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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-22237
PALEX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0520673
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1360 POST OAK BLVD., SUITE 800
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 350-6030
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 17, 1998 was $164,955,479. As of that date,
18,175,286 shares of the Company's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III is incorporated by reference from
the registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Core Business. PalEx, Inc. (together with its subsidiaries, "PalEx"
or the "Company") was formed in January 1996 to create a national provider of
pallets and related services. Concurrently with the closing of its initial
public offering on March 25, 1997 (the "Offering"), PalEx acquired Ridge
Pallets, Inc. ("Ridge"), Fraser Industries, Inc. ("Fraser") and Interstate
Pallet Co. ("Interstate" and, together with Ridge and Fraser, the "Founding
Companies"). Since that time, and through March 26, 1998, the Company has
acquired nine additional pallet companies, including American Pallet Recyclers,
Inc., Bay Area Pallet Company, Capital Pallet Co. Inc., New London Pallet, Inc.,
Pallet Outlet Company, Inc., Sheffield Lumber & Pallet Company, Inc., Sonoma
Pacific Company, Southern Pallet Company, Inc., and Summers Pallet
Manufacturing, Inc. (the "Acquired Pallet Companies"), making it the largest
producer of new pallets and the largest pallet recycler in the U.S. The Company
believes that, because of these acquisitions, it is in a position to capitalize
on the significant trends currently affecting product manufacturing and
distribution practices throughout the U.S., including the increasing reliance by
shippers and logistics agents on a smaller number of better capitalized, more
sophisticated vendors. The Company provides a broad variety of pallet products
and related services, including the manufacture and distribution of new pallets;
the recycling of pallets (including used pallet retrieval, repair, remanufacture
and secondary marketing); the maintenance of depot operations and the sorting
and storage of pallets for selected customers; and the processing and marketing
of various wood-based by-products derived from pallet recycling operations. The
Company now conducts its pallet operations from 37 facilities in Alabama,
Arkansas, Arizona, California, Florida, Georgia, Illinois, Mississippi, North
Carolina, Oklahoma, Pennsylvania, South Carolina, Texas, Virginia and Wisconsin.
The Company intends to actively pursue additional acquisitions of pallet
companies as part of its growth strategy.
Recent Post-Year-End Acquisitions. In separate transactions in
February 1998, PalEx acquired Acme Barrel Company, Inc., Container Services
Company, Consolidated Container Corporation and Drum Service Co. of Florida
(collectively, the "Container Group"), thereby expanding the Company's
operations into the industrial container management industry. As a result of
these very recent acquisitions, the Company is now the largest reconditioner of
steel drums in the U.S. The Company currently conducts drum reconditioning
operations from 13 facilities in California, Colorado, Florida, Georgia,
Illinois, Kansas, Minnesota, Utah and Washington. The Company anticipates that
its entry into this industry will strengthen its competitive position by
enabling customers of the combined enterprises to reduce their material-handling
costs by relying on a single vendor to satisfy their pallet and industrial
container requirements. The Company also anticipates that, once the individual
operations of the Container Group are integrated with the Company's operations,
its acquisition of the Container Group will result in synergies and economies of
scale by allowing the combined enterprises to more efficiently utilize their
transportation fleets and systems, cross-sell services and products to the
combined enterprises' customers and combine duplicate administrative functions.
The Company intends to actively pursue additional acquisitions of steel drum
reconditioners as part of its growth strategy. Because the Container Group
acquisitions occurred following the end of fiscal 1997, the description of the
Company's business in this Report focuses almost entirely on the Company's
historical core business: providing pallets and related services. (Certain pro
forma financial information relating to the acquisitions of the Container Group
is set forth in Note 11 of Notes to the Company's Consolidated Financial
Statements below. A complete set of the pro forma financial statements will be
prepared and filed on or before April 28, 1998, in an amendment to the Company's
Form 8-K regarding the acquisitions, which was filed on February 28, 1998.)
PALLET INDUSTRY OVERVIEW
Based on information supplied by industry sources, the Company
estimates that the U.S. pallet industry generated revenues of approximately $6
billion in 1996 and that it is served by approximately 3,800 companies, most of
which are small, privately held entities operating in only one location and
serving customers within a limited geographic radius. The industry generally is
composed of companies that manufacture new pallets and companies that repair and
recycle pallets. The Company estimates, based on industry sources, that during
1996 approximately 450
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million new wooden pallets were produced and approximately 85 million wooden
pallets were recycled. The Company estimates there are more than two billion
pallets in circulation in the U.S. today.
A pallet is a platform, usually made of wood, that is used for storing
and shipping goods. Pallets are used in virtually all U.S. industries where
products are physically distributed, including the automotive, chemical,
consumer products, grocery, produce and food production, paper and forest
products, retail, and steel and metals industries. Pallets come in a wide range
of shapes and sizes. Although most pallets are made of wood, they may also be
made of steel, plastic, cardboard, molded wood fiber and other materials to
satisfy smaller niche markets. The Company believes that there are over 1,000
different sizes and specifications of pallets used in North America. The
grocery industry, which utilizes approximately one-third of all new pallets
produced, uses a standard size 48" x 40" pallet, although many different styles
and specifications are manufactured for use in that industry. Other industries
use pallets having specifications that are appropriate for their particular
needs. Based on information supplied by industry sources, the Company believes
that in 1996 over 90% of the pallets used were of the traditional wooden type,
fabricated from lumber and metal fasteners. The wooden pallet has traditionally
been the basis for the design of storage racks, warehouse storage areas,
forklifts, docks and containers used in shipping goods.
The pallet industry has experienced significant changes and growth
during the past several years. These changes are due, among other factors, to
the focus by FORTUNE 1000 businesses on improving the logistical efficiency of
their manufacturing and distribution systems. This focus has caused many of
these businesses to attempt to reduce significantly the number of vendors
serving them in order to simplify their procurement and product distribution
processes. It also has prompted large manufacturers and distributors to
outsource key elements of those processes that are not within their core
competencies and to develop just-in-time procurement, manufacturing and
distribution systems. With the adoption of these systems, expedited product
movement has become increasingly important and the demand for a high quality
source of pallets has increased. Palletized freight facilitates movement
through the supply chain, reducing costly loading and unloading delays at
distribution centers and warehouse facilities. However, the use of low-quality
or improperly sized pallets may increase the level of product damage during
shipping or storage. As a result, there has been an increased demand for high-
quality pallets in an attempt to reduce product damage during shipping and
storage.
The broad changes affecting U.S. industry have created significant
demand for higher quality pallets distributed through an efficient, more
sophisticated system. Environmental and cost concerns have also accelerated the
trend toward increased reuse or "recycling" of previously used pallets, further
increasing the importance of the quality of newly manufactured pallets. In
recognition of these trends, CHEP has established a national pallet leasing
program that provides high-quality pallets to customers throughout the U.S. for
a daily fee. CHEP is a partnership created by Brambles Industries Limited, an
Australian publicly held corporation, and GKN, Ltd., a publicly held U.K.
corporation. The Company manufactures and repairs pallets for CHEP and provides
a variety of logistical services with respect to its existing pallet pool,
including the storage and just-in-time delivery of pallets. CHEP currently does
not manufacture or repair pallets. During the fiscal year ended December 28,
1997, approximately 35% of the Company's revenues were from the Company's
services to CHEP.
CHEP's pallet leasing system represents a significant change in the
U.S. pallet market. CHEP leases a high-quality, standardized and easily
identifiable (all CHEP pallets are painted blue) 48" x 40" pallet, primarily for
use by grocery and consumer products customers. CHEP pallets are manufactured
to strict specifications by vendors, including the Company, that have been
selected based on their ability to provide large volumes of pallets manufactured
to CHEP specifications in a timely manner. The advantages CHEP offers to its
customers are high-quality, uniform pallets and just-in-time delivery
capabilities.
DESCRIPTION OF SERVICES
New Pallet Manufacturing. New pallet manufacturing represented
approximately 69% of the Company's revenues for the fiscal year ended December
28, 1997. The manufacturing process for new pallets at each of the Company's
facilities is generally the most capital intensive part of the business, with
the majority of assembly and construction being automated. New pallets are
manufactured from an assortment of wood products, varying in type and quality,
with construction specifications being determined by the pallet's end use. The
Company believes that
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approximately 70% of the wood used in new pallets manufactured in North America
consists of hardwoods (including oak, poplar, alder and gum), with the balance
consisting of pine or other softwoods.
The Company uses sawing equipment that cuts large wood sections to
specification. The cut wood is then transported to assembly points where
employees load the side boards ("stringers") and deck boards into nailing
machines that nail the pallets together. After construction is completed,
pallets are transported to a stacker for shipment or storage. More customized or
smaller orders may be manufactured by hand on assembly tables by two laborers
utilizing pneumatic nailers. The Company typically manufactures pallets upon
receipt of customer orders and generally does not maintain a significant
inventory of completed pallets.
Pallet Repair, Remanufacture and Recycling. Many new pallets are
discarded by pallet users after one trip. However, pallets can be recovered,
repaired, if necessary, and reused. In addition, used pallets that are beyond
repair can be disassembled, and the recovered lumber can be reused to repair
used pallets. Pallet repair and recycling operations begin with the retrieval
or purchase of used pallets from a variety of sources. The condition and size
of these pallets vary greatly. Once obtained, the pallets are sorted by size
and condition. A portion of the pallets may require no repair and can be resold
or returned immediately. Repairable pallets have their damaged boards replaced
with salvaged boards or boards from new stock inventoried at the repair
facility. Pallets that cannot be repaired are dismantled, and the salvageable
boards are recovered for use in repairing and building other pallets. The
remaining damaged boards may be ground into wood fiber, which the Company sells
for use as landscaping mulch, fuel, animal bedding, gardening material and other
uses. Despite recent increasing automation, pallet recycling remains a labor
intensive process. Non-CHEP pallet repair, remanufacturing and recycling
represented approximately 12% of the Company's 1997 fiscal year revenues.
Pallet Management. Pallet management is the process of providing a
combination of services related to a customer's pallet usage, including the
manufacture, repair, retrieval, delivery and storage of pallets as well as the
disposal of unusable pallets and component parts. In a typical arrangement, the
Company will contract with a customer to remove all pallets from a particular
location and transport them to the Company's repair facility. The pallets are
sorted and repaired as needed and sold to third parties, returned to either the
customer or its supplier, or placed in storage and made available for return to
service ("depot services"). In a typical arrangement, the Company will contract
with a customer to perform any or all of the management services available.
ACQUISITIONS
Since the Offering and through March 26, 1998, the Company purchased
nine pallet companies in separate transactions, four of which were accounted for
as poolings-of-interest. These nine companies operate 15 facilities in six
states and had pro forma revenues of approximately $98.4 million for the
Company's fiscal year ended December 28, 1997. The aggregate consideration for
these acquired companies was approximately 3.6 million shares of the Company's
Common Stock, approximately $19.2 million in cash and approximately $7.2 million
principal amount of convertible notes.
In February 1998, PalEx Container Systems, Inc., a wholly owned
subsidiary of the Company, acquired the companies in the Container Group, which
conducted operations from 13 facilities in nine states and which had fiscal year
1997 pro forma revenues of approximately $90.9 million. The Container Group
acquisitions occurred in four separate transactions, three of which were
accounted for as poolings-of-interests. The aggregate consideration for the
Container Group acquisitions was approximately 4.2 million shares of the
Company's Common Stock and approximately $26.2 million in cash.
OPERATIONS
The Company centralizes its consolidated financial reporting, cash
management, training, human resources, safety and merger and acquisition
activities. The Company otherwise operates on a decentralized basis, with the
management of each operating location responsible for its day-to-day operations,
profitability and growth. Local management uses the Company's "best practices"
program, which seeks to replicate acquired companies' best practices throughout
the entire Company with respect to operations and processes, transportation and
other logistical activities,
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worker training and participation programs, financial controls, and purchasing
information in order to improve productivity, reduce operating costs and improve
customer satisfaction to stimulate internal growth.
SALES AND MARKETING
The Company currently sells to pallet customers within the various
geographic regions in which the Company conducts operations. The primary
pallet-related sales and marketing activities involve direct selling by the
Company's sales force and by members of senior management to local and regional
customers at the plant level and to large accounts and target industries more
broadly on a geographic basis. Because pricing is a function of regional
material and delivery costs, pricing is established at the regional level.
Because many of the Company's pallet customers need similar services
on a national scale, the Company is developing a national sales and marketing
plan to provide such services at many locations throughout the U.S. The Company
seeks to continue to develop a network of facilities that will allow these
customers to: (i) centralize purchases of new and recycled pallets; (ii) obtain
convenient and dependable service and a consistent supply of uniform quality
pallets; (iii) achieve greater efficiencies in their pallet use; and (iv) meet
corporate recycling goals. The Company has developed relationships with several
national customers and intends to attempt to provide service to these and
numerous other customers on a local, regional and national basis. The pallet
needs of national companies are not uniform, and the Company intends to tailor
its national programs for each customer. These programs include a combination
of sourcing, retrieving, repairing and recycling pallets according to individual
customer requirements.
CUSTOMERS
The Company seeks to efficiently serve large numbers of customers
across diverse markets and industries to provide a stable and diversified base
for ongoing sales of products and services in all its operations.
Customers of the Company's pallet services operations include
companies in the automotive, chemical, consumer products, grocery, produce and
food production, paper and forest products, retail, and steel and metals
industries and are both regional and national in scale. Because a significant
part of the Company's pallet products and services are sold to customers engaged
in the produce and citrus industries, the Company's sales volumes in certain
regions tend to be seasonal. During fiscal year ended December 28, 1997, the
Company sold pallets to over 2,700 customers. One customer, CHEP, accounted for
approximately 35% of the Company's annual revenues. No other single customer
accounted for 10% or more of the Company's revenues. The Company enters into
contracts with CHEP on a facility-by-facility basis, and the terms of such
contracts vary in accordance with the service to be provided. Depot agreements
may be terminated with or without cause, while repair and depot/repair
agreements may only be terminated by CHEP for cause and have both indefinite
terms and fixed terms of between one and three years. All of the CHEP contracts
prohibit the Company's contracting facilities from competing with CHEP during
the term of the agreement and for a period of up to three years thereafter in
the pallet-leasing business and from repairing pallets for other pallet leasing
companies. The CHEP contracts typically do not provide for fixed volumes of
repaired or new pallets.
MANAGEMENT INFORMATION AND CONTROLS
The Company's consolidated accounting and financial reporting
activities are centralized at its operational headquarters in Bartow, Florida,
while basic accounting activities are conducted at the regional level. The
Company believes that its current information systems hardware and software are
adequate to meet current and perceived needs for financial reporting and
internal management control information and other necessary information. The
Company believes this system enhances its ability to: (i) monitor each regional
operation; (ii) prepare both operations and capital asset budgets and budget
variances; (iii) assimilate newly acquired operations into its network through
standard reporting mechanisms; (iv) implement operational and productivity
measurements and benchmarking; and (v) conduct individual customer profitability
analysis.
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RAW MATERIALS
The primary raw materials used in new pallet manufacturing are lumber
and plywood. The Company has long-term relationships with its lumber and plywood
vendors, and the Company believes that these relationships, as well as its
ability to pursue larger volume purchases, will help to ensure adequate lumber
supplies at competitive prices in the future. During the fiscal year ended
December 28, 1997, the Company purchased lumber and plywood from over 175
vendors. Two of these vendors accounted for approximately 7% and 6%,
respectively, of the Company's total lumber purchases during the fiscal year
ended December 28, 1997. The Company does not believe that the loss of either of
these vendors would materially adversely affect its financial condition or
results of operations. The Company intends to continue to pursue a strategy of
purchasing and upgrading low-grade and alternative sources of lumber as well as
exploiting pricing aberrations and market trends to take advantage of lower
prices in the marketplace as they occur.
Pallet prices are closely related to the changing costs and
availability of lumber, the principal raw material used in the manufacture and
repair of wooden pallets. Typically, lumber prices fall in oversupplied lumber
markets, enabling small pallet manufacturers with limited capital resources to
procure lumber and initiate production of low-cost pallets, depressing pallet
prices overall and adversely affecting the Company's revenues and operating
margins. While the Company believes that it will benefit from strong
relationships with multiple lumber suppliers, there can be no assurance that the
Company will be able to secure adequate lumber supplies in the future. Lumber
supplies and costs are affected by many factors outside the Company's control,
including governmental regulation of logging on public lands, lumber agreements
between Canada and the U.S. and competition from other industries that use
similar grades and types of lumber. In addition, adverse weather conditions may
affect the Company's ability to obtain adequate supplies of lumber at a
reasonable cost. In 1997, the Company experienced higher lumber costs resulting
from high demand and the impact of wet weather on the harvesting of hardwood
timber in the southeast regions of the U.S. The Company tries to take advantage
of the price volatility of lumber by buying additional quantities of lumber when
prices are favorable and storing the inventory for later use. The Company also
is able to buy low-quality lumber and upgrade such lumber at its own plants.
Though the Company has studied the broad use of alternative materials for the
manufacture of pallets, such as plastic, management believes that there is not
currently an available alternative raw material that possesses the tensile
strength, recyclability and low cost of wood. The Company continues to evaluate
alternatives to wood and is receptive to their future use in pallet production.
The Company sources the majority of its pallets for reconstruction
from businesses that use pallets and from trucking companies. Businesses that
receive and ship a significant amount of goods are generally good sources for
used pallets. Often the pallets they receive are damaged or do not meet their
size or other specifications for internal systems or shipping. As a result,
these businesses accumulate pallets that can be recycled. The Company
identifies these sources through establishing relationships with pallet users
and by direct solicitation, telemarketing and advertising. The Company
generally achieves timely pallet removal by placing a trailer at a source which
loads unwanted pallets onto the trailer. The Company then removes the load of
pallets at the same time it delivers recycled pallets to the pallet user. In
some cases, the Company is paid a tipping fee for hauling away the used pallets
or is allowed to take the pallets away at no charge; in other cases, the Company
buys the used pallets.
COMPETITION
The Company believes that the principal competitive factors in the
pallet industry are price, quality of services and reliability. With over 3,800
industry participants, the pallet manufacturing industry has been, and is
expected to remain, extremely fragmented and highly competitive. Though several
companies have attempted to establish national pallet operations, most of the
Company's competitors are small, privately held companies that operate in only
one location and serve customers within a limited geographic radius.
Competition on pricing is often intense, and the Company may face increasing
competition from pallet leasing or other pallet systems providers, which are
marketed to new pallet purchasers as less expensive alternatives. CHEP's pallet
leasing system competes with new pallet sales to the grocery and wholesale
distribution industries, and may expand into other industries in the future. In
addition, pallet manufacturing and recycling operations are not highly capital
intensive, and the barriers to entry in such businesses are minimal. Certain
other smaller competitors may have lower overhead costs and, consequently, may
be able to manufacture or recycle pallets at lower costs than the Company.
Other companies with significantly greater
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capital and other resources than the Company (including CHEP) may enter or
expand their operations in the pallet manufacturing and recycling businesses in
the future, changing the competitive dynamics of the industry. The Company has
in the past and will continue to compete with lumber mills in the sale of new
pallets. The lumber mills typically view pallet manufacturing as an opportunity
to use the lower grade lumber that would otherwise be waste for the mill. While
the Company estimates, based on industry sources, that non-wooden pallets
currently account for less than 10% of the pallet market, there can be no
assurance that the Company will not face increasing competition from pallets
fabricated from non-wooden components in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's wholly owned subsidiary Sonoma Pacific is a party (with
its former stockholders) to non-competition agreements which may restrict until
July 31, 1998, Sonoma Pacific's (and its affiliates' or such former
stockholders') ability to engage in any activity or business enterprise or own
an interest in any entity which engages in any activity or business enterprise
which competes with First Alliance Logistics Management, L.L.C. (the
"Alliance"), an organization of pallet recyclers and manufacturers created to
pursue the national and global marketing and management of pallet systems,
including the sale or leasing of pallets. The Company's wholly owned subsidiary
Interstate and its former stockholder were parties to similar non-competition
agreements that terminated on January 14, 1998. Interstate, Sonoma Pacific and
their former stockholders (including current officers of the Company's
subsidiaries and a current director of the Company) joined the Alliance in
October 1995 and in connection therewith executed agreements pursuant to which
each agreed not to compete with the business of the Alliance for a period of one
year from withdrawal. Interstate and Stephen C. Sykes, its former sole
stockholder and a director of the Company, notified the Alliance of such
withdrawal on January 14, 1997, in connection with Interstate's agreement to
merge with a subsidiary of PalEx. In response, the Alliance notified Interstate
of its intent to enforce the terms of the non-competition agreements as it may
deem appropriate. The Alliance has not yet commenced legal proceedings, however,
and the Company does not know when, if ever, such proceedings might be
commenced. Sonoma Pacific withdrew from the Alliance effective July 31, 1997.
The non-competition agreements explicitly exclude from their coverage any
product or services sold or offered by Interstate or Sonoma Pacific at the time
they became members of the Alliance. Because Interstate and Sonoma Pacific were
engaged in the manufacture and recycling of pallets in October 1995 and continue
in these business lines currently, the Company believes that the non-compete
agreements do not apply to Interstate's and Sonoma Pacific's current businesses.
The Alliance could seek either injunctive relief or monetary damages from
Interstate and Sonoma Pacific. However, given the expiration of Interstate's
non-competition agreement and the short duration of Sonoma Pacific's
non-competition agreement and the exclusion of the businesses currently
conducted by Interstate and Sonoma Pacific, the Company believes that such
agreements, even if enforced, would not have a material adverse effect on its
operations.
EMPLOYEES
At March 15, 1998, the Company had approximately 2,800 employees;
approximately 705 of those were employees of the Container Group. Approximately
321 employees of the Container Group at three locations are covered by
collective bargaining agreements. The Company has not experienced any work
stoppage and believes that its relationship with its employees is satisfactory.
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RISK FACTORS
Absence of Combined Operating History. Prior to being acquired by the
Company, each subsidiary of the Company operated as a separate independent
entity. There can be no assurance that the Company will be able to integrate
these businesses on an economic basis. In addition, there can be no assurance
that the recently assembled management group will be able to oversee the
combined entity and effectively implement the Company's operating or growth
strategies. The financial results of the Company cover periods when the
Company's subsidiaries were not under common control or management and,
therefore, may not be indicative of the Company's future financial or operating
results. The success of the Company will depend on the extent management is
able to centralize and integrate certain administrative and accounting functions
and otherwise integrate its acquired companies and other future acquisitions
into one organization in a profitable manner. The inability of the Company to
successfully integrate its acquisitions would have a material adverse effect on
the Company's financial condition and results of operations and would make it
unlikely that the Company's acquisition program will be successful.
Supply and Demand for Lumber. Pallet prices are closely related to
the changing costs and availability of lumber, the principal raw material used
in the manufacture and repair of wooden pallets. Typically, lumber prices fall
in oversupplied lumber markets, enabling small pallet manufacturers with limited
capital resources to procure lumber and initiate production of low-cost pallets,
depressing pallet prices overall and adversely affecting the Company's revenues
and operating margins. The majority of the lumber used in the pallet industry
is hardwood, which is only grown in certain regions of the U.S. and which is
difficult to harvest in adverse weather, making its pricing volatile. For the
fiscal year ended December 28, 1997, purchases from two lumber vendors accounted
for approximately 7% and 6%, respectively, of the Company's total pro forma
combined lumber purchases. While the Company purchased plywood and lumber from
over 175 vendors during the fiscal year ended December 28, 1997, and believes
that it will benefit from strong relationships with multiple lumber suppliers,
there can be no assurance that the Company will be able to secure adequate
lumber supplies in the future. Lumber supplies and costs are affected by many
factors outside the Company's control, including weather, governmental
regulation of logging on public lands, lumber agreements between Canada and the
U.S. and competition from other industries that use similar grades and types of
lumber. For example, in 1997, the Company experienced higher lumber costs
resulting from high demand and the impact of wet weather on the harvesting of
hardwood timber in the southeast region of the U.S. To the extent the Company
encounters adverse lumber prices or is unable to procure adequate supplies of
lumber, its financial condition and results of operations could be materially
adversely affected.
Factors Affecting Internal Growth. The Company's ability to generate
internal earnings growth will be affected by, among other factors, its ability
to expand the range of services offered to customers, attract new customers,
increase volumes purchased by existing customers (including CHEP), hire and
retain employees, obtain raw materials at acceptable prices, open additional
manufacturing and repair facilities and reduce operating and overhead expenses.
Reliance on Acquisitions. One of the Company's principal growth
strategies is to increase its revenues and the markets it serves through the
acquisition of additional pallet manufacturing and recycling companies and steel
drum reconditioning companies. There can be no assurance that the Company will
be able to identify or acquire additional businesses or to integrate and manage
such additional businesses successfully. Acquisitions may involve a number of
risks, including: adverse short-term effects on the Company's reported operating
results; diversion of management's attention; dependence on retention, hiring
and training of key personnel; risks associated with unanticipated problems or
legal liabilities; and amortization of acquired intangible assets. Some or all
of these risks could have a material adverse effect on the Company's financial
condition or results of operations. In addition, to the extent that
consolidation becomes more prevalent in the industries in which the Company
operates, the prices for attractive acquisition candidates may increase and the
number of attractive acquisition candidates may decrease; in any event, there
can be no assurance that businesses acquired in the future will achieve sales
and profitability that justify the investment therein.
Financing. The Company intends to use its Common Stock for a portion
of the consideration for certain acquisitions. If the Common Stock does not
maintain a sufficient valuation or potential acquisition candidates are
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to use more of its cash resources,
if available, in order to pursue its acquisition program. If the Company does
not have sufficient cash resources, its growth could be limited unless it is
able to obtain additional capital through future
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debt or equity financings. Using cash to complete acquisitions and finance
internal growth could substantially limit the Company's financial flexibility,
using debt could result in financial covenants that limit the Company's
operations and financial flexibility, and using equity may result in significant
dilution of the ownership interests of the then existing stockholders of the
Company. There can be no assurance that the Company will be able to obtain
financing if and when it is needed or that, if available, it will be available
on terms the Company deems acceptable. As a result, the Company may be unable
to pursue its acquisition strategy successfully.
The Company is a party to a credit facility with Bank One, Texas, NA
and other bank lenders which allows the Company to borrow up to $125 million to
be used for general corporate purposes, future acquisitions, capital
expenditures and working capital. The facility requires the Company to comply
with various affirmative and negative covenants (including maintenance of
certain financial ratios) which could limit the Company's operational and
financial flexibility.
Weather Conditions. The Company sells a significant portion of its
products and services to customers who ship agricultural products. Severe
weather, particularly during the harvesting seasons, may cause a reduction in
demand from agricultural customers, adversely affecting the Company's revenues
and results of operations. A heavy freeze or other weather adversely affecting
the citrus and produce industries could have a significant negative impact on
the Company's financial condition and results of operations. In addition,
adverse weather conditions may affect the Company's ability to obtain adequate
supplies of lumber at a reasonable cost. In October through December 1996, the
Company experienced higher lumber costs resulting from, among other things, the
impact of wet weather on the harvesting of hardwood timber in the southeast
region of the U.S. Additionally, freezing weather conditions in south Florida
during January 1997 adversely impacted the produce harvest, thereby reducing the
demand for pallets. These conditions adversely affected the Company's results
of operations for the fiscal quarter ended March 2, 1997.
Seasonality; Fluctuation of Operating Results. The pallet
manufacturing business can be subject to seasonal variations in operations and
demand. Approximately 13% of the Company's pro forma revenues for the fiscal
year ended December 28, 1997, were attributable to the agricultural industry in
the southeast and western regions of the U.S., with the citrus and produce
industries comprising the largest components thereof. As a result, the Company's
operations experience the greatest demand for new pallets during the citrus and
produce harvesting seasons (generally October through May), with significantly
lower demand in the summer months. Moreover, yearly results can also fluctuate
significantly, particularly in the southeast region of the U.S., as a result of
the size of the citrus and produce harvests, which, in turn, largely depend on
the occurrence and severity of freezing weather. Quarterly results may also be
materially affected by the timing of acquisitions, the timing and magnitude of
acquisition assimilation costs, costs of opening new facilities, gain or loss of
a material customer, variation in product mix and weather conditions. In
addition, the Company's revenues and gross margins can fluctuate significantly
with variations in lumber prices. Accordingly, the Company's performance in any
particular quarter may not be indicative of the results which can be expected
for any other quarter or for the entire year.
Reliance on CHEP. During the fiscal year ended December 28, 1997,
approximately 35% of the Company's revenues and a significant percentage of the
Company's growth were attributable to CHEP. In addition, certain of the
Company's facilities are substantially dependent on CHEP as their predominant
customer. If CHEP were to materially decrease its purchase of pallets and
services from the Company, either because CHEP's operations encounter financial
reversals or as a result of CHEP's determination to manufacture pallets
internally, to buy pallets and services from competitors of the Company or to
substantially increase the number of pallets it repairs or for any other reason,
the Company's financial condition and results of operations could be materially
adversely affected. The Company and CHEP enter into an agreement for each
Company facility which performs CHEP repair or depot services. These agreements
generally do not contain fixed volume requirements, may be terminated with or
without cause depending on the nature of the service provided and have both
indefinite and fixed terms of between one and three years. The contracts
prohibit the Company's contracting facilities from competing with CHEP in pallet
leasing and from repairing pallets for other leasing companies during the term
of the agreement and for a period of up to three years thereafter. Although CHEP
has not terminated or failed to renew any of these agreements to date, there can
be no assurance that CHEP will not terminate or fail to renew such agreements in
the future.
9
<PAGE>
Management of Growth. The Company expects to grow both internally and
through acquisitions. Management expects to expend significant time and effort
in evaluating, completing and integrating acquisitions and opening new
facilities. There can be no assurance that the Company's systems, procedures
and controls will be adequate to support the Company's operations as they
expand. Any future growth also will impose significant added responsibilities
on members of senior management, including the need to identify, recruit and
integrate new senior level managers and executives. There can be no assurance
that such additional management will be identified and retained by the Company.
If the Company is unable to manage its growth efficiently and effectively, or is
unable to attract and retain additional qualified management, then the Company's
financial condition and results of operations could be materially adversely
affected.
Competition. The markets for pallet manufacturing and recycling
services are highly fragmented and competitive. Competition on pricing is often
intense and the Company may face increasing competition from pallet leasing or
other pallet systems providers, which are marketed as less expensive
alternatives to new pallet purchasers. CHEP's pallet leasing system competes
with new pallet sales to the grocery and wholesale distribution industries, and
may expand into other industries in the future. In addition, pallet
manufacturing and recycling operations are not highly capital intensive, and the
barriers to entry in such businesses are minimal. Certain other smaller
competitors may have lower overhead costs and, consequently, may be able to
manufacture or recycle pallets at lower costs than the Company. Other companies
with significantly greater capital and other resources than the Company
(including CHEP) may enter or expand their operations in the pallet
manufacturing and recycling businesses in the future, changing the competitive
dynamics of the industry. The Company has competed in the past, and will
continue to compete, with lumber mills in the sale of new pallets. Lumber mills
typically view pallet manufacturing as an opportunity to use the lower grade
lumber that would otherwise represent waste that must be disposed by the mill.
While the Company estimates, based on industry sources, that non-wooden pallets
currently account for less than 10% of the pallet market, there can be no
assurance that the Company will not face increasing competition from pallets
fabricated from non-wooden components in the future. For example, Ridge
currently sells agricultural harvesting boxes. For the past several years,
these products have faced increasing competition from plastic agricultural
containers, which has materially reduced the number of agricultural harvesting
boxes sold by Ridge. The Company expects competition with plastic agricultural
containers to continue in the future.
Effect of Non-Competition Agreement. Sonoma Pacific and its former
stockholders are parties to non-competition agreements which may restrict until
July 31, 1998, Sonoma Pacific's and its affiliates' or such stockholders'
ability to engage in any activity or business enterprise or own an interest in
any entity which engages in any activity or business enterprise which competes
with Alliance Logistics Management, L.L.C. (the "Alliance"), an organization of
pallet recyclers and manufacturers created to pursue the national and global
marketing and management of pallet systems, including the sale or leasing of
pallets. Interstate and its former stockholders were parties to similar non-
competition agreements that terminated on January 14, 1998. The Company has been
notified by the Alliance on that it intended to enforce the terms of the non-
competition agreements as it deems appropriate, although the Alliance has not to
date commenced legal proceedings and the Company does not know when, if ever,
such proceedings would commence. The agreements explicitly exclude from their
coverage any product or services offered or sold by Interstate and Sonoma
Pacific before October 1995, which are the same products or services currently
offered by Interstate and Sonoma Pacific. Because of the noncompete provisions'
short duration and exclusion of business currently conducted by Interstate and
Sonoma Pacific, the Company believes that such agreements will not have a
material adverse effect on its operations.
Effect of Certain Charter Provisions. The Board of Directors of the
Company is empowered to issue Preferred Stock without stockholder action. The
existence of this "blank-check" Preferred Stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise, even if such a transaction would
provide greater value to the Company's stockholders than if the Company remained
independent. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. Certain provisions of the Delaware General
Corporation Law may also discourage takeover attempts that have not been
approved by the Board of Directors.
Dependence on Key Personnel. The Company's operations are dependent
on the continued efforts of its executive officers and on senior management.
Furthermore, the Company will likely be dependent on the senior
10
<PAGE>
management of companies that may be acquired in the future. Although the
Company has entered into an employment agreement with each of the Company's
executive officers, there can be no assurance that any individual will continue
in such capacity for any particular period of time. The loss of key personnel,
or the inability to hire and retain qualified employees could have an adverse
effect on the Company's business, financial condition and results of operations.
The Company does not intend to carry key-person life insurance on any of its
employees.
Control by Existing Management and Stockholders. The Company's
executive officers, directors and key employees, and entities and persons
affiliated with them, beneficially owned, as of March 17, 1998, approximately
33% of the outstanding shares of Common Stock. These persons, if acting in
concert, will be able to continue to exercise control over the Company's
affairs, to elect the entire Board of Directors and to control the disposition
of any matter submitted to a vote of stockholders.
Potential Exposure to Environmental Liabilities. The Company's
operations are subject to various environmental laws and regulations, including
those dealing with handling and disposal of waste products, polychlorinated
biphenyls, fuel storage and air quality. As a result of past and future
operations at its facilities, the Company may be required to incur remediation
costs and other expenses related thereto. In addition, although the Company
intends to conduct appropriate due diligence with respect to environmental
matters in connection with future acquisitions, there can be no assurance that
the Company will be able to identify or be indemnified for all potential
environmental liabilities relating to any acquired business.
