably practicable after the date
hereof the Registration Statement and shall use all reasonable efforts to have
the Registration Statement declared effective by the SEC as promptly as
practicable. PalEx shall also take any action required to be taken under
applicable state blue sky or securities laws in connection with the issuance of
PalEx Common Stock. PalEx and the Company shall promptly furnish to each other
all information, and take such other actions, as may reasonably be requested in
connection with making such filings. The information provided and to be provided
by PalEx and the Company, respectively, for use in the Registration Statement
shall be true and correct in all material respects without omission of any
material fact which is required to make such information not false or misleading
as of the date thereof and in light of the circumstances under which given or
made.
SECTION 7.3. EXPENSES AND FEES. Main Street shall pay the fees and
expenses of the independent public accountants and legal counsel to PalEx and
all filing, printing and other reasonable, documented fees and expenses
associated with the IPO up to $1,250,000. PalEx shall pay or reimburse Main
Street from the proceeds of the IPO for such fees and expenses in excess of
$1,250,000. Neither the Company nor the Stockholder will be liable for any
portion of the above expenses in the event the IPO is not closed. PalEx shall
also pay (i) the underwriting discounts and commissions payable in connection
with the sale of PalEx Common Stock in the IPO, (ii) the fees payable to Raymond
James & Associates and Mr. Tucker Bridwell, as detailed on SCHEDULE 7.3 and
(iii) the fees and expenses incurred in delivering the tax opinion set forth in
Section 9.2(d). All other costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
SECTION 7.4. AGREEMENT TO COOPERATE. Subject to the terms and conditions
herein provided, each of the parties hereto shall use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
SECTION 7.5. PUBLIC STATEMENTS. Except as may require by law, no party
hereto shall issue any press release or any written public statement with
respect to this Agreement or the transactions contemplated hereby without the
prior written consent of PalEx and the Company.
SECTION 7.6. NOTIFICATION OF CERTAIN MATTERS. Each of the Company, the
Stockholder and PalEx agrees to give prompt notice to each of the others of, and
to use
-24-
<PAGE>
their respective reasonable best efforts to prevent or promptly remedy, (i) the
occurrence or failure to occur or the impending or threatened occurrence or
failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in this Agreement to be
untrue or inaccurate in any material respect at any time from the date hereof to
the Effective Time, or any of the information supplied by it for use in the
Registration Statement to be untrue in any material respect or to omit any
material fact, at any time from the date hereof until 25 days following the
Closing, and (ii) any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; PROVIDED, HOWEVER, that the delivery of any notice pursuant to this
Section 7.6 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
SECTION 7.7. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) After the Effective Time, PalEx shall, to the fullest extent permitted
under applicable law, indemnify and hold harmless, each present and former
director, officer and agent of the Company (each, together with such person's
heirs, executors or administrators, an "INDEMNIFIED PARTY" and collectively, the
"INDEMNIFIED PARTIES") against any costs or expenses (including reasonable
attorneys fees), judgments, fines, losses, claims, damages, liabilities and
amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of, relating to or in connection with any action or
omission of PalEx occurring prior to the Effective Time (including, without
limitation, acts or omissions in connection with such persons serving as an
officer, director or other fiduciary in any entity if such service was at the
request or for the benefit of the Company). In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) PalEx shall pay the reasonable fees and expenses of counsel
selected by the indemnified parties, which counsel shall be reasonably
satisfactory to PalEx, promptly after statements therefor are received, (ii)
PalEx will cooperate in the defense of any such matter, and (iii) any
determination required to be made with respect to whether an indemnified party's
conduct complies with the standards set forth under the DGCL or other applicable
statutes and PalEx's or the Surviving Corporation's respective Certificates of
Incorporation or By-Laws shall be made by independent legal counsel acceptable
to PalEx as the case may be, and the indemnified party; PROVIDED, HOWEVER, that
PalEx shall not be liable for any settlement effected without its written
consent (which consent shall not be unreasonably withheld).
(b) In the event that PalEx or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in each such case, proper provisions shall be made so that the
successors and assigns of PalEx shall assume the obligations set forth in this
Section 7.7.
-25-
<PAGE>
SECTION 7.8. CORRECTIONS TO THE REGISTRATION STATEMENT. Prior to the
effectiveness of the IPO, and until the expiration of the 25th day thereafter,
each of the Company, the Stockholder and PalEx shall correct promptly any
information provided by it to be used specifically in the Registration Statement
that shall have become false or misleading in any material respect and shall
take all steps necessary to file with the SEC and have declared effective or
cleared by the SEC any amendment or supplement to the Registration Statement so
as to correct the same and to cause the Prospectus included within such
Registration Statement as so corrected to be disseminated to the extent required
by applicable law.
SECTION 7.9. PREPARATION AND FILING OF TAX RETURNS.
(a) Each party hereto shall, and shall cause its affiliates to, provide to
each of the other parties hereto such cooperation and information as any of them
reasonably may request in filing any return, amended return or claim for refund,
determining a liability for Taxes or a right to refund of Taxes or in conducting
any audit or other proceeding in respect of Taxes. Such cooperation and
information shall include providing copies at no cost to the requesting party of
all relevant portions of relevant returns, together with relevant accompanying
schedules and relevant work papers, relevant documents relating to rulings or
other determinations by taxing authorities and relevant records concerning the
ownership and tax basis of property, which such party may possess. Each party
shall make its employees reasonably available on a mutually convenient basis at
its cost to provide explanation of any documents or information so provided.
Subject to the preceding sentence, each party required to file returns pursuant
to this Agreement shall bear all costs of filing such returns.
