<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 11, 1998
PALEX, INC.
(Exact name of registrant as specified in its charter)
Delaware 000-22237 76-0520673
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1360 Post Oak Boulevard, Suite 800
Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 350-6030
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 11, 1998, a wholly owned subsidiary ("Newco") of PalEx, Inc.
(the "Company") acquired in a single transaction all the outstanding capital
stock of SMG Corporation, an Ontario corporation ("Superior"). Superior is the
leading pallet rental company in Canada, with 10 locations in nine cities across
Canada. It owns and manages a pallet pool currently consisting of over 1.3
million pallets, which are primarily leased to Canadian Pallet Council ("CPC")
members. The CPC is a cooperative that provides access to a pool of distinctive
orange pallets which are used by CPC members. Superior owns the largest pool of
CPC pallets (approximately 16.3% of the total pool) and provides a total pallet
management solution to CPC members by providing or managing the pallet purchase,
rental, repair, recycling, recovery and logistics functions for CPC members and
other customers.
The terms of the acquisitions of Superior were the result of arms'-length
negotiations. The aggregate consideration for the outstanding capital stock of
Superior consisted of (a) 720,732 shares of Non-Voting Exchangeable Common
Shares of Newco, which shares are exchangeable for an equal number of shares of
the Company's Common Stock at the option of the holders of such shares and at
the option of the Company upon the occurrence of certain events, and (b)
approximately $17.2 million in cash, which was funded under the Company's
syndicated credit facility, the agent of which is Bank One, Texas, NA.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of businesses acquired.
The financial statements required by this item will be filed by amendment
not later than November 25, 1998.
(b) Pro forma financial information.
The pro forma financial information required by this item will be filed by
amendment not later than November 25, 1998.
2
<PAGE>
(c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------ -------------
2.1 Share Purchase Agreement dated as of September 11, 1998, by and
among (a) PalEx, Inc., a Delaware corporation (the "Company"), (b)
1313530 Ontario Inc., an Ontario corporation that is
wholly owned by the Company, and (c) 1271477 Ontario Limited,
Rollem Holdings Inc., 1271478 Ontario Limited, 1296288 Ontario
Limited, Save On Pallets Ltd., Pallet Management Services Inc., The
David E. Turner Family Trust II, The David E. Turner Family Trust
III, The Enrico DiLello Family Trust II, The Enrico DiLello Family
Trust III, The Worden Teasdale Family Trust, The Fraser Campbell
Family Trust II, The Fraser Campbell Family Trust III, The John F.
Campbell Family Trust II, The John F. Campbell Family Trust, The
Ronald Doering Family Trust, Fraser Campbell, John F. Campbell,
Enrico DiLello, Ronald Doering, Susan Virginia Teasdale, Worden
Teasdale, Clint Sharples and David E. Turner*
- ----------------
*Copies of omitted schedules and exhibits shall be furnished supplementally
to the Commission upon request.
3
<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 hereunto duly authorized.
PALEX, INC.
Date: September 23, 1998 By: /s/ Edward Rhyne
----------------------------
Edward Rhyne
Vice President and General Counsel
4
<PAGE>
EXHIBIT 2.1
SHARE PURCHASE AGREEMENT
BY AND AMONG
PALEX, INC.,
1313530 ONTARIO INC.
AND
THE SHAREHOLDERS OF SMG CORPORATION
DATED AS OF SEPTEMBER 11, 1998
<PAGE>
<TABLE>
<S> <C>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS
1.1. Definitions 1
1.2. Interpretation 5
ARTICLE II
SALE AND TRANSFER OF COMPANY SHARES; PURCHASE PRICE
2.1. Sale and Transfer of Company Shares 6
2.2. Payment of Purchase Price; Exchange of Share Certificates 6
ARTICLE III
CLOSING
3.1. Closing 7
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
4.1. Incorporation of Corporate Shareholders 7
4.2. Organization of the Company and Subsidiaries 7
4.3. Corporate Records 8
4.4. Authorization; Non-Contravention; Approvals 8
4.5. Ownership of Company Shares 9
4.6. Residence of Shareholders 9
4.7. Bankruptcy 9
4.8. Financial Statements 9
4.9. Liabilities and Obligations 10
4.10. Accounts and Notes Receivable 10
4.11. Assets 11
4.12. Material Customers, Contracts 11
4.13. Permits 12
4.14. Environmental Matters 13
4.15. Collective Agreements. 14
4.16. Insurance 15
4.17. Compensation; Employment Agreements 15
4.18. Noncompetition, Confidentiality and Nonsolicitation Agreements 15
4.19. Employee Plans 15
4.20. Litigation and Compliance with Law 17
4.21. Taxes 17
4.22. Absence of Changes 19
4.23. Accounts with Banks and Brokerages; Powers of Attorney 20
4.24. Competing Lines of Business; Related-Party Transactions 21
4.25. Product Warranties 21
4.26. Intangible Property 21
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.27. Contract A 21
4.28. Inventory of CPC Pallets 21
4.29. Restructuring 21
4.30. OSA 22
4.31. Disclosure 22
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PALEX AND NEWCO
5.1. Organization 22
5.2. Authorization; Non-Contravention; Approvals 22
5.3. Capitalization of Newco; Newco Exchangeable Shares 23
5.4. PalEx Common Stock 23
5.5. Litigation 23
5.6. Disclosure 23
ARTICLE VI
CERTAIN COVENANTS
6.1. Future Cooperation; Tax Matters 24
6.2. Expenses 24
6.3. Employment Agreement 24
6.4. Legal Opinion 25
6.5. Stock Option Plan 25
6.6. Support Agreement 25
6.7. Non-Competition Agreement 25
6.8. Termination of Shareholders' Agreements 25
6.9. Restructuring of the Company and its Affiliates 25
6.10. Release From Guarantees 25
6.11. Investment Canada Act Notice 25
6.12. Resignations 25
6.13. Releases and Waivers 26
6.14. Other PalEx and Newco Documents 26
ARTICLE VII
INDEMNIFICATION
7.1. General Indemnification by the Shareholders 26
7.2. Indemnification by PalEx 27
7.3. Third Person Claims 27
7.4. Indemnification Deductible 28
7.5. Limitation Upon Indemnity 28
7.6. Indemnification for Negligence of Indemnitee 28
ARTICLE VIII
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
8.1. General 28
8.2. Equitable Relief 29
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX
FEDERAL SECURITIES LAWS AND CONTRACTUAL RESTRICTIONS ON NEWCO
EXCHANGEABLE SHARES AND PALEX COMMON STOCK
9.2. Economic Risk; Sophistication 29
9.3. Restriction on Sale or Other Transfer of Restricted Stock 30
9.4. Rule 144 Reporting 31
ARTICLE X
MISCELLANEOUS
10.1. Successors and Assigns 31
10.2. Entire Agreement 31
10.3. Counterparts 31
10.4. Brokers and Agents 32
10.5. Notices 32
10.6. Attornment 33
10.7. Governing Law 34
10.8. Survival of Representations and Warranties 34
10.9. Exercise of Rights and Remedies 34
10.10. Reformation and Severability 34
10.11. Canadian Dollar Payments 34
10.12. Language 35
</TABLE>
iii
<PAGE>
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT (together with the Schedules hereto, this
"Agreement") is made as of the 11th day of September, 1998, by and among (a)
PalEx, Inc., a Delaware corporation (""PalEx"), (b) 1313530 Ontario Inc.
("Newco"), an Ontario corporation that is wholly owned by PalEx, and (c) 1271477
Ontario Limited, Rollem Holdings Inc., 1271478 Ontario Limited, 1296288 Ontario
Limited, Save On Pallets Ltd., Pallet Management Services Inc., The David E.
Turner Family Trust II, The David E. Turner Family Trust III, The Enrico DiLello
Family Trust II, The Enrico DiLello Family Trust III, The Worden Teasdale Family
Trust, The Fraser Campbell Family Trust II, The Fraser Campbell Family Trust
III, The John F. Campbell Family Trust II, The John F. Campbell Family Trust,
The Ronald Doering Family Trust, Fraser Campbell, John F. Campbell, Enrico
DiLello, Ronald Doering, Susan Virginia Teasdale, Worden Teasdale, Clint
Sharples and David E. Turner (the entities and individuals identified in this
clause (c) being collectively referred to as the "Shareholders"), which entities
and individuals directly own, or have indirect interests in, all the outstanding
capital stock of SMG Corporation, an Ontario corporation (together with its
predecessors, the "Company").
WHEREAS, Newco desires to purchase from the Shareholders, and the
Shareholders desire to sell to Newco, the Company Shares (as hereinafter
defined);
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants contained
herein, the parties hereto, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. Capitalized terms used in this Agreement shall have the
following meanings:
"Affiliate" of, or "Affiliated" with, a specified Person means a Person
that directly, or indirectly, controls, or is controlled by, or is under common
control with, the specified Person. A Person shall be deemed to control another
Person if such Person possesses, directly or indirectly, the power to direct or
cause the direction of the management or policies of such other Person, whether
through the ownership of voting securities, by contract or otherwise; and the
term "controlled" shall have a similar meaning.
"Agreement" has the meaning set forth in the first paragraph of this
Agreement.
"Applicable Employee Benefit Laws" has the meaning set forth in Section
4.19.
"Balance Sheet Date" has the meaning set forth in Section 4.8.
"Closing" has the meaning set forth in Section 3.1.
<PAGE>
"Closing Date" has the meaning set forth in Section 3.1.
"Company" has the meaning set forth in the first paragraph of this
Agreement.
"Company Shares" has the meaning set forth in Section 4.5.
"Contract A" has the meaning set forth in Section 4.27.
"Corporate Shareholder" means each Shareholder that is not a natural Person
or a trust.
"DiLello Shareholders" means Enrico DiLello, The Enrico DiLello Family
Trust II, The Enrico DiLello Family Trust III and Rollem Holdings Inc.
"Doering Shareholders" means Ronald Doering, The Ronald Doering Family
Trust, Save ON Pallets Ltd. and Pallet Management Services Inc.
"Employee Plans" has the meaning set forth in Section 4.19.
"Employment Agreements" has the meaning set forth in Section 6.3.
"Encumbrances" means liens, charges, pledges, options, mortgages,
hypothecs, prior assignments, leases, subleases, rights to possession, deeds of
trust, security interests, claims, rights or restrictions (whether on voting,
sale, transfer, disposition or otherwise), licenses, sublicenses, easements and
other encumbrances of every type and description, whether imposed by law,
agreement, undertaking or otherwise.
"Environmental Laws" means any applicable Law in respect of the natural
environment, public or occupational health or safety, and the manufacture,
importation, handling, transportation, storage, disposal and treatment of
Hazardous Substances.
"Environmental Permits" means all Permits issued or required by any
Environmental Laws or any court or governmental authority that relate to or are
required for the ownership and/or operation of the businesses of the Company or
any Subsidiary and its assets.
"Expiration Date" has the meaning set forth in Section 10.8.
"Financial Statements" has the meaning set forth in Section 4.8.
"Fraser Campbell Shareholders" means Fraser Campbell, The Fraser Campbell
Family Trust II, The Fraser Campbell Family Trust III, 1271478 Ontario Limited
and Clint Sharples.
"GAAP" means those accounting principles that are recognized as being
generally accepted in Canada from time to time as set out in the handbook
published by the Canadian Institute of Chartered Accountants, consistently
applied.
2
<PAGE>
"Governmental Authority" means any federal, provincial, local or foreign
government, political subdivision or governmental or regulatory authority,
agency, board, bureau, commission, instrumentality or court or quasi-
governmental authority.