In February 1998, the Company acquired Drum Service Co. of Florida, a
steel drum reconditioning company with a facility in Florida ("Drum Service").
Drum Service is a wholly owned subsidiary of the Company. In 1982 Drum Service
was notified by the U.S. Environmental Protection Agency (the "EPA") and the
Florida Department of Environmental Regulation (the "DER") that they believed
that Drum Service might be a potentially responsible party ("PRP") regarding the
Zellwood Groundwater Contamination Site in Orange County, Florida (the "Zellwood
Site"). The Zellwood Site was designated a "Superfund" environmental clean-up
site after the DER discovered arsenic contamination in a shallow monitoring well
adjacent to it. The Drum Service facility is a portion of the 57 acres
constituting the Zellwood Site. The Company believes that Drum Service and its
former sole shareholder were among approximately 25 entities and individuals
identified as PRPs by the EPA.
Between March 1990 and July 1996, the EPA issued various unilateral
administrative orders and notices to Drum Service and various other PRPs. Those
orders and notices demanded reimbursement from PRPs of approximately $2 million
of the EPA's costs regarding the Zellwood Site and requested the PRPs to accept
financial responsibility for additional clean-up efforts. During that time, the
EPA estimated that the cost of the selected remedy for soil at the Zellwood Site
would be approximately $1 million and the cost of the selected remedy for
groundwater at the Zellwood Site would be approximately $5.1 million. Drum
Service and the other PRPs did not agree to the EPA's demands or agree to fund
any additional clean-up. In April 1997, the EPA issued an order unilaterally
withdrawing its previous orders. Since that withdrawal order, the EPA has not
taken any formal administrative or civil action against Drum Service or its
former shareholder.
Drum Service has maintained comprehensive general liability insurance
coverage for over 25 years and has notified various insurers of the EPA's claims
regarding the Zellwood Site. A number of those insurers' policies did not
contain an exclusion for pollution. In 1992 Drum Service settled a claim with
an insurer for an amount that covered a substantial portion of the costs Drum
Service had incurred in dealing with the EPA and the DER. Drum Service has
identified other umbrella liability policies for which coverage may also be
available and has been approached by the insurer under two of those policies
seeking a settlement. The Company does not know when, if ever, the EPA may make
a claim against Drum Service regarding the Zellwood Site. Further, the Company
cannot estimate the amount of any such claim or, in light of the existence of
other PRPs, the extent of any liability of Drum Service. The Company and Drum
Service will continue to determine the availability of additional insurance
coverage for this matter.
Possible Volatility of Stock. The Common Stock is quoted on The
Nasdaq Stock Market, although no assurance can be given that an active trading
market for the Common Stock will continue. The market price of the Common Stock
may be subject to significant fluctuations from time to time in response to
numerous factors, including variations in the reported financial results of the
Company and changing conditions in the economy in general or in the Company's
11
<PAGE>
industry in particular. In addition, the stock markets experience significant
price and volume volatility from time to time which may affect the market price
of the Common Stock for reasons unrelated to the Company's performance.
Shares Eligible for Future Sale. The market price of the Common Stock
could be adversely affected by the sale of substantial amounts of Common Stock
in the public market. As of March 17, 1998, 18,175,286 shares of Common Stock
were issued and outstanding. Except for the shares of Common Stock acquired by
affiliates of the Company, and the shares privately issued as consideration in
certain acquisitions, the outstanding shares are generally freely tradeable.
The remaining outstanding shares of Common Stock were not issued in transactions
registered under the Securities Act, may not be sold except in transactions
registered under the Securities Act or pursuant to an exemption from
registration, including the exemption contained in Rule 144 under the Securities
Act. When these shares become saleable, the market price of the Common Stock
could be adversely affected by the sale of substantial amounts of the shares in
the public market.
As of March 17, 1998 the Company also had outstanding options to
purchase up to a total of 2,075,500 shares of Common Stock issued pursuant to
the Company's 1996 Stock Option Plan (the "Plan"). The aggregate amount of
Common Stock with respect to which options may be granted under the Plan may not
exceed 15% of the Company's outstanding Common Stock, as determined on each date
an option is granted. The Company has filed a Registration Statement on Form S-
8 to register for public resale all the shares subject to these options.
The effect, if any, of the availability for sale, or sale, of the
shares of Common Stock eligible for future sale on the market price of the
Common Stock prevailing from time to time is unpredictable, and no assurance can
be given that the effect will not be adverse.
Dividends. The Company intends to retain its earnings for continued
development of its business and does not intend to pay cash dividends on the
Common Stock in the foreseeable future. In addition, the Company's revolving
credit facility includes, and any additional lines of credit established in the
future may include, restrictions on the Company's ability to pay dividends
without the consent of the lender.
Year 2000 Compliant Information Systems. The Company uses software
and related technologies throughout its businesses that will be affected by the
so-called "Year 2000 problem." This problem, which is common to most
businesses, concerns the inability of information systems, primarily computer
software programs, to properly recognize and process date sensitive information
as the year 2000 approaches. The Company is in the process of modifying the
software in its management information system so that all of such software will
be Year 2000 compliant. The Company believes that it will be able to modify all
such software in time to minimize any detrimental effects on operations. There
can be no assurance, however, that the Company will timely complete such
modifications. Other operational areas that may be affected by Year 2000 issues
are being studied. Though it is not possible to accurately estimate the cost of
this work, the Company expects that such costs will not be material to the
Company's financial position or results of operations. Failure of the Company,
its vendors or its customers to have in place Year 2000 compliant systems could
have a material adverse effect on the Company.
12
<PAGE>
ITEM 2. PROPERTIES
At December 28, 1997, the Company operated 30 pallet facilities in 13
states. Of these facilities, 13 are owned by the Company and 17 are leased.
Most of the Company's facilities offer more than one pallet-related service.
The Company's corporate headquarters are located in Houston, Texas. The chart
below summarizes the locations of the Company's facilities as of December 28,
1997:
NUMBER
STATE OF FACILITIES
----- -------------
Alabama............................. 1
Arkansas............................ 5
Arizona............................. 2
California.......................... 4
Florida............................. 2
Georgia............................. 2
Illinois............................ 1
North Carolina...................... 2
South Carolina...................... 1
Mississippi......................... 1
Texas............................... 7
Virginia............................ 1
Wisconsin........................... 1
There are no major encumbrances on the titles to the Company's owned
properties or to the Company's leasehold interests in any of the leased
properties, except for liens on the Walterboro, South Carolina facility securing
the payment of indebtedness incurred to finance that facility. The Company
believes that its properties are generally adequate for its present needs.
Further, the Company believes that suitable additional or replacement space will
be available when required.
ITEM 3. LEGAL PROCEEDINGS
The Company has from time to time been a party to litigation arising
in the normal course of its business; most of that litigation involves claims
for personal injury or property damage incurred in connection with its
operations. Management believes that none of these actions will have a material
adverse effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on The Nasdaq Stock Market since
March 20, 1997, the date of the Offering, under the symbol "PALX." The
following table sets forth the high and low sales prices for the Common Stock
from March 20, 1997 through December 28, 1997. During 1997, the Company changed
its fiscal year-end to the last Sunday of each December from the year ending on
November 30.
<TABLE>
<CAPTION>
LOW HIGH
------- -------
<S> <C> <C>
Second Quarter (from March 20, 1997 through June 1, 1997) $ 7.75 $ 10.25
Third Quarter from (June 2, 1997 through August 31, 1997) $ 9.63 $ 14.25
Fourth Quarter (from September 1, 1997 through December 28, 1997) $11.125 $15.875
</TABLE>
On March 17, 1998, the last reported sale price of the Company's Common
Stock on The Nasdaq Stock Market was $13 per share. On that date, there were
151 holders of record of the Common Stock.
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, the Company's revolving credit
facility includes, and any additional lines of credit established in the future
may include, restrictions on the Company's ability to pay dividends without the
consent of the lender.
On November 20, 1997, the Company issued 285,675 shares of its Common Stock
as part of the consideration for the acquisition of Summers Pallet
Manufacturing, Inc. ("Summers"). These shares of Common Stock were issued
without registration under the Securities Act of 1933, amended (the "Securities
Act"), in reliance on the exemption provided by Section 4(2) of the Securities
Act.
14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following historical financial information should be read in
conjunction with the audited historical Consolidated Financial Statements of
PalEx, Inc. and Subsidiaries and the Notes thereto included in Item 8 "Financial
Statements and Supplementary Data." The historical financial information for
the fiscal years ended 1993 through 1997 reflects the historical statements of
Fraser, the accounting acquiror, restated for the effects of the business
combinations with Sonoma Pacific Company, Sheffield Lumber and Pallet Company
Inc., New London Pallet, Inc., and Bay Area Pallet Company (the "Pooled
Companies") accounted for as poolings-of-interests and the remaining Founding
Companies and Summers Pallet Manufacturing, Inc. (the "Purchased Company") from
their respective acquisitions dates.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, FISCAL YEAR ENDED
---------------------------------------------------------- TRANSITION DECEMBER 28,
1993 1994 1995 1996 PERIOD /(1)/ 1997
------------- ------------- ------------- ------------- ------------- --------------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
PALEX(2):
Revenues $57,799 $71,423 $77,256 $96,047 $ 3,828 $ 162,848
Gross profit 9,228 10,734 12,292 16,057 707 26,606
Selling, general and
administrative expenses 5,748 6,127 6,050 7,648 749 12,845
Goodwill amortization -- -- -- -- -- 447
Income (loss) from operations 3,480 4,607 6,242 8,409 (42) 13,314
Interest expense, net(3) (628) ( 887) (1,391) (1,251) (24) (1,277)
Net income (loss) $ 1,820 $ 2,506 $ 3,590 $ 5,676 $ (66) $ 7,152
======= ======= ======= ======= ======= =========
Net income (loss) per share--
diluted $ .30 $ .41 $ .59 $ .94 $ (.01) $ .58
Shares used in computing net
income (loss) per share--
diluted 6,054,446 6,054,446 6,054,446 6,054,446 6,054,446 12,289,942
PRO FORMA(4):
Revenues $ 183,561
Gross profit 31,301
Selling, general and
administrative expenses(5) 14,411
Goodwill amortization(6) 735
Income from operations 16,155
Interest income (expense),
net(7) (1,044)
Net income $ 8,816
=========
Net income per share $ .62
=========
Shares used in computing pro
forma net income per share(8) 14,233,277
NOVEMBER 30, DECEMBER 28,
------------------------------------------------- ------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
PALEX
Working capital $ 5,360 $ 2,386 $ 2,449 $ 3,340 $31,188
Total assets 25,594 35,471 36,430 37,129 96,562
Total debt, including current
portion 12,080 17,232 17,089 11,222 24,573
Stockholders' equity 9,646 11,800 13,323 18,054 60,292
</TABLE>
(1) Because the Company changed its fiscal year-end to the last Sunday of each
December from the year ending on November 30, a one month transition period
(the "Transition Period") beginning on December 1, 1996, and ending on
December 31, 1996 is presented herein for comparability of financial
statements between the periods presented.
(2) Fraser has been identified as the accounting acquiror for financial
statement presentation purposes. The acquisition of Ridge and Interstate
and one of the five Acquired Pallet Companies in 1997 were accounted for
using the
15
<PAGE>
purchase method of accounting and are included in the results of operations
from their respective dates of acquisition.
(3) Includes interest expense and other income (expense), net.
(4) The pro forma income statement data assume that the Offering and the
acquisitions of four companies, three of which were accounted for as
poolings-of-interests (the "Pooled Companies"), were closed on December 31,
1996, and are not necessarily indicative of the results the Company would
have obtained had these events actually occurred at that time or of the
Company's future results. The Founding Companies and the Pooled Companies
were not under common control or management during the period presented
above and, therefore, the data presented may not be comparable to or
indicative of post-combination results to be achieved by the Company. The
pro forma income statement data is based on preliminary estimates, available
information and certain assumptions that management deems appropriate and
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Report on Form 10-K.
(5) The pro forma income statement data for the fiscal year ended December 28,
1997 includes approximately $1.5 million in pro forma reductions in salary
and benefits of the former owners of the Founding Companies and the Pooled
Companies to which they have agreed prospectively, and the effect of
revisions of certain lease agreements between one of the Founding Companies
and its stockholder.
(6) Reflects amortization of the goodwill recorded as a result of the
acquisitions accounted for under the purchase method of accounting over a
30-year period.
(7) Includes interest income (expense) and other income (expense), net and
reflects the reduction of interest expense attributed to the repayment of
debt with proceeds from the Offering and the increase in interest expense
attributed to incremental borrowings.
(8) Includes (i) 5,910,000 shares issued to the owners of the Founding
Companies, (ii) 3,160,872 shares issued in connection with the acquisition
of the Pooled Companies, (iii) 50,000 shares issued to the management of
PalEx, (iv) 1,021,389 shares issued to Main Street Capital Partners, L.P.,
(v) 3,000,000 shares sold in the Offering, (vi) 142,500 shares issued to the
Founding Companies' profit sharing plans, (vii) 285,675 shares issued as
part of the consideration for the acquisition of Summers and (viii) 662,841
weighted average shares attributable to those sold pursuant to the
overallotment option and the stock option equivalent shares.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Item 6 - Selected Financial Data"
appearing elsewhere in this Annual Report on Form 10-K. This Report includes,
and any Form 10-Q or any Form 8-K of the Company or any other written or oral
statements made by or on behalf of the Company may include, forward-looking
statements reflecting the Company's current views with respect to future events
and financial performance. The words "anticipate," "estimate," "expect," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties to
the Company, including (but not limited to) the availability of attractive
acquisition opportunities, the successful integration and profitable management
of acquired businesses, improvement of operating efficiencies, the availability
of working capital and financing for future acquisitions, the Company's ability
to grow internally through expansion of services and customer bases and
reduction of overhead, conditions in lumber markets, seasonality, weather
conditions and other risk factors. Should one or more of these risks or
uncertainties materialize, or should assumptions underlying the anticipated or
estimated results prove incorrect, actual results may vary materially from those
anticipated or estimated. Although cautionary statements are made in this
Report related to factors that may affect future operating results, a more
detailed discussion of these factors is set forth above in "BUSINESS--Risk
Factors."
As described above in "BUSINESS -- Introduction," in February
1998, the Company acquired the Container Group in four separate acquisitions.
Those acquisitions have resulted in the expansion of the Company's business to
steel drum reconditioning and management services. Since these acquisitions
occurred after 1997, the following discussion and analysis of the Company's
financial condition and results of operations focuses on the Company's core
business -- providing pallets and related services -- and does not address the
business of the Container Group.
INTRODUCTION
The Company's net revenues are derived from: (i) the manufacture and sale
of new pallets; (ii) the repair, remanufacture and sale of recycled pallets and
the provision of pallet management services; (iii) the manufacture and sale of
ancillary products, including agricultural harvesting boxes and specialty bins,
and lumber sales; and (iv) the sales of by-products, including landscape mulch
and playground material.
New pallets constitute one of two core product lines and accounted for
approximately 69% of the Company's revenues for the fiscal year ended December
28, 1997. A substantial portion of the cost of a new pallet is lumber, and new
pallet sales prices are strongly influenced by the cost, availability and type
of lumber used. As a result, changes in lumber prices can significantly impact
the Company's revenues and margins. New pallet manufacturing is generally
considered to be a mature industry characterized by moderate growth rates.
The repair, remanufacture and sale of recycled pallets and the provision of
pallet management services, the Company's other core product line, accounted for
approximately 24% of the Company's revenues for the fiscal year ended December
28, 1997. These activities are more labor intensive and require fewer raw
materials than manufacturing new pallets. Recycling operations generally
generate higher gross profits as a percentage of revenues.
Ancillary product and lumber sales accounted for approximately 7% of the
Company's revenues for the fiscal year ended December 28, 1997. Ancillary
products include harvesting boxes and specialty bins used by the agricultural
industry. These products are generally characterized by higher unit sales costs
and higher gross margins than new or recycled pallets. Purchases of
agricultural harvesting boxes and specialty bins represent significant capital
expenditures to the Company's customers and can vary significantly from period
to period. In addition, sales of agricultural harvesting boxes to the citrus
industry in Florida materially declined from 1995 through 1997 as a result of
competition from plastic agricultural containers. The Company expects this
competition to continue.
The sale of by-products (generally, landscape mulch and playground material
produced by grinding unusable lumber and scrap) does not represent a significant
portion of the Company's revenues for the fiscal year ended December 28, 1997.
However, these products produce significant gross margins because the raw
material costs have
17
<PAGE>
been recovered from the production of a core or ancillary product. In addition,
the sale of by-product enables the Company to avoid disposal costs for unusable
lumber and scrap.
The Company recognizes revenue upon the delivery of a product or service to
a customer. The Company does not generally maintain significant finished goods
inventory. The costs in cost of sales are predominantly variable, such as the
cost of lumber, labor, fasteners, transportation, equipment maintenance and
utilities. Fixed costs in cost of sales include depreciation of equipment,
supervisory labor and direct overhead. A significant number of the Company's
production employees are paid on a production or 'piecework' basis, which the
Company believes provides incentives for increased productivity.
The Company manufactures and repairs pallets for CHEP and provides a
variety of logistical services with respect to CHEP's existing pallet pool,
including repair, storage and just-in-time delivery of pallets. CHEP currently
does not manufacture or repair pallets. During the fiscal year ended December
28, 1997, approximately 35% of the Company's revenues were attributable to CHEP,
with a majority of the revenue growth generated by six new facilities opened
within the last three years, which are primarily dedicated to providing services
to CHEP.
Although the Company sells products to a broad range of industries,
approximately 13% of the Company's pro forma revenues for the fiscal year
ended December 28, 1997 were attributable to the agricultural industry in the
southeastern and western regions of the U.S., with the citrus and produce
industries constituting the largest component thereof. Revenue associated with
these industries is highly seasonal, concentrated in the period from October
through May. Moreover, severe weather, particularly during the harvesting
seasons, may cause a reduction in demand from agricultural customers, adversely
affecting the Company's revenues and results of operations. For example,
freezing weather in south Florida during January 1997 adversely impacted the
product harvest, thereby reducing the demand for pallets. Adverse weather
conditions may also affect the Company's raw material costs. Throughout 1997,
the Company experienced higher lumber costs from increased demand and the impact
of wet weather on the harvesting of hardwood timber.
RESULTS OF OPERATIONS
Fraser has been identified as the accounting acquiror for financial
statement presentation purposes. The acquisition of Ridge and Interstate and
one of the five Acquired Pallet Companies in 1997 were accounted for using the
purchase method of accounting.
Subsequent to the acquisition of the Founding Companies and the Offering,
PalEx acquired four additional companies which were accounted for as poolings-
of-interests. On August 1, 1997 the Company completed the acquisitions of
Sheffield and Sonoma Pacific. On October 14, 1997 and October 31, 1997 the
Company completed the acquisitions of New London Pallet, Inc. and Bay Area
Pallet Company, respectively. The Company's historical financial statements
reflect the retroactive restatement for these poolings.
On November 20, 1997 the Company acquired substantially all of the assets
of Summers in a transaction accounted for as a purchase. The Company's results
of operations for the fiscal year ended December 28, 1997 include the results of
Summers from the date of acquisition.
The Founding Companies and the Acquired Pallet Companies acquired in 1997
have been managed prior to their acquisition by PalEx as independent private
companies, and these companies used different tax structures, which influenced,
among other things, their historical levels of owner's compensation. Selling,
general and administrative expenses for the periods presented are therefore
impacted by the amount of compensation and related benefits that the former
owners and certain key employees received from their respective businesses
during these periods. These former owners and key employees have agreed to
certain reductions in salaries and benefits in connection with the founding of
the Company or the acquisition of their businesses by the Company.
The following historical financial information reflects the historical
financial statements of Fraser, the accounting acquiror, restated for the
effects of the business combinations with the Pooled Companies accounted for as
poolings-of-interests and the remaining Founding Companies and the Purchased
Company from their respective
18
<PAGE>
acquisition dates. The historical financial information for the Pooled
Companies for the years ended December 31, 1995 and 1996 have been included in
the Company's consolidated financial statements for the years ended November 30,
1995 and 1996.
The following table sets forth certain selected financial data of the
Company and that data as a percentage of the Company's revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------
NOVEMBER 30,1995 DECEMBER 30, 1996 DECEMBER 28, 1997
---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $77,256 100.0% $96,047 100.0% $162,848 100.0%
Cost of goods sold 64,964 84.1 79,990 83.3 136,242 83.7
------- ----- ------- ----- -------- -----
Gross profit 12,292 15.9 16,057 16.7 26,606 16.3
Selling, general and
Administrative Expenses 6,050 7.8 7,648 8.0 12,845 7.9
Goodwill Amortization -- -- -- -- 447 .3
------- ----- ------- ----- -------- -----
Income from Operations 6,242 8.1 8,409 8.7 13,314 8.1
Interest expense (1,629) (2.1) (1,210) (1.3) (1,150) (.7)
Other income (expense),net 238 .3 (41) -- (127) --
------- ----- ------- ----- -------- -----
Income before Taxes 4,851 6.3 7,158 7.4 12,037 7.4
Income taxes 1,261 1.6 1,482 1.5 4,885 3.0
------- ----- ------- ----- -------- -----
Net income $ 3,590 4.7% $ 5,676 5.9% 7,152 4.4%
======= ===== ======= ===== ======== =====
</TABLE>
Year Ended December 28, 1997 Compared to Year Ended November 30, 1996
Revenues increased $66.8 million, or 69.6%, to approximately $162.8 million
from $96.0 million. Of this increase, approximately $45.4 million is primarily
attributable to the acquisition of Ridge and Interstate and approximately $21.4
million is attributable to an increase in new pallet sales.
Gross profit as a percentage of revenues remained relatively unchanged at
16.3% for the year ended December 28, 1997 compared to 16.7% for the year ended
November 30,1996. The lumber component of product cost is subject to the
influence of weather and general economic conditions, the operation of lumber
agreements between Canada and the U.S. and competition from other industries
that use similar grades and types of lumber. The slight decrease in gross
profit is partially attributable to increased lumber costs for the year, which
costs the Company partially passes on to its customer.
Selling, general and administrative expenses increased 67.9% to $12.8
million in 1997 from $7.6 million in 1996 and were 7.9% and 8.0% of revenues,
respectively. The amount of increase was primarily attributable to increased
costs associated with being a public company and with the acquisitions of Ridge,
Interstate and Summers.
Interest expense remained relatively unchanged in 1997 at approximately
$1.2 million.
Fraser recorded a charge to income tax expense of approximately $488,000
representing deferred income taxes at the time of the Offering which were not
previously recorded because of Fraser's status under Subchapter S of the
Internal Revenue Code. Federal and state income taxes have been provided on
earnings of Fraser and the Pooled Companies for the entire year and on the
earnings of Ridge, Interstate and the Purchased Company from their dates of
acquisition.
19
<PAGE>
As a result of the foregoing, net income for 1997 increased approximately
$1.5 million to $7.2 million from $5.7 million in 1996.
Year Ended November 30, 1996 Compared to November 30, 1995
Revenues increased $18.7 million, or 24.2%, to $96.0 million in 1996 from
$77.3 million in 1995. This increase was primarily attributable to the five
plants opened or acquired in 1995 and a new plant opened in 1996.
Gross profit as a percentage of revenues increased to 16.7% in 1996 from
15.9% in 1995. This increase was generally attributable to growth in repair and
recycling operations, which are characterized by lower raw material costs as a
percentage of revenue and which generally have higher margins than new pallet
operations. Gross profit increased 30.6% to $16.1 million in 1996 from $12.3
million in 1995, primarily as a result of increased revenues associated with the
six new facilities.
Selling, general and administrative expenses increased 26.4% to $7.6
million in 1996 from $6.1 million in 1995. The increase was generally
attributable to additional costs associated with the facilities opened or
acquired during both periods and increases in officers' compensation in 1996.
Interest expense declined to $1.2 million in 1996 from $1.6 million in 1995
as a result of the net repayments of debt.
As a result of the foregoing, net income increased to $5.7 million in 1996
from $3.6 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
On March 25, 1997, PalEx completed the Offering, which involved the sale of
3,000,000 shares of Common Stock at a price to the public of $7.50 per share.
The net proceeds to PalEx from the Offering (after deducting underwriting
discounts, commissions and offering expenses) were approximately $20.5 million.
Of this amount, $1.2 million was used to pay the cash portion of the purchase
prices relating to the acquisitions of the Founding Companies with the remainder
being used to repay certain indebtedness of the Founding Companies. On April
22, 1997, the Company sold an additional 450,000 shares of Common Stock at a
price to the public of $7.50 per share (generating net proceeds to the Company
of $3.1 million after underwriting discounts and commissions) pursuant to
exercise of an over-allotment option granted by the Company to the underwriters
in connection with the Offering. The net proceeds were used to repay debt
borrowed under the 1997 Credit Facility.
On March 25, 1997, the Company entered into a credit agreement with Bank
One, Texas, N.A. (the "1997 Credit Facility"). The 1997 Credit Facility
provided the Company with an unsecured revolving credit line of up to $35
million to be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies and the Acquired Pallet
Companies, future acquisitions, capital expenditures and working capital. The
1997 Credit Facility was increased on January 29, 1998. This expanded credit
facility (the "Credit Facility") provides the Company with a revolving line of
credit of up to $125 million and is secured by a pledge of the shares of stock
of the Company's subsidiaries. Advances under the Credit Facility bear interest
at the bank's designated variable rate plus margins ranging from -50 to +25
basis points, depending on the ratio of the Company's interest-bearing debt to
its pro forma trailing earnings before interest, taxes, depreciation and
amortization for the previous four quarters. At the Company's option, the loans
may bear interest based on a designated London Interbank Offering Rate ("LIBOR")
plus a margin ranging from 75 to 175 basis points, depending on the same ratio.
Commitment fees of 17.5 to 30 basis points are payable on the unused portion of
the line of credit. The Credit Facility contains a limit for standby letters of
credit up to $10 million. The Credit Facility prohibits the payment of
dividends by the Company, restricts the Company's incurring or assuming other
indebtedness and requires the Company to comply with certain financial
covenants. The Credit Facility will terminate, and all amounts outstanding
thereunder, if any, will be due and payable on January 29, 2003. The Company's
subsidiaries have guaranteed the repayment of all amounts due under the Credit
Facility. The approximate level of borrowings available under the Credit
Facility at March 18, 1998 was $47 million.
20
<PAGE>
The Company intends to continue to pursue acquisitions. The timing, size
or success of any acquisitions and the resulting additional capital commitments
are unpredictable. The Company expects to fund future acquisitions primarily
through a combination of issuances of additional equity, working capital, cash
flow from operations and borrowings, including the unused portion of the Credit
Facility. To the extent new sources of financing are necessary to fund future
acquisitions, there can be no assurance that the Company can secure such
additional financing if and when it is needed or on terms acceptable to the
Company.
SEASONALITY
The pallet manufacturing business can be subject to seasonal variations in
operations and demand. The Company has a significant number of agricultural
customers, and typically experiences the greatest demand for new pallets from
these customers during the citrus and produce harvesting seasons (generally
October through May) , with significantly lower demand in the summer months.
Yearly results can fluctuate significantly in the agricultural regions depending
on the size of the citrus and produce harvests, which, in turn, largely depend
on the occurrence and severity of freezing weather and changes in rainfall. The
Company's locations serving predominantly manufacturing and industrial customers
experience less seasonality. Management believes that the effects of such
seasonality will diminish as the Company grows and expands its customer base
both internally and through acquisitions.
Adverse weather conditions may affect the Company's ability to obtain
adequate supplies of lumber at a reasonable cost and the demand for its
products. For example, the Company experienced higher lumber costs resulting
from high demand and the impact of wet weather on the harvesting of both
hardwood and pine timber during 1997. Additionally, freezing weather conditions
in south Florida during January 1997 adversely impacted the produce harvest,
thereby reducing the demand for new pallets for the remainder of the 1997
harvest.
YEAR 2000 ISSUES
The Company uses software and related technologies throughout its
businesses that will be affected by the so-called "Year 2000 problem." This
problem, which is common to most businesses, concerns the inability of
information systems, primarily computer software programs, to properly recognize
and process date-sensitive information as the year 2000 approaches. The Company
is in the process of modifying the software in its management information system
so that all of such software will be Year 2000 compliant. The Company believes
that it will be able to modify all such software in time to minimize any
detrimental effects on operations. There can be no assurance, however, that the
Company will timely complete such modifications. Other operational areas that
may be affected by Year 2000 issues are being studied. Though it is not
possible to accurately estimate the cost of this work, the Company expects that
such costs will not be material to the Company's financial position or results
of operations. Failure of the Company, its vendors or its customers to have in
place Year 2000 compliant systems could have a material adverse effect on the
Company.
21
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14(a) 1 for information required for this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
The information called for in Part III of this Form 10-K is incorporated by
reference from the Company's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
April 27, 1998 (120 days after the end of the Company's fiscal year).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
PALEX, INC. AND SUBSIDIARIES:
Report of independent public accountants
Consolidated balance sheets at November 30, 1996 and December 28, 1997
Consolidated statements of operations for the years ended
November 30, 1995 and 1996 and December 28, 1997, and for the
one-month period ended December 31, 1996
Consolidated statements of changes in stockholders' equity for the
years ended November 30, 1995 and 1996 and December 28, 1997,
and for the one-month period ended December 31, 1996
Consolidated statements of cash flows for the years ended
November 30, 1995 and 1996 and December 28, 1997, and for the
one-month period ended December 31, 1996
Notes to consolidated financial statements
RIDGE PALLETS, INC.:
Report of independent public accountants
Balance sheets at July 30, 1995 and July 28, 1996
Statements of income for the years ended July 30, 1995 and
July 28, 1996 and for the eight months ended March 31, 1997
Statement of changes in stockholders' equity for the years ended July
30, 1995 and July 28, 1996 and for the eight months ended
March 31, 1997
Statement of cash flows for the years ended July 30, 1995 and July 28,
1996 and for the eight months ended March 31, 1997
Notes to financial statements
PALEX, INC.:
Report of independent public accountants
Balance sheet at November 30, 1996
Statements of income for the period from inception (January 8, 1996)
to November 30, 1996 and for the four months ended March 31, 1997
Statements of changes in stockholders' equity for the period from
inception (January 8, 1996) through November 30, 1996 and for
the four months ended March 31, 1997
Notes to financial statements
2. Financial Statement Schedules:
All financial statement schedules are omitted because they are not
required or the required information is shown in the Company's
Consolidated Financial Statements or the Notes thereto.
23
<PAGE>
3. Exhibits:
EXHIBIT
NO. DESCRIPTION
-----------
3.1/(1)/ Amended and Restated Certificate of Incorporation
3.2/(1)/ Bylaws
4.1/(1)/ Specimen Common Stock Certificate
10.1/(1)/ Agreement and Plan of Reorganization and Merger dated as of December
20, 1996 between PalEx, Inc. and Ridge Pallets, Inc.
10.2/(1)/ Agreement and Plan of Reorganization and Merger dated as of December
20, 1996 between PalEx, Inc. and Fraser Industries, Inc.
10.3/(1)/ Agreement and Plan of Reorganization and Merger dated as of December
20, 1996 between PalEx, Inc. and Interstate Pallet Co., Inc.
10.4/(2)/ Agreement and Plan of Reorganization, dated as of August 1, 1997, by
and among PalEx, Inc., Sheffield Acquisition, Inc., Sheffield Lumber
and Pallet Company, Inc. and the Stockholders named therein.
10.5/(2)/ Agreement and Plan of Reorganization, dated as of August 1, 1997, by
and among PalEx, Inc., Sonoma Pacific Acquisition, Inc., Sonoma
Pacific Company and the Stockholders named therein.
10.6/(2)/ Agreement and Plan of Reorganization, dated as of August 1, 1997, by
and among PalEx, Inc., Sonoma Pacific Company, Salinas Pacific
Company and the Stockholders named therein.
10.7/(2)/ Real Estate Purchase Agreement, dated as of August 1, 1997, by and
among PalEx, Inc., Sonoma Pacific Company, Robert D. Ekedahl and
Diana F. Ekedahl, as Trustees of the Ekedahl 1981 Revocable Trust,
and Gregg Gibson, as Tenants in Common.
10.8/(3)/ Asset Purchase Agreement, dated as of February 12, 1998, by and
among PalEx, Inc., Container Services Company NW Acquisition, Inc.,
Container Services Company SW Acquisition, Inc., Consolidated Drum
Reconditioning Co., Inc., CDRCo HC, LLC, CDRCo NW, LLC, CDRCo SW,
LLC, Joseph Cruz and Philip Freeman.
10.9/(3)/ Acquisition Agreement and Plan of Reorganization, dated as of
February 23, 1998, by and among PalEx, Inc., Acme Acquisition, Inc.,
Acme Barrel Company, Inc. and the stockholders named therein.
10.10/(3)/ Acquisition Agreement and Plan of Reorganization, dated as of
February 23, 1998, by and among PalEx, Inc., Acme Barrel Company,
Inc., ESP Realty Corp., Inc. and the Elliot Pearlman Living Trust
u/t/a dated July 2, 1996.
10.11/(3)/ Acquisition Agreement and Plan of Reorganization, dated as of
February 23, 1998, by and among PalEx, Inc., Western Container
Acquisition, Inc., Environmental Recyclers of Colorado Inc. and the
individual optionees named therein.
10.12/(3)/ Acquisition Agreement, dated as of February 23, 1998, by and among
PalEx, Inc., Western Container Acquisition, Inc. and Barton A.
Kaminsky.
24
<PAGE>
10.13/(1)/ Form of Employment and Noncompetition Agreement (the terms of each
agreement are identical except that each of Messrs. Holland,
Fletcher, Fraser and Sykes have a $125,000 annual salary and Messrs.
Maultsby and Rhyne have annual salaries of $175,000 and $152,000,
respectively) #
10.14/(1)/ Form of Officer and Director Indemnification Agreement
10.15/(1)/ PalEx, Inc. 1996 Stock Option Plan #
10.16/(4)/ Credit Agreement dated as of March 25, 1997 between PalEx, Inc. and
Bank One, Texas, N.A.
10.17/(4)/ Form of Guaranty entered into by the Company's subsidiaries in favor
of Bank One, Texas, N.A.
10.18 Credit Agreement dated as of January 29, 1998 among PalEx, Inc., the
lenders party thereto and BankOne, Texas, N.A.