(b) Each of the Company, PalEx and the Stockholder shall comply with the
tax reporting requirements of Section 1.351-3 of the Treasury Regulations
promulgated under the Code, and shall treat the exchange of Company Common Stock
for PalEx Common Stock as an exchange under Section 351 of the Code unless
otherwise required by law. The parties have independently determined and hereby
agree that such an exchange is an exchange as described under Section 351 of the
Code and specifically that:
(i) Neither the Company nor PalEx is an investment company as
defined in Section 351(e) of the Code or Section 1.351-1(c)(1)(i) of the
Treasury Regulations.
(ii) The fair market value of the assets of the Company
exceeds the sum of its liabilities, plus the amount of liabilities, if any, to
which the assets are subject.
(iii) The Company is not under jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
-26-
<PAGE>
(iv) The fair market value of the PalEx Common Stock and other
consideration, if any, received by the Stockholder, will be approximately equal
to the fair market value of the Company Stock surrendered in the Merger.
(v) There is no intercorporate indebtedness existing between
PalEx and the Company that was issued, acquired, or will be settled at a
discount.
(vi) None of the compensation received by any
Stockholder-employee of the Company after the Merger will be separate
consideration for, or allocable to, any of their securities of the Company. None
of the shares of PalEx Common Stock received by the Stockholder in the Merger
will be separate consideration for, or allocable to, any employment agreement;
and the compensation paid to the Stockholder in their capacity as employees
including, but not limited to, amounts paid pursuant to the employment
agreements between the Company and the Stockholder and incentive compensation in
the form of stock options, will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length for
similar services.
(vii) The proposed Merger is effected through the laws of the
United States, a State thereof or the District of Columbia.
(viii)The proposed Merger is being undertaken for reasons
germane to the business of the Company.
SECTION 7.10. COVENANTS CONCERNING TAXES.
(a) (i) The Stockholder shall pay (and shall indemnify, defend and hold
harmless PalEx, as the Surviving Corporation, from and against liability with
respect to) any and all Taxes, interest, penalties and additions to Taxes that
are imposed on them or the Company: (i) attributable to the taxable income of
the Company for all taxable periods during which the Company was an S
corporation (the "S Corporation Period"); and (ii) as a result of the Company's
S election being treated as invalid or ineffective for any reason or such
election being revoked or terminated prior to the Merger.
(ii) The Surviving Corporation shall pay or cause to be paid
(and shall indemnify, defend and hold harmless the Stockholder from and against
liability with respect to) any and all Taxes, interest, penalties and additions
to Taxes attributable to the taxable income of the Surviving Corporation for the
period after the Merger (the "C Corporation Period").
(b) If the Stockholder receives notice of an intention by a taxing
authority to audit any return of the Stockholder that includes any item of
income, gain, deduction, loss or
-27-
<PAGE>
credit reported by the Company with respect to the S Corporation Period that the
Stockholder have reason to believe may affect the Surviving Corporation's tax
returns during the C Corporation Period, the Stockholder shall inform the
Surviving Corporation, in writing, of the audit promptly after receipt of such
notice. If the Stockholder receives notice from a taxing authority of any
proposed adjustment for which the Surviving Corporation may be required to
indemnify hereunder (a "Proposed Adjustment"), the Stockholder shall give notice
to the Surviving Corporation of the Proposed Adjustment promptly after receipt
of such notice from a taxing authority. Within twenty (20) days following its
receipt of such notice, the Surviving Corporation shall give notice to the
Stockholder of its determination as to whether it desires the Stockholder to
contest such Proposed Adjustment. Upon such request the Stockholder, at his
option and upon written notice to the Surviving Corporation within ten (10) days
after their receipt of the notice described in the preceding sentence, shall (i)
contest the Proposed Adjustment at the Surviving Corporation's expense and
permit the Surviving Corporation to participate in (but not to control) such
proceedings, or (ii) permit the Surviving Corporation to contest the Proposed
Adjustment (including pursuing all administrative and judicial appeals and
demands). The Surviving Corporation shall pay to the Stockholder on demand all
reasonable costs and expenses (including reasonable attorneys' and accountants'
fees) that the Stockholder may incur in contesting such Proposed Adjustments.
The Stockholder shall not make, accept or enter into a settlement or other
compromise, with respect to any Taxes indemnified hereunder, or forego or
terminate any proceeding undertaken hereunder without the consent of the
Surviving Corporation, which consent shall not be unreasonably withheld. The
Stockholder will reasonably assist if the Surviving Corporation contests any
Proposed Adjustment.
(c) If the Surviving Corporation receives notice of an intention by a
taxing authority to audit any return of the Surviving Corporation that includes
any item of income, gain, deduction, loss or credit reported by the Surviving
Corporation with respect to the C Corporation Period that the Surviving
Corporation has reason to believe may affect the Stockholder's tax returns
during the S Corporation Period, the Surviving Corporation shall inform the
Stockholder in writing, of the audit promptly after receipt of such notice. If
the Surviving Corporation receives notice from a taxing authority of any
proposed adjustment for which the Stockholder may be required to indemnify the
Surviving Corporation hereunder (a "Surviving Corporation Proposed Adjustment"),
the Surviving Corporation shall give notice to the Stockholder of the Surviving
Corporation Proposed Adjustment promptly after receipt of such notice from a
taxing authority. Upon receipt of such notice from the Surviving Corporation,
the Stockholder may, by in turn giving prompt written notice to the Surviving
Corporation, request that the Surviving Corporation contest such Surviving
Corporation Proposed Adjustment. If the Stockholder request that any Surviving
Corporation Proposed Adjustment be contested, then the Surviving Corporation
shall contest the Surviving Corporation Proposed Adjustment (including pursuing
all administrative and judicial appeals and processes) at the Stockholder's
expense and shall permit the Stockholder to participate in (but not to control)
such proceeding.