"Hazardous Substances" means any solid, liquid, gas, odour, heat, sound,
vibration, radiation or combination of them that may impair the natural
environment, injure or damage property or plant or animal life or harm or impair
the health of any individual.
"Indemnified Party" has the meaning set forth in Section 7.3.
"Indemnifying Party" has the meaning set forth in Section 7.3.
"Interim Balance Sheet" has the meaning set forth in Section 4.8.
"Interim Financial Statements" has the meaning set forth in Section 4.8.
"ITA" means the Income Tax Act (Canada).
"John Campbell Shareholders" means John F. Campbell, The John F. Campbell
Family Trust, The John F. Campbell Family Trust II and 1296288 Ontario Limited.
"Law" or "Laws" means any and all provincial, municipal or foreign
statutes, treaties, laws, ordinances, proclamations, code, regulations,
licenses, permits, authorizations, approvals, consents, legal doctrine,
published requirements, orders, decrees, judgments, injunctions and rules of any
Governmental Authority, including, without limitation, those covering
environmental, Tax, energy, safety, health, transportation, bribery,
recordkeeping, zoning, discrimination, antitrust and wage and hour matters, in
each case as amended and in effect from time to time. Such term also includes,
where appropriate, any interpretation of the Law (or any part thereof) by any
Person having jurisdiction over it, or charged with its administration or
interpretation.
"Loss" or "Losses" means all liabilities, losses, claims, damages, actions,
suits, proceedings, demands, assessments, adjustments, fees, costs and expenses
(including specifically, but without limitation, reasonable attorneys' fees and
expenses of investigation).
"Material Customers" has the meaning set forth in Section 412.
"Newco" has the meaning set forth in the first paragraph of this Agreement.
"Newco Common Shares"means the common shares of Newco having the attributes
described in Schedule 1.1(a).
"Newco Exchangeable Shares" means the non-voting exchangeable common shares
of Newco having the attributes described in Schedule 1.1(b).
"1934 Act"means the Securities Exchange Act of 1934, as amended.
3
<PAGE>
"1933 Act" means the Securities Act of 1933, as amended.
"Original Exchange Rate" has the meaning set forth in Section 10.11.
"PalEx" has the meaning set forth in the first paragraph of this Agreement.
"PalEx Common Stock" means the Common Stock, U.S. $.01 par value, of PalEx.
"Payee" has the meaning set forth in Section 10.11.
"Payor" has the meaning set forth in Section 10.11.
"Permitted Encumbrances" means (a) any Encumbrances reserved against in the
Interim Balance Sheet, (b) Encumbrances for Taxes not yet due and payable or
which are being contested in good faith and by appropriate proceedings if
adequate reserves with respect thereto are maintained on the Company's books in
accordance with GAAP, and (c) obligations under operating and capital leases
described in Schedule 4.12.
"Permits" has the meaning set forth in Section 4.13.
"Person" is to be broadly interpreted and includes an individual, a
corporation, a partnership, a trust, an unincorporated organization, any
Governmental Authority, and the executors, administrators or other legal
representatives of an individual in such capacity.
"Plan" has the meaning set forth in Section 4.19.
"Purchase Price" has the meaning set forth in Section 2.2.
"Release" includes, without limitation, an actual or potential discharge,
deposit, spill, leak, pumping, pouring, emission, emptying, injection, escape,
leaching, seepage or disposal of a Hazardous Substance which is or may be in
breach of any Environmental Laws.
"Restricted Shares" has the meaning set forth in Section 9.1.
"Restructuring" has the meaning set forth in Section 6.9.
"Rule 144" means Rule 144 as promulgated under the 1933 Act.
"SEC" means the Securities and Exchange Commission.
"Shareholder" means any one of the Shareholders.
"Shareholders" has the meaning set forth in the first paragraph of this
Agreement.
"Subsidiaries" means the corporations listed on Schedule 4.2 other than the
Company.
4
<PAGE>
"Taxes" means all taxes, charges, fees, levies, imposts and other
assessments, including all income, sales, use, goods and services, value added,
capital, capital gains, alternative, net worth, transfer, profits, withholding,
payroll, employer health, excise, franchise, provincial, real property and
personal property taxes, and any other taxes, customs duties, fees, assessments
or similar charges in the nature of a tax including Canada Pension Plan and
provincial pension plan contributions, employment insurance payments and
workers' compensation premiums, together with any instalments with respect
thereto, and any interest, fines and penalties imposed by any Governmental
Authority (including federal, state, provincial, municipal and foreign
Governmental Authorities), and whether disputed or not.
"Teasdale Shareholders" means Worden Teasdale, Susan Virginia Teasdale and
The Worden Teasdale Family Trust.
"Third Person" has the meaning set forth in Section 7.3.
"Turner Shareholders" means David E. Turner, The David E. Turner Family
Trust II, The Dave E. Turner Family Trust III and 1271477 Ontario Limited.
"Year-End Financial Statements has the meaning set forth in Section 4.8.
1.2 INTERPRETATION. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in Sections 1.1 and 1.2 and elsewhere in this
Agreement include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the
meanings ascribed to them in accordance with GAAP;
(c) 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;
(d) any reference in this Agreement to any statute or any section
thereof shall, unless otherwise expressly stated, be deemed to be a
reference to such statute or section as amended, restated or re-enacted
from time to time;
(e) the division of this Agreement into articles, sections,
paragraphs, subsections and clauses and the insertion of headings are for
convenience of reference only and shall not affect the construction or
interpretation of this Agreement;
(f) unless there is something in the subject matter or context
inconsistent therewith:
5
<PAGE>
(i) words in the singular number include the plural and such
words shall be construed as if the plural had been used;
(ii words in the plural include the singular and such words
shall be construed as if the singular had been used; and
(ii words importing the use of any gender shall include all
genders where the context or party referred to so requires,
and the rest of the sentence shall be construed as if the
necessary grammatical and terminological changes had been
made; and
(g) time shall be of the essence in this Agreement.
ARTICLE II
SALE AND TRANSFER OF COMPANY SHARES; PURCHASE PRICE
2.1 SALE AND TRANSFER OF COMPANY SHARES. Subject to the terms and
conditions of this Agreement, at the Closing, the Shareholders shall sell,
convey and deliver to Newco, and Newco shall purchase and accept from the
Shareholders, all of the right, title and interest of the Shareholders in and to
the Company Shares, free and clear of all Encumbrances.
2.2 PAYMENT OF PURCHASE PRICE; EXCHANGE OF SHARE CERTIFICATES.
(a) In consideration for the sale of the Company Shares to Newco,
Newco shall pay to the Shareholders at the Closing an aggregate purchase
price (the "Purchase Price") consisting of (i) U.S. $17,256,020 in cash
and (ii) 720,732 Newco Exchangeable Shares. Schedule 2.2 attached hereto
sets forth the portion of the Purchase Price, including cash and the Newco
Exchangeable Shares, that is to be paid to each Shareholder. The cash
portion of the Purchase Price shall be paid at Closing by wire transfer to
such bank accounts as have been designated by each Shareholder in writing.
Certificates representing the Newco Exchangeable Shares included within the
Purchase Price shall be delivered to the Shareholders at Closing in
accordance with Schedule 2.2.
(b) At the Closing, each Shareholder shall furnish to Newco the
certificates representing such Shareholder's Company Shares, duly endorsed
in blank by such Shareholder or accompanied by duly executed blank stock
powers. The Shareholders hereby agree to promptly cure any deficiencies
with respect to the endorsement of the certificates or other documents of
conveyance with respect to the Company Shares or with respect to the stock
powers accompanying the certificates representing the Company Shares.
6
<PAGE>
ARTICLE III
CLOSING
3.1 CLOSING. The consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of PalEx, 1360 Post
Oak Blvd., Suite 800, Houston, Texas, concurrently with the execution of this
Agreement or at such other time and date as Newco and the Shareholders may
mutually agree, which date shall be referred to as the "Closing Date."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders jointly and severally (except as otherwise expressly
provided in Sections 4.1 and 4.6) represent and warrant to PalEx and Newco as
follows:
4.1 INCORPORATION OF CORPORATE SHAREHOLDERS. Each Corporate Shareholder
hereby jointly, but not severally, represents and warrants to PalEx and Newco
that:
(a) it is a corporation incorporated and validly subsisting under the
laws of the jurisdiction of its incorporation;
(b) it has sent to the appropriate Person all annual returns and
financial statements required to be sent under the laws of the jurisdiction
of its incorporation;
(c) it has the corporate power and authority and is qualified to own
and dispose of its Company Shares; and
(d) no act or proceeding has been taken by or against such Corporate
Shareholder in connection with the dissolution, liquidation, winding up,
bankruptcy or reorganization of such Corporate Shareholder.
4.2 ORGANIZATION OF THE COMPANY AND SUBSIDIARIES. The information set
forth on Schedule 4.2 concerning the name and jurisdiction of incorporation, the
authorized, issued and outstanding shares and the directors and officers of the
Company and each Subsidiary is true and correct. The Company and each
Subsidiary is incorporated and validly subsisting under the laws of its
jurisdiction of incorporation. Each of the Company and the Subsidiaries is
licensed or qualified to do business under the laws of the jurisdictions
specified in Schedule 4.2 and neither the character nor the location of the
properties owned by the Company or any Subsidiary nor the nature of the business
conducted by it requires licensing or qualification under the laws of any other
jurisdiction. Each of the Company and the Subsidiaries has full corporate power
to carry on its business and to own and operate its assets, properties and
business as now carried on and owned and operated. There are no rights,
subscriptions, warrants, options, conversion rights, calls, commitments or plans
or agreements of any kind outstanding which would enable any Person to purchase
or otherwise acquire any shares or other securities of the Company or any
Subsidiary including, without limitation, any securities convertible into or
exchangeable or exercisable for shares or other securities of the Company or any
Subsidiary.
7
<PAGE>
4.3 CORPORATE RECORDS. The minute books of each of the Company and the
Subsidiaries have been provided to Newco and contain true, correct and complete
copies of its articles, its by-laws, the minutes of every meeting of its board
of directors and every committee thereof and of its shareholders and every
written resolution of its directors and shareholders. The share certificate
book, register of shareholders, register of transfers and register of directors
and officers of the Company and each Subsidiary have been provided to Newco and
are complete and accurate in all material respects.
4.4 AUTHORIZATION; NON-CONTRAVENTION; APPROVALS.
(a) Each Shareholder has the full legal right, power, capacity and
authority to enter into this Agreement and all other agreements and
instruments to be executed by it as contemplated by this Agreement and to
carry out its obligations under this Agreement and such other agreements
and instruments. This Agreement has been duly authorized, as applicable,
and duly and validly executed and delivered by each Shareholder, and,
assuming the due authorization, execution and delivery hereof by PalEx and
Newco, constitutes a valid and binding agreement of each Shareholder,
enforceable against such Shareholder in accordance with its terms.
(b) The execution and delivery of this Agreement by the Shareholders
does not, and the consummation by the Shareholders of the transactions
contemplated hereby will not, violate 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 Encumbrance upon any of the properties or assets of the Company or any
Subsidiary or the Company Shares under any of the terms, conditions or
provisions of, (i) the Articles or By-Laws of the Company and its
Subsidiaries, (ii) any Law applicable to the Company, its Subsidiaries or
any of their properties or assets or the Company Shares or the
Shareholders, or (iii) any agreement, note, bond, mortgage, indenture, deed
of trust, license, franchise, permit, concession, lease or other
instrument, obligation or agreement of any kind to which the Company, the
Subsidiaries or the Shareholders are now a party or by which the Company,
the Subsidiaries or the Shareholders or any of their properties or assets
(including the Company Shares) may be bound or affected.