10.19 Form of Guaranty entered into by the Company's subsidiaries in favor
of Bank One, Texas, N.A.
11.1 Statement regarding computation of net income (loss) per share
21.1 List of subsidiaries of PalEx, Inc.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
________________________________
(1) Incorporated by reference from the exhibits to the Company's
Registration Statement on Form S-1 (Registration No. 333-18683).
(2) Incorporated by reference from the exhibits to the Company's Current
Report on Form 8-K (Commission File No. 000-22237) as filed with the
Commission on August 7, 1997.
(3) Incorporated by reference from the exhibits to the Company's Current
Report on Form 8-K (Commission File No. 000-22237) as filed with the
Commission on February 27, 1998.
(4) Incorporated by reference from the exhibits to the Company's
Quarterly Report on Form 10-Q (Commission File No. 000-22237) for
the fiscal quarter ended June 1, 1997, as filed with the Commission
on July 14, 1997.
# Management Contract
(b) Reports on Form 8-K:
On October 15, 1997, the Company filed an amendment to its Current
Report on Form 8-K dated August 1, 1997. Such amendment contained
certain financial statements and pro forma financial information
related to the acquisitions of Sheffield Lumber & Pallet Company,
Inc. and Sonoma Pacific Company as required by Regulation S-X.
On November 24, 1997, the Company filed a Current Report on Form 8-K
disclosing the change of fiscal year from a fiscal year ending on
the last Sunday of each November to a fiscal year ending on the last
Sunday of each December.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on March 27, 1998.
PALEX, INC.
By: /s/ Vance K. Maultsby, Jr.
--------------------------
Vance K. Maultsby, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.
/s/ Vance K. Maultsby, Jr. President and Chief Executive March 27, 1998
- -------------------------- Officer (Principal Executive
Vance K. Maultsby, Jr. Officer)
/s/ Casey A. Fletcher Chief Accounting Officer March 27, 1998
- -------------------------- (Principal Financial and
Casey A. Fletcher Accounting Officer)
/s/ Tucker S. Bridwell Director March 27, 1998
- --------------------------
Tucker S. Bridwell
/s/ A. Joseph Cruz Director March 27, 1998
- --------------------------
A. Joseph Cruz
/s/ John E. Drury Director March 27, 1998
- --------------------------
John E. Drury
/s/ Troy L. Fraser Director March 27, 1998
- --------------------------
Troy L. Fraser
/s/ A.E. Holland Director March 27, 1998
- --------------------------
A.E. Holland
/s/ Sam W. Humphreys Director March 27, 1998
- --------------------------
Sam W. Humphreys
/s/ Elliot S. Pearlman Director March 27, 1998
- --------------------------
Elliot S. Pearlman
/s/ Stephen C. Sykes Director March 27, 1998
- --------------------------
Stephen C. Sykes
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
PALEX, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.............................. F-2
Consolidated Balance Sheets........................................... F-3
Consolidated Statements of Operations................................. F-4
Consolidated Statements of Changes in Stockholders' Equity............ F-5
Consolidated Statements of Cash Flows................................. F-6
Notes to Consolidated Financial Statements............................ F-7
RIDGE PALLETS, INC.
Report of Independent Public Accountants.............................. F-21
Balance Sheets........................................................ F-22
Statements of Income.................................................. F-23
Statements of Changes in Stockholders' Equity......................... F-24
Statements of Cash Flows.............................................. F-25
Notes to Financial Statements......................................... F-26
PALEX, INC.
Report of Independent Public Accountants.............................. F-34
Balance Sheet......................................................... F-35
Statements of Income.................................................. F-36
Statements of Changes in Stockholders' Equity......................... F-37
Notes to Financial Statements......................................... F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of PalEx, Inc.:
We have audited the accompanying consolidated balance sheets of PalEx, Inc.
(a Delaware corporation) and subsidiaries as of November 30, 1996 and December
28, 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended November 30,1995 and
1996, and December 28, 1997, and the one month period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PalEx, Inc. and subsidiaries, as of November 30, 1996 and December 28, 1997, and
the results of their operations and their cash flows for the years ended
November 30, 1995 and 1996, and December 28, 1997, and the one month period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 1998
F-2
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 28,
ASSETS 1996 1997
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 666 $ 5,131
Accounts receivable, net of allowances of $178 and $465 6,666 13,158
Inventories 7,378 18,156
Deferred income taxes 417 782
Prepaid expenses and other current assets 130 2,127
------- -------
Total current assets 15,257 39,354
PROPERTY, PLANT AND EQUIPMENT, net 20,057 30,882
GOODWILL, net of accumulated amortization of $0 and $447 36 24,830
OTHER ASSETS 1,779 1,496
------- -------
Total assets $37,129 $96,562
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of Credit $ 865 $ --
Current maturities of long-term debt 1,669 73
Notes payable to related parties 2,980 --
Accounts payable 2,505 3,804
Accrued expenses 3,898 2,954
Income taxes payable -- 1,335
------- -------
Total current liabilities 11,917 8,166
LONG-TERM DEBT, net of current maturities 5,708 24,500
DEFERRED REVENUE 421 568
DEFERRED INCOME TAXES 1,029 3,036
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 30,000,000
shares authorized; 6,054,446 and 14,020,436
shares outstanding 60 140
Capital in excess of par value 5,350 52,804
Retained earnings 13,520 7,348
Less 250 and 0 treasury shares at cost (876) --
------- -------
Total stockholders' equity 18,054 60,292
------- -------
Total liabilities and stockholders' equity $37,129 $96,562
======= =======
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-3
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
One Month
Period Ended Year Ended
Year Ended November 30, December 31, December 28,
------------------------- ------------ ------------
1995 1996 1996 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 77,256 $ 96,047 $ 3,828 $ 162,848
COST OF GOODS SOLD 64,964 79,990 3,121 136,242
---------- ---------- ---------- -----------
Gross Profit 12,292 16,057 707 26,606
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,050 7,648 749 12,845
GOODWILL AMORTIZATION -- -- -- 447
---------- ---------- ---------- -----------
Income (loss) from operations 6,242 8,409 (42) 13,314
INTEREST EXPENSE (1,629) (1,210) (25) (1,150)
OTHER INCOME (EXPENSE), NET 238 (41) 1 (127)
---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 4,851 7,158 (66) 12,037
PROVISION FOR INCOME TAXES 1,261 1,482 -- 4,885
---------- ---------- ---------- -----------
NET INCOME (LOSS) $ 3,590 $ 5,676 $ (66) $ 7,152
========== ========== ========== ===========
Net Income (loss) per share $.59 $.94 $(.01) $.60
========== ========== ========== ===========
Net Income (loss) per share - Diluted $.59 $.94 $(.01) $.58
========== ========== ========== ===========
Shares used in computing net income
(loss) per share 6,054,446 6,054,446 6,054,446 11,937,274
========== ========== ========== ===========
Shares used in computing diluted net
income (loss) per share 6,054,446 6,054,446 6,054,446 12,289,942
========== ========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Capital in Total
---------------- Excess of Retained Treasury Stockholders'
Shares Amount Par Value Earnings Stock Equity
------ ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, November 30, 1994 6,054 $ 60 $ 3,161 $ 8,514 $ -- $ 11,735
Distributions to stockholders, net -- -- -- (2,042) -- (2,042)
Capital contributions equal to the
current income taxes of
S corporations -- -- 860 -- -- 860
Purchase treasury shares (876) (876)
Net income -- -- -- 3,590 -- 3,590
------ ---- ------- -------- -------- --------
BALANCE, November 30, 1995 6,054 60 4,021 10,062 (876) 13,267
Distributions to Stockholders, net -- -- -- (2,218) -- (2,218)
Capital contributions equal to the
current income taxes of
S Corporations -- -- 1,329 -- -- 1,329
Net income -- -- -- 5,676 -- 5,676
------ ---- ------- -------- -------- --------
BALANCE, November 30, 1996 6,054 60 5,350 13,520 (876) 18,054
Issuance of Common Stock:
Shares issued to profit sharing plans 143 1 800 -- -- 801
Public offering, net of offering costs 3,450 35 23,529 -- -- 23,564
Acquisition of Founding Companies 4,087 41 17,228 -- -- 17,269
Acquisition of Purchased Company 286 3 4,457 -- -- 4,460
Retire treasury shares -- -- -- (876) 876 --
Capital contributions -- -- 231 -- -- 231
Capital contributions equal to the current
income taxes of S Corporations -- -- 1,209 -- -- 1,209
Distributions to stockholders, net -- -- -- (12,382) -- (12,382)
Net loss for the one-month period ended
December 31, 1996 -- -- -- (66) -- (66)
Net income, year ended December 28,
1997 -- -- -- 7,152 -- 7,152
------ ---- ------- ---------- -------- --------
BALANCE, December 28, 1997 14,020 $140 $52,804 $ 7,348 $ -- $ 60,292
====== ==== ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-5
<PAGE>
PALEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
One Month
Year Ended November 30, Period Ended Year Ended
----------------------- December 31, December 28,
1995 1996 1996 1997
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 3,590 $ 5,676 $ (66) $ 7,152
Net loss for Fraser for the one
month transition period -- -- -- (66)
Adjustments to reconcile net income (loss) to
net cash provided by operating
activities:
Depreciation and amortization 2,650 2,165 99 4,607
Loss on Sale of property, plant and equipment -- -- -- 353
Capital contributions equal to the current
income taxes of S corporations 860 1,329 -- 1,209
Deferred tax provision 130 (51) -- (33)
Changes in operating assets and liabilities -
net of business acquisitions
Accounts receivable (569) 648 (387) (758)
Inventories 389 214 (486) (5,412)
Prepaids and other current assets (33) 112 80 (1,813)
Other assets (501) 148 1 1,164
Accounts payable 441 179 434 (70)
Accrued expenses (878) 1,468 (402) (2,693)
Accrued taxes -- -- -- 1,335
Deferred income 114 (78) (2) 147
------- ------- ----- --------
Net cash provided by (used in) operating activities 6,193 11,810 (729) 5,122
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,331) (4,063) (92) (7,683)
Cash paid for the Founding Companies and
Purchased Company, net of cash acquired -- -- -- (4,607)
------- ------- ----- --------
Net cash used in investing activities (3,331) (4,063) (92) (12,290)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on lines of credit (308) (3,435) -- (865)
Net proceeds (payments) on notes payable to
related party (280) 555 -- (2,980)
Proceeds from debt 1,010 2,656 821 32,246
Payments on debt (565) (5,643) -- (27,950)
Net proceeds from issuance of common stock -- -- -- 23,564
Distributions to stockholders, net (2,042) (2,218) -- (12,382)
Purchase of treasury shares (876) -- -- --
------- ------- ----- --------
Net cash provided by (used in) financing activities (3,061) (8,085) 821 11,633
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (199) (338) -- 4,465
CASH AND CASH EQUIVALENTS, beginning of
period 1,203 1,004 -- 666
CASH AND CASH EQUIVALENTS, end of
period $ 1,004 $ 666 $ -- $ 5,131
======= ======= ===== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 1,585 $ 1,275 $ 25 $ 1,088
======= ======= ===== ========
Cash paid for income taxes $ 28 $ 646 $ -- $ 1,768
======= ======= ===== ========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-6
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
1. BUSINESS AND ORGANIZATION
PalEx, Inc. ("PalEx" or the "Company") was founded in January 1996 to
create a nationwide provider of pallet products and related services. On March
25, 1997, concurrently with the closing of PalEx's initial public offering (the
"Offering") of its common stock, par value $.01 per share (the "Common Stock"),
PalEx and separate wholly owned subsidiaries of PalEx acquired, in separate
transactions (the "Acquisitions"), the following three businesses: Fraser
Industries, Inc. ("Fraser"), Ridge Pallets, Inc. ("Ridge"), and Interstate
Pallet Co., Inc. ("Interstate"), collectively referred to as the "Founding
Companies." The consideration for the acquisitions of the Founding Companies
consisted of a combination of cash and Common Stock.
Subsequent to the acquisition of the Founding Companies and the
Offering and during fiscal 1997, PalEx acquired five additional companies, four
of which were accounted for as poolings-of-interests (the "Pooled Companies").
The historical consolidated financial statements have been retroactively
restated for the acquisitions of the Pooled Companies.
The Company's headquarters are in Houston, Texas, with significant
manufacturing operations located in Texas, California, Florida and North
Carolina. Sales are made throughout the United States with significant
concentrations in the southeastern and western regions of the United States
serving primarily agricultural customers. Revenues related to these customers
are highly seasonal, occurring primarily during the harvesting season.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Fraser has been identified as the accounting acquiror for financial
statement presentation purposes. The acquisitions of Ridge, Interstate and
Summers Pallet Manufacturing, Inc. ("Summers" or the "Purchased Company") were
accounted for using the purchase method of accounting. The allocations of the
purchase price to the assets acquired and liabilities assumed has been assigned
and recorded based on estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available. The accompanying consolidated financial statements present Fraser
combined with the Pooled Companies for all periods, and include Ridge and
Interstate from March 31, 1997 and Summers from November 20, 1997, their
respective dates of acquisition. All significant intercompany transactions and
balances have been eliminated in consolidation.
The Pooled Companies previously reported on a calendar year-end. As
such, the accounts of these companies for their 1995 and 1996 calendar years
have been consolidated with the accounts of PalEx as of and for the years ended
November 30, 1995 and 1996.
Fiscal Year
During 1997, PalEx changed its year-end to the last Sunday in the
calendar year from November 30. Accordingly, it maintains its accounting records
using a 52/53 week year ending on the last Sunday in December. Each quarter
contains 13 weeks, unless otherwise noted. The accompanying consolidated
financial statements include the statement of operations and cash flows for the
one month period ended December 31, 1996, representing the income and cash flows
of Fraser, the accounting acquiror, for this one month transition period.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market, with cost
determined on a first-in, first-out basis or by specific identification. The
cost of finished goods inventory includes direct materials, direct labor and
overhead.
F-7
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
Property, Plant and Equipment
Property, plant, and equipment are carried at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
Company's capital leases are insignificant. The straight-line method of
depreciation is utilized for substantially all assets for financial reporting
purposes, but accelerated methods are used for tax purposes.
Expenditures for maintenance and repairs are charged to expense as
incurred. Additions and major replacements or betterments that increase
capacity or extend useful lives are added to the cost of the asset. Upon sales
or retirement of property, plant and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net.
In 1996 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS No. 121 establishes the
recognition and measurement standards related to the impairment of long lived
assets. The Company periodically assesses the realizability of its long-term
assets pursuant to the provisions of SFAS No. 121. Based on the Company's
analysis of the undiscounted future cash flows for its long-term assets, no
impairments would have been recognized under SFAS No. 121.
Income Taxes
The Company uses the liability method of accounting for income taxes,
wherein, deferred tax assets and liabilities are recognized for future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The stockholders of Fraser and three of the four Pooled Companies
elected to be taxed under the provisions of Subchapter S of the Internal Revenue
Code prior to their acquisition by the Company. Under these provisions, these
companies did not pay federal and certain state income taxes. Instead, these
companies' respective stockholders paid income taxes on their proportionate
shares of the Companies' net earnings. The S Corporation status of Fraser and
the Pooled Companies was terminated effective with the combination with PalEx,
and the Company is now subject to federal income taxes. The Company recorded a
charge to income tax expense of approximately $488,000 on March 25, 1997,
representing deferred income taxes at that date which were not previously
recorded because of Fraser's status under Subchapter S.
For purposes of these consolidated financial statements, federal and
state income taxes have been provided for the net income of the Pooled Companies
as if these companies had filed C Corporation tax returns for the preacquisition
periods. The current income tax expense of the Pooled Companies is reflected in
the consolidated financial statements in the provision for income taxes and as
an increase to capital in excess of par value.
Revenue Recognition
The Company recognizes revenue upon delivery of the product to the
customer.
Fair Value of Financial Instruments
SFAS No, 107, "Disclosures About Fair Values of Financial
Instruments," and SFAS No. 119, "Disclosures About Derivative Financial
Instruments and Fair Value of Financial Instruments," require the disclosure of
the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet, for which it is practicable to estimate
fair value. The carrying value of the Company's financial instruments
approximates fair value.
F-8
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenue and
expenses during the reporting period. The Company reviews all significant
estimates affecting its consolidated financial statements on a recurring basis
and records the effect of any necessary adjustments prior to their publication.
Adjustments made with respect to the use of estimates often relate to improved
information not previously available. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of financial
statements.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share." The Company adopted SFAS No. 128 for the year ended December 28,
1997. SFAS No. 128 simplifies the standards required under current accounting
rules for computing earnings per share and replaces the presentation of primary
net income per share and fully diluted net income per share with a presentation
of basic net income per share ("Net income per share") and diluted net income
per share ("Net income per share - diluted"). Net income per share excludes
dilution and is determined by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period.
Net income per share - diluted reflects the potential dilution that could occur
if securities and other contracts to issue common stock were exercised or
converted into common stock. Net income per share - diluted is computed
similarly to fully diluted net income per share under previous accounting rules.
Net income per share was computed using 6,054,446 shares (the
aggregate number of shares attributable to Fraser and the shares issued in
acquisitions accounted for under the pooling-of-interests method) for the years
ended November 30, 1995 and 1996. Net income per share for the year ended
December 28, 1997 was computed using, in addition to the aforementioned shares,
6,235,496 shares issued in consideration for the acquisition of Ridge,
Interstate and Summers, the shares issued pursuant to the Offering and
overallotment option, shares issued to Main Street Capital Partners, L.P. and to
PalEx management and shares issued to the profit sharing plans of the Founding
Companies. These shares were considered to be outstanding from their date of
issuance. Net income per share - diluted differs from the net income per share
computation due to the inclusion of stock options that were dilutive.
Concentrations of Risk
Materials
Pallet prices are closely related to the changing costs and
availability of lumber, the principal raw material used in the manufacture and
repair of wooden pallets. Lumber supplies and costs are affected by many factors
including weather, governmental regulation of logging on public lands, lumber
agreements between Canada and the United States and competition from other
industries that use similar grades and types of lumber.
Markets
Markets for pallet manufacturing and repair services are highly
fragmented and competitive. Pallet manufacturing and recycling operations are
not capital-intensive and barriers to entry in such businesses are minimal.
Customers
The Company sells to customers with local, regional and national
operations in many different industries and geographical locations. Of such
customers, one customer accounted for approximately 16 percent, 31 percent and
35 percent of the Company's consolidated revenues in 1995, 1996 and 1997,
respectively. As of December 28, 1997, this customer had an outstanding accounts
receivable balance which represented approximately 11 percent of the Company's
total accounts receivable.
Recent Accounting Pronouncements
In June 1997, SFAS No. 131, "Disclosures About Segments Of An
Enterprise and Related Information," was issued, establishing standards for
public enterprises to disclose certain information about operating segments and
related disclosures about products and services, geographic areas and
significant customers. The Company will adopt this pronouncement in 1998 in
accordance with the implementation requirements. Management believes the
adoption will not have a material impact on the Company's financial statements.
F-9
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS COMBINATIONS
Poolings
In the third and fourth quarters of 1997, the Company acquired all of
the outstanding stock of the Pooled Companies in exchange for 3,160,742 shares
of Common Stock. These companies produce and repair wooden pallets. These
acquisitions have been accounted for under the pooling-of-interests method of
accounting.
The following table summarizes the restated consolidated revenues, net
income and per share data of the Company after giving effect to these
transactions (in thousands, except per share data):
For the Years Ended November 30,
------------------------------------
1995 1996
---------------- ----------------
Net Net
Revenues Income Revenues Income
-------- ------ -------- ------
Revenues and net income -
As previously reported $30,135 $1,923 $49,282 $3,846
Pooled Companies 47,121 1,667 46,765 1,830
------- ------ ------- ------
As restated $77,256 $3,590 $96,047 $5,676
======= ====== ======= ======
Net income per share - diluted
As previously reported $ .66 $ 1.33
Pooled Companies (.07) (.39)
------ ------
As restated $ .59 $ .94
====== ======
The dilutive effect of the Pooled Companies on net income per share is
primarily the result of higher owners' compensation expense of the Pooled
Companies prior to their acquisition by the Company.
The historical financial statements for 1995 and 1996 represent the
operations of the Pooled Companies prior to their acquisition by the Company.
The combined revenues and net income of the Pooled Companies for the
preacquisition period in 1997 were $37.6 million and $4.6 million, respectively.
Purchases
The acquisitions of Ridge, Interstate and Summers (the "Purchased
Companies") were accounted for as purchases and have been reflected in the
Company's financial statements from March 31, 1997 for Ridge and Interstate and
from November 20, 1997 for Summers. The aggregate consideration paid in these
transactions was $4.6 million in cash and 3,301,971 shares of common stock with
an estimated fair value of $21.7 million. The accompanying consolidated balance
sheet as of December 28, 1997 includes allocations of the respective purchase
prices. The allocations resulted in goodwill recognized of $25.2 million,
representing the excess of purchase price over fair value of the net assets
acquired, as follows (in thousands):
Goodwill $ 25,241
Fair value of assets acquired 20,503
Liabilities assumed (19,408)
Fair value of common stock (21,729)
--------
Cash paid, net of cash acquired $ 4,607
========
Goodwill is amortized over the estimated useful life of thirty years using the
straight-line method.
F-10
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
The following table sets forth unaudited pro forma income statement
data of the Company which reflects adjustments to the consolidated financial
statements to present the effect of the acquisitions of Ridge, Interstate and
Summers as if the acquisitions were effective December 1, 1995 (dollar amounts
in thousands, except per share data):
Year Ended
------------------------------------
November 30, 1996 December 28, 1997
----------------- -----------------
(unaudited)
Revenues $146,899 $183,561
======== ========
Net Income $ 7,573 $ 8,816
======== ========
Net Income per share - diluted $ .56 $ .62
======== ========
Pro forma adjustments included in the amounts above primarily relate
to adjustments to selling, general and administrative expenses for changes in
the compensation level of the owners of the acquired businesses, adjustments to
interest expense attributed to incremental borrowings, amortization of goodwill,
retirement of debt obligations and adjustment to the federal and state income
tax provisions based on pro forma operating results. Net income per share
assumes all shares had been outstanding for the periods presented, except for
shares issued pursuant to the over-allotment option, which are included only
from their date of issuance.
The unaudited pro forma data presented above is not necessarily
indicative of actual results that might have occurred had the operations and
management teams of the Company, the Founding Companies, the Pooled Companies
and Summers been combined at the beginning of each period presented.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
Estimated
Useful Lives November 30, December 28,
In Years 1996 1997
------------ ------------- -------------
Land $ 1,313 $ 2,822
Machinery and equipment 5-10 24,841 32,981
Buildings 15-40 6,581 10,833
Furniture and fixtures 5-8 302 1,056
Tractors and trailers 5-6 1,883 4,244
-------- --------
34,920 51,936
Less: accumulated
depreciation (14,863) (21,054)
-------- --------
$ 20,057 $ 30,882
======== ========
F-11
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of
the following (in thousands):
November 30, December 28,
1996 1997
------------ -------------
Balance at beginning of year $ 156 $ 178
Additional charges to costs and expenses 22 203
Additional allowances from Purchased
Companies -- 95
Deductions for uncollectible accounts
written off -- (11)
----- -----
Balance at end of year $ 178 $ 465
===== =====
The major components of inventories are as follows (in thousands):
November 30, December 28,
1996 1997
------------ ------------
Lumber, hardware and fasteners $5,687 $15,503
Finished Goods 1,691 2,653
------ -------
$7,378 $18,156
====== =======
Accrued expenses consist of the following (in thousands):
November 30, December 28,
1996 1997
------------ ------------
Accrued compensation and benefits $2,280 $ 673
Accrued taxes 336 572
Other accrued expenses 1,282 1,709
------ ------
$3,898 $2,954
====== ======
6. DEBT
On March 25, 1997, the Company entered into a credit agreement with
Bank One, Texas, N.A. (the "Credit Facility"). The Credit Facility provides the
Company with an unsecured revolving line of credit of up to $35,000,000, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding and Pooled Companies, future
acquisitions, capital expenditures, letters of credit and working capital.
Advances under the Credit Facility bear interest at designated variable rates
plus margins ranging from 0 to 25 basis points, depending on the ratio of the
Company's interest bearing debt to its pro forma trailing earnings before
interest, taxes, depreciation and amortization for the previous four quarters.
At the Company's option, the loans may bear interest based on a designated
London Interbank Offering Rate ("LIBOR") plus a margin ranging from 75 to 175
basis points, depending on the ratio noted above. Commitment fees of 17.5 to 30
basis points are payable on the unused portion of the line of
F-12
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
credit. The Credit Facility contains a limit for standby letters of credit up
to $10 million. There were letter of credit commitments of approximately $1.1
million outstanding under the Credit Facility at December 28, 1997. The Credit
Facility prohibits the payment of dividends by the Company, restricts the
Company's incurring or assuming other indebtedness and requires the Company to
comply with certain financial covenants, including fixed charge coverage, funded
debt to earnings before taxes, depreciation and amortization and net worth to
tangible asset ratios. The Company was in compliance with the covenants at
December 28, 1997. The Credit Facility will terminate and all amounts
outstanding thereunder, if any, will be due and payable January 29, 2003. The
approximate level of borrowings available under the Credit Facility at December
28, 1997 was $10,000,000. The Company's subsidiaries have guaranteed the
repayment of all amounts due under the Credit Facility. On January 29, 1998,
the Credit Facility was increased to $125,000,000.
Fraser and the Pooled Companies had balances outstanding under lines
of credit at November 30, 1996 of $865,000. These lines bore interest at rates
ranging from LIBOR plus 1.75% to prime (8.25% at November 30, 1996) and were
secured by certain assets of the Company.
Fraser and the Pooled Companies had balances due to related parties at
November 30, 1996 of $2,980,000, which were retired in 1997. This indebtedness
bore interest at rates ranging from 7.00% to 9.50% and was unsecured.
The personal guarantees and security referred to herein with respect
to outstanding indebtedness as of November 30, 1996 were at the time when Fraser
and the Pooled Companies were not owned by PalEx. In connection with the
acquisition of these companies by PalEx, the indebtedness was retired.
F-13
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
<TABLE>
<CAPTION>
November 30, December 28,
Long-term debt consists of the following (in thousands): 1996 1997
------------- -------------
<S> <C> <C>
Amount due under the revolving
credit facility, bearing interest
at 8.50%, due on January 29,
2003, secured by guarantees
of the subsidiaries of the Company $ -- $ 5,000
Amount due under the revolving credit
facility, bearing interest at LIBOR
rates ranging from 6.7187% to 6.75%,
due on January 29, 2003, secured by
guarantees of the Subsidiaries of the
Company -- 19,000
Industrial development revenue bonds, bearing
interest at approximately 80% of prime (6.80%
at December 28, 1997), payable in annual
installments of $50,000 through maturity in
2008, secured by a certificate of deposit, bank
letter of credit and certain property, plant and
equipment -- 550
Other notes payable of Pooled and Purchased Companies 7,367 --
Other 10 23
------- -------
7,377 24,573
Less-current maturities (1,669) (73)
------- -------
$ 5,708 $24,500
======= =======
</TABLE>
Future Maturities of Long-Term Debt at December 28, 1997 are as follows (in
thousands):
Year Ending December,
1998 73
1999 50
2000 50
2001 50
2002 50
Thereafter 24,300
------
24,573
======
F-14
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
7. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Year Ended
----------------------------------
November 30, December 28,
------------------ ------------
1995 1996 1997
---- ---- ----
Federal
Current $ 889 $1,041 $4,052
Deferred 108 (42) (28)
------ ------ ------
997 999 4,024
------ ------ ------
State
Current 242 492 866
Deferred 22 (9) (5)
------ ------ ------
$ 264 $ 483 $ 861
------ ------ ------
Total $1,261 $1,482 $4,885
====== ====== ======
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (in thousands):
Year Ended
--------------------------------
November 30, December 28,
----------------- ------------
1995 1996 1997
---- ---- ----
Tax at federal statutory rate of 35% $1,698 $ 2,505 $4,213
Increase (decrease) resulting from:
State income taxes, net of
federal benefit 216 315 560
Income taxed to Fraser Stockholders (685) (1,381) (172)
Other 32 43 284
------ ------- ------
$1,261 $ 1,482 $4,885
====== ======= ======
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences for the periods ended
November 30, 1996 and December 28, 1997 result principally from the following
(in thousands):
November 30, December 28,
1996 1997
---- ----
Deferred income tax liabilities
Property and equipment $ (844) $(2,370)
Other (185) ( 666)
------- -------
Total deferred income tax liabilities (1,029) (3,036)
Deferred income tax assets
Allowance for doubtful accounts 145 98
Accruals and reserves 272 684
------- -------
Total deferred income tax assets 417 782
------- -------
Net deferred income tax liabilities $ (612) $(2,254)
======= =======
F-15
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the
outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are adequately covered by insurance or, if not
so covered, should not materially result in any liability which would have a
material adverse effect on the financial position, liquidity or results of
operations of the Company.
Insurance
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy.
The Company is self-insured for certain medical claims up to $50,000 per
person per year. Provisions for expected future payments are accrued based on
the Company's estimate of its aggregate liability for all open and unreported
claims. Management believes the amount currently accrued is adequate to cover
all known and unreported claims as of December 28, 1997.
Operating Lease Agreements
The Company conducts a portion of its operations and warehouses certain of
its products in leased facilities classified as operating leases.
Minimum future rental payments under noncancelable operating leases as of
December 28, 1997 are as follows (in thousands):
Year ending December,
1998 $1,131
1999 1,077
2000 1,004
2001 964
2002 928
Thereafter 2,976
------
$8,080
======
Certain leases provide for payment of taxes and other expenses by the
Company. Rent expense for operating leases was approximately $774,000, $463,000
and $1,445,000 for fiscal years 1995, 1996 and 1997, respectively. Rent expense
paid to related parties and included in the foregoing amounts was approximately
$221,000, $227,000 and $146,000 for fiscal years 1995, 1996 and 1997,
respectively.
9. STOCK OPTION PLAN
On June 1, 1996, the Board of Directors and the stockholders of the Company
approved the 1996 Stock Option Plan, as amended (the "Plan"). The Plan provides
for the granting of stock options ("Options") to directors, executive officers,
other employees and certain non-employee consultants of the Company. The
Company accounts for the Plan under APB Opinion No. 25, and no compensation
expense has been recognized. The Plan, which permits an amount equal to no more
than 15% of the outstanding shares of PalEx Common Stock to be issued as
optioned shares, terminates in June 2006. In general, the terms of the option
awards (including vesting schedules) will be established by the Compensation
Committee of the Company's Board of Directors. As of December 28, 1997, the
Company has granted options covering an aggregate of 1,321,500 shares of Common
Stock.
F-16
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
The following table summarizes activity under the Plan for the year ended
December 28, 1997:
Shares Exercise Price
Outstanding at November 30, 1996
Granted 1,328,500 $7.50 - $14.75
Exercised -- --
Forfeited and canceled (7,000) 7.50
---------
Outstanding at December 28, 1997 1,321,500 $7.50 - 14.75
=========
Weighted average fair value of options granted
during 1997 $ 5.38
Weighted average remaining contractual life 9.33 years
At December 28, 1997, options exercisable into 75,000 shares of Common
Stock were exercisable. Unexercised options expire ten years from the issue
date.
The following pro forma summary of the Company's consolidated results of
operations have been prepared as if the fair value based method of accounting
for stock based compensation as required by SFAS No. 123 had been applied:
<TABLE>
<CAPTION>
Year ended December 28, 1997
<S> <C>
Net income attributable to common stockholders............ $7,152,000
Pro forma adjustment...................................... (2,934,000)
----------
Pro forma net income attributable to common stockholders.. 4,218,000
Net income per share ("EPS")
Basic EPS as reported..................................... .60
Basic EPS pro forma....................................... .35
Diluted EPS as reported................................... .58
Diluted EPS pro forma..................................... .34
</TABLE>
Fair value of the options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions for
1997.
Risk free interest rate 6.66%
Dividend yield 0.00%
Volatility factor 35.77%
Weighted average expected life 10 years
10. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution profit-sharing plan (the "Plan")
which qualifies under Section 401(k) of the Internal Revenue Code. Participation
in the Plan is available to substantially all employees. Eligible employees may
contribute up to the lesser of 15% of their annual compensation or the maximum
amount permitted under Internal Revenue Service regulations to their 401(k)
account. The Company matches the contributions of participating employees on the
basis of the percentages specified in the Plan. Company matching contributions
to the Plan were approximately $169,000 in 1997. The employee and Company
matching contributions are invested at the direction of the individual employee.
F-17
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
Each of the Founding Companies and Sonoma and Sheffield had profit-
sharing plans at the time of their acquisition by PalEx. The Ridge Plan was
adopted as the PalEx plan and now functions as the Company's 401(k) Plan. The
other plans have been or will be merged into the PalEx plan. Profit-sharing
expense was $405,000 and $1,474,000 for 1995 and 1996, respectively, related to
Fraser and the Pooled Companies.
11. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent Pooling Acquisitions
Between December 28, 1997 and March 15, 1998, the Company acquired all
of the outstanding stock or substantially all of the assets of three industrial
container management business companies in exchange for 3,624,214 shares of
Common Stock in transactions which will be accounted for as poolings-of-
interests (the "Subsequent Poolings"). These companies provide steel drum
reconditioning and management services in the United States.
The following table summarizes the unaudited restated consolidated
revenues, net income and per share data of the Company after giving effect to
these transactions (in thousands, except per share data).
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------------------------------------------
November 30, 1995 November 30, 1996 December 28, 1997
--------------------- ------------------------ --------------------
Revenues Net Income Revenues Net Income Revenues Net Income
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income:
As presently reported $ 77,256 $3,590 $ 96,047 $5,676 $162,848 $7,152
Subsequent poolings 48,095 495 49,318 436 61,792 (682)
-------- ------ -------- ------ -------- ------
As restated $125,351 $4,085 $145,365 $6,112 $224,640 $6,470
======== ====== ======== ====== ======== ======
Net income per share - diluted
As presently reported $ .59 $ .94 $ .58
Subsequent poolings (.17) (.31) (.19)
As restated $ .42 $ .63 $ .39
====== ====== ======
</TABLE>
The dilutive effect of the Pooled Companies on net income per share is
primarily the result of higher compensation expense of the Pooled Companies
prior to their acquisition by the Company.