-28-
<PAGE>
(d) The parties shall cooperate fully with each other in all matters
relating to Taxes and in the determination of amounts payable hereunder. In the
case of disagreement as to the course of action to be pursued in dealing with
taxing authorities (including, without limitation, matters with respect to
preparation and filing of tax returns, conduct of audits, and proceedings in
courts), the decision of the party (the Surviving Corporation, on the one hand,
or the Stockholder, on the other hand) who will economically benefit from or be
burdened by the course of action (or in the case both parties benefit and/or are
burdened, the decision of the party with the greatest benefit or burden) shall
control.
SECTION 7.11. REGISTRATION RIGHTS.
(a) If at any time or times after the date hereof but prior to
the third anniversary of the Effective Time, PalEx shall determine to register
any of its securities (for itself or for any holder of securities of PalEx)
under the 1933 Act or any successor legislation (other than the Registration
Statement or a registration relating to stock option plans, employee benefit
plans or a transaction pursuant to Rule 145 under the Act), and in connection
therewith PalEx may lawfully register the PalEx Common Stock held by the
Stockholder and Main Street, PalEx will promptly give written notice thereof to
the Stockholder and Main Street and will include in such registration and effect
the registration under the 1933 Act of all Registrable Securities (as
hereinafter defined )that the Stockholder and Main Street may request in writing
by notice delivered to PalEx within 20 days after receipt by the Stockholder and
Main Street of the notice given by PalEx; PROVIDED, HOWEVER, that in connection
with any such offering by PalEx of any of its securities, no such registration
of Registrable Securities shall be required if the managing underwriter, if any,
for PalEx advises it in writing that including all or part of the Registrable
Shares in such offering will materially adversely affect the proposed offering
and jeopardize PalEx 's ability to sell its own securities in such offering. If
such managing underwriter advises PalEx that, in its opinion, part of the
Registrable Securities may be included in such offering without materially
adversely affecting the proposed offering, then PalEx shall be obligated to
include such lesser number of Registrable Securities in such offering, which
shares shall be taken from those owned and held by a group consisting of the
Stockholder, Main Street and other holders of PalEx Common Stock having
registration rights that are PARI PASSU with those of the Stockholder and Main
Street, and such limitation shall be imposed upon the Stockholder and such other
holders pro rata on the basis of the total number of shares of PalEx Common
Stock owned by the Stockholder, Main Street and such other holders or obtainable
by them upon the exercise of rights with respect to other securities owned by
them. All expenses of such registration and offering shall be borne by PalEx,
except that the Stockholder and Main Street shall bear underwriting commissions
and discounts attributable to their Registrable Securities being registered and
the fees and expenses of separate counsel, if any, for such Stockholder and Main
Street. The Stockholder and Main Street shall be entitled to an unlimited number
of registrations under this Section 7.11.
-29-
<PAGE>
(b) For the purposes of this Section 7.11, the term "Registrable
Securities" shall mean (i) the PalEx Common Stock currently held by Main Street,
(ii) PalEx Common Stock to be issued in connection with the Merger, and (iii)
any PalEx Common Stock issued or issuable with respect to the shares identified
in (i) and (ii) above by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization.
(c) Whenever, under the preceding paragraphs of this Section 7.11, PalEx
is required hereunder to register Registrable Securities, PalEx shall as
expeditiously as possible:
(i) Prepare and file with the SEC a registration statement
with respect to the Registrable Securities that complies with all
requirements of the Act;
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Act with
respect to the sale of securities covered by such registration statement
for the period necessary to complete the proposed public offering (but in
no event for a period in excess of ninety (90) days);
(iii) Furnish to Stockholder such copies of each preliminary
and final prospectus and such other documents as each such Stockholder may
reasonably request to facilitate the disposition of such Stockholder's
Registrable Securities;
(iv) Enter into an underwriting agreement with customary terms
and provisions as reasonably agreed by PalEx and the proposed underwriter,
if any, of the offering,
(v) Use its best efforts to register and qualify the
Registrable Securities covered by such registration statement under
applicable state securities or "blue-sky" laws, provided that PalEx shall
not be required in connection therewith or as a condition thereto to
qualify to do business as a foreign corporation in any such jurisdiction
wherein it is not so qualified; and
(vi) Furnish to each selling Stockholder a signed counterpart,
addressed to the Stockholder, of
(A) an opinion of counsel to PalEx, and
-30-
<PAGE>
(B) comfort letter(s) signed by the independent public
accountants who have certified PalEx's financial
statements included in the registration statement,
in each case, covering substantially the same matters with respect to the
registration statement (and the prospectus included therein) and (in the case of
the accountant's letter) with respect to events subsequent to the date of the
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountant's letters delivered to the underwriters in underwritten public
offerings of securities.
(d) PalEx shall have the right to select the managing underwriter or
underwriters for any underwritten offering made pursuant to a registration under
this Section 7.11.
(e) In connection with any underwritten offering by PalEx in which the
Stockholder participate, the Stockholder shall, if requested by the managing
underwriter or underwriters thereof, agree not to sell any of their Registrable
Securities or any other securities of PalEx owned by such Stockholder in any
transaction other than pursuant to such underwritten offering for a period
beginning 60 days prior to the date PalEx and the underwriter reasonably expect
the registration statement to become effective, and for such period after the
effective date of the registration statement as is agreed upon by the
underwriters and PalEx (not to exceed 180 days), provided that the PalEx's
officers and directors and each holder of 5% or more of PalEx's issued and
outstanding PalEx Common Stock also agree to such limitations.
(f) PalEx may delay any underwritten offering pursuant to Section 7.11
when a condition or pending transaction exists the disclosure of which would
reasonably be expected to have a material adverse effect on the proposed
offering.