(c) Except as set forth on Schedule 4.4, no declaration, filing or
registration with, or notice to, or authorization, consent or approval of,
any Governmental Authority or third party is necessary for the execution
and delivery of this Agreement by the Shareholders or the consummation by
them of the transactions contemplated hereby. Except as set forth on
Schedule 4.4, none of the contracts to which the Company or any Subsidiary
is a party requires notice to, or the consent or approval of, any third
party for the execution and delivery of this Agreement by the Shareholders
or the consummation of the transactions contemplated hereby.
8
<PAGE>
4.5 OWNERSHIP OF COMPANY SHARES. The Shareholders are, and at the Closing
will be, the registered and beneficial holders of the issued and outstanding
capital stock of the Company as set forth on Schedule 4.5 (the "Company
Shares"). Each Shareholder holds good and marketable title to the Company Shares
registered in its name, free and clear of all Encumbrances. No Person has any
agreement, option, right or privilege capable of becoming an agreement for the
purchase from any Shareholder of any of the Company Shares.
4.6 RESIDENCE OF SHAREHOLDERS. Each Shareholder jointly, but not
severally, represents and warrants to PalEx and Newco that it is not a non-
resident of Canada for purposes of Section 116 of the ITA.
4.7 BANKRUPTCY. Neither the Company nor any Subsidiary is an insolvent
person within the meaning of the Bankruptcy and Insolvency Act (Canada) and will
not become an insolvent person as a result of the Closing nor has the Company or
any Subsidiary made an assignment in favour of its creditors nor a proposal in
bankruptcy to its creditors or any class thereof nor has any petition for a
receiving order been presented in respect of it. Neither the Company nor any
Subsidiary has initiated proceedings with respect to a compromise or arrangement
with its creditors or for its winding up, liquidation or dissolution. No
receiver has been appointed in respect of the Company or any Subsidiary or any
of their assets and no execution or distress has been levied upon any of their
assets. The realizable value of the assets of each of the Company's
predecessors prior to the Restructuring were equal to or greater than the
aggregate of its liabilities and stated capital of all classes. After the
Restructuring, the realizable value of the assets of the Company are equal to or
greater than the aggregate of its liabilities and stated capital of all classes.
4.8 FINANCIAL STATEMENTS.
(a) Attached hereto as Schedule 4.8 are complete and correct copies of
the following financial statements:
(i) the audited consolidated balance sheets of the Company as of
May 31, 1998 and the related consolidated income statements
and statements of shareholders' equity and cash flows for
the one-year period ended May 31, 1998 (such balance sheets
and the related income statements are referred to herein as
the "Year-End Financial Statements"); and
(ii the internal consolidated balance sheet (the "Interim
Balance Sheet") of the Company as of July 31, 1998 (the
"Balance Sheet Date") and the related income statements and
statements of shareholders' equity and cash flows for the
two-month period ended July 31, 1998 (such balance sheet and
the related income statements and statements of
shareholders' equity and cash flows are referred to herein
as the
9
<PAGE>
"Interim Financial Statements" and, together with the Year-
End Financial Statements are referred to herein as the
"Financial Statements").
(b) The Year-End Financial Statements have been prepared from the
books and records of the Company and the Subsidiaries in accordance with
GAAP and present fairly the consolidated financial position and results of
operations of the Company and the Subsidiaries as of the dates of such
statements and for the periods covered thereby. Except for the absence of
notes, the Interim Financial Statements have been prepared from the books
and records of the Company and the Subsidiaries in accordance with GAAP and
present fairly the consolidated financial position and results of
operations of the Company and the Subsidiaries as of the dates of such
statements and for the periods covered thereby. The books of account of
the Company and the Subsidiaries have been kept accurately in all material
respects in the ordinary course of business and the transactions entered
therein represent bona fide transactions, and the revenues, expenses,
assets and liabilities of the Company and the Subsidiaries have been
property recorded therein in all material respects.
(c) The Company's working capital at August 31, 1998 as determined in
accordance with GAAP, excluding indebtedness other than current payables
incurred in the ordinary course of business, was not less than $7,094,000.
4.9 LIABILITIES AND OBLIGATIONS. Except as set forth in Schedule 4.9,
neither the Company nor any Subsidiary had at the Balance Sheet Date, nor has
any of them incurred since that date, any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of any nature, except (a)
liabilities, obligations or contingencies (i) that are accrued or reserved
against in the Financial Statements or reflected in the notes thereto or (ii)
that were incurred after the Balance Sheet Date and were incurred in the
ordinary course of business and consistent with past practices and (b)
liabilities and obligations that are of a nature not required to be reflected in
the Financial Statements prepared in accordance with GAAP and that were incurred
in the normal course of business, which liabilities and obligations described in
this clause (b) are described on Schedule 4.9. Schedule 4.9 contains a
reasonable estimate by the Company and the Shareholders of the maximum amount
that may be payable with respect to liabilities that are not fixed. For each
such liability for which the amount is not fixed or is contested, the Company
has provided a summary description of the liability together with copies of all
relevant documentation relating thereto. Schedule 4.9 sets forth the Company's
and the Subsidiaries' outstanding principal amount of indebtedness for borrowed
money (including overdrafts) as of the date hereof.
4.10 ACCOUNTS AND NOTES RECEIVABLE. Schedule 4.10 sets forth an accurate
list of the accounts and notes receivable of the Company and the Subsidiaries as
of the Balance Sheet Date and as at a date not earlier than the fifth business
day before the Closing Date, including any such amounts which are not reflected
in the Interim Balance Sheet. The reserve for doubtful accounts reflected in the
Interim Balance Sheet is sufficient to cover any trade or accounts receivable of
the Company and the Subsidiaries that are ultimately determined to be
uncollectible. Receivables from and advances to employees, any of the
Shareholders or any Affiliate of any Shareholder or the Company are separately
identified on Schedule 4.10. Schedule 4.10 also sets forth an accurate
10
<PAGE>
consolidated aging of all accounts and notes receivable of the Company and the
Subsidiaries as of the Balance Sheet Date, showing amounts due in 30-day aging
categories. The trade and other accounts receivable of the Company and the
Subsidiaries, including without limitation those classified as current assets on
the Interim Balance Sheet and those set forth on Schedule 410, are valid and
bona fide receivables, which arose in the ordinary course of business, and are
stated consistent with past practices, which practices have been described to
PalEx and Newco.
4.11 ASSETS.
(a) Schedule 4.11 sets forth an accurate list of all real and personal
property included in "property and equipment" on the Interim Balance Sheet
and all other tangible (e.g., physical) assets of the Company and the
Subsidiaries with a book value in excess of CDN $20,000 owned by the
Company or any Subsidiary as of (i) the Balance Sheet Date and (ii) the
date hereof. Attached hereto as Schedule 4.11 are complete and correct
copies of leases for all real or personal property leased by the Company or
any Subsidiary and descriptions of all real property on which buildings,
warehouses, workshops, garages and other structures used in the operation
of the business of the Company or any Subsidiary are situated. Schedule
4.11 indicates which assets used in the operation of the business of the
Company or any Subsidiary are currently owned by the Shareholders or
Affiliates of the Company or the Shareholders. All of the tangible assets,
vehicles and other significant machinery and equipment of the Company and
the Subsidiaries listed on Schedule 4.11 are in good working order and
condition, ordinary wear and tear excepted, and have been maintained in
accordance with good business practices. Except as set forth on Schedule
4.11, all fixed assets used by the Company or any Subsidiary that are
material to the operation of the Company's or any Subsidiary's business are
either owned by the Company or such Subsidiary or are leased under an
agreement identified on Schedule 4.11. All leases set forth on Schedule
4.11 are in full force and effect and constitute valid and binding
agreements of the parties thereto in accordance with their respective
terms. Schedule 4.11 contains correct and complete copies of all title
reports and title insurance policies received or owned by the Company or
any Subsidiary.
(b) The Company and each Subsidiary has good and marketable title to
the tangible and intangible personal property and the real property owned
and used in its business, including the properties identified as owned
property on Schedule 4.11, subject to no Encumbrance except Permitted
Encumbrances and those reflected on Schedule 4.11.
(c) The tangible and intangible assets of the Company and the
Subsidiaries constitute all the assets reasonably necessary for operation
of the business of the Company and the Subsidiaries as conducted at the
Balance Sheet Date.
4.12. MATERIAL CUSTOMERS, CONTRACTS AND BARTERING COMMITMENTS.
(a) Schedule 4.12 sets forth an accurate list of (i) all customers
representing 5% or more of the Company's consolidated revenues during the
12-month period ended May 31, 1998 (the "Material Customers"), and (ii) all
executory contracts, commitments and similar
11
<PAGE>
agreements to which the Company or any Subsidiary is currently a party or
by which it or any of its properties is bound and that would be material to
a reasonably prudent purchaser, including, but not limited to, (A) all
customer contracts, including, without limitation, consignment contracts,
in excess of CDN $20,000, individually, or CDN $35,000 in the aggregate,
(B) contracts with any labor organizations, (C) leases providing for annual
rental payments in excess of CDN $20,000, individually, or CDN $50,000 in
the aggregate, (D) loan agreements, (E) pledge and security agreements, (F)
indemnity or guaranty agreements or obligations, (G) bonds, (H) notes, (I)
mortgages, (J) joint venture or partnership agreements, (K) options to
purchase real or personal property, and (L) agreements relating to the
purchase or sale by the Company or any Subsidiary of assets (other than
oral agreements relating to sales of inventory or services in the ordinary
course of business, consistent with past practices) or securities for more
than CDN $20,000, individually, or CDN $50,000 in the aggregate. Prior to
the date hereof, the Company has made available to PalEx and Newco complete
and correct copies of all such agreements.
(b) Except to the extent set forth on Schedule 4.12, since May 31,
1998 (i) no Material Customer has canceled or substantially reduced or is
currently attempting or, to the knowledge of the Company or the
Shareholders, threatening to cancel or substantially reduce its purchases
of the Company's or any Subsidiary's products or services, and (ii) the
Company and each Subsidiary is in compliance with all material commitments
and obligations pertaining to it under the agreements described in
subsection (a) and is not in default under any such agreements, no notice
of default has been received by the Company or any Subsidiary, and neither
the Shareholders nor the Company is aware of any basis therefor.
(c) Neither the Company nor any Subsidiary is a party to any
governmental contracts subject to price redetermination or renegotiation.
Neither the Company nor any Subsidiary is 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.
(d) Schedule 4.12 sets forth a summary of the material terms of all
oral and written bartering arrangements to which the Company or any
Subsidiary is a party. The Company and each Subsidiary has a sufficient
supply of uncommitted inventory to fulfill its bartering obligations with
third parties.
4.13. PERMITS. Schedule 4.13 contains an accurate list of all material
licenses, franchises, permits, operating authorizations, franchises,
certificates and other governmental authorizations and intangible assets held by
the Company or any Subsidiary (the "Permits"). The Permits are valid, and
neither the Company nor any Subsidiary has received any notice that any
Governmental Authority intends to cancel, terminate or not renew any Permit.
The Permits are all the permits that are required by Law for the operation of
the business of the Company or any Subsidiary, as conducted at May 31, 1998 and
the Balance Sheet Date, and the ownership of the assets of the Company and the
Subsidiaries. The Company and each Subsidiary have conducted and is conducting
its business in compliance in all material respects with the requirements,
standards, criteria and conditions set forth in the Permits, as well as the
applicable orders, approvals and variances related thereto, and is
12
<PAGE>
not in violation of any of the foregoing. Except as specifically provided in
Schedule 4.13, the transactions contemplated by this Agreement will not result
in a default under or a breach or violation of, or adversely affect the rights
and benefits afforded to the Company or any Subsidiary by, any Permits.