F-18
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
Subsequent Purchase Acquisitions
Between December 28, 1997 and March 15, 1998, the Company acquired
certain assets and liabilities and the ongoing businesses of two companies for
approximately $26.2 million in cash and 530,766 shares of Common Stock in
transactions which will be accounted for as purchase business combinations
("Subsequent Purchases"). One of these acquisitions was of a pallet recycling
company and one was a provider of steel drum reconditioning and management
services. Set forth below is the unaudited pro forma combined revenue, net
income and net income per share data, adjusted for the effect of the Subsequent
Poolings and the Subsequent Purchases, as if these acquisitions had occurred on
the first day of the year presented (in thousands, except per share data):
1997
----
Revenue $274,470
========
Net income 11,515
========
Diluted net income per share $ .63
========
Pro forma adjustments included in the amounts above primarily relate
to adjustments to selling, general and administrative expenses for changes in
the compensation level of the owners of the acquired businesses, adjustments to
interest expense attributed to incremental borrowings, amortization of goodwill,
retirement of debt obligations and adjustment to the federal and state income
tax provisions based on pro forma operating results. Net income per share
assumes all shares had been outstanding for the periods presented.
The unaudited pro forma data presented above is not necessarily
indicative of actual results that might have occurred had the operations and
management teams of the Company, the Founding Companies, the Pooled Companies,
Summers, and the Subsequent Purchases been combined at the beginning of each
period presented.
Potential Environmental Liability
In February 1998, the Company acquired Drum Service Co. of Florida, a
steel drum reconditioning company with a facility in Florida ("Drum Service").
Drum Service is a wholly owned subsidiary of the Company. In 1982 Drum Service
was notified by the U.S. Environmental Protection Agency (the "EPA") and the
Florida Department of Environmental Regulation (the "DER") that they believed
that Drum Service might be a potentially responsible party ("PRP") regarding the
Zellwood Groundwater Contamination Site in Orange County, Florida (the "Zellwood
Site"). The Zellwood Site was designated a "Superfund" environmental clean-up
site after the DER discovered arsenic contamination in a shallow monitoring well
adjacent to it. The Drum Service facility is a portion of the 57 acres
constituting the Zellwood Site. The Company believes that Drum Service and its
former sole shareholder were among approximately 25 entities and individuals
identified as PRPs by the EPA.
Between March 1990 and July 1996, the EPA issued various unilateral
administrative orders and notices to Drum Service and various other PRPs. Those
orders and notices demanded reimbursement from PRPs of approximately $2 million
of the EPA's costs regarding the Zellwood Site and requested the PRPs to accept
financial responsibility for additional clean-up efforts. During that time, the
EPA estimated that the cost of the selected remedy for soil at the Zellwood Site
would be approximately $1 million and the cost of the selected remedy for
groundwater at the Zellwood Site would be approximately $5.1 million. Drum
Service and the other PRPs did not agree to the EPA's demands or agree to fund
any additional clean-up. In April 1997, the EPA issued an order unilaterally
withdrawing its previous orders. Since that withdrawal order, the EPA has not
taken any formal administrative or civil action against Drum Service or its
former shareholder.
Drum Service has maintained comprehensive general liability insurance
coverage for over 25 years and has notified various insurers of the EPA's claims
regarding the Zellwood Site. A number of those insurers' policies did not
F-19
<PAGE>
PALEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMETS
contain an exclusion for pollution. In 1992 Drum Service settled a claim with
an insurer for an amount that covered a substantial portion of the costs Drum
Service had incurred in dealing with the EPA and the DER. Drum Service has
identified other umbrella liability policies for which coverage may also be
available and has been approached by the insurer under two of those policies
seeking a settlement. The Company does not know when, if ever, the EPA may make
a claim against Drum Service regarding the Zellwood Site. Further, the Company
cannot estimate the amount of any such claim or, in light of the existence of
other PRPs, the extent of any liability of Drum Service. The Company and Drum
Service will continue to determine the availability of additional insurance
coverage for this matter.
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ridge Pallets, Inc.:
We have audited the accompanying balance sheets of Ridge Pallets, Inc. (a
Florida corporation) (the "Company"), as of July 30, 1995 and July 28, 1996,
and the related statements of income, changes in stockholders' equity and cash
flows for the years then ended, and for the eight months ended March 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ridge Pallets, Inc., as of
July 30, 1995 and July 28, 1996, and the results of its operations and cash
flows for the years then ended, and for the eight months ended March 31, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 1998
F-21
<PAGE>
RIDGE PALLETS, INC.
BALANCE SHEETS - JULY 30, 1995 AND JULY 28, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
July 30, July 28,
1995 1996
-------- --------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,259 $ 1,250
Accounts receivable, net of allowance of $155 and $123 2,560 3,376
Inventories 4,228 3,687
Other current assets 350 144
------- -------
Total current assets 11,397 8,457
Property, plant and equipment, net 5,211 6,151
Other assets 1,055 1,101
------- -------
Total assets $17,663 $15,709
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities
Current portion of long-term debt $ 1,050 $ 1,050
Accounts payable 338 796
Accrued expenses 780 1,003
Dividends payable 1,050 --
------- -------
Total current liabilities 3,218 2,849
Long-term debt, net of current maturities 12,221 8,600
------- -------
Total liabilities 15,439 11,449
------- -------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $1 par value, 5,000,000 shares
authorized; 483,000 shares and 549,500 shares issued
and outstanding for 1995 and 1996, respectively $ 483 $ 550
Additional paid-in capital 179 496
Retained earnings 1,562 3,214
Total stockholders' equity ------- -------
Total liabilities and stockholders' equity 2,224 4,260
------- -------
$17,663 $15,709
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED JULY 30, 1995, AND JULY 28, 1996
AND FOR THE EIGHT MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
For the Eight
July 30, July 28, Months Ended
1995 1996 March 31, 1997
-------- -------- --------------
Revenues $54,450 $48,341 $34,684
Cost of goods sold 46,388 40,540 30,029
------- ------- -------
Gross profit 8,062 7,801 4,655
Selling, general and administrative
expenses 3,826 3,825 2,939
------- ------- -------
Income from operations 4,236 3,976 1,716
Interest Expense (962) (1,032) (528)
Other income (expense), net 101 199 44
------- ------- -------
Income before income taxes 3,375 3,143 1,232
Provision for income taxes 83 76 24
------- ------- -------
Net income $ 3,292 $ 3,067 $ 1,208
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 30, 1995 AND JULY 28, 1996
AND FOR THE EIGHT MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional
--------------- Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance - initial capitalization,
August 1, 1994 350 $350 $ -- $ -- $ 350
Stock issued 133 133 179 -- 312
Net income -- -- -- 3,292 3,292
Dividends -- -- -- (1,730) (1,730)
---- ---- ----- ------- -------
Balance, July 30, 1995 483 483 179 1,562 2,224
Stock issued 67 67 317 -- 384
Net income -- -- -- 3,067 3,067
Dividends -- -- -- (1,415) (1,415)
---- ---- ----- ------- -------
Balance, July 28, 1996 550 550 496 3,214 4,260
Net income -- -- -- 1,208 1,208
Dividends -- -- -- (3,420) (3,420)
---- ---- ----- ------- -------
Balance, March 31, 1997 550 $550 $ 496 $ 1,002 $ 2,048
==== ==== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
RIDGE PALLETS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 30, 1995 AND JULY 28, 1996
AND FOR THE EIGHT MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
July 30, July 28, Eight Months
1995 1996 Ended
March 31,
1997
-------- -------- ------------
<S> <C> <C> <C>
Cash Provided by Operating Activities:
Net income $3,292 $ 3,067 $ 1,208
Additions (deductions) for noncash activities -
Depreciation and amortization 605 734 639
Loss on sale of property, plant and equipment 13 -- 11
Deferred income taxes 45 (2) --
Changes in operating assets and liabilities -
Accounts receivable 1,340 (816) (1,344)
Inventories 167 541 (1,344)
Other current assets 10 206 30
Other assets (275) (49) 230
Accounts payable (229) 458 342
Accrued expenses 35 229 367
------ ------- -------
Net cash provided by operating activities 5,003 4,368 139
------ ------- -------
Cash from Investing Activities:
Proceeds from sale of property, plant and
equipment 223 90 74
Purchase of property, plant and equipment (899) (1,765) (1,267)
------ ------- -------
Net cash used in investing activities (676) (1,675) (1,193)
------ ------- -------
Cash from Financing Activities:
Issuance of common stock 312 384 --
Dividends paid (680) (2,465) (3,300)
Payment of long-term debt (50) (3,621) (50)
Borrowings on line of credit -- -- 3,300
------ ------- -------
Net cash used in financing activities (418) (5,702) (50)
------ ------- --------
Increase (decrease) in cash and cash equivalents 3,909 (3,009) (1,104)
Cash and cash equivalents, beginning of period 350 4,259 1,250
------ ------- -------
Cash and cash equivalents, end of period $4,259 $ 1,250 $ 146
====== ======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for -
Interest $ 816 $ 1,018 $ 481
Income taxes 69 90 24
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
On August 1, 1994, The FMP Group, Inc. purchased from Ridge Pallets, Inc.
(the "Predecessor Company"), substantially all of its assets used in the pallet
and bin manufacturing business and the name "Ridge Pallets, Inc." for notes
payable of approximately $12,600,000 and the assumption of approximately
$1,800,000 in liabilities (the "Acquisition"). Simultaneously with the
transaction, the seller changed its name to Ridge Resources, Inc. and The FMP
Group, Inc., changed its name to Ridge Pallets, Inc. (the "Company").
The Company is a manufacturer of wooden pallets and agricultural harvesting
boxes and bins. Manufacturing facilities are located in Florida, Georgia and
South Carolina, with the Company's headquarters located in Bartow, Florida.
Sales of the Company's products are primarily in Florida and the Southeastern
United States. The Company's customer base is approximately 40 percent
agricultural, with the balance comprised of the cement, roof and tile, auto,
grocery, beverage and seafood industries.
The Company and its stockholders entered into a definitive agreement with
PalEx, Inc. ("PalEx") pursuant to which all outstanding shares of the Company's
common stock were exchanged for 2,640,768 shares of PalEx common stock
concurrent with the consummation of the initial public offering of the common
stock of PalEx on March 25, 1997.
In connection with the Acquisition, PalEx satisfied a portion of the
Company's obligation to the Ridge Pallets, Inc. Profit Sharing Plan
(supplemental profit-sharing obligation) through the issuance of approximately
82,500 shares of PalEx common stock, which were valued at approximately
$465,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
For accounting purposes, March 31, 1997 has been established as the
effective date of the Acquisition because management has determined that
effective control of the operations of the Company transferred to PalEx on that
date. Accordingly, the accompanying financial statements represent the Company's
financial condition and results of operations, cash flows and changes in
stockholders' equity through March 31, 1997.
Fiscal Year
The fiscal year of the Company is a 52-week or 53-week period that ends on
the last Sunday in July. The years ended July 30, 1995 and July 28, 1996, were
52-week periods.
Inventories
Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis or by specific identification. The cost of
finished goods inventory includes direct material, direct labor and overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation for the
years ended July 30, 1995 and July 28, 1996 and for the eight months ended March
31, 1997, is provided on the straight-line method based upon the estimated
useful lives of the assets.
Expenditures for maintenance and repairs are charged to operating expense
as incurred. Additions and major replacements or betterments that increase
capacity or extend useful lives are added to the cost of the asset. Upon sale
F-26
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
or retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in other income (expense), net.
Income Taxes
The stockholders of the Company have elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under these provisions,
the Company does not pay federal and certain state income taxes. Instead, the
Company's stockholders pay income taxes on their proportionate shares of the
Company's net earnings. The provision for income taxes is composed entirely of
state income taxes.
Cash Equivalents
For purposes of the statements of cash flows and balance sheets, the
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Noncash Activities
In fiscal year 1995, the Company issued notes payable of approximately
$12,600,000 and assumed approximately $1,800,000 of liabilities in connection
with the acquisition of the pallet and bin manufacturing business of Ridge
Resources, Inc. The assets acquired were recorded at fair value as follows:
(in thousands)
--------------
Property, plant and equipment $5,372
Inventories 4,394
Accounts Receivable 3,899
Other assets 720
Goodwill 23
-------
$14,408
=======
In addition, dividends of $1,050,000 were included in dividends payable at
July 30, 1995. In December 1997, a dividend distribution of non-operating
assets, with a net book value of approximately $120,000, was provided to the
stockholders. Accordingly, these noncash investing and financing activities have
been excluded from the accompanying statements of cash flows.
Revenue Recognition
The Company recognizes revenues upon delivery of the product to the
customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-27
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
Concentrations of Risks
Materials - Pallet prices are closely related to the changing costs and
availability of lumber, the principal raw material used in the manufacture and
repair of wooden pallets. Lumber supplies and costs are affected by many
factors including weather, governmental regulation of logging on public lands,
lumber agreements between Canada and the United States and competition from
other industries that use similar grades and types of lumber. The Company
received approximately 39 percent, 46 percent and 38 percent of its lumber
purchases from two suppliers in 1995, 1996, and for the eight months ended March
31, 1997, respectively.
Markets - Markets for pallet manufacturing and repair services are highly
fragmented and competitive. Pallet manufacturing and recycling operations are
not capital-intensive; therefore, barriers to entry in such businesses are
minimal.
Customers - The Company's sales are made to customers with local, regional
and national operations in many different industries and geographical locations.
Of such customers, one customer accounted for approximately 22 percent, 21
percent and 34 percent of revenues in 1995, 1996, and for the eight months ended
March 31, 1997, respectively. As of July 28, 1996, the customer had an
outstanding accounts receivable balance which represented approximately 10
percent of total accounts receivable.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
Estimated
Useful Lives July 30, July 28,
in Years 1995 1996
------------ -------- --------
Land -- $ 721 $ 721
Machinery and equipment 7-10 2,033 2,675
Vehicles and rolling stock 5 694 1,141
Buildings and building improvements 15-40 2,229 2,608
Furniture and fixtures 5-10 124 277
Less - Accumulated depreciation (590) (1,271)
------ -------
Property, plant and equipment, net $5,211 $ 6,151
====== =======
In 1996 the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement
establishes the recognition and measurement standards related to the impairment
of long-lived assets. The Company periodically assesses the realizability of
its long-term assets pursuant to the provisions of SFAS No. 121. Based on the
Company's analysis of the undiscounted future cash flows for its long-term
assets, no impairments would have been recognized under SFAS No. 121.
F-28
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
The major components of inventories are as follows:
July 30, July 28,
1995 1996
------ ------
(In thousands)
Lumber, hardware and fasteners $3,701 $3,054
Work in process 88 85
Finished goods 439 548
------ ------
$4,228 $3,687
====== ======
Activity in the Company's allowance for doubtful accounts
consists of the following:
Balance at beginning of the year $ 35 $ 155
Additions charged to expense (recoveries) 120 (5)
Deductions for uncollectible receivables written off -- (27)
------ ------
$ 155 $ 123
====== ======
Other assets are as follows:
Certificate of deposit - restricted $ 535 $ 554
Cash surrender values of officers' life insurance 130 146
Notes receivable 131 90
Other assets 259 311
------ ------
$1,055 $1,101
====== ======
Accrued expenses consist of the following:
Accrued workers' compensation $ 250 $ 250
Accrued salaries and benefits 90 378
Accrued interest payable 140 133
Accrued taxes 110 81
Other accrued expenses 190 161
------ ------
$ 780 $1,003
====== ======
F-29
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
5. DEBT:
The Company maintained a $4 million line of credit which was terminated
upon the acquisition of the Company by PalEx, Inc. There were no borrowings on
the line as of July 30, 1995, and July 28, 1996.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
July 30, 1995 July 28, 1996
------------- -------------
(In thousands)
<S> <C> <C>
Notes payable to Ridge Resources, Inc. and its shareholders, at prime,
interest due quarterly, principal due in annual installments totaling
$1,000,000 to $1,500,000, maturing January 3, 2000, and
collateralized by property, plant, equipment, receivables and
inventory and secured by shares of the Company held by its six
shareholders $12,571 $ 9,000
Industrial development bond, interest variable, approximating 80 percent of
prime, interest due monthly, $50,000 principal due annually;
collateralized by property, plant., and equipment and a standby
letter of credit from a bank in the amount of $695,000 700 650
------- -------
Less - Current portion 13,271 9,650
Total long-term debt (1,050) (1,050)
------- -------
$12,221 $ 8,600
======= =======
</TABLE>
The Notes payable to Ridge Resources and its shareholders were paid upon the
acquisition of the Company by PalEx, Inc.
6. INCOME TAXES:
State income taxes are as follows:
Year Year Eight Months
Ended Ended Ended
July 30, July 28, March 31,
1995 1996 1997
-------- --------- ------------
(In thousands)
State -
Current $ 38 $ 78 $ 24
Deferred 45 (2) --
----- ----- -----
$ 83 $ 76 $ 24
===== ===== =====
For the years ended 1995 and 1996 and for the eight months ended March 31,
1997, actual income tax expenses is primarily computed by applying the blended
state tax rate of 2.4 percent to income before income taxes.
F-30
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences for the years ended
1995 and 1996 result principally from the following:
July 30, July 28,
1995 1996
-------- --------
(In thousands)
Deferred income tax liabilities -
Depreciation and amortization $ 3 $ 9
Fiscal year-end deferral 48 44
Deferred income tax assets -
Inventory (3) (3)
Other assets (4) (7)
--- ---
Net current deferred income tax $44 $43
liabilities === ===
7. RELATED-PARTY TRANSACTIONS:
The Company is related to Sunbelt Forest Products Corporation ("Sunbelt")
and Ridge Resources, Inc., through certain common ownership, officers and
directors.
The following amounts are included in the statements of income:
<TABLE>
<CAPTION>
Year Year Eight Months
Ended Ended Ended
July 30, 1995 July 28, 1996 March 31, 1997
------------- ------------- --------------
(In thousands)
<S> <C> <C> <C>
Sales to Sunbelt $484 $666 $ 200
Purchases from Sunbelt -- 11 55
Accounting and managerial services revenue from
Sunbelt 75 55 33
Purchases from Ridge Resources, Inc. 199 421 15
Interest expense to Ridge Resources, Inc. 909 982 481
</TABLE>
F-31
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
The following amounts are included in the balance sheets:
July 30, July 28,
1995 1996
-------- --------
(In thousands)
Accounts receivable from Sunbelt $ 7 $ 6
Due from Ridge Resources, Inc. 5 1
Note payable to Ridge Resources, Inc. 12,571 9,000
8. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
Insurance
The Company has a workers' compensation and general liability policy,
subject to a $250,000 deductible. As such, any claim within the first $250,000
per incident would be the financial obligation of the Company. In addition, the
policy limits coverage to $850,000 per year. The Company maintains a certificate
of deposit as security in the amount of approximately $554,000, which is
included in other assets at July 28, 1996.
The accrued insurance claims payable represents managements estimate of the
Company's potential claims costs in satisfying the deductible provisions of the
insurance policy for claims occurring through July 28, 1996. The accrual is
based upon known facts and historical trends, and management believes such
accrual to be adequate.
The Company self-insures its employees' health insurance program. A trust
was established in July 1983 to administer this program. Effective August 1,
1994, the Company became the new trust sponsor. By agreement between the Company
and the trust, the Company must contribute sufficient funds to the trust to
ensure that the trust has sufficient monies to pay claims as provided in the
employee health insurance plan document. The Company contributed $185,000,
$145,000 and $95,000 in fiscal years 1995 and 1996 and for the eight months
ended March 31, 1997, respectively.
The trust obtained tax-exempt status from the Internal Revenue Service
during 1985. Its trustees are employees of the Company.
9. PROFIT-SHARING PLAN
The Company maintains a qualified profit-sharing plan (the "Plan"). Company
contributions are voluntary and at the discretion of the board of directors.
Annual contributions, in order to be deductible for income tax purposes by the
Company, cannot exceed 15 percent of salaries and wages.
F-32
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
Effective January 1, 1995, the Company amended the Plan to qualify under
Internal Revenue Code Section 401(k). In accordance with the Plan, the Company
will match 50 percent of employee 401(k) contributions, not to exceed 4 percent
of the employees' qualified compensation related to the Plan.
Total profit sharing and 401(k) expense was $400,000 for fiscal years 1995
and 1996 and $480,000 for the eight months ended March 31, 1997.
10. DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," and
SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," require the disclosure of the fair value of financial
instruments, both assets and liabilities recognized and not recognized on the
balance sheet, for which it is practicable to estimate fair value. The carrying
value of the Company's financial instruments approximates fair value.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of PalEx, Inc. (a Delaware
corporation), as of November 30, 1996, and the related statements of income and
statement of changes in stockholders' equity for the period from inception
(January 8, 1996) to November 30, 1996 and for the four months ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amount and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentations.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PalEx, Inc., as of November
30, 1996, and the results of its operations and changes in stockholders' equity
for the period from inception (January 8, 1996) to November 30, 1996 and for the
four months ended March 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 1998
F-34
<PAGE>
PALEX, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30,
------------
1996
----
Assets:
Cash and cash equivalents $ 1
Other assets 300
-----
Total assets $ 301
=====
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
no shares issued $ --
Common stock, $.01 par value, 30,000,000 shares authorized
1,071,389 shares issued and outstanding 11
Additional paid-in capital 599
Retained deficit (309)
-----
Total stockholders' equity $ 301
=====
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
PALEX, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION (JANUARY 8, FOUR MONTHS
1996) TO ENDED
NOVEMBER 30, 1996 MARCH 31, 1997
---------------------- -------------
<S> <C> <C>
Revenues $ -- $ --
Selling, general and administrative expenses 300 --
--------- ------
Loss before income taxes (300) --
--------- ------
Income tax benefit -- --
--------- ------
Net loss $ (300) $ --
========= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE>
PALEX, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Initial Capitalization 1,021 $10 $ -- $ (9) $ 1
Offering costs incurred by stockholder -- -- 300 -- 300
Issuance of management shares 50 1 299 -- 300
Net loss -- -- -- (300) (300)
----- --- ------ ----- ------
Balance, November 30, 1996 1,071 $11 $ 599 $(309) $ 301
Offering costs incurred by stockholder -- -- 800 -- 800
----- --- ------ ----- ------
Balance, March 31, 1997 1,071 $11 $1,399 $(309) $1,101
===== === ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
PalEx, Inc. ("PalEx" or the "Company"), was founded in January 1996 to
create a nationwide provider of pallet products and related services. PalEx
intends to acquire three U.S. pallet businesses (the "Acquisitions"), complete
an initial public offering (the "Offering") of its common stock and, subsequent
to the Offering, continue to acquire, through merger or purchase, similar
companies to expand its national operations.
PalEx has not conducted any operations, and all activities to date have
related to the acquisitions and the initial public offering ("IPO"). Cash of
$1,000 was generated from the initial capitalization of the Company (see Note
2). All other expenditures to date have been funded by the majority
stockholder, Main Street Capital Partners, L.P. ("Main Street"), on behalf of
the Company. Accordingly, a statement of cash flows would not provide
meaningful information and has been omitted. Main Street has committed to fund
the first $1.25 million of offering costs. PalEx treated these costs as
deferred costs and contributed capital as incurred by Main Street. As of
November 30, 1996 and March 31, 1997, costs of approximately $300,000 and $1.1
million, respectively, had been incurred by Main Street in connection with the
IPO.
On March 25, 1997, PalEx completed the Offering, which involved the sale by
PalEx of 3,000,000 shares of Common Stock at a price to the public of $7.50 per
share. The net proceeds to PalEx from the Offering (after deducting
underwriting discounts, commissions and offering expenses) were approximately
$20.1 million. Simultaneously with the closing of the Offering, PalEx acquired
in separate transactions three companies (the "Founding Companies") for an
aggregate consideration of $3.4 million in cash and 5,910,000 shares of PalEx
common stock. The effective closing of the acquisitions of the Founding
Companies and the IPO for accounting purposes is March 31, 1997. The
accompanying financial statements reflect the activities of PalEx prior to the
acquisitions of the Founding Companies and the IPO. Reference is made to the
historical financial statements and supplemental financial statements of PalEx,
Inc. included elsewhere herein.
In connection with the Acquisitions, PalEx will assume certain obligations
of the Founding Companies. Additionally, in connection with the Acquisitions,
PalEx agreed to satisfy profit sharing obligations of the Founding Companies
totaling approximately $802,000 through the issuance of approximately 142,500
shares of PalEx common stock.
2. STOCKHOLDER'S EQUITY:
In connection with the organization and initial capitalization of PalEx,
the Company issued 1,000 shares of common stock for $1,000 (see note 3).
In November 1996, the Company issued 50,000 shares (after reflecting the
stock dividend discussed in Note 3) of its common stock to the Chief Executive
Officer at an aggregate price of $500. The Company recorded a nonrecurring,
noncash charge of approximately $300,000 representing the difference between the
amounts paid for the shares and the estimated fair value of the shares on the
date of the sale as if the Acquisitions were completed.
In December 1996, PalEx declared a stock dividend of approximately 1,021
shares of common stock for each share of common stock then outstanding. In
addition, PalEx increased the number of authorized shares of common stock to
30,000,000 and authorized 5,000,000 shares of $.01 par value preferred stock.
The effects of the common stock dividend and the increase in the number of
common shares authorized have been retroactively reflected on the balance sheet
and in the accompanying notes.
F-38
<PAGE>
RIDGE PALLETS, INC.
NOTES TO FINANCIAL STATEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," allows entities to choose between a new fair
value based method of accounting for employee stock options or similar equity
instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25").
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
The Company has authorized the issuance of 1,800,000 shares of its common
stock in accordance with its stock option plan. The Company intends to file a
registration statement on Form S-8 under the Securities Act registering the
issuance of shares upon exercise of options granted under the Plan. The Company
expects to grant options to purchase a total of approximately 728,000 shares of
common stock at the initial public offering price upon consummation of the
Offering. The Chief Executive Officer was also granted 200,000 options to
purchase PalEx common stock at the IPO price.
3. CREDIT FACILITY
On March 25, 1997, the Company entered into a credit agreement with Bank
One, Texas, N.A. (The "Credit Facility"). The Credit Facility provides the
Company with an unsecured revolving line of credit of up to $35 million, which
may be used for general corporate purposes, including the repayment or
refinancing of indebtedness of the Founding Companies, future acquisitions,
capital expenditures and working capital. Advances under the Credit Facility
bear interest at such bank's designated variable rate plus margins ranging from
0 to 25 basis points, depending on the ratio of the Company's interest bearing
debt to its pro forma trailing earnings before interest, taxes, depreciation and
amortization for the previous four quarters. At the Company's option, the loans
may bear interest based on a designated London interbank offering rate plus a
margin ranging from 75 to 175 basis points, depending on the same ratio.
Commitment fees of 25 basis points per annum are payable on the unused portion
of the line of credit. The Credit Facility contains a limit for standby letters
of credit up to $10.0 million. The Credit Facility prohibits the payment of
dividends by the Company, restricts the Company's incurring or assuming other
indebtedness and requires the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable March 25, 2004. The Company's
subsidiaries have guaranteed the repayment of all amounts due under the Credit
Facility. On the date of the Offering, the Company borrowed $6.2 million under
the Credit Facility, at an interest rate of 8.25%. Subsequent to March 31,
1997, the Company repaid $1.2 million of such indebtedness with cash generated
from operations and converted the remaining $5.0 million of the borrowings to
loans based on the London interbank offering rate bearing various interest rates
averaging approximately 6.5%.
F-39
<PAGE>
EXHIBIT 10.18
================================================================================
$125,000,000
SECURED CREDIT AGREEMENT
DATED AS OF
JANUARY 29, 1998
AMONG
PALEX, INC., AS BORROWER
AND
THE LENDERS PARTY HERETO
AND
BANK ONE, TEXAS, NA, AS ADMINISTRATIVE AGENT
================================================================================
<PAGE>
TABLE OF CONTENTS PAGE
SECTION 1. DEFINITIONS; INTERPRETATION................................... 1
Section 1.1. Definitions................................................ 1
Section 1.2. Interpretation............................................. 12
SECTION 2. THE CREDIT FACILITY........................................... 12
Section 2.1. Loans...................................................... 12
Section 2.2. Letters of Credit.......................................... 13
Section 2.3. Types of Loans and Minimum Borrowing Amounts............... 17
Section 2.4. Manner of Borrowing........................................ 17
Section 2.5. Interest Periods........................................... 19
Section 2.6. Interest Payments.......................................... 19
Section 2.7. Default Rates.............................................. 20
Section 2.8. Maturity of Loans.......................................... 22
Section 2.9. Optional Prepayments....................................... 22
Section 2.10. Mandatory Prepayments of Loans............................. 22
Section 2.11. The Note................................................... 22
Section 2.12. Breakage Fees.............................................. 23
Section 2.13. Commitment Terminations.................................... 23
SECTION 3. FEES AND PAYMENTS............................................. 24
Section 3.1. Fees....................................................... 24
Section 3.2. Place and Application of Payments.......................... 25
Section 3.3. Withholding Taxes.......................................... 25
SECTION 4. CONDITIONS PRECEDENT.......................................... 27
Section 4.1. Conditions Precedent to Initial Borrowing.................. 27
Section 4.2. Condition Precedent to Consolidated Drum Borrowings........ 28
Section 4.3. Conditions Precedent to all Borrowings..................... 28
SECTION 5. REPRESENTATIONS AND WARRANTIES................................ 30
Section 5.1. Corporate Organization..................................... 30
Section 5.2. Corporate Power and Authority; Validity.................... 30
Section 5.3. No Violation............................................... 30
Section 5.4. Litigation................................................. 31
Section 5.5. Use of Proceeds; Margin Regulations........................ 31
Section 5.6. Investment Company Act..................................... 31
Section 5.7. Public Utility Holding Company Act......................... 31
Section 5.8. True and Complete Disclosure............................... 31
Section 5.9. Financial Statements....................................... 31
Section 5.10. No Material Adverse........................................ 32
Section 5.11. Labor Controversies........................................ 32
Section 5.12. Taxes...................................................... 32
Section 5.13. ERISA...................................................... 32
Section 5.14. Consents................................................... 32
Section 5.15. Capitalization............................................. 32
Section 5.16. Ownership of Property...................................... 33
Section 5.17. Compliance with Statutes................................... 33
Section 5.18. Environmental Matters...................................... 33
i
<PAGE>
TABLE OF CONTENTS PAGE
SECTION 6. COVENANTS..................................................... 34
Section 6.1. Corporate Existence........................................ 34
Section 6.2. Maintenance................................................ 34
Section 6.3. Taxes...................................................... 34
Section 6.4. ERISA...................................................... 34
Section 6.5. Insurance.................................................. 35
Section 6.6. Financial Reports and Other Information.................... 35
Section 6.7. Lenders Inspection Rights.................................. 36
Section 6.8. Conduct of Business........................................ 37
Section 6.9. New Subsidiaries........................................... 37
Section 6.10. Dividends and Negative Pledges............................. 37
Section 6.11. Restrictions on Fundamental Changes........................ 37
Section 6.12. Environmental Laws......................................... 38
Section 6.13. Liens...................................................... 38
Section 6.14. Indebtedness............................................... 40
Section 6.15. Loans, Advances and Investments............................ 40
Section 6.16. Transfer of Assets......................................... 41
Section 6.17. Transactions with Affiliates............................... 41
Section 6.18. Compliance with Laws....................................... 41
Section 6.19. Credit Exposure............................................ 42
Section 6.20. Minimum Consolidated Net Worth............................. 42
Section 6.21. Minimum Fixed Charge Coverage Ratio........................ 42
Section 6.22. Maximum Funded Debt to EBITDA Ratio........................ 42
Section 6.23. Minimum Tangible Assets to Total Liabilities Ratio......... 42
SECTION 7. EVENTS OF DEFAULT AND REMEDIES................................ 42
Section 7.1. Events of Default.......................................... 42
Section 7.2. Non-Bankruptcy Defaults.................................... 44
Section 7.3. Bankruptcy Defaults........................................ 45
Section 7.4. Collateral for Undrawn Letters of Credit................... 45
Section 7.5. Notice of Default.......................................... 46
SECTION 8. CHANGE IN CIRCUMSTANCES....................................... 46
Section 8.1. Change of Law.............................................. 46
Section 8.2. Unavailability of Deposits or Inability to Ascertain LIBOR
Rate....................................................... 46
Section 8.3. Increased Cost and Reduced Return.......................... 46
Section 8.4. Lending Offices............................................ 48
Section 8.5. Discretion of Lender as to Manner of Funding............... 48
SECTION 9. THE AGENT..................................................... 48
Section 9.1. Appointment and Authorization of Agent..................... 48
Section 9.2. Rights and Powers.......................................... 48
Section 9.3. Action by Agent............................................ 49
Section 9.4. Consultation with Experts.................................. 49
Section 9.5. Indemnification Provisions................................. 49
Section 9.6. Indemnity.................................................. 50
Section 9.7. Resignation of Agent and Successor Agent................... 50
ii
<PAGE>
TABLE OF CONTENTS PAGE
SECTION 10. MISCELLANEOUS................................................. 51
Section 10.1. No Waiver of Rights........................................ 51
Section 10.2. Non-Business Day........................................... 51
Section 10.3. Documentary Taxes.......................................... 51
Section 10.4. Survival of Representations................................ 51
Section 10.5. Survival of Indemnities.................................... 51
Section 10.6. Setoff..................................................... 51
Section 10.7. Notices.................................................... 52
Section 10.8. Counterparts............................................... 53
Section 10.9. Successors and Assigns..................................... 53
Section 10.10. Sales and Transfers of Borrowings and Notes; Participations
in Borrowings and Notes.................................... 53
Section 10.11. Amendments................................................. 56
Section 10.12. Headings................................................... 56
Section 10.13. Legal Fees, Other Costs and Indemnification................ 56
Section 10.14. Governing Law; Submission to Jurisdiction; Waiver of Jury
Trial...................................................... 57
Section 10.15. Confidentiality............................................ 58
Section 10.16. Severability............................................... 59
Section 10.17. Change in Accounting Principles or Tax Laws................ 59
Section 10.18. Effectiveness.............................................. 59
Section 10.19. Notice..................................................... 59
EXHIBITS
- --------
Exhibit 2.2A Form of Borrowing Request
Exhibit 2.2B Form of Application
Exhibit 2.11 Form of Note
Exhibit 4.1A Form of Subsidiary Guaranty
Exhibit 4.1B Form of Stock Pledge Agreement
Exhibit 4.1C Form of Certificate of Financial Condition
Exhibit 6.6 Form of Compliance Certificate
Exhibit 10.10 Form of Assignment Agreement
SCHEDULES
- ---------
Schedule 4.1 List of Subsidiaries
Schedule 5.4 List of Litigation
Schedule 6.13 List of Existing Liens
Schedule 6.14 List of Existing Indebtedness
iii
<PAGE>
SECURED CREDIT AGREEMENT, dated as of January 29, 1998, between PalEx,
Inc., a Delaware corporation (the "Borrower"), Ridge Pallets, Inc., a Florida
corporation (a "Borrower" for purposes of Section 2.2(c) hereof), Bank One,
Texas, NA ("Bank One"), National City Bank of Columbus, Wells Fargo Bank,
Comerica Bank, Banque Paribas, The Sumitomo Bank, Limited, and the other lenders
from time to time parties hereto (each a "Lender" and collectively, the
"Lenders"), and Bank One as administrative agent for the Lenders (in such
capacity, the "Agent").