(g) PalEx will indemnify Stockholder, each of its officers, directors and
partners, and each other person, if any, who controls such Stockholder within
the meaning of the Section 15 of the 1933 Act, against any losses, claims,
damages, expenses, or liabilities to which such persons may become subject under
the 1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or action in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement or any preliminary prospectus or final prospectus or
amendment or supplement thereto on the effective date thereof, or arise out of
or are based upon 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 such persons for any legal or any other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that PalEx 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 such
registration
-31-
<PAGE>
statement, or any preliminary prospectus or final prospectus or amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to PalEx through an instrument duly executed by such person
specifically for use in the preparation thereof.
It shall be a condition precedent to the obligation of PalEx to include in
any registration statement any Registrable Securities then held by a Stockholder
that PalEx shall have received an undertaking, satisfactory to it and the
managing underwriter or underwriters, from Stockholder to indemnify and hold
harmless (in the same manner and to the same extent as set forth in the
preceding paragraph) PalEx, each director of PalEx, each officer of PalEx who
shall sign such registration statement and the managing underwriter or
underwriters and any person who controls such Underwriters or PalEx within the
meaning of the 1933 Act, with respect to any statement or omission from such
registration statement, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, if such statement or omission
was made in reliance upon and in conformity with information furnished to PalEx
through an instrument duly executed by the Stockholder specifically for use in
the preparation of such registration statement, preliminary prospectus or final
prospectus or such amendment or supplement thereto.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs in this Section 7.11, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to the latter of the commencement of such action. In case any such action is
brought against an indemnified party, the indemnifying party will be entitled to
participate in and to assumed the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses incurred by the latter in connection with the
defense thereof.
SECTION 7.12. CONTRIBUTION TO COMPANY PROFIT SHARING PLAN. PalEx shall
make a one-time contribution of PalEx Common Stock to the Interstate Pallet Co.,
Inc. Profit Sharing Plan (the "Plan") concurrently with the consummation of the
IPO. PalEx shall contribute that number of shares of PalEx Common Stock with a
value equal to $75,000 based on a price per share of PalEx Common Stock equal to
the mid-point of the estimated pricing range as set forth in the preliminary
prospectus relating to the IPO, adjusted to reflect a discount of 25%. The
contribution of PalEx Common Stock shall be allocated among the Company's
employees based on the terms of the Plan.
SECTION 7.13. RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the SEC that may permit the sale of
PalEx Common Stock to the public without registration, PalEx agrees to use its
best efforts to:
-32-
<PAGE>
(i) make and keep public information regarding PalEx available as those
terms are understood and defined in Rule 144 under the 1933 Act, at all times
from and after 90 days following the effective date of the first registration
under the 1933 Act filed by PalEx for an offering of its securities to the
general public;
(ii) file with the SEC in a timely manner all reports and other documents
required of PalEx under the 1933 Act and the 1934 Act at any time after it has
become subject to such reporting requirements; and
(iii) so long as a Stockholder owns any restricted PalEx Common Stock,
furnish to each Stockholder forthwith upon written request a written statement
by PalEx as to its compliance with the reporting requirements of Rule 144 (at
any time from and after 90 days following the effective date of the first
registration statement filed by PalEx for an offering of its securities to the
general public), and of the 1933 Act and the 1934 Act (at any time after it has
become subject to such reporting requirements), a copy of the most recent annual
or quarterly report of PalEx, and such other reports and documents so filed as a
Stockholder may reasonably request in availing itself of any rule or regulation
of the SEC allowing a Stockholder to sell any such shares without registration.
SECTION 7.14. PURCHASE OF STOCKHOLDER REAL PROPERTY. The Stockholder shall
have the right during the period beginning six months after the Consummation
Date and ending twelve months after the Consummation Date to require PalEx to
purchase the real property described on SCHEDULE 9.2. Stockholder shall provide
PalEx with written notice of his intention to exercise his right under this
Section 7.14. The purchase price for the real property shall be the average fair
market value as determined by two appraisers reasonably acceptable to PalEx and
Stockholder. PalEx shall pay, in cash at closing, the lesser of the full
purchase price or $1,200,000. The portion of the purchase price in excess of
$1,200,000, if any, shall be payable in equal monthly installments over a period
of sixty months and shall bear interest at the same rate as PalEx's then current
revolving credit facility as determined on the first day of each month.
ARTICLE VIII
INDEMNIFICATION
The Stockholder and PalEx each make the following covenants:
SECTION 8.1. PALEX LOSSES.
(a) The Stockholder agrees to indemnify and hold harmless PalEx and its
directors, officers, employees, representatives, agents and attorneys from,
against and in respect of any and all PalEx Losses (as defined below) suffered,
sustained, incurred or
-33-
<PAGE>
required to be paid by any of them by reason of (i) any representation or
warranty made by the Company or the Stockholder in or pursuant to this Agreement
being untrue or incorrect in any respect; (ii) any failure by the Company or the
Stockholder to observe or perform their covenants and agreements set forth in
this Agreement or any other agreement or document executed by them in connection
with the transactions contemplated hereby; and (iii) any liability under the
1933 Act, the 1934 Act or other Federal or state law or regulation, at common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact relating to the Company or the Stockholder
contained in any preliminary prospectus, relating to the IPO, the Registration
Statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or arising out of or based upon any omission to state
therein a material fact relating to the Company or the Stockholder required to
be stated therein or necessary to make the statements therein not misleading,
and not provided to PalEx or its counsel by the Company or the Stockholder;
PROVIDED, HOWEVER, that such indemnity shall not inure to the benefit of PalEx
to the extent that such untrue statement (or alleged untrue statement) was made
in, or omission (or alleged omission) occurred in, any preliminary prospectus
and the Stockholder provided, in writing, corrected information to PalEx or its
counsel for inclusion in the final prospectus prior to distributing such
prospectus, and such information was not so included. This Section 8.1 is
intended to indemnify PalEx and its directors, officers, employees,
representatives, agents and attorneys from the results of their own negligence.