4.14. ENVIRONMENTAL MATTERS. Except as set forth on Schedule 4.14:
(a) the business that has been and is carried on by the Company, the
Subsidiaries and their respective predecessors, and the assets used by the
Company, the Subsidiaries and their respective predecessors, (including the
condition of any real property owned or used by the Company or any
Subsidiary and the waters on or under such real property) have been carried
on and used and are currently carried on and used in compliance with all
Environmental Laws;
(b) the Company, the Subsidiaries and their respective predecessors
have not used any machinery, equipment or facility included in their assets
(whether real or personal), or permitted them to be used, to generate,
manufacture, refine, treat, transport, store, handle, dispose of, transfer,
produce or process any Hazardous Substance except in compliance with all
Environmental Laws;
(c) the Company, the Subsidiaries and their respective predecessors
are not, and have not been, subject to any proceedings alleging the
violation of any Environmental Law or to determine whether any remedial
action is needed to respond to a Release or the presence of a Hazardous
Substance on the real property owned or used by the Company, the
Subsidiaries or their respective predecessors;
(d) there are no circumstances that could reasonably be expected to
give rise to any civil or criminal proceedings or Loss regarding the
Release or presence of a Hazardous Substance or the violation of any
Environmental Law by the Company, any Subsidiary or the Company's or any
Subsidiary's employees, agents or others for whom it is responsible;
(e) the Environmental Permits listed in Schedule 4.14(e) constitute
all Environmental Permits held by the Company and its Subsidiaries. The
Environmental Permits presently held are valid and in full force and
effect, and no violations thereof have been experienced, noted or recorded,
and no proceedings are pending or threatened to revoke or limit any of
them;
(f) all Hazardous Substances disposed of, treated or stored by the
Company, any Subsidiary or the respective predecessors thereof have been
disposed of, treated and stored in compliance with all Environmental Laws;
(g) there are no proceedings nor any circumstances or material facts
which could, if true, give rise to any proceedings, in which it is alleged
that the Company, any Subsidiary or the respective predecessors thereof is
potentially responsible for a domestic or foreign federal, provincial,
state, municipal or local clean-up or remediation of lands contaminated
with Hazardous Substances or for any other remedial or corrective action
under an Environmental Law;
13
<PAGE>
(h) the Company, the Subsidiaries or the respective predecessors
thereof have maintained all environmental and operating documents and
records in the manner and for the time periods required by any
Environmental Law and have never conducted an environmental audit of the
business or any asset thereof (for purposes of this Section 4.14(h), an
environmental audit includes any evaluation, assessment, review or study
performed at the request of or on behalf of the Company, any Subsidiary, a
lender, a prospective purchaser of the business or assets of the Company or
any Subsidiary or a Governmental Authority);
(i) there are no underground storage tanks located on any real
property owned or used by the Company or any Subsidiary; and
(j) to the knowledge of the Shareholders, there are no pending or
proposed changes to Environmental Laws that would render illegal or
materially restrict the business or operations of the Company or any
Subsidiary.
4.15. COLLECTIVE AGREEMENTS. Except as set out in Schedule 4.15:
(a) neither the Company nor any Subsidiary is a party to any
collective bargaining agreement, contract or legally binding commitment to
any trade union or employee organization or group in respect of or
affecting its employees;
(b) neither the Company nor any Subsidiary is currently engaged in any
labour negotiation;
(c) neither the Company nor any Subsidiary is a party to any
application, complaint or other proceeding under any statute;
(d) neither the Company nor any Subsidiary has engaged in any unfair
labour practice and neither the Company nor any Subsidiary is aware of any
pending or threatened complaint regarding any alleged unfair labour
practices;
(e) there is no strike, labour dispute, work slow down or stoppage
pending or, to the Shareholders' knowledge, threatened against the Company
or any Subsidiary;
(f) there is no grievance or arbitration proceeding arising out of or
under any collective bargaining agreement which is pending or, to the
Shareholders' knowledge, threatened against the Company or any Subsidiary;
(g) neither the Company nor any Subsidiary has experienced any
material work stoppage; and
14
<PAGE>
(h) neither the Company nor any Subsidiary is the subject of any union
organization effort.
4.16. INSURANCE. Schedule 4.16 sets forth an accurate list of all insurance
policies carried by the Company or any Subsidiary. The Company has previously
provided to PalEx and Newco copies of all insurance loss runs or workmen's
compensation claims during the past year and, to the extent in the Company's
possession after diligent search and inquiry, for the previous five years. None
of such policies are "claims made" policies. All of such policies provide
adequate coverage against the risks involved in the Company's and the
Subsidiaries' businesses. The policies described in such Schedule 4.16 for the
current policy year are currently in full force and effect. As of the Closing
Date, any open claims and any losses subject to insurance coverage for which a
claim has not been made are recoverable under insurance policies of the Company,
except to the extent of any applicable deductible or loss retention as set forth
on Schedule 4.16. The Company and the Subsidiaries maintain and have maintained
insurance in amounts and with terms that are sufficient to insure the risks
attendant to the business of the Company and its Subsidiaries, which insurance
policies are with insurance carriers that are financially able to cover any
claims of the Company or its Subsidiaries under such policies.
4.17. COMPENSATION; EMPLOYMENT AGREEMENTS. Schedule 4.17 sets forth all the
employees of the Company and each Subsidiary as of the date of this Agreement
and the age, position, status, length of service, compensation and benefits of
each of them, respectively. Except as set out in Schedule 4.17, neither the
Company nor any Subsidiary is a party to or bound by any contracts or
requirements of applicable Law in respect of any employee or former employee,
other than pursuant to applicable employee legislation, including:
(a) any contracts for the employment or statutorily required re-employment
of any employee; or
(b) any bonus, deferred compensation, profit sharing, pension, retirement,
hospitalization insurance or other plans or arrangements providing employee
benefits, except for the plans providing employee benefits described in
Schedule 4.17.
4.18. NONCOMPETITION, CONFIDENTIALITY AND NONSOLICITATION AGREEMENTS.
Schedule 4.18 sets forth all agreements containing covenants not to compete or
solicit employees or to maintain the confidentiality of information to which the
Company or any Subsidiary is bound or under which the Company or any Subsidiary
has any rights or obligations.
4.19. EMPLOYEE PLANS.
(a) Schedule 4.19 sets forth all the employee benefit, health,
welfare, supplemental unemployment benefit, bonus, pension, profit sharing,
deferred compensation, stock compensation, stock purchase, retirement,
hospitalization insurance, medical, dental, legal, disability and similar
plans or arrangements or practices relating to the employees or former
employees which are currently maintained or were maintained at any time in
the last five calendar years by the Company or any Subsidiary (the
"Employee Plans").
15
<PAGE>
(b) All of the Employee Plans are and have been established,
registered, qualified, invested and administered in all respects in
accordance with all laws, regulations, orders or other legislative,
administrative or judicial promulgations applicable to the Employee Plans
("Applicable Employee Benefit Laws"). No fact or circumstance exists that
could adversely affect the tax-exempt status of an Employee Plan.
(c) All obligations regarding the Employee Plans have been satisfied,
there are no outstanding defaults or violations by any party to any
Employee Plan and no Taxes, penalties or fees are owing or exigible under
any of the Employee Plans.
(d) The Company or the applicable Subsidiary may unilaterally amend,
modify, vary, revoke or terminate, in whole or in part, each Employee Plan
and take contribution holidays under or withdraw surplus from each Employee
Plan, subject only to approvals required by Applicable Employee Benefit
Laws.
(e) No Employee Plan, nor any related trust or other funding medium
thereunder, is subject to any pending investigation, examination or other
proceeding, action or claim initiated by any governmental agency or
instrumentality, or by any other party (other than routine claims for
benefits), and there exists no state of facts which after notice or lapse
of time or both could reasonably be expected to give rise to any such
investigation, examination or other proceeding, action or claim or to
affect the registration of any Employee Plan required to be registered.
(f) All contributions or premiums required to be made by the Company
or any Subsidiary under the terms of each Employee Plan or by Applicable
Employee Benefit Laws have been made in a timely fashion in accordance with
Applicable Employee Benefit Laws and the terms of the Employee Plans, and
neither the Company nor any Subsidiary has, and as of the Closing will not
have, any liability (other than liabilities accruing after the Closing)
with respect to any of the Employee Plans. Contributions or premiums will
be paid by the Company or the applicable Subsidiary on an accrual basis for
the period up to the Closing even though not otherwise required to be made
until a later date.
(g) No amendments have been made to any Employee Plan and no
improvements to any Employee Plan have been promised and no amendments or
improvements to an Employee Plan will be made or promised by the Company or
any Subsidiary before the Closing.
(h) There have been no improper withdrawals, applications or transfers
of assets from any Employee Plan or the trusts or other funding media
relating thereto, and neither the Company, any Subsidiary nor any of their
respective agents has been in breach of any fiduciary obligation with
respect to the administration of the Employee Plans or the trusts or other
funding media relating thereto.
16
<PAGE>
(i) Subject to approvals under Applicable Employee Benefit Laws, the
Company or any applicable Subsidiary may amend, revise or merge any
Employee Plan or the assets transferred from any Employee Plan with any
other arrangement, plan or fund.
(j) The Company has furnished to Newco and PalEx true, correct and
complete copies of all the Employee Plans as amended as of the date hereof
together with all related documentation including funding agreements,
actuarial reports, funding and financial information returns and
statements, all professional opinions (whether or not internally prepared)
with respect to each Employee Plan, all material internal memoranda
concerning the Employee Plans, copies of material correspondence with all
regulatory authorities with respect to each Employee Plan and plan
summaries, booklets and personnel manuals. No material changes have
occurred to the Employee Plans or are expected to occur which would affect
the actuarial reports or financial statements required to be provided to
Newco pursuant to this Section 4.19.
(k) Each Employee Plan is fully funded or fully insured on both an
ongoing and solvency basis pursuant to the actuarial assumptions and
methodology set out in Schedule 4.19.
(l) None of the Employee Plans enjoys any special tax status under
Applicable Employee Benefit Laws, nor have any advance tax rulings been
sought or received in respect of the Employee Plans.
(m) All employee data necessary to administer each Employee Plan has
been provided by the Company to Newco and is true and correct.
(n) No insurance policy or any other contract or agreement affecting
any Employee Plan requires or permits a retroactive increase in premiums or
payments due thereunder. The level of insurance reserves under each
insured Employee Plan is reasonable and sufficient to provide for all
incurred but unreported claims.
(o) Except as disclosed in Schedule 4.19, none of the Employee Plans
provides benefits to retired employees or to the beneficiaries or
dependents of retired employees.
4.20. LITIGATION AND COMPLIANCE WITH LAW. Except as set forth in Schedule
420, there are no claims, actions, suits, complaints, applications,
investigations or proceedings, pending or, to the knowledge of the Company or
the Shareholders, threatened against or affecting the Company or any Subsidiary,
at law or in equity, or before or by any Governmental Authority having
jurisdiction over the Company or any Subsidiary. No notice of any claim,
action, suit, complaint, application, investigation or proceeding, whether
pending or threatened, has been received by the Company or any Subsidiary and,
to the knowledge of the Company and the Shareholders, there is no basis
therefor. The Company and each Subsidiary has complied, and is in compliance in
all material respects, with all Laws applicable to the Company or any
Subsidiary, its assets or the operation of its business.