WITNESSETH:
WHEREAS, the Borrower desires to obtain a commitment from each of the
Lenders to make loans to the Borrower and to participate in letters of credit
for the account of the Borrower; and
WHEREAS, the Lenders are willing to extend such commitments to the Borrower
on the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
SECTION 1. DEFINITIONS; INTERPRETATION.
Section 1.1. Definitions. Unless otherwise defined herein, the following
terms shall have the following meanings:
"Acquisition" means a direct or indirect purchase by the Borrower or any of
its Subsidiaries after the Effective Date hereof for cash, stock or other
securities or other property, whether in one or more related transactions, of
all or substantially all of the assets or voting securities or other equity
interests of a Person or a business unit, division or group of a Person.
"Adjusted LIBOR Rate" means, for any Borrowing of LIBOR Loans, a rate per
annum determined in accordance with the following formula:
Adjusted LIBOR Rate = LIBOR Rate
----------------------
1.00 - Eurodollar Reserve Percentage
"Affiliate" means, for any Person, (i) any other Person that directly or
indirectly through one or more intermediaries controls, or is under common
control with, or is controlled by, such Person, and (ii) any other Person owning
beneficially or controlling ten percent (10%) or more of the equity interests in
such Person. As used in this definition, "control" means the power, directly or
indirectly, to direct or cause the direction of management or policies of a
Person (through ownership of voting securities or other equity interests, by
contract or otherwise).
<PAGE>
"Agent" means Bank One acting in its capacity as administrative agent for
the Lenders, and any successor agent appointed hereunder pursuant to Section
9.7.
"Agent Loans" means the loans made by the Agent, in its sole discretion,
described in Section 2.1(b).
"Agent Swing Line" means the uncommitted credit facility in an amount of
$5,000,000 for making Agent Loans described in Section 2.1(b).
"Agreement" means this Secured Credit Agreement, as amended, restated or
supplemented from time to time.
"Applicable Margin" means for Base Rate Loans or LIBOR Loans, as
applicable, for any day at such times as the relevant Funded Debt to EBITDA
Ratio is in one of the following ranges, the percentage per annum set forth
opposite such Funded Debt to EBITDA Ratio for such Loans as follows:
<TABLE>
<CAPTION>
Funded Debt to EBITDA
Ratio LIBOR Loans Base Rate Loans
- --------------------- ------------ ----------------
<S> <C> <C>
Less than or equal to 1.25 to 0.75% 0.00%
1.0
Greater than 1.25 to 1.0 but 1.00% 0.00%
less than or equal to 1.50 to
1.0
Greater than 1.50 to 1.0 but 1.25% 0.00%
less than or equal to 2.0 to
1.0
Greater than 2.0 to 1.0 but 1.50% 0.00%
less than or equal to 2.50 to
1.0
Greater than 2.50 to 1.0 1.75% 0.25%
</TABLE>
For the period from the Effective Date through the earlier of the date the
Borrower is to provide the Agent with the financial statements for the fiscal
quarter ended March 31, 1998, as required by Section 6.6(a)(ii) or the date such
financial statements are provided to the Agent, the Applicable Margin for LIBOR
Loans shall be 1.25% and the Applicable Margin for Base Rate Loans shall be
0.00%. Thereafter, the Applicable Margin shall be set by the Agent upon its
receipt of the applicable financial statements and Compliance Certificate as
required by Section 6.6(a)(i) or (ii) and Section 6.6(b) from the Borrower to be
effective as of the date one (1) Business Day after the
2
<PAGE>
earlier of the date such financial statements are required to be provided or the
date such financial statements are provided to the Agent.
"Application" means an application for a Letter of Credit as defined in
Section 2.2(c).
"Arranger" means Bank One Capital Markets.
"Assignment Agreement" means an agreement in substantially the form of
Exhibit 10.10 whereby a Lender conveys part or all of its Commitments, Loans and
participations in Letters of Credit to another Person that thereupon becomes a
Lender, or that increases its Commitments, outstanding Loans and outstanding
participations in Letters of Credit pursuant to Section 10.10.
"Base Rate" means, for any day, the fluctuating commercial loan rate
announced by the Agent from time to time as its base rate for Dollar loans in
the United States of America in effect on such day (which base rate may not be
the lowest rate charged by the Agent on loans to any of its customers), with any
change in the Base Rate resulting from a change in such announced rate to be
effective on the date of the relevant change.
"Base Rate Loan" means (i) a Revolving Loan bearing interest prior to
maturity at the Base Rate plus the Applicable Margin, or (ii) an Agent Loan
bearing interest prior to maturity at the Base Rate minus 0.5%, as applicable.
"Borrower" means PalEx, Inc., a Delaware corporation, and for purposes of
Section 2.2(b), Ridge Pallets.
"Borrowing" means any extension of credit made by the Lenders or the Agent,
as the case may be, by way of Loans or Letters of Credit, including any
Borrowings advanced, continued or converted. A Borrowing is "advanced" on the
day the Lenders or the Agent, as the case may be, advances funds comprising such
Borrowing to the Borrower or a Letter of Credit is issued, is "continued" (in
the case of LIBOR Loans) on the date a new Interest Period commences for such
Borrowing and is "converted" when such Borrowing is changed from one type of
Loan to the other, all as requested by the Borrower pursuant to Section 2.4(a).
"Borrowing Request" means a request for a Borrowing as defined in Section
2.2(c).
"Business Day" means any day other than a Saturday or Sunday on which banks
are not authorized or required to close in Houston, Texas, and, if the
applicable Business Day relates to the advance or continuation of, conversion
into or payment on a LIBOR Loan, on which banks are dealing in Dollar deposits
in the interbank eurocurrency market in London, England.
"Capitalized Lease Obligations" means, for any Person, the amount of such
Person's liabilities under all leases of real or personal property (or any
interest therein) which is required to be capitalized on the balance sheet of
such Person as determined in accordance with GAAP.
3
<PAGE>
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof having maturities of not more than twelve (12) months
from the date of acquisition; (ii) U.S. Dollar denominated time deposits and
certificates of deposit maturing within one (1) year from the date of
acquisition thereof with any Lender or any other financial institution whose
short-term senior unsecured debt rating is at least A-1 from S&P or P-1 from
Moody's; (iii) LIBOR denominated time deposits and certificates of deposit
maturing within six (6) months from the date of acquisition thereof with any
Lender or any other financial institution whose short-term senior unsecured debt
rating is at least A-1 from S&P or P-1 from Moody's; (iv) commercial paper or
Eurocommercial paper with a rating of at least A-1 from S&P or P-1 from Moody's,
with maturities of not more than twelve (12) months from the date of
acquisition; (v) repurchase obligations entered into with any Lender or any
other financial institution whose short-term senior unsecured debt rating is at
least A-1 from S&P or P-1 from Moody's, which are secured by a fully perfected
security interest in any obligation of the type described in (i) above and has a
market value of the time such repurchase is entered into of not less than 100%
of the repurchase obligation of such Lender or such other Person thereunder;
(vi) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within twelve (12) months from the date of
acquisition thereof or providing for the resetting of the interest rate
applicable thereto not less often than annually and, at the time of acquisition,
having one of the two highest ratings obtainable from either S&P or Moody's; and
(vii) money market funds which have at least $1,000,000,000 in assets and which
invest primarily in securities of the types described in clauses (i) through
(vi) above.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means the stock of any Subsidiary in which the Agent is
granted a Lien for the benefit of the Lenders under the terms of a Stock Pledge
Agreement.
"Collateral Account" means the cash collateral account for outstanding
undrawn Letters of Credit as defined in Section 7.4(b).
"Commitment" means, relative to any Lender, such Lender's obligation to
make Revolving Loans and participate in Letters of Credit issued pursuant to
Sections 2.1 and 2.2 in the percentage set forth opposite its signature hereto
or pursuant to Section 10.10, as such commitment may be reduced from time to
time pursuant to this Agreement, provided that the obligation of the Agent to
make Revolving Loans and participate in Letters of Credit shall be limited to
$35,000,000 minus the outstanding principal amount of the Agent Loans from time
to time outstanding.
"Commitment Amount" means an amount equal to $125,000,000 minus the
outstanding amount of Agent Loans, as such amount may be reduced from time to
time pursuant to the terms of this Agreement.
4
<PAGE>
"Commitment Termination Date" means the earliest of (i) five (5) years from
the date hereof; (ii) the date on which the Commitments are terminated in full
or reduced to zero pursuant to Section 2.13; or (iii) the occurrence of any
Event of Default described in Section 7.1(f) or (g) with respect to the Borrower
or the occurrence and continuance of any other Event of Default and either (x)
the declaration of the Loans to be due and payable pursuant to Section 7.2, or
(y) in the absence of such declaration, the giving of written notice by the
Agent, acting at the direction of the Majority Lenders, to the Borrower pursuant
to Section 7.2 that the Commitments have been terminated.
"Compliance Certificate" means a certificate substantially in the form of
Exhibit 6.6.
"Consolidated Drum" means Consolidated Drum Reconditioning Co., Inc., a
California corporation.
"Consolidated Interest Expense" means, for any period, total interest
expense of the Borrower and its Subsidiaries on a consolidated basis for such
period in connection with Indebtedness, determined in accordance with GAAP.
"Consolidated Net Income" means, for any period, the net income (or loss),
after provision for taxes, of the Borrower and its Subsidiaries on a
consolidated basis for such period, determined in accordance with GAAP.
"Consolidated Net Worth" means, as of any date of determination, the
Borrower's consolidated stockholders equity determined in accordance with GAAP.
"Credit Documents" means this Agreement, the Notes, the Subsidiary
Guaranties, the Stock Pledge Agreements, the Applications, the Borrowing
Requests and any other documents or instruments executed by the Borrower or any
of the Guarantors in connection with this Agreement.
"Default" means any event or condition the occurrence of which would, with
the passage of time or the giving of notice, or both, constitute an Event of
Default.
"Dollar" and "U.S. Dollar" and the sign "$" means lawful money of the
United States of America.
"EBITDA" means, for any period, on a historic four fiscal quarter rolling
basis, the sum of (i) Consolidated Net Income plus each of the following to the
extent actually deducted in determining Consolidated Net Income (a) Consolidated
Interest Expense, (b) provisions for taxes based on income or revenues, and (c)
any extraordinary, unusual or nonrecurring gains or losses plus (ii) the amount
of all depreciation, amortization expense and other non-cash charges deducted in
determining Consolidated Net Income, all calculated on a consolidated basis for
the Borrower and its Subsidiaries and as determined in accordance with GAAP.
Upon the consummation of any
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Acquisition, EBITDA shall be adjusted to include the historical financial
results of the acquired business (on a trailing four fiscal quarter pro forma
basis consistent with SEC regulations).
"Effective Date" means the date this Agreement becomes effective as defined
in Section 10.18.
"Environmental Claims" means any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of non-
compliance or violations, investigations or proceedings relating to any
Environmental Law ("Claims") or any permit issued under any Environmental Law,
including, without limitation, (i) any and all Claims by governmental or
regulatory authorities for enforcement, cleanup, removal, response, remedial or
other actions or damages pursuant to any applicable Environmental Law, and (ii)
any and all Claims by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief resulting from
Hazardous Materials or arising from alleged injury or threat of injury to health
or safety in relation to the environment.
"Environmental Law" means any federal, state or local statute, law, rule,
regulation, ordinance, code, policy or rule of common law now or hereafter in
effect, including any judicial or administrative order, consent, decree or
judgment relating to (i) the environment, (ii) health or safety in relation to
the environment or (iii) Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Eurodollar Reserve Percentage" means, with respect to each Interest Period
for a LIBOR Loan, a percentage (expressed as a decimal) equal to the daily
average during such Interest Period of the percentages in effect on each day of
such Interest Period, if any, as prescribed by the Board of Governors of the
Federal Reserve System (or any successor thereto), for determining the maximum
reserve requirements (including, without limitation, any supplemental, marginal
and emergency reserves) applicable to "Eurocurrency Liabilities" pursuant to
Regulation D of the Board of Governors of the Federal Reserve System or any
other then applicable regulation of the Board of Governors which prescribes
reserve requirements applicable to "Eurocurrency Liabilities" as presently
defined in Regulation D.
"Event of Default" means any of the events or circumstances specified in
Section 7.1.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/16th of 1%) equal to the weighted
average of the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the next Business Day,
provided that (A) if such day is not a Business Day, the rate on such
transactions on the immediately preceding Business Day as so published on the
next Business Day shall apply, and (B) if no such rate is published on such next
Business Day, the rate for such day shall be the average of the offered rates
quoted to the Agent by two (2) federal funds brokers of recognized standing on
such day for such transactions as selected by the Agent.
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"Fee Letter" means that certain letter agreement dated December 29, 1997,
by and between the Agent, the Arranger and the Borrower.
"Fixed Charge Coverage Ratio" means, for any period, on a historic four
fiscal quarter rolling basis, the ratio of (i) the sum of, without duplication,
(a) EBITDA, minus (b) cash taxes, minus (c) all cash expenditures (which have
not been financed) for fixed or capital assets which in accordance with GAAP
would be classified as capital expenditures, minus (d) all cash dividends,
distributions or payments made in respect of the capital stock of the Borrower
to the extent permitted hereunder; to (ii) the sum of, without duplication, (a)
the portion of Funded Debt due and payable within one (1) year of the date of
determination (including an amount equal to 1/7th of any outstanding balance of
the Loans), plus (b) Consolidated Interest Expense for the four fiscal quarters
then ended, all calculated on a consolidated basis for the Borrower and its
Subsidiaries and as determined in accordance with GAAP. Upon the consummation
of any Acquisition, the Fixed Charge Coverage Ratio shall be determined
including the historical financial results of the acquired business (on a
trailing four fiscal quarter pro forma basis, consistent with SEC regulations).
"Funded Debt" means, as of any date of determination, the sum, without
duplication, of the following for the Borrower and its Subsidiaries: (i)
Indebtedness for borrowed money, all obligations evidenced by bonds, debentures,
notes or similar instruments, and purchase money obligations which in accordance
with GAAP would be shown on the consolidated balance sheet of the Borrower as a
liability, (ii) all reimbursement obligations relative to the face amount of all
drawn letters of credit issued for the account of the Borrower or any of its
Subsidiaries, and (iii) all Capitalized Lease Obligations.
"Funded Debt to EBITDA Ratio" means, for any period, the ratio of (i)
Funded Debt, to (ii) EBITDA.
"GAAP" means generally accepted accounting principles from time to time in
effect as set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
the statements and pronouncements of the Financial Accounting Standards Board or
in such other statements, opinions and pronouncements by such other entity as
may be approved by a significant segment of the U.S. accounting profession.
"Guarantor" means each of American Pallet Recyclers, Inc., a Delaware
corporation, Bay Area Pallet Company, a California corporation, Fraser
Industries, Inc., a Texas corporation, Ridge Pallets, Inc., a Florida
corporation, Interstate Pallet Co., Inc., a Virginia corporation, NLD, Inc., a
Delaware corporation, NLP Transport, Inc., a Delaware corporation, New London
Pallet, Inc., a Wisconsin corporation, Sheffield Lumber and Pallet Company,
Inc., a North Carolina corporation, Sonoma Pacific Company, a California
corporation, and Summers Pallet Manufacturing, Inc., a Texas corporation, and
any other Subsidiary of the Borrower required to become a Guarantor pursuant to
Section 6.9.
"Guaranty" by any Person means all obligations (other than endorsements in
the ordinary course of business of negotiable instruments for deposit or
collection) of such Person guarantying
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or in effect guarantying any Indebtedness, dividend or other obligation
(including, without limitation, obligations in connection with sales of any
property) of any other Person (the "primary obligor") in any manner, whether
directly or indirectly, including, without limitation, all obligations incurred
through an agreement, contingent or otherwise, by such Person: (i) to purchase
such Indebtedness or obligation, or to purchase any property or assets
constituting security therefor, primarily for the purpose of assuring the owner
of such Indebtedness or obligations of the ability of the primary obligor to
make payment of the Indebtedness or obligation; or (ii) to advance or supply
funds (x) for the purchase or payment of such Indebtedness or obligation, or (y)
to maintain working capital or other balance sheet condition, or otherwise to
advance or make available funds for the purchase or payment of such Indebtedness
or obligation, in each case primarily for the purpose of assuring the owner of
such Indebtedness or obligation of the ability of the primary obligor to make
payment of the Indebtedness or obligation; or (iii) to lease property or to
purchase securities or other property or services of the primary obligor
primarily for the purpose of assuring the owner of such Indebtedness or
obligation of the ability of the primary obligor to make payment of the
Indebtedness or obligation; or (iv) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in respect
thereof. For the purpose of all computations made under this Agreement, the
amount of a Guaranty in respect of any obligation shall be deemed to be equal to
the amount that would apply if such obligation were the direct obligation of
such Person rather than the primary obligor or, if less, the maximum aggregate
potential liability of such Person under the terms of the Guaranty.
"Hazardous Material" shall have the meaning assigned to that term in the
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Acts of 1986, and shall
include any substance defined as "hazardous" or "toxic" or words used in place
thereof under any Environmental Law applicable to the Borrower or any of its
Subsidiaries.
"Highest Lawful Rate" means the maximum nonusurious interest rate, if any,
that at any time or from time to time may be contracted for, taken, reserved,
charged or received on the Loans or the Reimbursement Obligations, or under laws
applicable to the Agent or any of the Lenders, which are presently in effect or,
to the extent allowed by applicable law, under such laws which may hereafter be
in effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow. Determination of the rate of interest for the
purpose of determining whether the Loans or the Reimbursement Obligations are
usurious under all applicable laws shall be made by amortizing, prorating,
allocating, and spreading, in equal parts during the period of the full stated
term of the Loans, all interest at any time contracted for, taken, reserved,
charged or received from the Borrower in connection with the Loans or the
Reimbursement Obligations, as applicable.
"Indebtedness" means, for any Person, the following obligations of such
Person, without duplication: (i) obligations of such Person for borrowed money;
(ii) obligations of such Person representing the deferred purchase price of
property or services other than accounts payable arising in the ordinary course
of business and other than amounts which are being contested in good faith and
for which reserves in conformity with GAAP have been provided; (iii) obligations
of such Person evidenced by bonds, notes, bankers acceptances, debentures or
other similar
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instruments of such Person or reimbursement obligations or other obligations
with respect to letters of credit issued for such Person's account or letters of
credit issued pursuant to such Person's application therefor; (iv) obligations
of other Persons, whether or not assumed, secured by Liens upon property or
payable out of the proceeds or production from property now or hereafter owned
or acquired by such Person, but only to the extent of such property's fair
market value; (v) Capitalized Lease Obligations of such Person; (vi) obligations
under hedge, swap, exchange, forward, future, collar or cap arrangements, fixed
price agreements and all other agreements or arrangements designed to protect
against fluctuations in interest rates, commodity prices, and currency exchange
rates; and (vii) obligations of such Person pursuant to a Guaranty of any of the
foregoing of another Person. For purposes of this Agreement, the Indebtedness
of any Person shall include the Indebtedness of any partnership or joint venture
to which such Person is a party, to the extent such Indebtedness has recourse to
such Person.
"Indemnified Taxes" shall have the meaning ascribed to such term in Section
3.3.
"Initial Borrowing Date" means the date on which all conditions precedent
set forth herein to the initial Borrowings are satisfied or waived in writing
and the initial Borrowing hereunder occurs.
"Interest Payment Date" means (i) for a Base Rate Loan, the last Business
Day of each calendar quarter such Loan is outstanding commencing March 31, 1998,
and (ii) for a LIBOR Loan, the last Business Day of each Interest Period for
such Loan and, during any Interest Period of six (6) months, the next Business
Day occurring three (3) months after the commencement of such Interest Period.
"Interest Period" means the period commencing on the date that a Borrowing
of LIBOR Loans is advanced, continued or created by conversion and, subject to
Section 2.5, ending on the date one (1), two (2), three (3) or six (6) months
thereafter as selected by the Borrower pursuant to the terms of this Agreement.
"Investments" shall have the meaning ascribed to such term in Section 6.15.
"L/C Commitments" means, relative to any Lender, such Lender's obligation
to participate in Letters of Credit pursuant to Section 2.2 in the percentage
set forth opposite its signature hereto or pursuant to Section 10.10, as such
commitments may be reduced from time to time pursuant to the terms of this
Agreement; provided that the obligation of the Agent to participate in Letters
of Credit pursuant to its L/C Commitment shall be reduced proportionately from
time to time by the outstanding principal of the Agent Loans and shall be
reinstated from time to time as and when the Agent Loans are repaid.
"L/C Commitment Amount" means $10,000,000, as such amount may be reduced
from time to time pursuant to the terms of this Agreement.
"L/C Documents" means this Agreement, the Letters of Credit and any
Borrowing Requests and Applications with respect thereto and any draft or other
document presented in connection with a drawing thereunder.
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"L/C Obligations" means the undrawn face amounts of all outstanding Letters
of Credit and all unpaid Reimbursement Obligations with respect to Letters of
Credit.
"Lenders" is defined in the preamble.
"Lending Office" means the branch, office or affiliate of a Lender
specified on the appropriate signature page hereof or designated pursuant to
Sections 8.4 or 10.10.
"Letter of Credit" means any of the letters of credit issued by the Agent
on behalf of the Lenders for the account of the Borrower pursuant to Section
2.2(a) or (b).
"LIBOR Loan" means a Revolving Loan bearing interest prior to maturity at
the Adjusted LIBOR Rate plus the Applicable Margin.
"LIBOR Rate" means, relative to any Interest Period for each LIBOR Loan
comprising part of the same Borrowing, a rate of interest per annum (rounded
upwards, if necessary, to the nearest whole multiple of 1/16 of 1%), equal to
the arithmetic average of the quotation by the Agent of the rate of interest per
annum at which deposits in Dollars in immediately available and freely
transferable funds are offered to the Agent two (2) Business Days before the
commencement of such Interest Period by major banks in the London interbank
market as at or about 10:00 a.m. (New York, New York time) for a period
approximately equal to such Interest Period and in an amount equal or comparable
to the aggregate principal amount of the LIBOR Loan to which such Interest
Period relates scheduled to be made, continued or converted pursuant to the
terms hereof, as applicable, as part of such Borrowing.
"Lien" means any interest in any property or asset in favor of a Person
other than the owner of the property or asset and securing an obligation owed to
such Person, whether such interest is based on the common law, statute or
contract, including, but not limited to, the security interest lien arising from
a mortgage, encumbrance, pledge, conditional sale, security agreement or trust
receipt, or a lease, consignment or bailment for security purposes.
"Loan" mean a Base Rate Loan or a LIBOR Loan, each of which is a "type" of
Loan hereunder, outstanding as a Revolving Loan or an Agent Loan, as applicable.
"Majority Lenders" means, at any time, the Lenders then holding in the
aggregate at least sixty-six and two-thirds percent (66 2/3%) of the aggregate
of the Commitments plus the outstanding principal amount of the Agent Loans, or
if the Commitments have terminated pursuant to the terms hereof, the aggregate
Obligations. The percentage set forth opposite each Lender's name in the line
"Percentage" on the signature page hereto reflects the initial voting percentage
of each Lender hereunder on the Effective Date.
"Material Adverse Effect" means an effect that results in a material
adverse change since August 31, 1997, in (i) the business, properties, assets,
financial condition or prospects of the Borrower or of the Borrower and its
Subsidiaries taken as a whole, or (ii) in the ability of the Borrower or any of
the Guarantors to perform its Obligations under the Credit Documents to which it
is a party.
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"Maturity Date" means January 29, 2003.
"Moody's" means Moody's Investors Service, Inc., or any successor thereto.
"Notes" shall mean the Revolving Notes and the Agent Note.
"Obligations" means all joint and several obligations of the Borrower and
the Guarantors to pay fees, costs and expenses hereunder, to pay principal or
interest on Loans and Reimbursement Obligations and to pay any other obligations
to the Agent or the Lenders arising under or in relation to any Credit Document.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.
"Percentage" means, for each Lender, the percentage of the Commitments
represented by such Lender's Commitment; provided that, if the Commitments are
terminated, each Lender's Percentage shall be calculated based on its Commitment
in effect immediately before such termination, subject to any assignments by
such Lender of Obligations pursuant to Section 10.10.
"Permitted Business" means any business described in Section 6.8.
"Permitted Liens" means the Liens described in Section 6.13.
"Person" means an individual, partnership, corporation, limited liability
company, association, trust, unincorporated organization or any other entity or
organization, including a government or any agency or political subdivision
thereof.
"Plan" means an employee pension benefit plan covered by Title IV of ERISA
or subject to the minimum funding standards under Section 412 of the Code that
is either (i) maintained by the Borrower or any of its Subsidiaries, or (ii)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
the Borrower or any of its Subsidiaries is then making or accruing an obligation
to make contributions or has within the preceding five (5) plan years made or
had an obligation to make contributions.
"Reimbursement Obligation" means the obligations of the Borrower to
reimburse the Agent, for the benefit of the Lenders, for each drawing under a
Letter of Credit as described in Section 2.2(c).
"Revolving Loans" means the revolving loans by the Lenders described in
Section 2.1(a).
"Revolving Notes" means the revolving promissory notes of the Borrower as
defined in Section 2.11.
"Ridge Pallets" means Ridge Pallets, Inc., a Florida corporation.
"S&P" means Standard & Poor's Rating Group or any successor thereto.
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"Stock Pledge Agreements" means each Stock Pledge Agreement of the Borrower
and any Subsidiary of the Borrower which owns a Subsidiary in substantially the
form of Exhibit 4.1B.
"Subsidiary" means, for any Person, any corporation or other entity of
which more than fifty percent (50%) of the outstanding stock or comparable
equity interests having ordinary voting power for the election of the board of
directors of such corporation, any managers of such limited liability company or
similar governing body (irrespective of whether or not, at the time, stock or
other equity interests of any other class or classes of such corporation or
other entity shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned by such Person, as
applicable, or by one or more of its Subsidiaries.
"Subsidiary Guaranty" means each Guaranty of the Subsidiary Guarantors in
substantially the form of Exhibit 4.1A.
"Tangible Assets" means all property which would be considered to be
tangible under GAAP, all calculated on a consolidated basis for the Borrower and
its Subsidiaries.
"Tangible Assets to Total Liabilities Ratio" means, for any period, the
ratio of (i) Tangible Assets, to (ii) Total Liabilities.
"Taxes" shall have the meaning ascribed to such term in Section 5.12.
"Total Liabilities" means, as of any date of determination, the sum of all
liabilities (including, without duplication, the aggregate face amount of all
undrawn Letters of Credit but excluding all other contingent obligations)
calculated on a consolidated basis for the Borrower and its Subsidiaries in
accordance with GAAP.
"Unfunded Vested Liabilities" means, for any Plan at any time, the amount
by which the present value of all vested nonforfeitable accrued benefits under
such Plan exceeds the fair market value of all Plan assets allocable to such
benefits, determined as of the then most recent valuation date for such Plan,
but only to the extent that such excess represents a potential liability of the
Borrower or any of its Subsidiaries to the PBGC or such Plan.
Section 1.2. Interpretation. The foregoing definitions shall be equally
applicable to the singular and plural forms of the terms defined. All
references to times of day in this Agreement shall be references to Houston,
Texas time unless otherwise specifically provided.
SECTION 2. THE CREDIT FACILITY.
Section 2.1. Loans. (a) Revolving Loans. Subject to the terms and
conditions hereof, each Lender severally and not jointly agrees to make one or
more loans (each a "Revolving Loan") to the Borrower from time to time before
the Commitment Termination Date on a revolving basis in an aggregate amount not
to exceed at any time outstanding an amount equal to its Percentage of the
Commitment Amount (for each Lender, its "Commitment"), subject to any reductions
thereof pursuant to the terms of this Agreement. No Lender shall be permitted
or required to make any Revolving Loan
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if, after giving effect thereto, (i) the aggregate principal amount of the
Revolving Loans of all Lenders and L/C Obligations outstanding of the Borrower
would thereby exceed the Commitment Amount then in effect; (ii) the aggregate
principal amount of all Revolving Loans of such Lender and its participating
interest in all L/C Obligations would thereby exceed the Percentage of such
Lender of the Commitment Amount then in effect; or (iii) with respect to the
Agent, the aggregate principal amount of all Revolving Loans, its participating
interest in all L/C Obligations and the aggregate principal amount of all its
Agent Loans would thereby exceed its Commitment. Each Borrowing of Revolving
Loans shall be made ratably from the Lenders in proportion to their respective
Percentages (subject to the limitation of the Commitment of the Agent).
Revolving Loans may be repaid, in whole or in part, and all or any portion of
the principal amount thereof reborrowed, before the Commitment Termination Date,
subject to the terms and conditions hereof.
(b) Agent Loans. Subject to the terms and conditions hereof, the Agent
may, in its sole discretion, make one or more loans (each an "Agent Loan") to
the Borrower from time to time before the Commitment Termination Date in an
aggregate amount not to exceed at any time outstanding the amount of the Agent
Swing Line. Agent Loans may be repaid, in whole or in part, at any time. Upon
an Event of Default and at the request of the Agent, (i) the Lenders agree to
make Revolving Loans to the Borrower in an amount equal to the outstanding
amount of the Agent Loans so long as no Event of Default of which the Agent had
actual knowledge was in existence at the time the Agent Loan was made, and the
Borrower hereby instructs the Agent in such circumstance to apply the proceeds
of such Revolving Loans to such Agent Loans such that the Agent Loans are repaid
in full; or (ii) in the event any such Revolving Loans are not made, each Lender
severally and not jointly agrees to purchase from the Agent, and the Agent
hereby agrees to sell to each Lender, an undivided percentage participation
interest, up to the extent of its Percentage, in each Agent Loan, in each case
such that the principal amount of each Lender's Revolving Loans and/or
participations in Agent Loans shall be an amount equal to its Percentage times
the principal amount of all Loans.
Section 2.2. Letters of Credit. (a) Issuance of Letters of Credit.
Subject to the terms and conditions hereof, the Agent agrees to issue, from time
to time prior to the Commitment Termination Date, at the request of the Borrower
and on behalf of the Lenders and in reliance on their obligations under this
Section 2.2, one or more letters of credit (each a "Letter of Credit") for the
Borrower's account; provided that the Agent shall have no obligation to issue a
Letter of Credit if, after the issuance thereof, (i) the outstanding Loans and
L/C Obligations would thereby exceed the Commitment Amount then in effect, (ii)
the outstanding L/C Obligations would thereby exceed the L/C Commitment Amount
then in effect, or (iii) the issuance of such Letter of Credit would violate any
legal or regulatory restriction then applicable to the Agent or any Lender as
notified by such Lender to the Agent before the date of issuance of such Letter
of Credit.
(b) Ridge Pallets Letter of Credit. Bank One has issued at the request of
the Borrower and Ridge Pallets an irrevocable standby letter of credit (the
"Ridge Pallets Letter of Credit") for the account of Ridge Pallets and for the
benefit of Credit Commercial de France, New York Branch (the "Facing Bank") in
the amount of $641,500 in connection with the Economic Development Revenue
Bonds, Series 1989-B (Ridge Pallets, Inc. Project) in the principal amount of
$950,000 issued by the South Carolina Jobs-Economic Development Authority (the
"Bonds"). Ridge Pallets hereby irrevocably and unconditionally agrees to
reimburse the Agent, for the benefit of the Lenders, for each
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payment or disbursement made by the Agent to settle its obligations under any
draft drawn under the Ridge Pallets Letter of Credit (the "Ridge Pallets
Reimbursement Obligation") within two (2) Business Days from when such draft is
paid as provided in Section 2.2(d). For the limited purpose of the Ridge Pallets
Letter of Credit and the Ridge Pallets Reimbursement Obligation, Ridge Pallet
shall be a co-borrower under this Agreement, and each of Ridge Pallets and the
Borrower hereby agrees to be jointly and severally liable for the Ridge Pallets
Reimbursement Obligation. The stated amount of the Ridge Pallets Letter of
Credit shall be included in the use of the Commitment Amount, the Ridge Pallets
Letter of Credit shall be for all purposes a Letter of Credit under this
Agreement and the Ridge Pallets Reimbursement Obligation shall be for all
purposes a Reimbursement Obligation under this Agreement. The Ridge Pallets
Reimbursement Obligation shall be absolute, unconditional and irrevocable and
shall be performed strictly in accordance with the terms of this Agreement under
all circumstances whatsoever (other than the defense of payment in accordance
with this Agreement or a defense based on the gross negligence or willful
misconduct of the Agent), all as provided in Section 2.2(d)(ii). Ridge Pallets
agree to maintain the Facing Letter of Credit and Reimbursement Agreement dated
as of December 1, 1989, between Ridge Pallets and the Facing Bank (the "Facing
Letter of Credit Agreement") in effect at all times during the period prior to
the expiry date of the Ridge Pallets Letter of Credit, as it may be extended
from time to time, and Ridge Pallets agrees to not make any amendment to or
modification of the Facing Letter of Credit Agreement or the Letter of Credit
issued by the Facing Bank on behalf of Ridge Pallets without the written consent
of the Agent. The repayment of the Ridge Pallets Reimbursement Obligation shall
not be secured by any of the Collateral or receive the benefits of any of the
Stock Pledge Agreements.