The Stockholder's obligations pursuant to this Section 8.1 shall expire one (1)
year after the Closing, except with respect to (x) obligations under Sections
4.13 and 7.10 hereof, which shall survive until the earlier of (A) the
expiration of the applicable periods (including any extensions) of the
respective statutes of limitation applicable to the payment of the Taxes or (B)
the completion of the final audit and determinations by the applicable taxing
authority and final disposition of any deficiency resulting therefrom; and (y)
solely to the extent that PalEx actually incurs liability under the 1933 Act or
the 1934 Act, the obligations under clause (iii) above shall survive until the
expiration of any applicable statute of limitations with respect to such claims.
(b) "PalEx Losses" shall mean all damages (including, without limitation,
amounts paid in settlement with the Stockholder's consent, which consent may not
be unreasonably withheld), losses, obligations, liabilities, claims,
deficiencies, costs and expenses (including, without limitation, reasonable
attorneys' fees), penalties, fines, interest and monetary sanctions, including,
without limitation, reasonable attorneys' fees and costs incurred to comply with
injunctions and other court and agency orders, and other costs and expenses
incident to any suit, action, investigation, claim or proceeding or to establish
or enforce the rights of PalEx or such other persons to indemnification
hereunder.
SECTION 8.2. STOCKHOLDER LOSSES.
-34-
<PAGE>
(a) PalEx agrees to indemnify and hold harmless the Stockholder, for and
in respect of any and all Stockholder Losses (as defined below) suffered,
sustained, incurred or required to be paid by the Stockholder by reason of (i)
any representation or warranty made by PalEx in or pursuant to this Agreement
being untrue or incorrect in any respect; (ii) any failure by PalEx to observe
or perform its covenants and agreements set forth in this Agreement or any other
agreement or document executed by it in connection with the transactions
contemplated hereby; or (iii) any liability under the 1933 Act, the 1934 Act or
other Federal or state law or regulation, at common law or otherwise, arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact relating to PalEx or any of the Founding Companies other than the
Company contained in any preliminary prospectus, the Registration Statement or
any prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact relating to PalEx or any of the Founding Companies
other than the Company required to be stated therein or necessary to make the
statements therein not misleading. This Section 8.2 is intended to indemnify the
Stockholder from the results of his own negligence. PalEx's obligations under
this Section 8.2 shall expire one year after Closing, except that, if the
Stockholder actually incur liability under the 1933 Act or the 1934 Act, the
obligations under clause (iii) above shall survive until the expiration of any
applicable statute of limitations with respect to such claims.
(b) "Stockholder's Losses" shall mean all damages (including, without
limitation, amounts paid in settlement with the consent of PalEx, which consent
may not be reasonably withheld), losses, obligations, liabilities, claims,
deficiencies, costs and expenses (including, without limitation, reasonable
attorneys' fees), penalties, fines, interest and monetary sanctions, including,
without limitation, reasonable attorneys' fees and costs incurred to comply with
injunctions and other court and agency orders, and other costs and expenses
incident to any suit, action, investigation, claim or proceeding or to establish
or enforce the right of the Stockholder to indemnification hereunder.
SECTION 8.3. NOTICE OF LOSS. A notice setting forth in reasonable detail
the breach or other matter which is asserted shall be promptly given to the
Indemnifying Party (as defined below) and, if such matter arises out of a suit,
action, investigation, proceeding or claim, such notice shall be given within
thirty (30) days after the Indemnified Party (as defined below) has knowledge of
the matter. The failure of the Indemnified Party to give notice hereunder shall
not release the Indemnifying Party from its obligations under this Article VIII,
except to the extent the Indemnifying Party is actually prejudiced by such
failure to give prompt notice. With respect to PalEx Losses, the Stockholder
shall be the Indemnifying Party and PalEx and its respective directors,
officers, employees, representatives, agents and attorneys shall be the
Indemnified Parties. With respect to Stockholder Losses, PalEx shall be the
Indemnifying Party and the Stockholder shall be the Indemnified Party.
-35-
<PAGE>
SECTION 8.4. RIGHT TO DEFEND. Upon receipt of notice of any matter for
which indemnification might be claimed by an Indemnified Party, the Indemnifying
Party shall be entitled to defend, contest or otherwise protect against any such
matter at its own cost and expense, and the Indemnified Party must cooperate in
any such defense or other action. The Indemnified Party shall have the right,
but not the obligation, to participate at its own expense in defense thereof by
counsel of its own choosing, but the Indemnifying Party be entitled to control
the defense unless the Indemnified Party has relieved the Indemnifying Party
from liability with respect to the particular matter or the Indemnifying Party
fails to assume defense of the matter. In the event the Indemnifying Party shall
fail to defend, contest or otherwise protect in a timely manner against any
matter, the Indemnified Party shall have the right, but not the obligation,
thereafter to defend, contest or otherwise protect against the same and make any
compromise or settlement thereof and recover the reasonable cost thereof from
the Indemnifying Party including, without limitation, reasonable attorneys'
fees, disbursements and all amounts paid as a result of such suit, action,
investigation, claim or proceeding or the compromise or settlement thereof;
provided, however, that the Indemnified Party must send a written notice to the
Indemnifying Party of any such proposed settlement or compromise, which
settlement or compromise the Indemnifying Party may reject, in its reasonable
judgment, within ten (10) days of receipt of such notice. Failure to reject such
notice within such ten (10) day period shall be deemed an acceptance of such
settlement or compromise. The Indemnified Party shall have the right to effect a
settlement or compromise over the objection of the Indemnifying Party; provided,
that if (i) the Indemnifying Party is contesting such claim in good faith or
(ii) the Indemnifying Party has assumed the defense from the Indemnified Party,
the Indemnified Party waives any right to indemnity therefor. If the
Indemnifying Party undertakes the defense of such matters, the Indemnified Party
shall not, so long as the Indemnifying Party does not abandon the defense
thereof, be entitled to recover from the Indemnifying Party any legal or other
expenses subsequently incurred by the Indemnified Party in connection with the
defense thereof other than the reasonable costs of investigation undertaken by
the Indemnified Party with the prior written consent of the Indemnifying Party.