17
<PAGE>
4.21. TAXES.
(a) The Company and each Subsidiary has prepared and filed on time
with all appropriate governmental bodies all tax returns, declarations,
remittances, information returns, reports and other documents of every
nature required to be filed by or on behalf of the Company and each
Subsidiary in respect of any Taxes or in respect of any other provision in
any domestic or foreign federal, provincial, municipal, state, territorial
or other taxing statute for all fiscal periods ending prior to the date
hereof and will continue to do so in respect of any fiscal period ending on
or before the Closing Date. All such returns, declarations, remittances,
information returns, reports and other documents are correct and complete
in all material respects, and no material fact has been omitted therefrom.
No extension of time in which to file any such returns, declarations,
remittances, information returns, reports or other documents is in effect.
All Taxes shown on all such returns, or on any assessments or reassessments
in respect of any such returns have been paid in full.
(b) The Company and each Subsidiary has paid in full all Taxes
required to be paid on or prior to the date hereof and has made adequate
provision in the Interim Financial Statements in accordance with GAAP for
the payment of all Taxes in respect of all fiscal periods ending on or
before the Closing Date.
(c) There are no reassessments of the Company's or any Subsidiary's
Taxes that have been issued and are outstanding and there are no
outstanding issues that have been raised and communicated to the Company or
any Subsidiary by any Governmental Authority for any taxation year in
respect of which a Tax return of the Company or any Subsidiary has been
audited. No governmental body has challenged, disputed or questioned the
Company or any Subsidiary in respect of Taxes or of any returns, filings or
other reports filed under any statute providing for Taxes. Neither the
Company nor any Subsidiary is negotiating any draft assessment or
reassessment with any governmental body. Neither the Company nor any
Subsidiary is aware of any contingent liabilities for Taxes or any grounds
for an assessment or reassessment of the Company or any Subsidiary,
including, without limitation, unreported benefits conferred on any
shareholder of the Company, aggressive treatment of income, expenses,
credits or other claims for deduction under any return or notice other than
as disclosed in the Interim Financial Statements. Neither the Company, any
Subsidiary nor any Shareholder has received any indication from any
Governmental Authority that an assessment or reassessment of the Company or
any Subsidiary is proposed in respect of any Taxes, regardless of its
merits. Neither the Company nor any Subsidiary has executed or filed with
any Governmental Authority any agreement or waiver extending the period for
assessment, reassessment or collection of any Taxes.
(d) The Company and each Subsidiary has withheld from each payment
made to any of its present or former employees, officers and directors, and
to all persons who are non-residents of Canada for the purposes of the ITA
all amounts required by law to be withheld, and furthermore, has remitted
such withheld amounts within the prescribed periods to the appropriate
governmental body. The Company and each Subsidiary has remitted all Canada
Pension Plan contributions, provincial pension plan contributions,
employment
18
<PAGE>
insurance premiums, employer health taxes and other Taxes payable by it in
respect of its employees and has remitted such amounts to the proper
governmental body within the time required under the applicable
legislation. The Company and each Subsidiary has charged, collected and
remitted on a timely basis all Taxes as required under applicable
legislation on any sale, supply or delivery whatsoever, made by the Company
or any Subsidiary.
(e) At the Closing Date, for purposes of the ITA, the Company and each
Subsidiary will own depreciable property of the prescribed classes and
having consolidated undepreciated capital costs as set out in Schedule
4.21.
(f) Neither the Company nor any Subsidiary will at any time be deemed
to have a capital gain pursuant to subsection 80.03(2) of the ITA as a
result of any transaction or event taking place in any taxation year ending
on or before the Closing Date.
(g) Neither the Company nor any Subsidiary has entered into an
agreement contemplated in section 80.04 or subsection 127(13) to (17),
127(20), 125(3) or 126.1(9) of the ITA or any equivalent provincial
provision.
(h) There are not circumstances existing which could result in the
application of section 78 of the ITA or any equivalent provincial provision
to the Company or to any Subsidiary.
(i) The amalgamation of the Company with certain of its direct and
indirect shareholders in the Restructuring will qualify as an
"amalgamation" for purposes of subsection 87(1) of the ITA.
4.22. ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth
in Schedule 4.22 and except for the Restructuring, the Company and each
Subsidiary has conducted its operations in the ordinary course and there has not
been:
(a) any adverse change in the business, operations, properties,
condition (financial or other), assets, liabilities (contingent or
otherwise), results of operations or prospects of the Company and the
Subsidiaries, taken as a whole;
(b) any damage, destruction or loss (whether or not covered by
insurance) adversely affecting the properties or business of the Company
and the Subsidiaries, individually or in the aggregate;
(c) any change in the authorized and issued capital stock or the
articles of the Company or any Subsidiary or its outstanding securities or
any change in the Shareholders' ownership interests in the Company or any
grant of any options, warrants, calls, conversion rights or commitments or
the declaration or payment of any dividend or other distribution;
19
<PAGE>
(d) 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;
(e) any increase in the compensation payable or to become payable by
the Company or any Subsidiary to any of its officers, directors,
Shareholders, employees, consultants or agents, except for ordinary and
customary bonuses and salary increases for employees in accordance with
past practice, which bonuses and salary increases are set forth in Schedule
4.22;
(f) any significant work interruptions, labor grievances or claims
filed;
(g) any sale or transfer, or any agreement to sell or transfer, any
material assets, properties or rights of the Company or any Subsidiary to
any Person, including, without limitation, any Shareholder or any Affiliate
of a Shareholder;
(h) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company or any Subsidiary;
(i) any increase in the Company's or any Subsidiary's indebtedness,
other than accounts payable incurred in the ordinary course of business,
consistent with past practices;
(j) 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 any Subsidiary or requiring consent of any
party to the transfer and assignment of any such assets, property or
rights;
(k) 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 or any Subsidiary's business;
(l) any waiver of any material rights or claims of the Company or any
Subsidiary;
(m) any material change in the accounting or costing systems or
methods of the Company or its Subsidiaries; or
(n) any other material transaction or material contract by the Company
or any Subsidiary outside the ordinary course of business.
4.23. ACCOUNTS WITH BANKS AND BROKERAGES; POWERS OF ATTORNEY. Schedule 4.23
sets forth an accurate schedule, as of the date of this Agreement, of (a) the
name of each financial institution or brokerage firm in which the Company or any
Subsidiary has accounts or safe deposit boxes; (b) the names in which the
accounts or boxes are held; (c) the type of account and the cash, cash
equivalents and securities held in such account as of the second business day
prior to the
20
<PAGE>
Closing, none of which assets have been withdrawn from such accounts since such
date except for bona fide business purposes in the ordinary course of the
business of the Company and each Subsidiary; and (d) the name of each Person
authorized to draw thereon or have access thereto. Schedule 4.23 also sets forth
the name of each Person holding a general or special power of attorney from the
Company or any Subsidiary and a description of the terms thereof.
4.24. COMPETING LINES OF BUSINESS; RELATED-PARTY TRANSACTIONS. Except as
set forth in Schedule 4.24, no Shareholder, no Affiliate of any Shareholder nor
any other Affiliate of the Company or any Subsidiary owns, directly or
indirectly, any interest in, or is an officer, director, employee or consultant
of or otherwise receives remuneration from, any business (excluding for this
purpose the Company and each Subsidiary) which is a competitor, lessor, lessee,
customer or supplier of the Company or any Subsidiary. Except as set forth in
Schedule 4.24, no officer or director of the Company or any Subsidiary and no
Shareholder has nor, during the period from December 31, 1997 through the date
hereof, had any interest in any material property, real or personal, tangible or
intangible, used in or pertaining to the business of the Company or any
Subsidiary.
4.25. PRODUCT WARRANTIES. There are no claims against the Company or any
Subsidiary on account of product warranties or with respect to the production or
sale of defective or inferior products.
4.26. INTANGIBLE PROPERTY. Schedule 4.26 sets forth an accurate list of all
material patents, patent applications, trademarks, service marks, technology,
licenses, trade names, copyrights and other intellectual property or proprietary
property rights owned or used by the Company or any Subsidiary. The Company and
the Subsidiaries own or possess, and the assets of the Company and the
Subsidiaries include, sufficient legal rights to use all of such items without
conflict with or infringement of the rights of others.
4.27. CONTRACT A. The total cost to the Company to consummate the
transactions contemplated by (a) that certain Asset Purchase Agreement dated
July 24, 1998, by and between 1296289 Ontario Limited, an Ontario corporation
and wholly owned Subsidiary of the Company, and St-Remi Pallet (Canada) Inc. and
Andre Boyer, and (b) that certain Asset Purchase Agreement dated July 24, 1998,
by and between 1296289 Ontario Limited, Lo-Kost Pallet Leasing Corp. and Odette
Tremblay and Harry Wiens (collectively, "Contract A"), including, without
limitation, the purchase price and all costs, fees, expenses, commissions, Taxes
or liabilities to be paid or borne by the Company or any Subsidiary equals CDN
$5,621,817.
4.28. INVENTORY OF CPC PALLETS. The Company holds good and marketable
title, free and clear of all Encumbrances other than Permitted Encumbrances, to
not less than 990,426 CPC standard pallets, 73,230 of which are held for sale,
917,196 of which are held by the Company for rental, and 19,142 of which were
purchased from St-Remi Pallet (Canada) Inc.
4.29. RESTRUCTURING. The Restructuring has been consummated and has not had
and will not have any adverse effect on PalEx, Newco, the Company or their
financial condition or results of operation, the consummation of the
transactions contemplated hereby, or the operation of the
21
<PAGE>
business of the Company after the Closing. None of the Persons that were
amalgamated with SMG Corporation, or otherwise acquired by SMG Corporation, in
the Restructuring (a) had any liabilities or obligations (contingent or
otherwise and whether or not known) at the time of the Restructuring or (b) have
had at any time any operations or assets other than shares in SMG Corporation or
corporations owning shares in SMG Corporation, other passive investments and,
prior to the acquisition of such Persons interest in SMG Corporation, an
interest in the same business as carried on by the Company.
4.30. OSA. The Company is not a "reporting issuer" within the meaning of
the Securities Act (Ontario).
4.31. DISCLOSURE. None of the foregoing representations and warranties and
no document furnished by or on behalf of the Shareholders to Newco or PalEx in
connection with the negotiation of the transactions contemplated by this
Agreement contain any untrue statement of a material fact or omit to state any
material fact necessary to make any such statement or representation not
misleading to a prospective purchaser of the Company Shares seeking full
information as to the Company and the Subsidiaries and their respective
properties, businesses and affairs. Except for those matters disclosed in this
Agreement, there are no facts not disclosed in this Agreement which, if learned
by Newco or PalEx, might reasonably be expected to materially diminish Newco's
and PalEx's evaluation of the value of the Company Shares or which, if learned
by Newco or PalEx, might reasonably be expected to deter Newco and PalEx from
completing the transactions contemplated by this Agreement on the terms of this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PALEX AND NEWCO
PalEx and Newco jointly and severally represent and warrant to the
Shareholders as follows:
5.1. ORGANIZATION. Each of Newco and PalEx is a corporation duly
incorporated under the laws of the jurisdiction of its incorporation and is duly
organized, validly subsisting and in good standing under such laws.