(c) Issuance Procedure. To request that the Agent issue a Letter of
Credit, the Borrower shall deliver to the Agent (with a duplicate copy to an
operations employee of the Agent as designated by the Agent from time to time) a
duly executed Borrowing Request in the form of Exhibit 2.2A (each a "Borrowing
Request"), together with a duly executed application for the relevant Letter of
Credit substantially in the form of Exhibit 2.2B (each an "Application"), or
such other computerized issuance or application procedure, instituted from time
to time by the Agent and agreed to by the Borrower, completed to the reasonable
satisfaction of the Agent, and such other documentation and information as the
Agent may reasonably request. In the event of any irreconcilable difference or
inconsistency between this Agreement and an Application, the provisions of this
Agreement shall govern. Upon receipt of a properly completed and executed
Borrowing Request and Application and any other reasonably requested documents
or information at least three (3) Business Days prior to any requested issuance
date, the Agent will process such Borrowing Request and Application in
accordance with its customary procedures and issue the requested Letter of
Credit on the requested issuance date. The Borrower may cancel any requested
issuance of a Letter of Credit prior to the issuance thereof. The Agent will
notify each Lender of the amount and expiration date of each Letter of Credit it
issues promptly upon issuance thereof. Each Letter of Credit (except for up to
$2,000,000 in aggregate face amounts of Letters of Credit) shall have an
expiration date no later than one (1) year from the date of issuance thereof,
provided that in no event shall a Letter of Credit have an expiration date later
than four (4) Business Days before the Maturity Date. If the Agent issues any
Letters of Credit with expiration dates that automatically extend unless the
Agent gives notice that the expiration date will not so extend, the Agent will
give such notice of non-renewal before the time necessary to prevent such
automatic extension if before such required notice date (i) the expiration date
of such Letter of Credit if so extended would be later than four (4) Business
Days before the Maturity Date, (ii) the
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Commitment Termination Date shall have occurred, (iii) an Event of Default has
occurred and is continuing, or (iv) the Agent is so directed by the Borrower.
The Agent agrees to issue amendments to any Letter of Credit increasing its
amount, or extending its expiration date, at the request of the Borrower subject
to the conditions precedent for all Loans of Section 4.3 and the other terms and
conditions of this Section 2.2.
(d) The Borrower's Reimbursement Obligations.
(i) The Borrower hereby irrevocably and unconditionally agrees to
reimburse the Agent, for the benefit of the Lenders, for each payment or
disbursement made by the Agent to settle its obligations under any draft drawn
under a Letter of Credit (each, a "Reimbursement Obligation") within two (2)
Business Days from when such draft is paid with either funds not borrowed
hereunder or with a Borrowing subject to Section 2.4 and the other terms and
conditions contained in this Agreement. The Reimbursement Obligation shall bear
interest (which the Borrower hereby promises to pay) from and after the date
such draft is paid until (but excluding the date) the Reimbursement Obligation
is paid at the lesser of the Highest Lawful Rate or the Base Rate plus the
Applicable Margin so long as the Reimbursement Obligation shall not be past due,
and thereafter at the default rate per annum as set forth in Section 2.7(c),
whether or not the Maturity Date shall have occurred. If any such payment or
disbursement is reimbursed to the Agent on the date such payment or disbursement
is made by the Agent, interest shall be paid on the reimbursable amount for one
(1) day. The Agent shall give the Borrower notice of any drawing on a Letter of
Credit within one (1) Business Day after such drawing is paid.
(ii) The Borrower agrees for the benefit of the Agent and each Lender
that, notwithstanding any provision of any Application, the obligations of the
Borrower under this Section 2.2(d) and each applicable Application shall be
absolute, unconditional and irrevocable (subject to Section 2.2(c)) and shall be
performed strictly in accordance with the terms of this Agreement and each
applicable Application under all circumstances whatsoever INCLUDING, BUT NOT
LIMITED TO, ANY DEFENSE BASED UPON THE AGENT'S OR ANY LENDER'S OWN SIMPLE OR
CONTRIBUTORY NEGLIGENCE (other than the defense of payment in accordance with
this Agreement or a defense based on the gross negligence or willful misconduct
of the Agent or any Lender), including, without limitation, the following
circumstances (subject in all cases to the defense of payment in accordance with
this Agreement or a defense based on the gross negligence or willful misconduct
of the Agent or any Lender):
(1) any lack of validity or enforceability of any of the L/C
Documents;
(2) any amendment or waiver of or any consent to depart from all
or any of the provisions of any of the L/C Documents;
(3) the existence of any claim, setoff, defense or other right
the Borrower or any Subsidiary may have at any time against a
beneficiary of a Letter of Credit (or any Person for whom a
beneficiary may be acting), the Agent, any Lender or any other Person,
whether in connection with this Agreement, another L/C Document or any
unrelated transaction;
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(4) any statement or any other document presented under a Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in
any respect or any statement therein being untrue or inaccurate in any
respect, provided that the Agent's determination that documents
presented under the Letter of Credit comply with the terms thereof did
not constitute gross negligence or willful misconduct of the Agent;
(5) payment by the Agent under a Letter of Credit against
presentation to the Agent of a draft or certificate that does not
comply with the terms of the Letter of Credit, provided that the
Agent's determination that documents presented under the Letter of
Credit comply with the terms thereof did not constitute gross
negligence or willful misconduct of the Agent; or
(6) any other act or omission to act or delay of any kind by the
Agent, any Lender or any other Person or any other event or
circumstance whatsoever that might, but for the provisions of this
Section 2.2(d), constitute a legal or equitable discharge of the
Borrower's obligations hereunder or under any L/C Document, provided
that such act or omission of the Agent did not constitute gross
negligence or willful misconduct of the Agent or any Lender.
(e) The Participating Interests. Each Lender severally and not jointly
agrees to purchase from the Agent, and the Agent hereby agrees to sell to each
Lender, an undivided percentage participating interest, to the extent of its
Percentage, in each Letter of Credit (including the Ridge Pallets Letter of
Credit and all other letters of credit issued by Bank One listed on Schedule
6.14) issued by, and Reimbursement Obligation owed to, the Agent in connection
with a Letter of Credit. Upon any failure by the Borrower to pay any
Reimbursement Obligation in connection with a Letter of Credit at the time
required in Sections 2.2(d) and 2.4(c), or if the Agent is required at any time
to return to the Borrower or to a trustee, receiver, liquidator, custodian or
other Person any portion of any payment by the Borrower of any Reimbursement
Obligation in connection with a Letter of Credit, the Agent shall promptly give
notice of same to each Lender, and the Agent shall have the right to require
each Lender to fund its participation in such Reimbursement Obligation. Each
Lender (except the Agent to the extent it is also a Lender) shall pay to the
Agent an amount equal to each Lender's Percentage of such unpaid or recaptured
Reimbursement Obligation not later than the Business Day it receives notice from
the Agent to such effect, if such notice is received before 2:00 p.m., or not
later than the following Business Day if such notice is received after such
time. If a Lender fails to pay timely such amount to the Agent, it shall also
pay to the Agent interest on such amount accrued from the date payment of such
amount was made by the Agent to the date of such payment by the Lender at a rate
per annum equal to the Federal Funds Rate in effect for each such day, and only
after such payment shall such Lender be entitled to receive its Percentage of
each payment received on the relevant Reimbursement Obligation and of interest
paid thereon. If any such Lender fails to pay such amount to the Agent, any
payments made by the Borrower with respect to the relevant Reimbursement
Obligation shall first be applied by the Agent to the unfunded participation in
such Reimbursement Obligation before any other Lenders receive any payments or
proceeds. The Agent will thereafter pay each Lender its Percentage of each
payment received by it relating to that for which such Lender has funded its
Percentage, from the date of funding. THE SEVERAL OBLIGATIONS OF THE LENDERS
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TO THE AGENT UNDER THIS SECTION 2.2(E) SHALL BE ABSOLUTE, IRREVOCABLE AND
UNCONDITIONAL UNDER ANY AND ALL CIRCUMSTANCES WHATSOEVER AND SHALL NOT BE
SUBJECT TO ANY SETOFF, COUNTERCLAIM OR DEFENSE TO PAYMENT ANY LENDER MAY HAVE OR
HAVE HAD AGAINST THE BORROWER, THE AGENT, ANY OTHER LENDER OR ANY OTHER PERSON
WHATSOEVER INCLUDING, BUT NOT LIMITED TO, ANY DEFENSE BASED ON THE FAILURE OF
THE DEMAND FOR PAYMENT UNDER THE LETTER OF CREDIT TO CONFORM TO THE TERMS OF
SUCH LETTER OF CREDIT OR THE LEGALITY, VALIDITY, REGULARITY OR ENFORCEABILITY OF
SUCH LETTER OF CREDIT AND INCLUDING, BUT NOT LIMITED TO, THOSE RESULTING FROM
THE AGENT'S OWN SIMPLE OR CONTRIBUTORY NEGLIGENCE. Without limiting the
generality of the foregoing, such obligations shall not be affected by any
Default or Event of Default or by any subsequent reduction or termination of any
Commitment of a Lender, and each payment by a Lender under Section 2.2 shall be
made without any offset, abatement, withholding or reduction whatsoever.
Section 2.3. Types of Loans and Minimum Borrowing Amounts. Borrowings of
Revolving Loans may be outstanding as either Base Rate Loans or LIBOR Loans, as
selected by the Borrower pursuant to Section 2.4. Borrowings of Agent Loans may
be outstanding only as Base Rate Loans. All Borrowings of LIBOR Loans advanced
on the Initial Borrowing Date shall be advanced as Base Rate Loans unless the
requisite notice for a LIBOR Loan has been given pursuant to Section 2.4(a) and
indemnification has been provided to the Lenders in connection therewith. Each
Borrowing of Base Rate Loans shall be in an amount of not less than $500,000 and
each Borrowing of LIBOR Loans shall be in an amount of not less than $1,000,000.
Section 2.4. Manner of Borrowing.
(a) Notice to the Agent. Subject to the limitations in Section 2.3, the
Borrower shall give notice to the Agent by no later than 11:00 a.m. at least
three (3) Business Days before the date on which the Borrower requests the
Lenders or the Agent, as applicable, to advance a Borrowing of LIBOR Loans and
on the date the Borrower requests the Lenders or the Agent, as applicable, to
advance a Borrowing of Base Rate Loans pursuant to a duly executed Borrowing
Request, and the Agent shall promptly give the Lenders notice thereof.
(b) Selection of Interest Periods. The Borrower may select multiple
Interest Periods for the Revolving Loans constituting any particular Borrowing,
provided that at no time shall the number of different Interest Periods for
outstanding LIBOR Loans exceed five (5). The Revolving Loans included in each
Borrowing shall bear interest initially at the type of rate specified in the
Borrowing Request with respect thereto. Thereafter, the Borrower may from time
to time elect to change or continue the type of interest rate borne by each
Borrowing or, subject to Section 2.3's minimum amount requirement for each
outstanding Borrowing, a portion thereof, as follows: (i) if such Borrowing is
of LIBOR Loans, the Borrower may continue part or all of such Borrowing as LIBOR
Loans for an Interest Period specified by the Borrower or convert part or all of
such Borrowing into Base Rate Loans on the last day of the Interest Period
applicable thereto, or the Borrower may earlier convert part or all of such
Borrowing into Base Rate Loans so long as it pays the breakage fees and funding
losses provided in Section 2.12 and all interest accrued on such Borrowing, and
(ii) if such Borrowing is of Base Rate Loans, the Borrower may convert all or
part of such Borrowing into LIBOR
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Loans for an Interest Period specified by the Borrower on any Business Day.
Notices of the continuation of a Borrowing of LIBOR Loans for an additional
Interest Period or of the conversion of part or all of a Borrowing of LIBOR
Loans into Base Rate Loans or of Base Rate Loans into LIBOR Loans must be given
by no later than 11:00 a.m. at least three (3) Business Days before the date of
the requested continuation or conversion. The Borrower shall give such notices
concerning the advance, continuation, or conversion of a Borrowing by telephone
or facsimile (which notice shall be irrevocable once given and, if by telephone,
shall be promptly confirmed in writing) pursuant to a Borrowing Request which
shall specify the date of the requested advance, continuation or conversion
(which shall be a Business Day), the amount of the requested Borrowing, the type
of Loans to comprise such new, continued or converted Borrowing and, if such
Borrowing is to be comprised of LIBOR Loans, the Interest Period applicable
thereto. The Borrower agrees that the Agent and each Lender may rely on any such
telephonic or facsimile notice given by any person it in good faith believes is
an authorized representative of the Borrower without the necessity of
independent investigation and that, if any such notice by telephone conflicts
with any written confirmation, such telephonic notice shall govern if the Agent
or any Lender has acted in reliance thereon.
(c) Borrower's Failure to Notify. If the Borrower fails to give notice
pursuant to Section 2.4(a) or (b) of (i) the continuation or conversion of any
outstanding principal amount of a Borrowing of LIBOR Loans or of (ii) a
Borrowing of Loans to pay outstanding Reimbursement Obligations, as applicable,
and has not notified the Agent by 11:00 a.m. at least three (3) Business Days
before the last day of the Interest Period for such Borrowing of LIBOR Loans or
the day such Reimbursement Obligation becomes due that it intends to repay such
Borrowing or such Reimbursement Obligation with funds not borrowed hereunder,
the Borrower shall be deemed to have requested, (x) the continuation of such
Borrowing as a LIBOR Loan with an Interest Period of one (1) month, or (y) the
advance of a new Borrowing of Base Rate Loans on such day in the amount of the
Reimbursement Obligation then due, which Borrowing shall be deemed to have been
funded on such day to pay the Reimbursement Obligation then due, in each case so
long as no Default or Event of Default shall have occurred and be continuing or
would occur as a result of such Borrowing but otherwise disregarding the
conditions to a Borrowing set forth in Section 4.3. Upon the occurrence and
during the continuance of any Event of Default, (i) each LIBOR Loan will
automatically, on the last day of the then existing Interest Period therefor,
convert into a Base Rate Loan and (ii) the obligation of the Lenders to make,
continue or convert Loans into LIBOR Loans shall be suspended.
(d) Funding and Disbursement of Loans. Not later than 1:00 p.m. on the
date of any requested advance of a new Borrowing of Revolving Loans, each
Lender, subject to all other provisions hereof, shall make available its
Revolving Loan comprising its ratable share of such Borrowing in funds
immediately available in Houston, Texas for the benefit of the Agent and
according to the disbursement instructions of the Agent. The Agent shall make
the proceeds of each such Borrowing, and each Agent Loan which the Agent makes,
in its sole discretion, available in immediately available funds to the Borrower
on the date of any requested advance of a new Borrowing by 2:00 p.m. No Lender
shall be responsible to the Borrower for any failure by another Lender to fund
its portion of a Borrowing, and no such failure by a Lender shall relieve any
other Lender from its obligation, if any, to fund its portion of a Borrowing.
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(e) Agent Reliance on Lender Funding. Unless the Agent shall have been
notified by a Lender before the date on which such Lender is scheduled to make
payment to the Agent of the proceeds of a Revolving Loan (which notice shall be
effective upon receipt) that such Lender does not intend to make such payment,
the Agent may assume that such Lender has made such payment when due and in
reliance upon such assumption may (but shall not be required to) make available
to the Borrower the proceeds of the Revolving Loan to be made by such Lender
and, if any Lender has not in fact made such payment to the Agent, such Lender
shall, on demand, pay to the Agent the amount made available to the Borrower
attributable to such Lender together with interest thereon for each day during
the period commencing on the date such amount was made available to the Borrower
and ending on (but excluding) the date such Lender pays such amount to the Agent
at a rate per annum equal to the interest rate attributable to the relevant
Revolving Loan. If such amount is not received from such Lender by the Agent
immediately upon demand, the Borrower will, on demand, repay to the Agent the
proceeds of the Loan attributable to such Lender with interest thereon at a rate
per annum equal to the interest rate applicable to the relevant Revolving Loan.
Section 2.5. Interest Periods. As provided in Section 2.4(a) and (b), at
the time of each request for the advance or continuation of, or conversion into,
a Borrowing of LIBOR Loans, the Borrower shall select an Interest Period
applicable to such LIBOR Loans from among the available options subject to the
limitations in Section 2.4(a); provided, however, that:
(i) the Borrower may not select an Interest Period for a Borrowing of
LIBOR Loans that extends beyond the Maturity Date;
(ii) whenever the last day of any Interest Period would otherwise be a
day that is not a Business Day, the last day of such Interest Period shall
either be (i) extended to the next succeeding Business Day, or (ii) reduced to
the immediately preceding Business Day if the next succeeding Business Day is in
the next calendar month; and
(iii) for purposes of determining an Interest Period, a month means a
period starting on one day in a calendar month and ending on the numerically
corresponding day in the next calendar month; provided, however, that if there
is no such numerically corresponding day in the month in which an Interest
Period is to end or if such Interest Period begins on the last Business Day of a
calendar month, then such Interest Period shall end on the last Business Day of
the calendar month in which such Interest Period is to end.
Section 2.6. Interest Payments.
(a) Base Rate Loans. Each Base Rate Loan shall bear interest (computed on
the basis of a 365/366-day year and actual days elapsed, excluding the date of
repayment) on the unpaid principal amount thereof from the date such Loan is
made until maturity (whether by acceleration or otherwise) or conversion to a
LIBOR Loan in accordance with Section 2.4(b) hereof, at a rate per annum equal
to the lesser of (i) the Highest Lawful Rate, or (ii) with respect to Revolving
Loans, the sum of the Base Rate from time to time in effect plus the Applicable
Margin, or with respect to Agent Loans, the sum of the Base Rate from time to
time in effect minus 0.5%, payable in arrears on each Interest
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Payment Date for such Loan and at maturity (whether by acceleration or
otherwise) or conversion to a LIBOR Loan in accordance with Section 2.4(b).
(b) LIBOR Loans. Each LIBOR Loan shall bear interest (computed on the
basis of a 360-day year and actual days elapsed, excluding the date of
repayment) on the unpaid principal amount thereof from the date such Loan is
made until maturity (whether by acceleration or otherwise) or conversion to a
Base Rate Loan in accordance with Section 2.4(b) hereof, at a rate per annum
equal to the lesser of (i) the Highest Lawful Rate, or (ii) the sum of the
Adjusted LIBOR Rate plus the Applicable Margin, payable in arrears on each
Interest Payment Date for such Loan and at maturity (whether by acceleration or
otherwise) or conversion to a Base Rate Loan in accordance with Section 2.4(b).
(c) Rate Determinations. The Agent shall determine each interest rate
applicable to the Loans and Reimbursement Obligations hereunder and such
determination shall be conclusive and binding except in the case of the Agent's
manifest error or willful misconduct. The Agent shall give prompt telephonic,
telex or facsimile notice to the Borrower and each Lender (in the case of
Revolving Loans) of the interest rate applicable to each Loan or Reimbursement
Obligation (but, if such notice is given by telephone, the Agent shall confirm
such rate in writing) promptly after the Agent has made such determination.
Section 2.7. Default Rates. If any payment of principal on any Loan is
not made when due after the expiration of the grace period therefor provided in
Section 7.1 (whether by acceleration or otherwise), such Loan shall bear
interest (computed on the basis of a year of 360, 365 or 366 days, as
applicable, and actual days elapsed) from the date such payment was due until
such principal then due is paid in full, payable on demand, at a rate per annum
equal to:
(a) for any Base Rate Loan which is a Revolving Loan the lesser of (i) the
Highest Lawful Rate, or (ii) the sum of two percent (2%) per annum plus the Base
Rate from time to time in effect (but not less than the Base Rate in effect at
maturity) plus the Applicable Margin;
(b) for any LIBOR Loan the lesser of (i) the Highest Lawful Rate, or (ii)
the sum of two percent (2%) per annum plus the rate of interest in effect
thereon at the time of such default until the end of the Interest Period for
such Loan and, thereafter, at a rate per annum equal to the sum of two percent
(2%) per annum plus the Base Rate from time to time in effect (but not less than
the Base Rate in effect at maturity) plus the Applicable Margin;
(c) for any unpaid Reimbursement Obligations, the lesser of (i) the Highest
Lawful Rate, or (ii) the sum of two percent (2%) per annum plus the Base Rate
from time to time in effect (but not less than the Base Rate in effect at
maturity) plus the Applicable Margin; and
(d) for any Base Rate Loan which is an Agent Loan, the lesser of (i) the
Highest Lawful Rate, or (ii) the sum of two percent (2%) per annum plus the Base
Rate from time to time in effect (but not less than the Base Rate in effect at
maturity) minus 0.5%.
It is the intention of the Agent and each Lender to conform strictly to usury
laws applicable to it. Accordingly, if the transactions contemplated hereby or
the Loans or the Reimbursement Obligations
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would be usurious as to the Agent or the Lenders under laws applicable to it
(including the laws of the United States of America and the State of Texas or
any other jurisdiction whose laws may be mandatorily applicable to the Agent or
such Lender notwithstanding the other provisions of this Agreement, the Notes or
any other Credit Document), then, in that event, notwithstanding anything to the
contrary in this Agreement, the Notes or any other Credit Document, it is agreed
as follows: (i) the aggregate of all consideration which constitutes interest
under laws applicable to the Lenders that is contracted for, taken, reserved,
charged or received by the Lenders under this Agreement, the Notes or any other
Credit Document or otherwise shall under no circumstances exceed the Highest
Lawful Rate, and any excess shall be credited by the applicable Lender on the
principal amount of the applicable Note or to the Reimbursement Obligations (or,
if the principal amount of such Note and all Reimbursement Obligations owed to
such Lender shall have been paid in full, refunded by such Lender to the
Borrower); (ii) in the event that the maturity of the Notes is accelerated by
reason of an election of the holder or holders thereof resulting from any Event
of Default hereunder or otherwise, or in the event of any required or permitted
prepayment, then such consideration that constitutes interest under laws
applicable to the Lenders may never include more than the Highest Lawful Rate,
and excess interest, if any, provided for in this Agreement, the Notes, any
other Credit Document or otherwise shall be automatically canceled by the
applicable Lenders as of the date of such acceleration or prepayment and, if
theretofore paid, shall be credited by the applicable Lenders on the principal
amount of the applicable Notes or Reimbursement Obligations (or if the principal
amounts thereof shall have been paid in full, refunded by the applicable Lender
to the Borrower); and (iii) if at any time the interest provided hereunder,
together with any other fees payable pursuant to this Agreement, the Notes or
any other Credit Document and deemed interest under applicable law, exceeds the
amount that would have accrued at the Highest Lawful Rate, the amount of
interest and any such fees to accrue to the Lenders hereunder and thereunder
shall be limited to the amount which would have accrued at the Highest Lawful
Rate, but any subsequent reductions shall not reduce the interest to accrue to
the Lenders hereunder and thereunder below the Highest Lawful Rate until the
total amount of interest accrued pursuant hereto and thereto and such fees
deemed to be interest equals the amount of interest which would have accrued to
the Lenders if a varying rate per annum equal to the interest hereunder had at
all times been in effect plus the amount of fees which would have been received
but for the effect of this Section 2.7. The Agent and the Lenders hereby elect
to determine the applicable rate ceiling under Article 5069-1D.001 to 1D.013 of
the Texas Credit Revised Civil Statutes by the weekly rate ceiling from time to
time in effect, subject to the Agent's and the Lenders' right subsequently to
change such method in accordance with applicable law. In the event the Loans and
all Reimbursement Obligations are paid in full by the Borrower prior to the
Maturity Date and the interest received for the actual period of the existence
of the Loans or the Reimbursement Obligations exceeds the Highest Lawful Rate,
the applicable Lenders shall refund to the Borrower the amount of the excess or
shall credit the amount of the excess against amounts owing under the Loans and
none of the Lenders shall be subject to any of the penalties provided by law for
contracting for, taking, reserving, charging or receiving interest in excess of
the Highest Lawful Rate. The provisions of Chapter 346 of Tex. Finance Code Ann.
(Vernon 1998), regulating certain revolving credit accounts shall not apply to
this Agreement or any of the Notes.
Section 2.8. Maturity of Loans. Each Revolving Loan, together with
accrued and unpaid interest thereon and all other fees then due and owing under
any Credit Document, shall mature and become due and payable on the Maturity
Date. Each Agent Loan, together with accrued and unpaid
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interest thereon, shall mature and become due and payable five (5) days after
the date of such Agent Loan, provided that all such Agent Loans shall mature and
become due and payable no later than the Maturity Date.
Section 2.9. Optional Prepayments. The Borrower shall have the privilege
of prepaying the Loans without premium or penalty in whole or in part at any
time. If the Borrower is prepaying LIBOR Loans, it shall give to the Agent
notice of such prepayment no later than 11:00 a.m. at least three (3) Business
Days before the proposed prepayment date. All prepayments of LIBOR Loans shall
be accompanied by accrued interest thereon, together with any applicable
breakage fees and funding losses pursuant to Section 2.12. The Borrower may
direct the application of any optional prepayment hereunder to the Base Rate
Loans or LIBOR Loans outstanding.
Section 2.10. Mandatory Prepayments of Loans. If the aggregate principal
amount of outstanding Loans and L/C Obligations shall at any time for any reason
exceed the Commitment Amount then in effect, the Borrower shall, immediately and
without notice or demand, pay the amount of such excess to the Lenders as a
prepayment of the Loans and, if all Loans have been paid, a pre-funding of
Letters of Credit pursuant to the provisions of Section 7.4. Any mandatory
prepayment of Loans pursuant hereto shall not be limited by the notice provision
for prepayments set forth in Section 2.9, but immediately upon determining the
need to make any such prepayment, the Borrower shall notify the Agent of such
required prepayment. Each such prepayment shall be accompanied by a payment of
all accrued and unpaid interest on the Loans prepaid and any applicable breakage
fees and funding losses pursuant to Section 2.12.
Section 2.11. The Notes. The Revolving Loans outstanding to the Borrower
from the Lenders (and, with respect to the Agent, any Agent Loans outstanding to
the Borrower) shall be evidenced by promissory notes of the Borrower payable to
each of the Lenders in the form of Exhibit 2.11 (such promissory notes, together
with any replacements thereof, the "Notes"). Each holder of a Note shall record
on its books and records or on a schedule to the Note the amount of each Loan
outstanding from it to the Borrower, all payments of principal and interest and
the principal balance from time to time outstanding thereon, the type of such
Loan and, if a LIBOR Loan, the Interest Period and interest rate applicable
thereto. Such record, whether shown on the books and records of a holder of a
Note or on a schedule to its Note, shall be prima facie evidence as to all such
matters; provided, however, that the failure of any holder to record any of the
foregoing or any error in any such record shall not limit or otherwise affect
the obligation of the Borrower to repay all Loans outstanding to it hereunder,
together with accrued interest thereon. At the request of any holder of a Note
and upon such holder tendering to the Borrower the Note to be replaced, the
Borrower shall furnish a new Note to such holder to replace any outstanding Note
and at such time the first notation appearing on the schedule on the reverse
side of, or attached to, such new Note shall set forth the aggregate unpaid
principal amount of all Loans, if any, then outstanding thereon.
Section 2.12. Breakage Fees. If any Lender incurs any loss, cost or
expense (including, without limitation, any loss of profit and loss, cost,
expense or premium reasonably incurred by reason of the liquidation or re-
employment of deposits or other funds acquired by such Lender to fund or
maintain any LIBOR Loan or the relending or reinvesting of such deposits or
amounts paid or prepaid
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to the Lenders) as a result of any of the following events other than any such
occurrence as a result of a change of circumstance described in Sections 8.1 or
8.2:
(i) any payment, prepayment or conversion of a LIBOR Loan on a date other
than the last day of its Interest Period (whether by acceleration, prepayment or
otherwise);
(ii) any failure to make a principal payment of a LIBOR Loan on the due
date therefor; or
(iii) any failure by the Borrower to borrow, continue, prepay or convert to
a LIBOR Loan on the date specified in a notice given pursuant to Section 2.4(a)
or (b),
then the Borrower shall pay to such Lender such amount as will reimburse such
Lender for such loss, cost or expense. If any Lender makes such a claim for
compensation, it shall provide to the Borrower a certificate executed by an
officer of such Lender setting forth the amount of such loss, cost or expense in
reasonable detail (including an explanation of the basis for and the computation
of such loss, cost or expense), and the amounts shown on such certificate shall
be conclusive and binding absent manifest error. Within ten (10) days of
receipt of such certificate, the Borrower shall pay to such Lender such amount
as will compensate such Lender for such loss, cost or expense as provided
herein.
Section 2.13. Commitment Terminations. The Borrower shall have the right
at any time and from time to time, upon five (5) Business Days' prior and
irrevocable written notice to the Agent, to terminate or reduce the Commitments
without premium or penalty, in whole or in part, any partial termination to be
(i) in an amount not less than $1,000,000 as determined by the Borrower, and
(ii) allocated ratably among the Lenders in proportion to their respective
Commitments, as applicable; provided that the Commitment Amount may not be
reduced to an amount less than the sum of the aggregate principal amount of
outstanding Loans plus the aggregate outstanding L/C Obligations, after giving
effect to payments on such proposed termination or reduction date, unless the
Borrower provides to the Lenders or the Agent, as applicable, cash collateral in
an amount sufficient to cover such shortage or back to back letters of credit
from a financial institution satisfactory to all of the Lenders in an amount
equal to the undrawn face amount of any applicable outstanding Letters of Credit
with an expiry date of at least five (5) days after the expiry date of any
applicable Letter of Credit and which provide that the Lenders may make a
drawing thereunder in the event that it pays a drawing under such Letter of
Credit. Any termination of the Commitments pursuant to this Section 2.13 is
permanent and may not be reinstated. The Agent shall give prompt notice to each
Lender of any such termination of the Commitments.
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SECTION 3. FEES AND PAYMENTS.
Section 3.1. Fees. (a) Commitment Fee. For the period from the
Effective Date to and including the Commitment Termination Date the Borrower
shall pay to the Agent for the ratable account of the Lenders, a commitment fee
(computed on a basis of a 365/366-day year and actual days elapsed) on an amount
equal to the average daily difference between (i) the sum of the Commitment
Amount plus the outstanding principal amount of the Agent Loans and (ii) the
outstanding Revolving Loans and L/C Obligations, such commitment fee to be
calculated, for any day, at such times as the relevant Funded Debt to EBITDA
Ratio is in one of the following ranges, based upon the percentage per anum set
forth opposite such Funded Debt to EBITDA Ratio set forth below times such
amount:
Funded Debt to EBITDA Ratio Commitment Fee
--------------------------- --------------
Less than or equal to 1.25 to 1.0 0.175%
Greater than 1.25 to 1.0 but less
than or equal to 1.50 to 1.0 0.200%
Greater than 1.50 to 1.0 but less
than or equal to 2.0 to 1.0 0.250%
Greater than 2.0 to 1.0 but less
than or equal to 2.50 to 1.0 0.250%
Greater than 2.50 to 1.0 0.300%
For the period from the Effective Date through the earlier of the date the
Borrower is to provide the Agent with the financial statements for the fiscal
quarter ended March 31, 1998, as required by Section 6.6(a)(ii) or the date such
financial statements are provided to the Agent, the commitment fee percentage
shall be 0.250%. Thereafter, the commitment fee percentage shall be set by the
Agent at the same time and in the same manner as the Applicable Margin is set.
Such commitment fees shall be payable in arrears commencing on March 31, 1998,
and on the last Business Day of each calendar quarter thereafter and on the
Maturity Date unless the Commitments are terminated in whole on an earlier date,
in which event the commitment fee for the period to but not including the date
of such termination shall be paid in whole on the date of such termination.
(b) Letter of Credit Fees. Commencing upon the date of issuance or
extension of any Letter of Credit, the Borrower shall pay to the Agent quarterly
in arrears (pro rated, if necessary for any portion of such quarter) for the
ratable account of the Lenders and a non-refundable fee equal to the greater of
(x) $500, or (y) the face amount of such Letter of Credit times the Applicable
Margin for LIBOR Loans, calculated on the basis of a 365/366-day year and actual
days in the period and based on the then scheduled expiry date of the Letter of
Credit. Thereafter, such fees shall be payable by the Borrower in arrears on
the last Business Day of each calendar quarter of each year commencing with the
next succeeding calendar quarter, with the last such payment on the date any
such Letter of
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Credit expires. In addition, the Borrower shall pay to the Agent solely for the
Agent's account, in connection with each Letter of Credit, reasonable
administrative and amendment fees and expenses for letters of credit established
by the Agent from time to time in accordance with its customary practices and as
agreed between the Agent and the Borrower and the fronting fee described in the
Fee Letter.
(c) Agent Fees. The Borrower shall pay to each of the Agent and the
Arranger the fees agreed to between the Agent, the Arranger and the Borrower
pursuant to the Fee Letter, and any other fees from time to time agreed to by
the Borrower and the Agent.
Section 3.2. Place and Application of Payments. All payments of
principal of and interest on the Loans and the Reimbursement Obligations and all
other amounts payable by the Borrower under the Credit Documents shall be made
by the Borrower to the Agent by no later than 1:30 p.m. on the due date thereof
at the office of the Agent in Houston, Texas (or such other location as the
Agent may designate to the Borrower). Any payments received by the Agent from
the Borrower after 1:30 p.m. shall be deemed to have been received on the next
Business Day.
Section 3.3. Withholding Taxes. (a) Payments Free of Withholding.