SECTION 8.5. COOPERATION. Each of PalEx, the Company and the Stockholder
and each of their affiliates, successors and assigns shall cooperate with each
other in the defense of any suit, action, investigation, proceeding or claim by
a third party and, during normal business hours, shall afford each other access
to their books and records and employees relating to such suit, action,
investigation, proceeding or claim and shall furnish each other all such further
information that they have the right and power to furnish as may reasonably be
necessary to defend such suit, action, investigation, proceeding or claim.
SECTION 8.6. EXCLUSIVE REMEDY. The indemnification provided for in this
Article III shall be the exclusive remedy in any action seeking damages or any
other form of monetary relief brought by any party to this Agreement against
another party, provided
-36-
<PAGE>
that, nothing herein shall be construed to limit the right of a party, in a
proper case, to seek injunctive relief for a breach of this Agreement.
SECTION 8.7. LIMITATION UPON INDEMNITY.
(a) Neither the Stockholder nor PalEx shall be entitled to indemnification
from the other under the provisions of this Article VIII until such time as the
claims subject to indemnification by such party exceed, in the aggregate,
Forty-Eight Thousand Dollars ($48,000) (the "Indemnity Deductible").
(b) The aggregate indemnification obligations of the Stockholder under
this Article VIII shall be limited to the obligations in excess of the Indemnity
Deductible but not more than Four Million Eight Hundred Thousand Dollars
($4,800,000); PROVIDED, HOWEVER, if the per share price of the PalEx Common
Stock is less than the per share price of the PalEx Common Stock issued in the
IPO, the foregoing limit on indemnity obligations shall be reduced by the
difference in such prices multiplied by the number of shares of PalEx Common
Stock issued to the Stockholder pursuant to this Agreement.
ARTICLE IX
CLOSING CONDITIONS
SECTION 9.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger shall be subject
to the fulfillment at or prior to the Closing Date and continued fulfillment as
of the Consummation Date of the following conditions:
(a) the Underwriting Agreement related to the IPO shall have been
executed;
(b) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding for
that purpose shall have been instituted by the SEC or any state regulatory
authorities;
(c) no preliminary or permanent injunction or other order or decree by any
federal or state court which prevents the consummation of the IPO or the Merger
shall have been issued and remain in effect;
(d) no action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency in the United States which would prevent the consummation of the Merger
or make the consummation of the Merger illegal; and
-37-
<PAGE>
(e) all material governmental and third party waivers, consents, orders
and approvals required for the consummation of the Merger and the transactions
contemplated hereby shall have been obtained and be in effect.
SECTION 9.2. CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER.
Unless waived by the Company, the obligation of the Company to effect the Merger
shall be subject to the fulfillment at or prior to the Closing Date and
continued fulfillment as of the Consummation Date of the following additional
conditions:
(a) PalEx and Subsidiary shall have performed in all material respects
their agreements contained in this Agreement required to be performed on or
prior to the Closing Date and the representations and warranties of PalEx and
Subsidiary contained in this Agreement shall be true and correct in all material
respects on and as of the date made and on and as of the Closing Date as if made
at and as of such date, and the Company shall have received a certificate of the
chief executive officer of PalEx and Subsidiary to that effect;
(b) no governmental authority shall have promulgated any statute, rule or
regulation which, when taken together with all such promulgations, would
materially impair the value to the Stockholder of the Merger;
(c) the Company shall have received an opinion from the legal or
accounting advisors of PalEx, at the expense of PalEx, that the Merger will
constitute a tax-free transaction under Section 351 of the Code to the extent of
PalEx Common Stock received by the Stockholders, in which regard the Company and
the Stockholder shall provide representations reasonably required by such
advisors in providing such opinion;
(d) PalEx shall upon consummation of the Merger enter into a lease with
the Stockholder for the real property described in SCHEDULE 9.2. The lease shall
be for an initial term of five years with an option to renew for an additional
five years. The rental shall be fair market rate to be adjusted upon the
exercise of the option to extend the term.; and
(e) All conditions to the merger of the other Founding Companies, on
substantially the same terms as provided herein, with subsidiaries of PalEx
shall have been satisfied or waived by the applicable party.
SECTION 9.3. CONDITIONS TO OBLIGATIONS OF PALEX TO EFFECT THE MERGER.