5.2. AUTHORIZATION; NON-CONTRAVENTION; APPROVALS.
(a) Each of Newco and PalEx has the full legal right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement have been approved by the board of directors of each of Newco and
PalEx. No additional corporate proceedings on the part of Newco or PalEx
are necessary to authorize the execution and delivery of this Agreement and
the consummation by Newco and PalEx of the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by
Newco and PalEx, and, assuming the due authorization, execution and
delivery by the Shareholders, constitutes a valid and binding agreement of
each of Newco and PalEx, enforceable against each of them in accordance
with its terms.
22
<PAGE>
(b) The execution and delivery of this Agreement by Newco and PalEx
does not, and the consummation by Newco and PalEx of the transactions
contemplated hereby will not, violate 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 Newco or PalEx or any of its subsidiaries under any
of the terms, conditions or provisions of (i) the Certificate of
Incorporation or Bylaws of PalEx or the Articles or By-Laws of Newco, (ii)
any Law applicable to Newco or PalEx 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 Newco or PalEx is now a party
or by which Newco or PalEx or any of its properties or assets may be bound
or affected.
(c) Except as contemplated in Section 6.11, no declaration, filing or
registration with, or notice to, or authorization, consent or approval of,
any Governmental Authority or Third Party is necessary for the execution
and delivery of this Agreement by Newco or PalEx or the consummation by
Newco or PalEx of the transactions contemplated hereby.
(d) PalEx is not subject to any contractual restrictions that would
preclude the Company from continuing to conduct its business in Canada
after the Closing, as such business has been represented to PalEx to have
been conducted immediately prior to Closing.
(e) The Company's operation of its business in Canada immediately
after the Closing, as such business has been represented to PalEx to have
been conducted immediately prior to Closing, is not reasonably likely to
have a material adverse effect on PalEx as a result of the breach of any
agreement to which PalEx or any of its Subsidiaries is a party.
5.3. CAPITALIZATION OF NEWCO; NEWCO EXCHANGEABLE SHARES. The authorized
capital stock of Newco consists of an unlimited number of Newco Common Shares
and an unlimited number of shares of Newco Exchangeable Shares. One Hundred
Newco Common Shares are issued and outstanding and registered in the name of
PalEx and is validly issued, fully paid and nonassessable. Each Newco
Exchangeable Share issued in accordance with the terms of this Agreement will be
validly issued, fully paid and nonassessable.
5.4. PALEX COMMON STOCK. The shares of PalEx Common Stock to be issued
upon exchange of the Newco Exchangeable Shares in accordance with the terms
thereof will be duly authorized, validly issued, fully paid and nonassessable.
Upon issuance, such shares of PalEx Common Stock will be listed, or approved for
listing upon notice of issuance, with The Nasdaq Stock Market.
5.5. LITIGATION. There are no suits, actions, or legal, administrative,
arbitration or other proceedings or, to PalEx's knowledge, governmental
investigations against PalEx pending or, to PalEx's knowledge, threatened, that
seek to prevent the consummation of the transactions contemplated hereby.
23
<PAGE>
5.6. DISCLOSURE. PalEx has fully provided the Shareholders or their
representatives with all the information that they have requested in analyzing
whether to consummate the transactions contemplated hereby, including, without
limitation, its Annual Report on Form 10-K for the fiscal year ended December
28, 1997, as amended, and its Quarterly Report on Form 10-Q for the fiscal
quarter ended June 28, 1998. None of the information so provided nor any
representation or warranty of Newco or PalEx contained in this Agreement
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading.
ARTICLE VI
CERTAIN COVENANTS
6.1. FUTURE COOPERATION; TAX MATTERS. The Shareholders, Newco and PalEx
shall each deliver or cause to be delivered to the other following the Closing
such additional instruments as the other may reasonably request for the purpose
of fully carrying out this Agreement. The Shareholders will cooperate with
PalEx and Newco at and after the Closing in furnishing information, evidence,
testimony and other assistance in connection with any actions, proceedings,
arrangements or disputes of any nature with respect to matters pertaining to all
periods prior to the Closing Date. PalEx and Newco will cooperate with the
Shareholders in the preparation of all Tax returns covering the period from the
beginning of the Company's current tax years through the Closing. In addition,
after the Closing, PalEx and Newco will cause the Company to provide the
Shareholders with access to such of its books and records as may be reasonably
requested by the Shareholders in connection with Tax matters relating to the
Company and periods ending on or prior to the Closing Date. The party
requesting cooperation, information or actions under this Section 6.1 shall
reimburse the other party for all reasonable out-of-pocket costs and expenses
paid or incurred in connection therewith, which costs and expenses shall not,
however, include per diem charges for employees or allocations of overhead
charges. The Shareholders shall be liable for all sales, transfer, stamp or
similar Taxes, if any, resulting from sale of the Company Shares pursuant to the
terms of this Agreement.
6.2. EXPENSES. PalEx and Newco will pay their respective fees, expenses
and disbursements and those of their agents, representatives, accountants and
counsel incurred in connection with the execution, delivery and performance of
this Agreement and any amendments thereto and the consummation of the
transactions contemplated hereby. The Shareholders will pay the fees, expenses
and disbursements of the Shareholders and their respective agents,
representatives, financial advisors, accountants and counsel incurred in
connection with the execution, delivery and performance of this Agreement and
any amendments hereto and the consummation of the transactions contemplated
hereby. In addition, the Shareholders shall be responsible for all such fees
and expenses incurred by the Company or any Subsidiary in connection with the
execution, delivery and performance of this Agreement and any amendments hereto
and the consummation of the transactions contemplated hereby.
24
<PAGE>
6.3. EMPLOYMENT AGREEMENT. At the Closing, the Company shall enter into a
mutually acceptable Employment and Non-Competition Agreement with each of
individuals identified on Schedule 6.3 (the "Employment Agreements") to be
effective as of the Closing Date.
6.4. LEGAL OPINION. At the Closing, the Shareholders shall cause their
legal counsel, Brans, Lehun, Baldwin, to deliver to PalEx and Newco a mutually
acceptable legal opinion.
6.5. STOCK OPTION PLAN. Effective as of the Closing Date, Newco shall cause
PalEx to grant nonqualified options to purchase an aggregate of 100,000 shares
of PalEx Common Stock under PalEx's 1996 Stock Option Plan, as amended, to the
employees of the Company and the Subsidiaries (other than the Shareholders)
named in Schedule 6.5 and in the respective amounts listed thereon.
6.6. SUPPORT AGREEMENT. Concurrently with the Closing, (a) PalEx and Newco
shall, and (b) the Shareholders shall cause all holders of Newco Exchangeable
Shares to, execute and deliver a mutually acceptable Support Agreement.
6.7. NON-COMPETITION AGREEMENT. Concurrently with the Closing, PalEx,
Newco, the Company and each of the Shareholders shall enter into a mutually
acceptable Non-Competition Agreement.
6.8. TERMINATION OF SHAREHOLDERS' AGREEMENTS. Concurrently with the
Closing, all of the Shareholders' Agreements or similar agreements among the
Shareholders or any third Persons shall have been terminated by the parties
thereto, which agreements shall include, without limitation, (a) the Superior
Pallet Corporation Shareholders Agreement among Superior Pallet Service Ltd.,
Canadawide Pallet Services Ltd., Adian Materials Handling Limited, Enrico
DiLello, David Turner, Fraser Campbell, John Campbell, Worden Teasdale and
Superior Pallet Corporation dated June 1, 1991; (b) the Shareholders' Agreement
made as of June 1, 1997 between Superior Pallet Corporation and Pallet Rental
Systems Inc. and Pallet Management Services Inc. and Save-On-Pallets Ltd. and
SMG Corporation; and (c) Superior Pallet Service Ltd. Shareholders Agreement
Between Enrico D. DiLello, David Edward Turner and Superior Pallet Service Ltd.
dated February 25, 1986.
6.9. RESTRUCTURING OF THE COMPANY AND ITS AFFILIATES. Prior to the
Closing, the Shareholders shall have caused the occurrence of the restructuring
events described on Schedule 6.9 (the "Restructuring").
6.10. RELEASE FROM GUARANTEES. PalEx shall use its commercially reasonable
efforts to have the Shareholders released from the personal guarantees of
indebtedness of the Company or any Subsidiary, each of which guarantees is
identified in Schedule 6.10. PalEx hereby agrees to indemnify each Shareholder
and hold him harmless for any amounts that such Shareholder is required to pay
under such personal guarantees after the Closing.
6.11. INVESTMENT CANADA ACT NOTICE. Prior to or within 30 days following
the Closing Date, Newco agrees to file a notice under the Investment Canada Act
advising the Minister responsible therefor of the proposed consummation or
consummation, as the case may be, of the transactions contemplated hereby.
25
<PAGE>
6.12. RESIGNATIONS. Each Shareholder hereby resigns any officer and
director position held with the Company or any Subsidiary.
6.13. RELEASES AND WAIVERS. Except for claims against the Company or a
Subsidiary, as the case may be, for indemnification under applicable corporate
Laws for acts or omissions as a director or officer on behalf of the Company or
such Subsidiary, (a) each Shareholder hereby irrevocably waives all known and
unknown claims it may have against the Company and each Subsidiary or any past
or current officer or director (in any capacity) of the Company or any
Subsidiary, and (b) each Shareholder hereby irrevocably releases the Company and
each Subsidiary and all such other parties from claims arising out of any state
of facts existing prior to the Closing, regardless of whether any such claim
arises under any existing agreement or otherwise.
6.14. OTHER PALEX AND NEWCO DOCUMENTS. At the Closing, PalEx and Newco
shall receive the following additional certificates, instruments and documents:
(a) the share certificates representing the Company Shares duly
endorsed in blank by the Shareholders, or accompanied by stock powers duly
executed in blank by the Shareholders, and otherwise in a form acceptable
to PalEx and Newco for transfer on the books of the Company; and
(b) all of the Company's and each Subsidiary's books and records,
including without limitation, minute books, corporate charter, bylaws,
stock records, bank account records, accounting records, computer records
and all contracts with third parties.
ARTICLE VII
INDEMNIFICATION
The Shareholders and PalEx make the following respective covenants:
7.1. GENERAL INDEMNIFICATION BY THE SHAREHOLDERS. The Shareholders
covenant and agree that they will, jointly and severally (without any right of
indemnification or contribution from the Company or any Subsidiary), indemnify,
defend, protect and hold harmless PalEx, Newco and their respective officers,
directors, employees, shareholders, agents, representatives and Affiliates
(including the Company and each Subsidiary) from and against all Losses incurred
by any of such indemnified Persons as a result of or arising from:
(a) any breach of the representations and warranties of the
Shareholders set forth herein or in the Schedules or certificates delivered
in connection herewith, provided that notice of such claim is given in
accordance with Section 10.5 hereof on or before the Expiration Date;
26
<PAGE>
(b) all Taxes payable by the Company or any Subsidiary for all periods
prior to and including the Closing Date and all sales, transfer, stamp or
similar Taxes arising from the consummation of the transactions
contemplated by this Agreement;
(c) any breach or nonfulfillment of any covenant or agreement on the
part of any Shareholder under this Agreement;
(d) any Environmental Laws with respect to the period before the
Closing and Hazardous Substances on, or transported from, any premises
owned or operated by the Company or any Subsidiary with respect to the
period before the Closing;
(e) the Restructuring, including, without limitation, any Taxes
resulting from the Restructuring or a breach of the representation set
forth in Section 4.29; and
(f) liabilities or obligations of any Person that is a party to the
Restructuring other than liabilities and obligations of SMG Corporation
that do not arise or exist as a result of or in connection with the
Restructuring, provided that such liabilities and obligations of SMG
Corporation that are not subject to indemnification under this Section
7.1(f) may, if appropriate, be the subject of indemnification under other
subsections of this Section 7.1.