Except as otherwise required by law and subject to Section 3.3(b), each payment
by the Borrower to the Agent or any Lender under this Agreement or any other
Credit Document shall be made without withholding for or on account of any
present or future taxes (other than overall net income taxes on the recipient)
imposed by or within the jurisdiction in which the Borrower is domiciled, any
jurisdiction from which the Borrower makes any payment, or (in each case) any
political subdivision or taxing authority thereof or therein, excluding, in the
case of each Lender and the Agent, taxes, assessments or other governmental
charges
(i) imposed on, based upon, or measured by its income, and branch profits,
franchise and similar taxes imposed on it, by any jurisdiction in which the
Agent or such Lender, as the case may be, is incorporated or maintains its
principal place of business or Lending Office or which subjects the Agent
or such Lender to tax by reason of a connection between the taxing
jurisdiction and the Agent or such Lender (other than a connection
resulting from the transactions contemplated by this Agreement);
(ii) imposed as a result of a connection between the taxing jurisdiction
and the Agent or such Lender, as the case may be, other than a connection
resulting from the transactions contemplated by this Agreement;
(iii) imposed as a result of the transfer by such Lender of its interest
in this Agreement or any other Credit Document or a designation by such
Lender (other than pursuant to Section 3.3(d) hereof) of a new Lending
Office (other than taxes imposed as a result of any change in treaty, law
or regulation after such transfer of the Lender's interest in this
Agreement or any Credit Document or designation of a new Lending Office);
(iv) imposed by the United States of America upon a Lender organized under
the laws of a jurisdiction outside of the United States, except to the
extent that such tax is imposed or increased as a result of any change in
applicable law, regulation or treaty (other than any
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addition of or change in any "anti-treaty shopping," "limitation of
benefits," or similar provision applicable to a treaty) after the Effective
Date hereof, in the case of each Lender originally a party hereto or, in
the case of any Purchasing Lender (as defined in Section 10.10), after the
date on which it becomes a Lender;
(v) which would not have been imposed but for (a) the failure of the Agent
or any Lender, as the case may be, to provide (x) an Internal Revenue
Service Form 1001 or 4224, as the case may be, or any substitute or
successor form prescribed by the Internal Revenue Service pursuant to
Section 3.3(b) below, or (y) any other certification, documentation or
proof which is reasonably requested by the Borrower, or (b) a determination
by a taxing authority or a court of competent jurisdiction that a
certification, documentation or other proof provided by such Lender or the
Agent to establish an exemption from such tax, assessment or other
governmental charge is false
(all such non-excluded taxes, assessments or other governmental charges and
liabilities being hereinafter referred to as "Indemnified Taxes"). If any such
withholding is so required, the Borrower shall make the withholding, pay the
amount withheld to the appropriate governmental authority before penalties
attach thereto or interest accrues thereon and forthwith pay such additional
amount as may be necessary to ensure that the net amount actually received by
the Agent and each Lender is free and clear of such Indemnified Taxes (including
Indemnified Taxes on such additional amount) and is equal to the amount that the
Agent or such Lender (as the case may be) would have received had such
withholding not been made. If the Agent or any Lender pays any amount in
respect of any Indemnified Taxes, penalties or interest, the Borrower shall
reimburse the Agent or that Lender for the payment on demand in the currency in
which such payment was made. If the Borrower pays any Indemnified Taxes,
penalties or interest, it shall deliver official tax receipts evidencing the
payment or certified copies thereof, or other satisfactory evidence of payment
if such tax receipts have not yet been received by the Borrower (with such tax
receipts to be promptly delivered when actually received), to the Agent or the
Lender on whose account such withholding was made (with a copy to the Agent if
not the recipient of the original) within fifteen (15) days of such payment.
(b) U.S. Withholding Tax Exemptions. Each Lender that is not a United
States person (as such term is defined in Section 7701(a)(30) of the Code) shall
submit to the Borrower and the Agent on or before the Effective Date, two duly
completed and signed copies of either Form 1001 (entitling such Lender to a
complete exemption from withholding under the Code on all amounts to be received
by such Lender, including fees, pursuant to the Credit Documents) or Form 4224
(relating to all amounts to be received by such Lender, including fees, pursuant
to the Credit Documents) of the Internal Revenue Service. Thereafter and from
time to time, each Lender shall submit to the Borrower and the Agent such
additional duly completed and signed copies of one or the other of such forms
(or such successor forms as shall be adopted from time to time by the relevant
United States taxing authorities) as may be (i) notified by the Borrower,
directly or through the Agent, to such Lender, and (ii) required under then-
current United States law or regulations to avoid United States withholding
taxes on payments in respect of all amounts to be received by such Lender,
including fees, pursuant to the Credit Documents. Upon the request of the
Borrower, each Lender that is a United States person shall submit to the
Borrower a certificate to the effect that it is such a United States person.
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(c) Inability of Lender to Submit Forms. If any Lender determines, as a
result of any change in applicable law, regulation or treaty, or in any official
application or interpretation thereof, that it is unable to submit to the
Borrower or the Agent any form or certificate that such Lender is obligated to
submit pursuant to Section 3.3(b) or that such Lender is required to withdraw or
cancel any such form or certificate previously submitted or any such form or
certificate otherwise becomes ineffective or inaccurate, such Lender shall
promptly notify the Borrower and the Agent of such fact and the Lender shall to
that extent not be obligated to provide any such form or certificate and will be
entitled to withdraw or cancel any affected form or certificate, as applicable.
(d) Refund of Taxes. If any Lender or the Agent receives a refund of any
Indemnified Tax or any tax referred to in Section 10.3 with respect to which the
Borrower has paid any amount pursuant to this Section 3.3 or Section 10.3, such
Lender or the Agent shall pay the amount of such refund (including any interest
received with respect thereto) to the Borrower.
SECTION 4. CONDITIONS PRECEDENT.
Section 4.1. Conditions Precedent to Initial Borrowing. The obligation
of each Lender to advance the initial Loans hereunder and of the Agent to issue
any Letter of Credit on the Initial Borrowing Date is subject to the following
conditions precedent, all in form and substance satisfactory to the Lenders (and
which shall be evidenced by the making of such Loan(s) and, if applicable, the
issuance of such Letter(s) of Credit) and in sufficient number of signed
counterparts, where applicable, to provide one for each Lender (except for the
Notes, of which only one original shall be signed for each Lender):
(a) The Agent shall have received:
(i) Notes. The duly executed Notes of the Borrower;
(ii) Guaranties. The duly executed Guaranties of each of the
Guarantors in substantially the form of Exhibit 4.1A;
(iii) Stock Pledge Agreement. The duly executed Stock Pledge
Agreement from the Borrower in substantially the form of Exhibit 4.1B,
together with all of the pledged securities referred to in Schedule 4.1 as
required to be delivered to effectuate and perfect such stock pledges,
accompanied by executed and undated stock powers;
(iv) Certificate of Officers of Borrower and Guarantors. A
certificate of the Secretary or Assistant Secretary and the President or
Vice President of each of the Borrower and the Guarantors containing
specimen signatures of the persons authorized to execute Credit Documents
on such Person's behalf or any other documents provided for herein,
together with (x) copies of resolutions of the Board of Directors of such
Person authorizing the execution and delivery of the Credit Documents and
of all other legal documents or proceedings taken by such Person in
connection with the execution and delivery of the Credit Documents, (y)
copies of such Person's Certificate or Articles of Incorporation, certified
by the Secretary of State of such Person's jurisdiction of organization,
and Bylaws and (z) a certificate of existence and good
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standing from the appropriate governing agency of such Person's
jurisdiction of organization and of all jurisdictions where such Person is
authorized to do business;
(v) Fees. Payment of all fees and all expenses incurred through the
Effective Date then due and owing to the Agent and the Arranger pursuant to
this Agreement and the Fee Letter;
(vi) Compliance Certificate. A duly executed Compliance Certificate
as of August 31, 1997;
(vii) Insurance Certificate. An insurance certificate from the
Borrower describing in reasonable detail the insurance maintained by the
Borrower and its Subsidiaries as required by the Credit Documents;
(viii) Consents. Certified copies of all documents evidencing any
necessary consents and governmental approvals taken or obtained by the
Borrower and the Guarantors with respect to the Credit Documents;
(ix) Certificate of Financial Condition. A certificate of the
principal financial officer of the Borrower in substantially the form of
Exhibit 4.1C documenting the solvency of the Borrower and its Subsidiaries
on a consolidated basis and certifying as true, correct and complete the
most recent financial statements described in Section 5.9;
(x) Opinion of Counsel. The opinion of Edward Rhyne, Esquire,
General Counsel to the Borrower and the Guarantors covering such matters as
the Lenders may reasonably require; and
(xi) Other Documents. Such other documents as the Lenders may
reasonably request.
(b) All legal matters incident to the execution and delivery of the Credit
Documents shall be satisfactory to the Lenders.
Section 4.2. Condition Precedent to Consolidated Drum Borrowings. In the
case of any advance of a Borrowing hereunder to fund the Acquisition of the
assets of Consolidated Drum and its Subsidiaries, the Agent shall have received
Phase I environmental reports reasonably satisfactory to it with respect to the
three (3) processing facilities to be acquired.
Section 4.3. Conditions Precedent to all Borrowings. In the case of each
advance of a Borrowing hereunder (including the issuance of, increase in the
amount of, or extension of the expiry date of, a Letter of Credit and the
initial Borrowing hereunder but excluding the Revolving Loans to be made as
required by Section 2.1(b)):
(a) Notices. In the case of a Borrowing, the Agent shall have received the
Borrowing Request required by Section 2.4, and in the case of the issuance,
extension or increase of a Letter of
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Credit, the Agent shall have received a duly completed Borrowing Request and
Application for such Letter of Credit meeting the requirements of Section 2.2;
(b) Representations and Warranties True and Correct. Each of the
representations and warranties of the Borrower and its Subsidiaries set forth
herein and in the Credit Documents shall be true and correct in all material
respects as of the time of such new Borrowing, except as a result of the
transactions expressly permitted hereunder or thereunder and except to the
extent that any such representation or warranty relates solely to an earlier
date, in which case it shall have been true and correct in all material respects
as of such earlier date;
(c) No Default. No Default or Event of Default shall have occurred and be
continuing or would occur as a result of such Borrowing;
(d) New Litigation and Changes in Pending Litigation. Since the Effective
Date, no new litigation (including, without limitation, derivative or injunctive
actions), arbitration proceedings or governmental proceedings shall be pending
or known to be threatened against the Borrower or any of its Subsidiaries which
could reasonably be expected to have a Material Adverse Effect; and no material
development (whether or not disclosed) shall have occurred in any litigation
(including, without limitation, derivative or injunctive actions), arbitration
proceedings or governmental proceedings previously disclosed, which could
reasonably be expected to have a Material Adverse Effect;
(e) Regulation U; Other Laws. The Borrowings to be made by the Borrower
shall not result in either the Borrower or the Agent or any Lender being in non-
compliance with or in violation of Regulation U of the Board of Governors of the
Federal Reserve System and shall not be prohibited by any other legal
requirement (including Regulations G, T and X of the Board of Governors of the
Federal Reserve System) imposed by the banking laws of the United States of
America, and shall not otherwise subject the Agent or any Lender to a penalty or
other onerous conditions under or pursuant to any legal requirement; and
(f) Material Adverse Change. There has occurred no event or effect that
has had or could reasonably be expected to have a Material Adverse Effect.
Each request for the advance of a Borrowing and each request for the issuance
of, increase in the amount of, or extension of the expiry date of, a Letter of
Credit shall be deemed to be a representation and warranty by the Borrower on
the date of such Borrowing, or issuance of, increase in the amount of, or
extension of the expiry date of, such Letter of Credit that all conditions
precedent to such Borrowing have been satisfied or fulfilled unless the Borrower
gives to the Agent written notice to the contrary, in which case no Lender shall
be required to fund such advances and the Agent shall not be required to issue,
increase the amount of or extend the expiry date of such Letter of Credit unless
the Majority Lenders shall have previously waived in writing such non-
compliance. In the event that any of the conditions specified in Section 4.3(c)
are not satisfied, the Borrower may not convert any Base Rate Loan into a LIBOR
Loan or continue any LIBOR Loan and may only convert or continue any LIBOR Loan
into or as a Base Rate Loan in accordance with Section 2.4(b) hereof and subject
to the applicability of the provisions of Section 2.8 regarding default rates of
interest. Further, in such case, any LIBOR Loan which has not been accelerated
pursuant to the terms hereof shall automatically
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convert into a Base Rate Loan at the end of the applicable Interest Period
unless prior to such time, the conditions specified in Section 4.3(c) shall have
been satisfied or waived pursuant to the terms hereof.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Agent and each Lender as
follows:
Section 5.1. Corporate Organization. (a) The Borrower and each of its
Subsidiaries (i) is a duly incorporated and existing corporation (or other
Person) in good standing under the laws of the jurisdiction of its organization,
(ii) has all necessary corporate power (or comparable power, in the case of a
Subsidiary that is not a corporation) to own the property and assets it uses in
its business and otherwise to carry on its business as presently conducted, and
(iii) is duly licensed or qualified and in good standing in each jurisdiction in
which the nature of the business transacted by it or the nature of the property
owned or leased by it makes such licensing or qualification necessary, except
where the failure to be so licensed or qualified could not reasonably be
expected to have a Material Adverse Effect.
(b) As of the date hereof, the Borrower has no Subsidiaries other than the
Persons listed on Schedule 4.1, and the Borrower owns one hundred percent (100%)
of each class of capital stock of each of such Persons.
Section 5.2. Corporate Power and Authority; Validity. Each of the
Borrower and the Guarantors has the corporate power and authority to execute,
deliver and carry out the terms and provisions of the Credit Documents to which
it is a party and has taken all necessary corporate action to authorize the
execution, delivery and performance of the Credit Documents to which it is a
party. Each of the Borrower and the Guarantors has duly executed and delivered
each such Credit Document and each such Credit Document constitutes the legal,
valid and binding obligation of such Person enforceable in accordance with its
terms, subject as to enforcement only to bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and by general principles of equity, regardless of whether in a
proceeding in equity or at law.
Section 5.3. No Violation. Neither the execution, delivery nor
performance by the Borrower or any of the Guarantors of the Credit Documents nor
compliance by any of such Persons with the terms and provisions thereof, nor the
consummation by it of the transactions contemplated herein or therein, will (i)
contravene any applicable provision of any law, statute, rule or regulation, or
any applicable order, writ, injunction or decree of any court or governmental
instrumentality, except where such contravention could not reasonably be
expected to have a Material Adverse Effect, (ii) conflict with or result in any
breach of any term, covenant, condition or other provision of, or constitute a
default under (except where such conflict, breach or default could not
reasonably be expected to have a Material Adverse Effect), or result in the
creation or imposition of (or the obligation to create or impose) any Lien other
than any Permitted Lien upon any of the property or assets of the Borrower or
its Subsidiaries under the terms of any contractual obligation to which the
Borrower or any of its Subsidiaries is a party or by which it or any of its
properties or assets are bound or to which it may be subject, or (iii) violate
or conflict with any provision of the Certificate or Articles of Incorporation
or Bylaws of such Person.
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Section 5.4. Litigation. There are no lawsuits (including, without
limitation, derivative or injunctive actions), arbitration proceedings or
governmental proceedings pending or, to the best knowledge of the Borrower,
threatened, involving the Borrower or any of its Subsidiaries except as
disclosed in Schedule 5.4 and except for such lawsuits or other proceedings
which could not reasonably be expected to have a Material Adverse Effect.
Section 5.5. Use of Proceeds; Margin Regulations. The proceeds of the
Loans may only be used to repay existing Indebtedness, to provide working
capital and for general corporate purposes (including the issuance of Letters of
Credit) and for Acquisitions. Neither the Borrower nor any of its Subsidiaries
are engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock. No proceeds of any Loan will be used to purchase or
carry any "margin stock" (as defined in Regulation U of the Board of Governors
of the Federal Reserve System), to extend credit for the purpose of purchasing
or carrying any "margin stock," or for a purpose which violates Regulations G,
T, U or X of the Board of Governors of the Federal Reserve System.
Section 5.6. Investment Company Act. Neither the Borrower nor any of its
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
Section 5.7. Public Utility Holding Company Act. Neither the Borrower
nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of
a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
Section 5.8. True and Complete Disclosure. All factual information (not
including estimated, pro forma financial information and other projections)
heretofore or contemporaneously furnished by the Borrower or any of its
Subsidiaries in writing to the Lenders in connection with any Credit Document or
any transaction contemplated therein is, and all other such factual information
hereafter furnished by any such Persons in writing to the Lenders in connection
herewith, any of the other Credit Documents or the Loans will be, true and
accurate in all material respects, taken as a whole, on the date of such
information and not incomplete by omitting to state any material fact necessary
to make the information therein not misleading at such time in light of the
circumstances under which such information was provided. All estimates, pro
forma financial information and projections furnished by the Borrower or any of
its Subsidiaries in writing to the Lenders in connection with any Credit
Document or any transaction contemplated therein, were prepared by the Borrower
in good faith based upon assumptions believed by the Borrower to be reasonable
at the time such information was prepared.
Section 5.9. Financial Statements. The financial statements heretofore
delivered to the Lenders for the Borrower's fiscal quarter ending August 31,
1997, were prepared on a consolidated basis in accordance with GAAP, and such
financial statements, together with the related notes and schedules, fairly
presents the financial position of the Borrower and its Subsidiaries as of the
date thereof and the results of operations for the period covered thereby,
subject to normal year-end adjustments. The Borrower and its Subsidiaries have
no material contingent liabilities or Indebtedness other than those disclosed in
such financial statements.
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Section 5.10. No Material Adverse Change. From August 31, 1997, there has
occurred no event or effect that has had, or to the best knowledge of the
Borrower could reasonably be expected to have, a Material Adverse Effect.
Section 5.11. Labor Controversies. There are no labor strikes, lock-outs,
slow downs, work stoppages or similar events pending or, to the best knowledge
of the Borrower, threatened against the Borrower or any of its Subsidiaries that
could reasonably be expected to have a Material Adverse Effect.
Section 5.12. Taxes. Except as disclosed on Schedule 5.12, the Borrower
and its Subsidiaries have filed all federal tax returns and all other material
tax returns required to be filed, and have paid all governmental taxes, rates,
assessments, fees, charges and levies (collectively, "Taxes") except such Taxes,
if any, as are being contested in good faith and for which reserves have been
provided in accordance with GAAP and except where the failure to pay such Taxes
could not reasonably be expected to have a Material Adverse Effect. Except as
disclosed on Schedule 5.12, no tax liens have been filed and no claims are being
asserted for Taxes. Except as disclosed on Schedule 5.12, the charges, accruals
and reserves on the books of the Borrower and its Subsidiaries for Taxes and
other governmental charges have been determined in accordance with GAAP.
Section 5.13. ERISA. With respect to each Plan, the Borrower and its
Subsidiaries have fulfilled their obligations under the minimum funding
standards of, and are in compliance in all material respects with, ERISA and
with the Code to the extent applicable to it, and have not incurred any
liability under Title IV of ERISA to the PBGC or a Plan other than a liability
to the PBGC for premiums under Section 4007 of ERISA, except where such
liability could not reasonably be expected to have a Material Adverse Effect.
Neither the Borrower nor any of its Subsidiaries has any contingent liability
with respect to any post-retirement benefits under a welfare plan as defined in
ERISA other than liability for continuation coverage described in Part 6 of
Title I of ERISA, except where such liability could not reasonably be expected
to have a Material Adverse Effect.
Section 5.14. Consents. All consents and approvals of, and filings and
registrations with, and all other actions of, all governmental agencies,
authorities or instrumentalities required to consummate the Borrowings
hereunder, on the date of each such Borrowing, have been obtained or made and
are or will be in full force and effect.
Section 5.15. Capitalization. All outstanding shares of the Borrower and
its Subsidiaries have been duly and validly issued, are fully paid and
nonassessable. None of the Borrower's Subsidiaries has outstanding any
securities convertible into or exchangeable for its capital stock or outstanding
any rights to subscribe for or to purchase, or any options for the purchase of,
or any agreement providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any character relating to, its capital stock.
Section 5.16. Ownership of Property. The Borrower and its Subsidiaries
have good and marketable title to or a valid leasehold interest in all of its
property except to the extent, in the aggregate, no Material Adverse Effect
could reasonably be expected to result from the failure to have such title or
interest, subject to no Liens except Permitted Liens. The Borrower and its
Subsidiaries
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own or hold valid licenses to use all the material patents, trademarks, permits,
service marks and trade names, free of any burdensome restrictions, that are
necessary to the operation of the business of the Borrower and its Subsidiaries
as presently conducted, except where the failure to own or hold such licenses
could not reasonably be expected to have a Material Adverse Effect.
Section 5.17. Compliance with Statutes. The Borrower and its Subsidiaries
are in compliance in all material respects with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies and have all necessary permits, licenses and other necessary
authorizations with respect to the conduct of their businesses and the ownership
and operation of their properties except where the failure to so comply or hold
such permits, licenses or other authorizations could not reasonably be expected
to have a Material Adverse Effect.
Section 5.18. Environmental Matters.
(a) Borrower and its Subsidiaries have complied with, and on the date of
each Borrowing will be in compliance with, all applicable Environmental Laws and
the requirements of any permits issued under such Environmental Laws except
where failure to so comply could not reasonably be expected to have a Material
Adverse Effect. To the best knowledge of the Borrower, there are no pending,
past or threatened Environmental Claims against the Borrower or any of its
Subsidiaries or any property owned or operated by the Borrower or any of its
Subsidiaries which could reasonably be expected to have a Material Adverse
Effect. To the best knowledge of the Borrower, there are no conditions or
occurrences on any property owned or operated by the Borrower or any of its
Subsidiaries or on any property adjoining or in the vicinity of any such
property that could reasonably be expected (i) to form the basis of an
Environmental Claim against the Borrower or any of its Subsidiaries or any
property owned or operated by the Borrower or any of its Subsidiaries, or (ii)
to cause any property owned or operated by the Borrower or any of its
Subsidiaries to be subject to any material restrictions on the ownership,
occupancy, use or transferability of such property by the Borrower or any of its
Subsidiaries under any applicable Environmental Law except for any such
condition or occurrence described in clauses (i) or (ii) which could not
reasonably be expected to have a Material Adverse Effect.
(b) To the best knowledge of the Borrower (i) Hazardous Materials have not
at any time been generated, used, treated or stored on, or transported to or
from, any property owned or operated by the Borrower or any of its Subsidiaries
in a manner that has violated or could reasonably be expected to violate any
Environmental Law, except for such violation which could not reasonably be
expected to have a Material Adverse Effect, and (ii) Hazardous Materials have
not at any time been released on or from any property owned or operated by the
Borrower or any of its Subsidiaries in a matter that has violated or could
reasonably be expected to violate any Environmental Law, except for such
violation which could not reasonably be expected to have a Material Adverse
Effect.
SECTION 6. COVENANTS.
The Borrower covenants and agrees that, without the consent of the
Majority Lenders and so long as any Note, Letter of Credit or Reimbursement
Obligation or any other Obligation is outstanding or any Commitment is
outstanding hereunder:
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Section 6.1. Corporate Existence. The Borrower and its Subsidiaries will
preserve and maintain their existence except (i) for the dissolution of any
Subsidiaries whose assets are transferred to the Borrower or any of its
Subsidiaries and (ii) as otherwise expressly permitted herein.
Section 6.2. Maintenance. The Borrower and its Subsidiaries will
maintain, preserve and keep their material plants, properties and equipment
necessary to the proper conduct of their businesses in reasonably good repair,
working order and condition (normal wear and tear excepted) and will from time
to time make all reasonably necessary repairs, renewals, replacements, additions
and betterments thereto so that at all times such plants, properties and
equipment are reasonably preserved and maintained; provided, however, that
nothing in this Section 6.2 shall prevent the Borrower or any of its
Subsidiaries from discontinuing the operation or maintenance of any such plants,
properties or equipment if such discontinuance is, in the judgment of the
Borrower or any such Subsidiary, as applicable, desirable in the conduct of its
business and not materially disadvantageous to the Lenders.
Section 6.3. Taxes. The Borrower and its Subsidiaries will duly pay and
discharge all Taxes upon or against them or their properties before payment is
delinquent and before penalties accrue thereon, unless and to the extent that
the same is being contested in good faith and by appropriate proceedings and
reserves have been established in conformity with GAAP.
Section 6.4. ERISA. The Borrower and its Subsidiaries will promptly pay
and discharge all obligations and liabilities arising under ERISA or otherwise
with respect to each Plan of a character which if unpaid or unperformed might
result in the imposition of a material Lien against any properties or assets of
the Borrower or any of its Subsidiaries and will promptly notify the Agent of
(i) the occurrence of any reportable event (as defined in ERISA) relating to a
Plan other than any such event with respect to which the PBGC has waived notice
by regulation; (ii) receipt of any notice from PBGC of its intention to seek
termination of any Plan or appointment of a trustee therefor; (iii) the
Borrower's or any of its Subsidiary's intention to terminate or withdraw from
any Plan; and (iv) the occurrence of any event that could result in the
incurrence of any material liability, fine or penalty, or any material increase
in the contingent liability of the Borrower or any of its Subsidiaries, in
connection with any post-retirement benefit under a welfare plan benefit (as
defined in ERISA).
Section 6.5. Insurance. The Borrower and its Subsidiaries will maintain
or cause to be maintained with responsible insurance companies, insurance
against any loss or damage to all material insurable property and assets owned
by them, such insurance to be of a character and in or in excess of such amounts
as are customarily maintained by companies similarly situated and operating like
property or assets, all of which policies shall provide that no policy shall
terminate without at least thirty (30) days' advance written notice to the Agent
and be reasonably acceptable to the Agent. The Borrower and each of its
Subsidiaries will also insure employers' and public and product liability risks
with responsible insurance companies, all as reasonably acceptable to the Agent.
The Borrower will on or before January 31st of each calendar year and upon the
request of the Agent, furnish a certificate from an officer of the Borrower
setting forth the nature and extent of the insurance maintained pursuant to this
Section 6.5.
Section 6.6. Financial Reports and Other Information.
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(a) The Borrower and its Subsidiaries will maintain a system of accounting
in such manner as will enable preparation of financial statements in accordance
with GAAP and will furnish to the Lenders and its authorized representatives
such information about the business and financial condition of the Borrower and
its Subsidiaries as any Lender may reasonably request; and, without any request,
will furnish to the Agent:
(i) within forty-five (45) days after the end of each fiscal quarter
of each fiscal year of the Borrower, the consolidated balance sheet of the
Borrower and its Subsidiaries as at the end of such fiscal quarter and the
related consolidated and consolidating statements of income and retained
earnings and of cash flows for such fiscal quarter and for the portion of
the fiscal year ended with the last day of such fiscal quarter, all of
which shall be in reasonable detail and certified by the principal
financial officer of the Borrower that they fairly present the financial
condition of the Borrower and its Subsidiaries as of the dates indicated
and the results of their operations and changes in their cash flows for the
periods indicated and that they have been prepared in accordance with GAAP,
in each case, subject to normal year-end audit adjustments; and
(ii) within one hundred twenty (120) days after the end of each fiscal
year of the Borrower, consolidated and consolidating balance sheets of the
Borrower and its Subsidiaries as at the end of such fiscal year and the
related consolidated and consolidating statements of income and retained
earnings and of cash flows for such fiscal year and setting forth
consolidated comparative figures for the preceding fiscal year and
certified by the principal financial officer of the Borrower, to the effect
that such statements fairly present the financial condition of the Borrower
and its Subsidiaries as of the dates indicated and the results of their
operations and changes in their cash flows, and in the case of the
consolidated statements, audited by an independent nationally-recognized
accounting firm acceptable to the Agent together with a certificate of such
accountants to the Lenders stating that in the course of the regular audit
of the business of Borrower, which audit was conducted in accordance with
GAAP, such accountants obtained no knowledge that a Default or an Event of
Default has occurred and is continuing, or if, in the opinion of such
accountants, a Default or an Event of Default has occurred and is
continuing, a statement as to the nature thereof.
(b) Each financial statement furnished to the Agent pursuant to subsections
(i) and (ii) of Section 6.6(a) shall be accompanied by (i) a written certificate
signed by the Borrower's principal financial officer to the effect that (x) no
Default or Event of Default has occurred during the period covered by such
statements or, if any such Default or Event of Default has occurred during such
period, setting forth a description of such Default or Event of Default and
specifying the action, if any, taken by the Borrower to remedy the same, and (y)
the representations and warranties contained herein are true and correct in all
material respects as though made on the date of such certificate, except to the
extent that any such representation or warranty relates solely to an earlier
date, in which case it was true and correct as of such earlier date and except
as otherwise described therein, as a result of the transactions expressly
permitted hereunder or as previously disclosed to the Lenders, and (ii) a
Compliance Certificate in the form of Exhibit 6.6 showing the Borrower's
compliance with the financial covenants set forth herein.
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(c) Promptly upon receipt thereof, the Borrower will provide the Agent with
a copy of each report or "management letter" submitted to the Borrower or any of
its Subsidiaries by its independent accountants or auditors in connection with
any annual, interim or special audit made by them of the books and records of
the Borrower or any of its Subsidiaries.
(d) Promptly after obtaining knowledge of any of the following, the
Borrower will provide the Agent with written notice in reasonable detail of:
(i) any pending or threatened Environmental Claim against the Borrower or any of
its Subsidiaries or any property owned or operated by the Borrower or any of its
Subsidiaries that if adversely determined could reasonably be expected to have a
Material Adverse Effect; (ii) any condition or occurrence on any property owned
or operated by the Borrower or any of its Subsidiaries that results in
noncompliance by the Borrower or any of its Subsidiaries with any Environmental
Law that could reasonably be expected to have a Material Adverse Effect; and
(iii) the taking of any material removal or remedial action in response to the
actual or alleged presence of any Hazardous Material on any property owned or
operated by the Borrower or any of its Subsidiaries, which Hazardous Material or
the removal or remediation thereof could reasonably be expected to have a
Material Adverse Effect.
(e) The Borrower will promptly and in any event, within ten (10) days after
an officer of the Borrower has knowledge thereof, give written notice to the
Agent of: (i) any pending or threatened litigation or proceeding against the
Borrower or any of its Subsidiaries asserting any claim or claims against any of
same in excess of $250,000 in the aggregate; (ii) the occurrence of any Default
or Event of Default; (iii) any circumstance that has had a Material Adverse
Effect; and (iv) any event which would result in a breach of, Sections 6.20,
6.21, 6.22 or 6.23.
(f) The Agent will promptly provide to each Lender all information provided
to it by the Borrower pursuant to this Section 6.6.
Section 6.7. Lenders Inspection Rights. Upon reasonable notice from the
Agent or any Lender, the Borrower will permit the Agent or any Lender (and such
Persons as the Agent or any Lender may designate), at the Borrower's expense
while an Event of Default has occurred and is continuing, during normal business
hours following reasonable notice to visit and inspect any of the properties of
the Borrower or any of its Subsidiaries, to examine all of their books and
records, to make copies and extracts therefrom, and to discuss their respective
affairs, finances and accounts with their respective officers, employees and
independent public accountants (and by this provision, the Borrower authorizes
such accountants to discuss with the Agent or any Lender, and such Persons as
the Agent or any Lender may designate, the affairs, finances and accounts of the
Borrower and its Subsidiaries provided that the Borrower has the opportunity to
be present at such discussions), all at such reasonable times and as often as
may be reasonably requested.
Section 6.8. Conduct of Business. The Borrower and its Subsidiaries will
not engage in any line of business other than the pallet manufacturing and
recycling services business, the steel drum reconditioning, manufacturing and
distributing business, and related services (each, a "Permitted Business").
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Section 6.9. New Subsidiaries. The Borrower shall cause (i) any direct
or indirect Subsidiary which is formed or acquired after the Effective Date to
become a Guarantor with respect to, and jointly and severally liable with all
other Guarantors for, all of the Obligations under this Agreement and the Note
within fifteen (15) days following such formation or acquisition pursuant to a
Guaranty substantially in the form of Exhibit 4.1A, and (ii) all shares of
capital stock or other ownership interests of the Borrower or any Subsidiary
acquired after the Effective Date to be pledged as security for the Obligations
pursuant to a Stock Pledge Agreement substantially in the form of Exhibit 4.1B.
Section 6.10. Dividends and Negative Pledges.
(a) The Borrower shall not pay any dividends or other distributions on its
capital stock.
(b) Neither the Borrower nor any of its Subsidiaries shall, directly or
indirectly, create or otherwise permit to exist or become effective any
restriction on the ability of any Subsidiary of the Borrower to (i) pay
dividends or make any other distributions on its capital stock or any other
interest or participation in its profits owned by the Borrower or to pay any
Indebtedness owed to the Borrower, or (ii) make loans or advances to the
Borrower or any of its Subsidiaries, except in either case for restrictions
existing under or by reason of applicable law, this Agreement and the other
Credit Documents.
(c) Neither the Borrower nor any of its Subsidiaries shall enter into any
agreement creating or assuming any Lien upon its properties, revenues or assets,
whether now owned or hereafter acquired other than as permitted hereunder.
Neither the Borrower nor any of its Subsidiaries shall enter into any agreement
other than this Agreement and the Credit Documents prohibiting the creation or
assumption of any Lien upon its properties, revenues or assets, whether now
owned or hereafter acquired or prohibiting or restricting the ability of the
Borrower or any of its Subsidiaries to amend or otherwise modify this Agreement
or any Credit Document.
Section 6.11. Restrictions on Fundamental Changes. Neither the Borrower
nor any of its Subsidiaries shall be a party to any merger into or consolidation
with, make an Acquisition or otherwise purchase or acquire all or substantially
all of the assets or stock of, any other Person, or sell all or substantially
all of its assets or stock, except:
(a) the Borrower or any of its Subsidiaries may merge into or consolidate
with, make an Acquisition or otherwise purchase or acquire all or substantially
all of the assets or stock of any other Person if upon the consummation of any
such merger, consolidation, purchase or Acquisition, (i) the Borrower or such
Subsidiary is the surviving corporation to any such merger or consolidation (or
the other Person will thereby become a Subsidiary); (ii) the nature of the
business of such acquired Person is a Permitted Business; (iii) the Borrower
shall have delivered to the Agent (which the Agent shall promptly provide to
each Lender) within ten (10) Business Days prior to the consummation of an
Acquisition a report signed by an executive officer of the Borrower which shall
contain calculations demonstrating the Borrower's compliance with Sections 6.20,
6.21, 6.22 and 6.23 (on a trailing four fiscal quarter pro forma basis,
consistent with SEC regulations), such calculations to use historical financial
results of the acquired business; (iv) the maximum cash purchase price paid and
Indebtedness incurred to a seller by the Borrower or any of its Subsidiaries in
connection with any single Acquisition
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shall not exceed $10,000,000, (provided that the Lenders hereby consent to the
Acquisition of the assets of Consolidated Drum Reconditioning Co., Inc., a
California corporation, and its Subsidiaries)); and (v) no Default or Event of
Default shall have occurred and be continuing or would otherwise be existing as
a result of such merger, consolidation, purchase or Acquisition; and
(b) the Borrower may purchase or otherwise acquire all or substantially all
of the stock or assets of, or otherwise acquire by merger or consolidation, any
of its Subsidiaries, and any such Subsidiary may merge into, or consolidate
with, or purchase or otherwise acquire all or substantially all of the assets or
stock of or sell all or substantially all of its assets or stock to, any other
Subsidiary of the Borrower or the Borrower, in each case so long as the Borrower
shall be the surviving entity to any such merger or consolidation if the
transaction is with the Borrower.
Except as otherwise permitted in this Section 6.11, the Borrower shall not sell
or dispose of any capital stock of or its ownership interest in any of the
Guarantors or any other Subsidiaries which it may form.
Section 6.12. Environmental Laws. The Borrower and its Subsidiaries shall
comply with all Environmental Laws (including, without limitation, obtaining and
maintaining all necessary permits, licenses and other necessary authorizations)
applicable to or affecting the properties or business operations of the Borrower
or any of its Subsidiaries except where the failure to so comply could not
reasonably be expected to have a Material Adverse Effect.