Unless waived by PalEx, the obligations of PalEx to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the additional
following conditions:
(a) the Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and
-38-
<PAGE>
the representations and warranties of the Company contained in this Agreement
shall be true and correct in all material respects on and as of the date made
and on and as of the Closing Date as if made at and as of such date, and PalEx
shall have received a Certificate of the President or Vice President - Finance
of the Company to that effect;
(b) the Stockholder shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of the Stockholder
contained in this Agreement shall be true and correct in all material respects
on and as of the date made and on and as of the Closing Date as if made at and
as of such date, and PalEx shall have received a Certificate of each Stockholder
to that effect;
(c) PalEx shall have received an opinion from Cantor, Arkema & Edmonds,
special counsel to the Company, dated the Closing Date, reasonably satisfactory
to PalEx and covering the due incorporation of the Company, the binding nature
of this Agreement, the effectiveness of the Merger and the validity of the
Company Stock to be exchanged in the Merger and certain other customary matters
reasonably requested by PalEx or its counsel;
(d) PalEx shall have received "COMFORT" letters in customary form from the
Company's independent public accountants, dated the effective date of the
Registration Statement and the Closing Date (or such other date reasonably
acceptable to PalEx) with respect to certain financial statements and other
financial information included in the Registration Statement and any subsequent
changes in specified balance sheet and income statement items, including total
assets, working capital, total stockholder' equity, total revenues and the total
and per share amounts of net income;
(e) no governmental authority shall have promulgated any statute, rule or
regulation which, when taken together with all such promulgations, would
materially impair the value to PalEx of the Merger; and
(f) the Stockholder and the Company shall have received, prior to the
Closing Date, a binding written waiver of any noncompetition or noncompete
restrictions to which the Stockholder or the Company may be subject and which
may, in the opinion of PalEx, have a material adverse effect on PalEx or the
Surviving Corporation.
-39-
<PAGE>
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1. TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date under the following conditions:
(a) The Company shall have the right to terminate this Agreement:
(i) if the Merger is not completed by April 1, 1997 otherwise
than on account of delay or default on the part of the Company or the
Stockholder or any of their affiliates or associates;
(ii) if the Merger is enjoined by a final, unappealable court
order not entered at the request or with the support of the Company or the
Stockholder or any of their affiliates or associates;
(iii) if PalEx or Subsidiary (A) fails to perform in any
material respect any of their respective material covenants in this Agreement
and (B) does not cure such default in all material respects within 30 days after
written notice of such default is given to PalEx and Subsidiary; or
(iv) if PalEx fails to complete its acquisitions of Fraser or
Ridge.
(b) PalEx shall have the right to terminate this Agreement:
(i) if the Merger is not completed by April 1, 1997 otherwise
than on account of delay or default on the part of PalEx or any of its
stockholders or any of their affiliates or associates;
(ii) if the Merger is enjoined by a final, unappealable court
order not entered at the request or with the support of PalEx or any of
its 5% stockholders or any of their affiliates or associates;
(iii) if the Company (A) fails to perform in any material
respect any of its material covenants in this Agreement and (B) does not
cure such default in all material respects within 30 days after written
notice of such default is given to the Company by PalEx;
(iv) if the Stockholder (A) fails to perform in any material
respect any of their material covenants in this Agreement and (B) does not
cure such default in all material respects within 30 days after written
notice of such default is given to the Stockholder by PalEx; or
-40-
<PAGE>
(v) If PalEx fails to complete its acquisitions of Fraser or
Ridge.
SECTION 10.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement by either PalEx or the Company, as provided in Section 10.1, this
Agreement shall forthwith become void and there shall be no further obligation
on the part of the Company, Subsidiary, PalEx or their respective officers or
directors (except the obligations set forth in this Section 10.2 and in Sections
7.1, 7.3 and 7.5, all of which shall survive the termination). Nothing in this
Section 10.2 shall relieve any party from liability for any breach of this
Agreement.
SECTION 10.3. AMENDMENT. This Agreement may not be amended except by
action taken by the parties' respective Boards of Directors or duly authorized
committees thereof and then only by an instrument in writing signed on behalf of
each of the parties hereto and in compliance with applicable law.
SECTION 10.4. WAIVER. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant thereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE XI
SECURITIES ACT REPRESENTATIONS AND TRANSFER RESTRICTIONS
The PalEx Common Stock to be acquired by the Stockholder pursuant to
this Agreement is being acquired solely for such Stockholder's own account, for
investment purposes only, and with no present intention of distributing, selling
or otherwise disposing of it in connection with a distribution.
SECTION 11.1. ECONOMIC RISK; SOPHISTICATION. The Stockholder represents
and warrants to PalEx that he or she is an "accredited investor" as defined in
Regulation D promulgated under the 1933 Act; that he or she is able to bear the
economic risk of an investment in the PalEx Common Stock acquired pursuant to
this Agreement and can afford to sustain a total loss of such investment and has
such knowledge and experience in financial and business matters that he or she
is capable of evaluating the merits and risks of the proposed investment in the
PalEx Common Stock; and that he has had an adequate opportunity to ask questions
and receive answers from the officers of PalEx concerning any and all matters
relating to the transactions described herein including,
-41-
<PAGE>
without limitation, the background and experience of the current and proposed
officers and directors of PalEx, and the plans for the operations of the
business of PalEx.
SECTION 11.2. TRANSFER RESTRICTIONS.
(a) Except for transfers to immediate family members who agree to be bound
by the restrictions set forth in this Section 11.2 (or trusts for the benefit of
the Stockholder or family members, the trustees of which so agree), and except
for sales in accordance with Section 7.11, for a period of two (2) years from
the Closing, the Stockholder shall not (a) sell, assign, exchange, transfer,
encumber, pledge, distribute or otherwise dispose of (i) any shares of PalEx
Common Stock received by the Stockholder in the Merger, or (ii) any interest
(including, without limitation, an option to buy or sell) in any such shares of
PalEx Common Stock, in whole or in part, and no such attempted transfer shall be
treated as effective for any purpose; or (b) engage in any transaction, whether
or not with respect to any shares of PalEx Common Stock or any interest therein,
the intent or effect of which is to reduce the risk of owning the shares of
PalEx Common Stock acquired pursuant to Section 2.2 hereof (including, by way of
example and not limitation, engaging in put, call, short-sale, straddle or
similar market transactions). The certificates evidencing the PalEx Common Stock
delivered to the Stockholder pursuant to Section 2.2 of this Agreement will bear
a legend substantially in the form set forth below and containing such other
information as PalEx may deem necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT
TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE,
PLEDGE, DISTRIBUTION OR OTHER DISPOSITION, PRIOR TO_____________, 1999.
UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER
AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH
THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE.
(b) Main Street will execute an agreement to restrict the transfer of its
shares of PalEx Common Stock in a manner identical to the restrictions included
in this Article XI.
ARTICLE XII
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
At the Closing, the Stockholder shall execute and deliver an employment
and noncompetition agreement substantially in the form of Exhibit 12 and Main
Street shall execute a noncompetition agreement with substantially the same
terms.
-42-
<PAGE>
ARTICLE XIII
GENERAL PROVISIONS
SECTION 13.1. BROKERS. The Company represents and warrants that no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
(except for the fee described in SCHEDULE 13.1) or commission in connection with
the Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company. PalEx represents and warrants
that no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the Merger or the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of PalEx or its stockholders (other than underwriting discounts and
commission to be paid in connection with the IPO).
SECTION 13.2. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested) or sent via facsimile to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to PalEx or Subsidiary, to:
Vance K. Maultsby, Jr.
Chief Executive Officer
3555 Timmons Lane, Suite 610
Houston, Texas 77027
with a copy to:
John Wombwell, Esq.
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
(b) If to the Company, to:
Interstate Pallet Co., Inc.
3707 Nine Mile Road
Richmond, VA 23223
Attention: Stephen C. Sykes
-43-
<PAGE>
with a copy to:
Steven M. Edmonds, Esq.
Cantor, Arkema & Edmonds
823 East Main Street
Richmond, Virginia 23219
SECTION 13.3. INTERPRETATION. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement, unless a contrary intention
appears, (i) the words "HEREIN", "HEREOF" and "HEREUNDER" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision and (ii) reference to any Article or
Section means such Article or Section hereof. No provision of this Agreement
shall be interpreted or construed against any party hereto solely because such
party or its legal representative drafted such provision.
SECTION 13.4. MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof and
(b) shall not be assigned by operation of law or otherwise, except that PalEx
may assign this Agreement to any other wholly-owned subsidiary of PalEx. THIS
AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION
AND EFFECT, BY THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO CONTRACTS
EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE.
SECTION 13.5. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 13.6. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and except as set forth in
Section 8.1(a), nothing in this Agreement, express or implied, is intended to
confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
-44-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as
of the date first written above.
MAIN STREET CAPITAL PALEX, INC.
PARTNERS, L.P.
By: Main Street Advisory Partners, L.P. By: _____________________
Name: Vance K. Maultsby, Jr.
By: Main Street Merchant Partners, L.L.C. Title:Chief Executive Officer
By: _________________________ INTERSTATE ACQUISITION CORPORATION
Name: Sam W. Humphreys
Title: Managing Director
By: _____________________
Name: Vance K. Maultsby, Jr.
Title:Chief Executive Officer
INTERSTATE PALLET CO., INC.
By: _____________________
Name: Stephen C. Sykes
Title:Chief Executive Officer
_______________________________
Stephen C. Sykes, Individually
-45-
<PAGE>
SCHEDULE 2.1
MANNER OF CONVERSION
At the Closing, the Stockholder shall receive the Cash Component (as
defined below) and the Interstate Stock Component (as defined below). For
purposes of the Agreement, the terms Reference Value Offset Amount, Adjusted
Indebtedness, Cash Component and Interstate Stock Component shall have the
following meanings:
(a) Reference Value Offset Amount shall mean (i) the Cash Component equal
to $1,200,000 less the amount of the Adjusted Indebtedness (defined below)
payable to the Interstate Stockholder from the proceeds of the IPO, and
(ii) assumption of the Adjusted Indebtedness (defined below).
(b) Adjusted Indebtedness shall mean the result obtained by subtracting
from the Company's total indebtedness as of the Closing Date indebtedness
(i) incurred and cash expenditures made after July 31, 1996 specifically
to fund capital expenditures after such date, (ii) attributable to
wood-waste storage bins and a nailing machine purchased in June 1996 and
(iii) attributable to a debt owed to the Stockholder in the amount of
$343,000.
(c) Interstate Stock Component shall mean the number of shares of PalEx
Common Stock to be received by the Interstate Stockholder upon
consummation of the Merger, which shall be determined by applying the
following formula:
Interstate Stock Reference Value
Interstate Stock Component = 6,000,000 x --------------------------------
Sum of Fraser, Ridge and
Interstate Stock Reference
Values
WHERE the Founding Companies Stock Reference Values will be
determined by subtracting from each Founding Company's Enterprise
Value ($36 million for Fraser and Ridge, $4.8 million for
Interstate) each Founding Company's Reference Value Offset Amount.
Each of the Founding Companies shall have the right to reduce their
respective Stock Component calculated above by returning shares of PalEx Common
Stock. The Founding Company shall receive 2.77778 options to purchase PalEx
Common Stock at the IPO price for each share of PalEx Common Stock returned. The
reduction of the Stock Component by a Founding Company shall not affect the
Stock Component of the other Founding Companies which shall be calculated as if
such reduction had not occurred.
A Founding Company shall exercise such right to return stock by written
notice to PalEx no later than 3 (three) days prior to the printing of the
Preliminary Prospectus in connection with the IPO.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> MAR-02-1997
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 3,463
<ALLOWANCES> (57)
<INVENTORY> 3,431
<CURRENT-ASSETS> 6,843
<PP&E> 7,280
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,273
<CURRENT-LIABILITIES> 5,111
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 7,822
<TOTAL-LIABILITY-AND-EQUITY> 14,273
<SALES> 12,405
<TOTAL-REVENUES> 12,405
<CGS> 10,543
<TOTAL-COSTS> 11,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 597
<INCOME-TAX> 0
<INCOME-CONTINUING> 597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 597
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