7.2. INDEMNIFICATION BY PALEX. PalEx covenants and agrees that it will
indemnify, defend, protect and hold harmless the Shareholders and their
respective agents, representatives, Affiliates, beneficiaries and heirs and
employees at all times from and after the date of this Agreement from and
against all Losses incurred by any of such indemnified Persons as a result of or
arising from
(a) any breach of the representations and warranties of PalEx or Newco
set forth herein or in the Schedules or certificates attached hereto,
provided that notice of such claim is given in accordance with Section 10.5
hereof on or before the Expiration Date, or
(b) any breach or nonfulfillment of any covenant or agreement on the
part of PalEx or Newco under this Agreement.
7.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the
"Indemnified Party") has received notice of or has knowledge of any claim by a
Person not a party to this Agreement ("Third Person"), of the commencement of
any action or proceeding by a Third Person, which the Indemnified Party believes
in good faith is an indemnifiable claim under this Agreement, the Indemnified
Party shall give to the party obligated to provide indemnification pursuant to
Section 7.1, or 7.2 hereof (hereinafter the "Indemnifying Party") written notice
of such claim or the commencement of such action or proceeding. Such notice
shall state the nature and the basis of such claim and a reasonable estimate of
the amount thereof; provided, however, that the failure to provide, or delay in
providing, such notice shall not affect the Indemnified Party's right to
indemnification hereunder unless the defense of such claim is irreparably and
adversely affected by the failure to provide, or the delay in providing, such
notice. The Indemnifying Party shall have the right to defend and settle, at
its own expense and by its own counsel, any such matter so long as the
Indemnifying Party pursues the same diligently and in good faith. The
Indemnifying Party shall not
27
<PAGE>
settle any such Third Person claim without the consent of the Indemnified Party,
unless the settlement thereof imposes no liability or obligation on, and
includes a complete release from liability of, the Indemnified Party. If the
Indemnifying Party undertakes to defend or settle such Third Person Claim, it
shall promptly notify the Indemnified Party of its intention to do so, and the
Indemnified Party shall cooperate with the Indemnifying Party and its counsel in
all commercially reasonable respects in the defense thereof and in any
settlement thereof. Such cooperation shall include, but shall not be limited to,
furnishing the Indemnifying Party with any books, records and other information
reasonably requested by the Indemnifying Party and in the Indemnified Party's
possession or control. If the Indemnifying Party has notified the Indemnified
Party of its intention to undertake to defend or settle any such asserted
liability, and for so long as the Indemnifying Party diligently pursues such
defense, the Indemnified Party shall be entitled, at its expense, to participate
in the defense of such asserted liability and the negotiations of the settlement
thereof. If, upon receiving notice, the Indemnifying Party does not timely
undertake to defend such matter to which the Indemnified Party is entitled to
indemnification hereunder, or fails diligently to pursue such defense, the
Indemnified Party may undertake such defense through counsel of its choice, at
the cost and expense of the Indemnifying Party, and the Indemnified Party may
settle such matter, in its discretion, and the Indemnifying Party shall
reimburse the Indemnified Party for the amount paid in such settlement and any
other liabilities or expenses incurred by the Indemnified Party in connection
therewith.
7.4. INDEMNIFICATION DEDUCTIBLE. Neither the Shareholders, on the one
hand, nor PalEx, on the other hand, shall be entitled to indemnification from
the other under the provisions of Section 7.1(a) or Section 7.2(a), as the case
may be, until such time as, and only to the extent that, the claims subject to
indemnification by such other party exceed, in the aggregate, U.S. $274,780.
Notwithstanding the foregoing, the limitations set forth in this Section 74
shall not apply to fraudulent misrepresentations.
7.5. LIMITATION UPON INDEMNITY. Notwithstanding anything to the contrary
contained herein, the aggregate indemnification obligation of the Shareholders
under Section 7.1(a) shall be limited to U.S. $27,477,919.
7.6. INDEMNIFICATION FOR NEGLIGENCE OF INDEMNITEE. EXCEPT AS EXPRESSLY SET
FORTH IN SECTION 7.3, AN INDEMNIFIED PARTY'S RIGHTS TO INDEMNIFICATION UNDER
THIS ARTICLE VII SHALL NOT BE AFFECTED BY SUCH INDEMNIFIED PARTY'S NEGLIGENCE OR
ALLEGED NEGLIGENCE IN RESPONDING OR FAILING TO RESPOND TO THE MATTER GIVING RISE
TO THE CLAIM FOR INDEMNIFICATION.
ARTICLE VII
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
8.1. GENERAL. Each Shareholder recognizes and acknowledges that he had in
the past, currently has, and in the future will have, access to certain
confidential information of, and relating
28
<PAGE>
to the business of, the Company, Newco and/or PalEx, such as lists of customers,
operational policies, and pricing and cost policies that are, and following the
Closing will be, valuable, special and unique assets of the Company, Newco
and/or PalEx. Each Shareholder agrees that he will not use or disclose such
confidential information to any Person for any purpose whatsoever, except as is
required in the course of performing his duties to the Company, Newco and/or
PalEx, unless (a) such information becomes known to the public generally through
no fault of such Shareholder, (b) such information is to disclosed to such
Shareholder on a non-confidential basis by a third Person that is legally or
contractually bound to keep such information confidential, or (c) disclosure is
required by Law, provided that prior to disclosing any information pursuant to
this clause (c) such Shareholder shall, if possible, give prior written notice
thereof to the Company, Newco and PalEx and provide the Company, Newco and PalEx
with the opportunity to contest such disclosure. In the event of a breach or
threatened breach by any Shareholder of the provisions of this Section, the
Company, Newco and/or PalEx shall be entitled to an injunction restraining such
Shareholder from disclosing, in whole or in part, such confidential information.
Nothing herein shall be construed as prohibiting the Company, Newco and/or PalEx
from pursuing any other available remedy for such breach or threatened breach,
including, without limitation, the recovery of damages.
8.2. EQUITABLE RELIEF. Because of the difficulty of measuring economic
losses as a result of the breach of the foregoing covenants, because a breach of
such covenant would diminish the value of the assets and business of the Company
being sold pursuant to this Agreement, and because of the immediate and
irreparable damage that would be caused for which the Company, Newco and/or
PalEx would have no other adequate remedy, each Shareholder agrees that the
foregoing covenants may be enforced against him by injunctions, restraining
orders and other equitable actions.
ARTICLE IX
FEDERAL SECURITIES LAWS AND CONTRACTUAL RESTRICTIONS
ON NEWCO EXCHANGEABLE SHARES AND PALEX COMMON STOCK
9.1. COMPLIANCE WITH LAW. The Shareholders acknowledge that the shares of
PalEx Common Stock issued upon exchange of the Newco Exchangeable Shares (the
"Restricted Shares") will not be registered under the 1933 Act and therefore may
not be resold without compliance with the 1933 Act. The Restricted Shares are
being, or will be, acquired by the Shareholders solely for their own account,
for investment purposes only and with no present intention of distributing,
selling or otherwise disposing of them in connection with a distribution. The
Shareholders covenant, warrant and represent that none of the Restricted Shares
will be, directly or indirectly, offered, sold, assigned, pledged, hypothecated,
transferred or otherwise disposed of except after full compliance with all of
the applicable provisions of the Act and the rules and regulations of the SEC.
The certificates representing the Restricted Shares shall bear the following
legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE NOT ISSUED IN A TRANSACTION
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"),
OR ANY APPLICABLE STATE SECURITIES LAWS. THE SHARES REPRESENTED HEREBY HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH
SALE OR TRANSFER IS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES
29
<PAGE>
ACT AND APPLICABLE STATE SECURITIES LAWS OR, IN THE OPINION OF COUNSEL TO
THE ISSUER, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND SUCH LAWS.
9.2. ECONOMIC RISK; SOPHISTICATION. Each Shareholder is able to bear the
economic risk of an investment in the PalEx Common Stock issued in connection
with the consummation of the transactions contemplated by this Agreement and can
afford to sustain a total loss of such investment. Each Shareholder has such
knowledge and experience in financial and business matters that he is capable of
evaluating the merits and risks of the proposed investment and therefore has the
capacity to protect its or his own interests in connection with his acquisition
of Newco Exchangeable Shares pursuant to the terms of this Agreement or the
PalEx Common Stock issued upon the exchange of Newco Exchangeable Shares. Each
Shareholder represents to PalEx that its Newco Exchangeable Shares and the PalEx
Common Stock issued upon the exchange of Newco Exchangeable Shares are being
acquired solely for the account of such Shareholder for investment purposes only
and not with a view to distribution. Each Shareholder or his representatives
have had an adequate opportunity to ask questions and receive answers from the
officers of PalEx concerning, among other matters, PalEx, its management, its
plans for the operation of its business and potential additional acquisitions.
9.3. RESTRICTION ON SALE OR OTHER TRANSFER OF RESTRICTED STOCK.
Notwithstanding anything contained herein, each Shareholder covenants, warrants
and represents that, unless PalEx and Newco otherwise consent in writing,
(a) as to (i) the DiLello Shareholders, the Teasdale Shareholders, the
John Campbell Shareholders and the Doering Shareholders and (ii) the Turner
Shareholders, if David E. Turner's employment with the Company is
terminated by the Company "without cause," as determined in accordance with
Mr. Turner's Employment Agreement, not more than one-half, and
(b) as to (i) the Fraser Campbell Shareholders and (ii) the Turner
Shareholders, if David E. Turner's employment with the Company is not
terminated by the Company "without cause," as determined in accordance with
Mr. Turner's Employment Agreement, none,
of the Newco Exchangeable Shares or Restricted Shares will be offered, sold,
assigned, pledged, hypothecated, transferred or otherwise disposed of (other
than pursuant to an exchange of Newco Exchangeable Shares for Restricted Shares
in accordance with the terms of the Newco Exchangeable Shares) during the two
year period commencing on the Closing Date (the "Lockup Period"). In any event,
Newco Exchangeable Shares or Restricted Shares will only be offered, sold,
assigned, pledged, hypothecated, transferred or otherwise disposed of only after
full compliance with all of the applicable provisions of the 1933 Act and the
rules and regulations of the SEC, and, during the Lockup Period, no Shareholder
shall engage in put, call, short-sale, hedge, straddle or similar transactions
intended to reduce the Shareholder's risk of owning such Newco Exchangeable
Shares or the Restricted Shares. Certificates representing one-half of the
Newco Exchangeable Shares and the Restricted Shares shall bear the following
legend in addition to the legend under Section 9.1:
30
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A CONTRACTUAL
RESTRICTION ON TRANSFER AND MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, TRANSFERRED OR OTHERWISE DISPOSED OF DURING THE PERIOD OF
SUCH CONTRACTUAL RESTRICTION WITHOUT THE PRIOR WRITTEN CONSENT OF [INSERT
APPROPRIATE NAME OF 1313530 ONTARIO INC. OR PALEX, INC.]
9.4. 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, for a period of two years after
the Closing or, if longer, for such period as shares of PalEx Common Stock
issued in exchange for Newco Exchangeable Shares are subject to Rule 144, PalEx
agrees to use its commercially reasonable efforts to:
(a) make and keep public information (as such terms are defined in
Rule 144) regarding PalEx available;
(b) file with the SEC in a timely manner all reports and other
documents required of PalEx under the 1933 Act and the 1934 Act; and
(c) furnish to each Stockholder upon written request a written
statement by PalEx as to its compliance with the reporting requirements of
Rule 144, the 1933 Act and the 1934 Act, a copy of the most recent annual
or quarterly report of PalEx, and such other reports and documents so filed
as such Stockholder may reasonably request in availing himself of any rule
or regulation of the SEC allowing such Stockholder to sell any such shares
without registration.
ARTICLE X
MISCELLANEOUS
10.1 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties
hereunder may not be assigned (except by operation of Law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
PalEx, Newco and the Company, and the heirs and legal representatives of the
Shareholders.
10.2. ENTIRE AGREEMENT. This Agreement (including the Schedules, exhibits
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the Shareholders, the
Company, Newco and PalEx and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement may be
modified or amended only by a written instrument executed by the Shareholders,
Newco and PalEx, acting through their respective officers, duly authorized by
their respective Boards of Directors.
10.3. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
taken together shall be deemed to constitute one and the same instrument.
Counterparts may be executed either in original or faxed
31
<PAGE>
form and the parties hereto adopt any signatures received by a receiving fax
machine as original signatures of the parties hereto; provided, however, that
any party hereto providing its signature in such manner shall promptly forward
to the other parties an original of the signed copy of this Agreement which was
so faxed.
10.4. BROKERS AND AGENTS. Except for the Shareholder's engagement of Cole &
Partners Limited, each party represents and warrants that it, and the
Shareholders jointly and severally represent that the Company, employed no
broker or agent in connection with the transactions contemplated by this
Agreement. The Shareholder agrees to indemnify the Company, Newco and PalEx
against all loss, cost, damages or expense arising out of claims for fees or
commissions of Cole & Partners Limited or its agents or representatives in
connection with or arising out of the transactions contemplated by this
Agreement. Each party agrees to indemnify each other party against all loss,
cost, damages or expense arising out of claims for fees or commissions of
brokers employed or alleged to have been employed by such indemnifying party (it
being understood that the Shareholders, and not the Company, shall be
responsible for the indemnification obligation which may arise in connection
with any claims for fees or commissions of brokers made by any Person who
alleges to have been employed by the Company).
10.5. NOTICES. All notices, requests, consents, directions, and other
instruments and communications required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given if
delivered personally, if mailed first-class, postage prepaid, registered or
certified mail, or if sent by telecopy, telecommunication or other similar form
of communication (with transmission confirmed), as follows:
(a) If to PalEx , addressed to it at:
PalEx, Inc.
1360 Post Oak Blvd.
Suite 800
Houston, Texas 77056
Fax: (713) 350-6031
Attn: Edward Rhyne
(b) If to Newco, addressed to it at:
c/o PalEx, Inc.
1360 Post Oak Blvd.
Suite 800
Houston, Texas 77056
Fax: (713) 350-6031
Attn: Edward Rhyne
32
<PAGE>
(c) If to the Shareholders, addressed to them at:
c/o Brans, Lehun, Baldwin
Richmond Adelaide Centre
120 Adelaide Street West
Toronto, Canada MSH 1T1
Fax: (416) 601-0655
Attn: Cosimo Fiorenza
or to such other address and to the attention of such other person(s) or
officer(s) as any party may designate by written notice. Any mailed notice
shall be deemed to have been given and received on the fifth business day
following the day of mailing. Any notice sent by telecopy, telecommunication or
other similar form of communication shall be deemed to have been given and
received on the date of the written confirmation of successful transmission.
10. ATTORNMENT. Each party agrees (a) that any action or proceeding
relating to this Agreement must be brought in any court of competent
jurisdiction in the Province of Ontario, and for that purpose now irrevocably
and unconditionally attorns and submits to the jurisdiction of such Ontario
court; (b) not to oppose any such Ontario action or proceeding on the basis of
forum non conveniens or for any other reason; and (c) not to oppose the
enforcement against it in any other jurisdiction of any judgment or order duly
obtained from an Ontario court as contemplated by this Section. Each of the
Shareholders, Newco and PalEx irrevocably appoints the following Persons as its
agents to receive on its behalf service of summons and any other legal process
which may be served in any action, suit or proceeding:
For the Shareholders:
c/o Brans, Lehun, Baldwin
Richmond Adelaide Centre
120 Adelaide Street West
Toronto, Canada MSH 1T1
Fax: (416) 601-0655
Attn: Cosimo Fiorenza
For Newco and PalEx:
c/o PalEx, Inc.
1360 Post Oak Blvd.
Suite 800
Houston, Texas 77056
Attn: Edward Rhyne
33
<PAGE>
Such service may be made by mailing or delivering a copy of such process to the
applicable party in care of its agent at the address given in this Section and
each of the parties hereto hereby irrevocably authorizes and directs the
respective agents to accept such service on their behalf. If and to the extent
such service and any summons or other legal process cannot for any reason be
effected upon the applicable agent as in this Agreement provided, each of the
parties to this Agreement further irrevocably consents to the service of any and
all legal process in any such action, suit or proceeding by the mailing of
copies of such process in the manner specified in Section 1.05. Nothing in this
Section will affect the rights of the parties to this Agreement to serve legal
process in any other manner permitted by law.
10.7. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable in that Province and shall be treated, in all respects as a Ontario
contract.
10.8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth in and shall survive the Closing for a period of three
years from the Closing Date (the "Expiration Date"), except that the
representations and warranties set forth in (a) Section 4.5 shall survive
indefinitely and (b) Section 414 and Section 4.21 hereof shall survive until
such time as the limitations period has run for all periods ended prior to the
Closing Date, which shall be deemed to be the Expiration Dates for Sections 4.14
and 4.21. The respective parties shall remain liable after the Expiration Date
for breaches of the representations and warranties set forth in and , provided
such breaches are asserted in good faith by notice in writing to the alleged
breaching party prior to the Expiration Date. Notwithstanding anything to the
contrary contained in this Agreement, any party to this Agreement may assert
claims based on fraud during the applicable statutory limitations period.
10.9. EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein,
no delay of or omission in the exercise of any right, power or remedy accruing
to any party as a result of any breach or default by any other party under this
Agreement shall impair any such right, power or remedy, nor shall it be
construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
10.10. REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and unenforceable,
but so as to most nearly retain the intent of the parties, and if such
modification is not possible, such provision shall be severed from this
Agreement, and in either case, the validity, legality and enforceability of the
remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
10.11. CANADIAN DOLLAR PAYMENTS. Except as expressly set forth in this
Agreement, all amounts to be paid pursuant to this Agreement shall be
denominated and paid in U.S. Dollars. If any payment under this Agreement is
made, pursuant to a judgment or order of any court or tribunal or otherwise, in
Canadian Dollars, such payment in Canadian Dollars will discharge the obligation
of the party obligated to make the payment (the "Payor") to the extent of the
U.S. Dollar equivalent of
34
<PAGE>
such Canadian Dollar payment using the exchange rate (as published in the Wall
Street Journal) of U.S. Dollars per Canadian Dollar on the date such obligation
is paid. Consequently, (a) if such U.S. Dollar equivalent is greater than the
U.S. Dollar equivalent of such Canadian Dollar payment using the exchange rate
(as published in the Wall Street Journal) of U.S. Dollars per Canadian Dollar on
the date the obligation that is the subject of such judgment or order was
originally due and payable pursuant to the terms of this Agreement (the
"Original Exchange Rate"), then the recipient of such payment (the "Payee")
shall repay the excess to the Payor and indemnify and save the Payor harmless
from and against any loss or damage arising because of such excess; and (b) if
such U.S. Dollar equivalent is less than the U.S. Dollar equivalent of such
Canadian Dollar payment using the Original Exchange Rate, then the Payor shall
pay the difference to the Payee and indemnify and save the Payee harmless from
and against any loss or damage arising because of such deficiency. The
obligation set forth in the immediately preceding sentence (i) is separate and
independent from any other obligation of the parties hereto, (ii) will give rise
to a separate and independent cause of action, (iii) will apply irrespective of
any indulgence granted by the Payee from time to time, (iv) will continue in
full force and effect notwithstanding any judgment in order for a liquidated sum
in respect of an amount due under this Agreement or under any judgment or order,
and (v) will not merge in any order of foreclosure made in respect of any
security given by the Payor or any other person to or for the benefit of the
Payee.
10.12. LANGUAGE. The parties to this Agreement and all deeds, documents and
notices relating to this Agreement be drawn up in the English language. Les
parties aux presentes ont exige que le present contrat et tous autres contrats,
documents ou avis afferents aux presentes soient rediges en langue anglaise.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
PALEX, INC.
By: /s/ Edward Rhyne
-----------------------------
Name: Edward Rhyne
Title: Vice President
1313530 ONTARIO INC.
By: /s/ 1313530 Ontario Inc.
-----------------------------
Name:
Title:
1271477 ONTARIO LIMITED
By: /s/ 1271477 Ontario Limited
------------------------------
Name:
Title:
ROLLEM HOLDINGS INC.
By: /s/ Rollem Holdings Inc.
------------------------------
Name:
Title:
<PAGE>
1271478 ONTARIO LIMITED
By: /s/ 1271478 Ontario Limited
------------------------------
Name:
Title:
1296288 ONTARIO LIMITED
By: /s/ 1296288 Ontario Limited
------------------------------
Name:
Title:
SAVE ON PALLETS LTD.
By: /s/ Save on Pallets, Ltd.
------------------------------
Name:
Title:
PALLET MANAGEMENT SERVICES INC.
By: /s/ Pallet Management Services, Inc.
----------------------------------------
Name:
Title:
THE DAVID E. TURNER FAMILY TRUST II
By: /s/ The David E. Turner Family Trust II
------------------------------------------
Name:
Title:
<PAGE>
THE DAVID E. TURNER FAMILY TRUST III
By: /s/ The David E. Turner Family Trust III
-------------------------------------------
Name:
Title:
THE ENRICO DILELLO FAMILY TRUST II
By: /s/ The Enrico Dilello Family Trust II
-----------------------------------------
Name:
Title:
THE ENRICO DILELLO FAMILY TRUST III
By: /s/ The Enrico Dilello Trust III
-----------------------------------------
Name:
Title:
THE WORDEN TEASDALE FAMILY TRUST
By: /s/ The Worden Teasdale Family Trust
-----------------------------------------
Name:
Title:
THE FRASER CAMPBELL FAMILY TRUST II
By: /s/ The Fraser Campbell Family Trust
----------------------------------------
Name:
Title:
<PAGE>
THE FRASER CAMPBELL FAMILY TRUST III
By: /s/ The Fraser Campbell Family Trust III
---------------------------------------------
Name:
Title:
THE JOHN F. CAMPBELL FAMILY TRUST II
By: /s/ The John F. Campbell Family Trust II
---------------------------------------------
Name:
Title:
THE JOHN F. CAMPBELL FAMILY TRUST
By: /s/ The John F. Campbell Family Trust
---------------------------------------------
Name:
Title:
THE RONALD DOERING FAMILY TRUST
By: /s/ The Ronald Doering Family Trust
---------------------------------------------
Name:
Title:
/s/ Fraser Campbell
------------------------------------------------
Fraser Campbell, Individually
/s/ John F. Campbell
------------------------------------------------
John F. Campbell, Individually
<PAGE>
/s/ Enrico DiLello
-----------------------------------------------
Enrico DiLello, Individually
/s/ Ronald Doering
-----------------------------------------------
Ronald Doering, Individually
/s/ Clint Sharples
-----------------------------------------------
Clint Sharples, Individually
/s/ Worden Teasdale
-----------------------------------------------
Worden Teasdale, Individually
/s/ Susan Virginia Teasdale
-----------------------------------------------
Susan Virginia Teasdale, Individually
/s/ David E. Turner
-----------------------------------------------
David E. Turner, Individually