Section 6.13. Liens. The Borrower and its Subsidiaries shall not create,
incur, assume or suffer to exist any Lien of any kind on any of their properties
or assets of any kind except the following (collectively, the "Permitted
Liens"):
(a) Liens arising in the ordinary course of business by operation of law in
connection with workers' compensation, unemployment insurance, old age benefits,
social security obligations, taxes, assessments, statutory obligations or other
similar charges, good faith deposits, pledges or other Liens in connection with
(or to obtain letters of credit in connection with) bids, performance bonds,
contracts or leases to which the Borrower or its Subsidiaries are a party or
other deposits required to be made in the ordinary course of business; provided
that in each case the obligation secured is not for Indebtedness and is not
overdue or, if overdue, is being contested in good faith by appropriate
proceedings and reserves in conformity with GAAP have been provided therefor;
(b) mechanics', workmen, materialmen, landlords', carriers' or other
similar Liens arising in the ordinary course of business (or deposits to obtain
the release of such Liens) related to obligations not due or, if due, that are
being contested in good faith by appropriate proceedings and reserves in
conformity with GAAP have been provided therefor;
(c) inchoate Liens under ERISA and Liens for Taxes not yet due or which are
being contested in good faith by appropriate proceedings and reserves in
conformity with GAAP have been provided therefor;
(d) Liens arising out of judgments or awards against the Borrower or any of
its Subsidiaries, or in connection with surety or appeal bonds or the like in
connection with bonding such judgments
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or awards, the time for appeal from which or petition for rehearing of which
shall not have expired or for which the Borrower or such Subsidiary shall be
prosecuting on appeal or proceeding for review and for which it shall have
obtained a stay of execution or the like pending such appeal or proceeding for
review; provided that the aggregate amount of uninsured or underinsured
liabilities (including interest, costs, fees and penalties, if any) of the
Borrower and its Subsidiaries secured by such Liens shall not exceed $250,000 at
any one time outstanding and provided further there is adequate assurance, in
the sole discretion of the Lenders, that the insurance proceeds attributable
thereto shall be paid promptly upon the expiry of such time period or resolution
of such proceeding if necessary to remove such Liens;
(e) rights of a common owner of any interest in property held by a Person
and such common owner as tenants in common or through other common ownership;
(f) encumbrances (other than to secure the payment of Indebtedness),
easements, restrictions, servitudes, permits, conditions, covenants, exceptions
or reservations in any property or rights-of-way of a Person for the purpose of
roads, pipelines, transmission lines, transportation lines, distribution lines,
removal of gas, oil, coal, metals, steam, minerals, timber or other natural
resources, and other like purposes, or for the joint or common use of real
property, rights-of-way, facilities or equipment, or defects, irregularity and
deficiencies in title of any property or rights-of-way which do not materially
diminish the value of or the ability to use such property;
(g) financing statements filed by lessors of property (but only with
respect to the property so leased) and Liens under any conditional sale or title
retention agreements entered into in the ordinary course of business;
(h) rights of lessees of equipment owned by the Borrower or any of its
Subsidiaries;
(i) existing Liens in connection with Indebtedness permitted under Section
6.14(d) and any extension, renewal or replacement thereof;
(j) Liens securing Indebtedness permitted by Section 6.14(d) on any assets
acquired;
(k) existing Liens listed on Schedule 6.13 and any extension, renewal or
replacement thereof; and
(l) Liens created by the Stock Pledge Agreements.
Section 6.14. Indebtedness. The Borrower and its Subsidiaries shall not
contract, assume or suffer to exist any Indebtedness (including, without
limitation, any Guaranties), except:
(a) Indebtedness under the Credit Documents;
(b) unsecured intercompany loans and advances from the Borrower to any of
its Subsidiaries and unsecured intercompany loans and advances from any of such
Subsidiaries to the Borrower or any other Subsidiaries of the Borrower;
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(c) existing Indebtedness outstanding on the Effective Date hereof and
listed on Schedule 6.14, and any subsequent extensions, renewals or refinancings
thereof so long as such Indebtedness is not increased in amount, the maturity
date thereof is not made earlier in time, the interest rate per annum applicable
thereto is not increased, any amortization of principal thereunder is not
shortened and the payments thereunder are not increased;
(d) Capitalized Lease Obligations and purchase money Indebtedness on assets
acquired in an aggregate amount not to exceed $2,000,000 at any one time
outstanding; and
(e) unsecured Indebtedness to a seller incurred in connection with an
Acquisition, provided that such Indebtedness is subordinated in payment to the
Obligations hereunder, such Indebtedness contains covenants no more restrictive
than the covenants contained in this Agreement and standstill provisions
reasonably acceptable to the Agent and no payments may be made thereon if a
Default or Event of Default shall have occurred and be continuing or would occur
as a result of any such payment.
Section 6.15. Loans, Advances and Investments. The Borrower and its
Subsidiaries shall not lend money or make advances to any Person, or purchase or
acquire any stock, indebtedness, obligations or securities of, or any other
interest in, or make any capital contribution to, any Person (any of the
foregoing, an "Investment") other than:
(a) Investments in Cash Equivalents;
(b) receivables owing to the Borrower or its Subsidiaries created or
acquired in the ordinary course of business and payable on customary trade terms
of the Borrower or such Subsidiary and in compliance with the requirements of
Section 6.17;
(c) Investments received in connection with the bankruptcy or
reorganization of suppliers and customers and in settlement of delinquent
obligations of, and other disputes with, customers and suppliers arising in the
ordinary course of business;
(d) deposits made in the ordinary course of business consistent with past
practices to secure the performance of leases;
(e) as permitted by Section 6.14(b);
(f) loans to employees of the Borrower or any of its Subsidiaries, provided
that all such loans shall not exceed $100,000 at any one time; and
(g) advances to vendors in the ordinary course of business, provided that
no such advance to a vendor shall be in excess of $100,000 and such advances
shall not exceed $500,000 at any one time.
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Section 6.16. Transfer of Assets. The Borrower and its Subsidiaries shall
not permit any sale, transfer, conveyance, assignment or other disposition of
any material asset of the Borrower or any of its Subsidiaries except:
(a) transfers of inventory, equipment and other assets in the ordinary
course of business;
(b) the retirement or replacement of assets (with assets of equal or
greater value) in the ordinary course of business;
(c) transfers of any assets among the Borrower and any of its Subsidiaries;
and
(d) the transfer of any assets acquired in an Acquisition which are not
necessary for the operation of the business of the Borrower and its
Subsidiaries, provided that the net cash proceeds thereof are reinvested by the
Borrower and its Subsidiaries in the operation of a Permitted Business.
Section 6.17. Transactions with Affiliates. Except as otherwise
specifically permitted herein, the Borrower and its Subsidiaries shall not enter
into or be a party to any material transaction or arrangement or series of
related transactions or arrangements which in the aggregate would be material
with any Affiliate of such Person, including without limitation, the purchase
from, sale to or exchange of property with or the rendering of any service by or
for, any Affiliate, except pursuant to the reasonable requirements of such
entity's business and upon fair and reasonable terms.
Section 6.18. Compliance with Laws. The Borrower and its Subsidiaries
shall conduct their businesses and otherwise be in compliance in all material
respects with all applicable laws, regulations, ordinances and orders of all
governmental, judicial and arbitral authorities applicable to them and shall
obtain and maintain all necessary permits, licenses and other authorizations
necessary to conduct their businesses and own and operate their properties
except where the failure to comply or have such permits, licenses or other
authorizations could not reasonably be expected to have a Material Adverse
Effect.
Section 6.19. Credit Exposure. No more than ten percent (10%) of the
Borrower's Consolidated Net Worth shall be subject to credit risk from any
single customer (including any Affiliate of such customer) unless such accounts
receivable are supported by a letter of credit issued or confirmed by a
financial institution acceptable to the Agent.
Section 6.20. Minimum Consolidated Net Worth. The Borrower will maintain
a minimum Consolidated Net Worth of not less than an amount equal to the sum of
(i) $49,400,000, plus (ii) for each fiscal quarter ended prior to (but not on)
such date of determination, commencing with the fiscal quarter ended December
31, 1997 (which period shall include September 1, 1997 through December 31,
1997, as a result of the change in the Borrower's fiscal year), an amount equal
to 50% of Consolidated Net Income for such fiscal quarter, if positive, plus
(iii) for the fiscal quarter during which such date of determination falls, an
amount equal to 100% of the amount of any equity issuance by the Borrower,
including in a secondary offering or where equity is used to acquire another
entity in an Acquisition, plus (iv) for the fiscal quarter during which such
determination falls, an amount
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equal to 100% of the stockholders equity of any entity acquired in an
Acquisition for which the Borrower uses the pooling of interest method of
accounting in accordance with GAAP.
Section 6.21. Minimum Fixed Charge Coverage Ratio. The Borrower will
maintain a Fixed Charge Coverage Ratio of at least 1.25 to 1.0.
Section 6.22. Maximum Funded Debt to EBITDA Ratio. The Borrower will
maintain a maximum Funded Debt to EBITDA Ratio of not greater than 2.75 to 1.0.
Section 6.23. Minimum Tangible Assets to Total Liabilities Ratio. The
Borrower will maintain a minimum Tangible Assets to Total Liabilities Ratio of
not less than 1.0 to 1.0 through December 31, 1998, 1.2 to 1.0 through December
31, 1999, and 1.4 to 1.0 thereafter.
SECTION 7. EVENTS OF DEFAULT AND REMEDIES.
Section 7.1. Events of Default. Any one or more of the following shall
constitute an Event of Default:
(a) default by the Borrower in the payment of the principal amount of any
Loan, any Reimbursement Obligation or any interest thereon or any fees payable
hereunder within ten (10) days of the date such payment is due;
(b) default by the Borrower in the observance or performance of any
covenant set forth in Sections 6.6(e), 6.10(a), 6.11 or 6.16;
(c) default by the Borrower in the observance or performance of any
provision hereof or of any other Credit Document not mentioned in (a) or (b)
above (excluding any default of Section 6.21 solely as a result of distributions
or dividends made by the entity acquired in an Acquisition before the date of
such Acquisition), which is not remedied within thirty (30) days after the
earlier of (i) such default or event of default first becoming known to any
officer of the Borrower, or (ii) notice to the Borrower by the Agent of the
occurrence of such default or event of default;
(d) any representation or warranty or other written statement made or
deemed made herein, in any other Credit Document or in any financial or other
report or document furnished in compliance herewith or therewith by the Borrower
or any of its Subsidiaries proves untrue in any material respect as of the date
of the issuance or making, or deemed issuance or making thereof;
(e) default occurs in the payment when due (after any applicable grace
period) of Indebtedness in an aggregate principal amount of $250,000 or more of
the Borrower or any of its Subsidiaries, or the occurrence of any other default,
which with the passage of time or notice would permit the holder or beneficiary
of such Indebtedness, or a trustee therefor, to cause the acceleration of the
maturity of any such Indebtedness or any mandatory unscheduled prepayment,
purchase, or other early funding thereof;
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(f) the Borrower or any of its Subsidiaries (i) has entered involuntarily
against it an order for relief under the United States Bankruptcy Code or a
comparable action is taken under any bankruptcy or insolvency law of another
country or political subdivision of such country, (ii) generally does not pay,
or admits its inability generally to pay, its debts as they become due, (iii)
makes a general assignment for the benefit of creditors, (iv) applies for,
seeks, consents to, or acquiesces in, the appointment of a receiver, custodian,
trustee, examiner, liquidator or similar official for it or any substantial part
of its property, (v) institutes any proceeding seeking to have entered against
it an order for relief under the United States Bankruptcy Code or any comparable
law, to adjudicate it insolvent, or seeking dissolution, winding up,
liquidation, reorganization, arrangement, adjustment or composition of it or its
debts under any law relating to bankruptcy, insolvency or reorganization or
relief of debtors or fails to file an answer or other pleading denying the
material allegations of any such proceeding filed against it, (vi) makes any
board of directors resolution in direct furtherance of any matter described in
clauses (i)-(v) above, or (vii) fails to contest in good faith any appointment
or proceeding described in Section 7.1(f);
(g) a custodian, receiver, trustee, examiner, liquidator or similar
official is appointed for the Borrower or any of its Subsidiaries or any
substantial part of its property, or a proceeding described in Section 7.1(f)(v)
is instituted against the Borrower or any of its Subsidiaries, and such
appointment continues undischarged or such proceeding continues undismissed or
unstayed for a period of sixty (60) days;
(h) the Borrower or any of its Subsidiaries fails within thirty (30) days
(or such earlier date as any steps to execute on such judgment or order take
place) to pay, bond or otherwise discharge, or to obtain an indemnity against on
terms and conditions satisfactory to the Lenders in its sole discretion, any one
or more judgments or orders for the payment of money in excess of $250,000 in
the aggregate which is uninsured or underinsured by at least such amount
(provided that there is adequate assurance, in the sole discretion of the
Lenders, that the insurance proceeds attributable thereto shall be paid promptly
upon the expiration of such time period or resolution of such proceeding), which
is not stayed on appeal or otherwise being appropriately contested in good faith
in a manner that stays execution;
(i) the Borrower or any of its Subsidiaries fails to pay when due an amount
aggregating in excess of $250,000 that it is liable to pay to the PBGC or to a
Plan under Title IV of ERISA; or a notice of intent to terminate a Plan having
Unfunded Vested Liabilities of the Borrower or any of its Subsidiaries in excess
of $250,000 (a "Material Plan") is filed under Title IV of ERISA; or the PBGC
institutes proceedings under Title IV of ERISA to terminate or to cause a
trustee to be appointed to administer any Material Plan; or a proceeding is
instituted by a fiduciary of any Material Plan against the Borrower or any of
its Subsidiaries to collect any liability under Section 515 or 4219(c)(5) of
ERISA and such proceeding is not dismissed within thirty (30) days thereafter;
or a condition exists by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any Material Plan must be terminated;
(j) the Borrower, any Guarantor, any Person acting on behalf of the
Borrower or any Guarantor, or any governmental, judicial or arbitral authority
challenges the validity of any Credit Document or the Borrower's or any
Guarantor's obligations thereunder, or any Credit Document
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ceases to be in full force and effect in all material respects or ceases to give
to the Agent and the Lenders the rights and powers purported to be granted in
its favor thereby in all material respects; or
(k) any Person or two or more Persons acting in concert, other than the
Borrower's management and stockholders just prior to the completion of the
Borrower's initial public offering of its capital stock or any Affiliates
thereof, shall acquire beneficial ownership (within the meaning of Rule 13d-3 of
the Securities Exchange Act of 1934), directly or indirectly, of securities of
the Borrower (or other securities convertible into such securities) representing
fifty percent (50%) or more of the combined voting power of all outstanding
securities of the Borrower entitled to vote in the election of directors.
Section 7.2. Non-Bankruptcy Defaults. When any Event of Default other
than those described in subsections (f) or (g) of Section 7.1 has occurred and
is continuing, the Agent shall, by notice to the Borrower: (a) if so directed by
the Majority Lenders, terminate the remaining Commitments and all other
obligations of the Lenders hereunder on the date stated in such notice (which
may be the date thereof); (b) if so directed by the Majority Lenders, declare
the principal of and the accrued interest on all outstanding Notes to be
forthwith due and payable and thereupon all outstanding Notes, including both
principal and interest thereon, shall be and become immediately due and payable
together with all other amounts payable under the Credit Documents without
further demand, presentment, protest or notice of any kind, including, but not
limited to, notice of intent to accelerate and notice of acceleration, each of
which is expressly waived by the Borrower; and (c) if so directed by the
Majority Lenders, demand that the Borrower immediately pay to the Agent (to be
held by the Agent pursuant to Section 7.4) the full amount then available for
drawing under each or any outstanding Letter of Credit; and the Borrower agrees
to immediately make such payment and acknowledges and agrees that neither the
Agent nor the Lenders would have an adequate remedy at law for failure by the
Borrower to honor any such demand and that the Agent, for the benefit of the
Lenders shall have the right to require the Borrower to specifically perform
such undertaking whether or not any drawings or other demands for payment have
been made under any Letter of Credit. The Agent, after giving notice to the
Borrower pursuant to Section 7.1(c) or (d) or this Section 7.2, shall also
promptly send a copy of such notice to the other Lenders, but the failure to do
so shall not impair or annul the effect of such notice.
Section 7.3. Bankruptcy Defaults. When any Event of Default described in
subsections (f) or (g) of Section 7.1 has occurred and is continuing with
respect to the Borrower, then (i) all outstanding Notes shall immediately become
due and payable together with all other amounts payable under the Credit
Documents without presentment, demand, protest or notice of any kind, each of
which is expressly waived by the Borrower, (ii) all obligations of the Agent or
any Lender to extend further credit pursuant to any of the terms hereof shall
immediately terminate, and (iii) the Borrower shall immediately pay to the Agent
(to be held by the Agent pursuant to Section 7.4) the full amount then available
for drawing under all outstanding Letters of Credit, the Borrower acknowledging
and agreeing that neither the Agent nor the Lenders would have an adequate
remedy at law for failure by the Borrower to honor any such demand and that the
Agent and the Lenders shall have the right to require the Borrower to
specifically perform such undertaking whether or not any drawings or other
demands for payment have been made under any of the Letters of Credit.
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Section 7.4. Collateral for Undrawn Letters of Credit. (a) If the
prepayment of the amount available for drawing under any or all outstanding
Letters of Credit is required under Section 7.2 or 7.3, the Borrower shall
forthwith pay the amount required to be so prepaid, to be held by the Agent as
provided in subsection (b) below.
(b) All amounts prepaid pursuant to subsection (a) above shall be held by
the Agent in a separate collateral account (such account, and the credit
balances, properties and any investments from time to time held therein, and any
substitutions for such account, any certificate of deposit or other instrument
evidencing any of the foregoing and all proceeds of and earnings on any of the
foregoing being collectively called the "Collateral Account") as security for,
and for application by the Agent (to the extent available) to, the reimbursement
of any drawing under any Letter of Credit then or thereafter made by the Agent,
and to the payment of the unpaid balance of any Loans and all other due and
unpaid Obligations (collectively, the "Collateralized Obligations"). The
Collateral Account shall be held in the name of and subject to the exclusive
dominion and control of the Agent, for the benefit of the Lenders, as pledgee
hereunder. If and when requested by the Borrower, the Agent shall invest and
reinvest funds held in the Collateral Account from time to time in Cash
Equivalents specified from time to time by the Borrower, provided that the Agent
is irrevocably authorized to sell investments held in the Collateral Account
when and as required to make payments out of the Collateral Account for
application to Collateralized Obligations due and owing from the Borrower to the
Lenders. If such funds have been deposited pursuant to Section 7.2 or 7.3, when
and if (i) the Borrower shall have made payment of all Collateralized
Obligations then due and payable, (ii) all relevant preference or other
disgorgement periods relating to the receipt of such payments have passed, and
(iii) no Letters of Credit, Commitments, Loans, Reimbursement Obligations or
other Obligations remain outstanding hereunder, the Agent shall repay to the
Borrower any remaining amounts held in the Collateral Account.
Section 7.5. Notice of Default. The Agent shall give notice to the
Borrower under Section 7.1(c) and (d) and 7.2 promptly upon being requested to
do so by the Majority Lenders and shall thereupon notify all the Lenders
thereof.
Section 7.6. Application of Proceeds. After the occurrence of and during
the continuance of an Event of Default, any payment to the Agent hereunder or
from the proceeds of any cash collateral shall be applied as the Agent and the
Lenders shall elect in their sole discretion.
SECTION 8. CHANGE IN CIRCUMSTANCES.
Section 8.1. Change of Law. Notwithstanding any other provisions of this
Agreement or any Note, if at any time any change in applicable law or regulation
or in the interpretation thereof makes it unlawful for any Lender to make or
continue to maintain LIBOR Loans or to give effect to its obligations as
contemplated hereby, such Lender shall promptly give notice thereof to the
Borrower and such Lender's obligations to make, continue or convert Loans into
LIBOR Loans under this Agreement shall be suspended until it is no longer
unlawful for such Lender to make or maintain LIBOR Loans. The Borrower shall
prepay on demand the outstanding principal amount of any such affected LIBOR
Loans, together with all interest accrued thereon and all other amounts then due
and payable to such Lender under this Agreement; provided, however, subject to
all of the terms and
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conditions of this Agreement, the Borrower may then elect to borrow the
principal amount of the affected LIBOR Loans from such Lender by means of Base
Rate Loans from such Lender that shall not be made ratably by the Lenders but
only by such affected Lender.
Section 8.2. Unavailability of Deposits or Inability to Ascertain LIBOR
Rate. If on or before the first day of any Interest Period for any Borrowing of
LIBOR Loans the Agent determines (after consultation with other Lenders) that,
due to changes in circumstances since the date hereof, adequate and fair means
do not exist for determining the Adjusted LIBOR Rate or such rate will not
accurately reflect the cost to the Majority Lenders of funding LIBOR Loans for
such Interest Period, the Agent shall give notice of such determination to the
Borrower and the Lenders, whereupon until the Agent notifies the Borrower and
Lenders that the circumstances giving rise to such suspension no longer exist,
the obligations of the Lenders to make, continue or convert Loans into LIBOR
Loans shall be suspended.
Section 8.3. Increased Cost and Reduced Return. (a) If, on or after the
Effective Date, the adoption of or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Lender (or its
Lending Office), including the Agent in its capacity as the issuer of Letters of
Credit, with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency:
(i) subjects any Lender of that type (or its Lending Office) to any
tax, duty or other charge related to any LIBOR Loan, Letter of Credit or
Reimbursement Obligation, or its participation in any thereof, or its
obligation to advance or maintain LIBOR Loans, issue Letters of Credit or
to participate therein, or shall change the basis of taxation of payments
to any Lender (or its Lending Office) of the principal of or interest on
its LIBOR Loans, Letters of Credit or participations therein, or any other
amounts due under this Agreement related to its LIBOR Loans, Letters of
Credit, Reimbursement Obligations or participations therein, or its
obligation to make LIBOR Loans, issue Letters of Credit or acquire
participations therein (except for changes in the rate of tax on the
overall net income of such Lender or its Lending Office imposed by the
jurisdiction in which such Lender's principal executive office or Lending
Office is located); or
(ii) imposes, modifies or deems applicable any reserve, special
deposit or similar requirement (including, without limitation, any such
requirement imposed by the Board of Governors of the Federal Reserve
System) against assets of, deposits with or for the account of, or credit
extended by, any Lender of that type (or its Lending Office) or imposes on
any Lender of that type (or its Lending Office) or on the interbank market
any other condition affecting its LIBOR Loans, its Letters of Credit, any
Reimbursement Obligation owed to it or its participation in any thereof, or
its obligation to advance or maintain LIBOR Loans, issue Letters of Credit
or to participate in any thereof;
and the result of any of the foregoing is to increase the cost to such Lender
(or its Lending Office) of advancing or maintaining any LIBOR Loan, issuing or
maintaining a Letter of Credit or participation therein, or to reduce the amount
of any sum received or receivable by such Lender (or its Lending
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Office) in connection therewith under this Agreement or its Note(s), by an
amount deemed by such Lender to be material, then, within fifteen (15) days
after demand in reasonable detail by such Lender (with a copy to the Agent), the
Borrower shall be obligated to pay to such Lender such additional amount or
amounts as will compensate such Lender for such increased cost or reduction.
(b) If, after the Effective Date, the Agent or any Lender shall have
determined that the adoption after the Effective Date of any applicable law,
rule or regulation regarding capital adequacy, or any change therein (including,
without limitation, any revision in the Final Risk-Based Capital Guidelines of
the Board of Governors of the Federal Reserve System (12 CFR Part 208, Appendix
A; 12 CFR Part 225, Appendix A) or of the Office of the Comptroller of the
Currency (12 CFR Part 3, Appendix A), or in any other applicable capital
adequacy rules heretofore adopted and issued by any governmental authority), or
any change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Agent or any Lender (or its Lending
Office) with any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on such
Lender's capital, or on the capital of any corporation controlling such Lender,
as a consequence of its obligations hereunder to a level below that which such
Lender could have achieved but for such adoption, change or compliance (taking
into consideration such Lender's policies with respect to capital adequacy) by
an amount deemed by such Lender to be material, then from time to time, within
fifteen (15) days after demand in reasonable detail by such Lender (with a copy
to the Agent), the Borrower shall pay to such Lender such additional amount or
amounts as will compensate such Lender for such reduction.
(c) The Agent and each Lender that determines to seek compensation under
this Section 8.3 shall notify the Borrower and, in the case of a Lender other
than the Agent, the Agent of the circumstances that entitle the Agent or Lender
to such compensation and will designate a different Lending Office if such
designation will avoid the need for, or reduce the amount of, such compensation
and will not, in the sole judgment of such Lender, be otherwise disadvantageous
to it; provided that, the foregoing shall not in any way affect the rights of
any Lender or the obligations of the Borrower under this Section 8.3, and
provided further that no Lender shall be obligated to make its LIBOR Loans
hereunder at any office located in the United States. A certificate of any
Lender claiming compensation under this Section 8.3 and setting forth the
additional amount or amounts to be paid to it hereunder shall be conclusive in
the absence of manifest error. In determining such amount, such Lender may use
any reasonable averaging and attribution methods.
Section 8.4. Lending Offices. The Agent and each Lender may, at its
option, elect to make its Loans hereunder at the Lending Office for each type of
Loan available hereunder or at such other of its branches, offices or Affiliates
as it may from time to time elect and designate in a written notice to the
Borrower and the Agent subject to Section 8.3(c).
Section 8.5. Discretion of Lender as to Manner of Funding.
Notwithstanding any other provision of this Agreement, each Lender shall be
entitled to fund and maintain its funding of all or any part of its Loans in any
manner it sees fit, it being understood, however, that for the purposes of this
Agreement all determinations hereunder shall be made as if each Lender had
actually funded and
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maintained each LIBOR Loan through the purchase of deposits in the eurodollar
interbank market having a maturity corresponding to such Loan's Interest Period
and bearing an interest rate equal to LIBOR for such Interest Period.
SECTION 9. THE AGENT.
Section 9.1. Appointment and Authorization of Agent. Each Lender hereby
appoints Bank One as the Agent under the Credit Documents and hereby authorizes
the Agent to take such action as Agent on its behalf and to exercise such powers
under the Credit Documents as are delegated to the Agent by the terms thereof,
together with such powers as are reasonably incidental thereto.
Section 9.2. Rights and Powers. The Agent shall have the same rights and
powers under the Credit Documents as any other Lender and may exercise or
refrain from exercising such rights and power as though it were not the Agent,
and the Agent and its Affiliates may accept deposits from, lend money to, and
generally engage in any kind of business with the Borrower or any of its
Subsidiaries or Affiliates as if it were not the Agent under the Credit
Documents. The term Lender as used in all Credit Documents, unless the context
otherwise clearly requires, includes the Agent in its individual capacity as a
Lender, including its capacity as a Lender under the Agent Swing Line.
References herein to the Agent Loans, or to the amount owing to the Agent for
which an interest rate is being determined, refer to the Agent in its individual
capacity as a Lender.
Section 9.3. Action by Agent. The obligations of the Agent under the
Credit Documents are only those expressly set forth therein. Without limiting
the generality of the foregoing, the Agent shall not be required to take any
action concerning any Default or Event of Default, except as expressly provided
in Sections 7.2 and 7.5. Upon the occurrence of an Event of Default, the Agent
shall take such action to enforce its Lien on the Collateral and to preserve and
protect the Collateral as may be directed by the Majority Lenders. Unless and
until the Majority Lenders give such direction, the Agent may take or refrain
from taking such actions as it deems appropriate and in the best interest of all
the Lenders. In no event, however, shall the Agent be required to take any
action in violation of applicable law or of any provision of any Credit
Document, and the Agent shall in all cases be fully justified in failing or
refusing to act hereunder or under any other Credit Document unless it first
receives any further assurances of its indemnification from the Lenders that it
may require, including prepayment of any related expenses and any other
protection it requires against any and all costs, expenses, and liabilities it
may incur in taking or continuing to take any such action. The Agent shall be
entitled to assume that no Default or Event of Default exists unless notified in
writing to the contrary by a Lender or the Borrower. In all cases in which the
Credit Documents do not require the Agent to take specific action, as
applicable, the Agent shall be fully justified in using its discretion in
failing to take or in taking any action thereunder. Any instructions of the
Majority Lenders, or of any other group of Lenders called for under specific
provisions of the Credit Documents, shall be binding on all the Lenders and
holders of Notes.
Section 9.4. Consultation with Experts. The Agent may consult with legal
counsel, independent public accountants and other experts selected by it and
shall not be liable for any action taken or omitted to be taken by it in good
faith in accordance with the advice of such counsel, accountants or experts.
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Section 9.5. Indemnification Provisions. Neither the Agent nor any of
its directors, officers, agents, or employees shall be liable for any action
taken or not taken by it in connection with the Credit Documents (i) with the
consent or at the request of the Majority Lenders or all the Lenders where
unanimity is required or (ii) in the absence of its own gross negligence or
willful misconduct. Neither the Agent nor any of its directors, officers,
agents or employees shall be responsible for or have any duty to ascertain,
inquire into or verify (i) any statement, warranty or representation made in
connection with this Agreement, any other Credit Document or any Borrowing; (ii)
the performance or observance of any of the covenants or agreements of the
Borrower or any Subsidiary contained herein or in any other Credit Document;
(iii) the satisfaction of any condition specified in Section 4 hereof, except
receipt of items required to be delivered to the Agent; or (iv) the validity,
effectiveness, genuineness, enforceability, perfection, value, worth or
collectability hereof or of any other Credit Document or of the Liens provided
for by the Security Documents or of any other documents or writing furnished in
connection with any Credit Document or of the Collateral; and the Agent makes no
representation of any kind or character with respect to any such matters
mentioned in this sentence. The Agent may execute any of its duties under any of
the Credit Documents by or through employees, agents, and attorneys-in-fact and
shall not be answerable to the Lenders or any other Person for the default or
misconduct of any such agents or attorneys-in-fact selected with reasonable
care. The Agent shall not incur any liability by acting in reliance upon any
notice, consent, certificate, other document or statement (whether written or
oral) believed by it to be genuine or to be sent by the proper party or parties.
In particular and without limiting any of the foregoing, the Agent shall have no
responsibility for confirming the existence or worth of any Collateral or the
accuracy of any Compliance Certificate or other document or instrument received
by it under the Credit Documents. The Agent may treat the payee of any Note as
the holder thereof until written notice of transfer shall have been filed with
the Agent signed by such owner in form satisfactory to the Agent. Each Lender
acknowledges that it has independently and without reliance on the Agent or any
other Lender obtained such information and made such investigations and
inquiries regarding the Borrower and its Subsidiaries as it deems important, and
based upon such information, investigations and inquiries made its own credit
analysis and decision to extend credit to the Borrower in the manner set forth
in the Credit Documents. It shall be the responsibility of each Lender to keep
itself informed about the creditworthiness and business properties, assets,
liabilities, condition (financial or otherwise) and prospects of the Borrower
and its Subsidiaries, the creditworthiness of all account debtors of the
Borrower and its Subsidiaries, and the Agent shall have no liability whatsoever
to any Lender for such matters. The Agent shall have no duty to disclose to the
Lenders information that is not required by any Credit Document to be furnished
by the Borrower or any Subsidiaries to the Agent at such time, but is
voluntarily furnished to the Agent (either in its capacity as Agent or in its
individual capacity).
Section 9.6. Indemnity. The Lenders shall ratably, in accordance with
their Percentages, indemnify and hold the Agent, and its directors, officers,
employees, agents and representatives harmless from and against any liabilities,
losses, costs or expenses suffered or incurred by it or by any security trustee
under any Credit Document or in connection with the transactions contemplated
thereby, regardless of when asserted or arising, except to the extent they are
promptly reimbursed for the same by the Borrower or out of the proceeds of the
Collateral and except to the extent that any event giving rise to a claim was
caused by the gross negligence or willful misconduct of the party seeking to be
indemnified. The obligations of the Lenders under this Section 9.6 shall
survive termination of this Agreement.
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Section 9.7. Resignation of Agent and Successor Agent. The Agent may
resign at any time upon at least thirty (30) days' prior written notice to the
Lenders and the Borrower. Upon any such resignation of the Agent, the Majority
Lenders, with the consent of the Borrower (which consent shall not be
unreasonably withheld) shall have the right to appoint a successor Agent. If no
successor Agent, shall have been so appointed by the Majority Lenders and shall
have accepted such appointment within thirty (30) days after the retiring
Agent's giving of notice of resignation, then the retiring Agent, may, on behalf
of the Lenders, appoint a successor Agent, as the case may be, which shall be
any Lender hereunder or any commercial bank organized under the laws of the
United States of America or of any State thereof and having a combined capital
and surplus of at least $500,000,000. Upon the acceptance of its appointment as
the Agent hereunder, such successor Agent, as the case may be, shall thereupon
succeed to and become vested with all the rights and duties of the retiring
Agent, under the Credit Documents, and the retiring Agent, shall be discharged
from its duties and obligations thereunder. After any retiring Agent's
resignation hereunder as Agent, the provisions of this Section 9 and all
protective provisions of the other Credit Documents shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Agent.
SECTION 10. MISCELLANEOUS.
Section 10.1. No Waiver of Rights. No delay or failure on the part of the
Agent or any of the Lenders, or on the part of the holder or holders of the
Notes, in the exercise of any power, right or remedy under any Credit Document
shall operate as a waiver thereof or as an acquiescence in any default, nor
shall any single or partial exercise thereof preclude any other or further
exercise of any other power, right or remedy. To the fullest extent permitted
by applicable law, the powers, rights and remedies under the Credit Documents of
the Lenders and the holder or holders of the Notes are cumulative to, and not
exclusive of, any rights or remedies any of them would otherwise have.
Section 10.2. Non-Business Day. If any payment of principal or interest
on any Loan, Reimbursement Obligation or of any other Obligation or Agent
Obligation shall fall due on a day which is not a Business Day, interest or fees
(as applicable) at the rate, if any, for such Loan, such Reimbursement
Obligation or such other Obligation or Agent Obligation bears for the period
prior to maturity shall continue to accrue in the manner set forth herein on
such Obligation from the stated due date thereof to and including the next
succeeding Business Day on which the same shall be payable.
Section 10.3. Documentary Taxes. The Borrower agrees that it will pay any
documentary, stamp or similar taxes payable with respect to any Credit Document,
including interest and penalties, in the event any such taxes are assessed
irrespective of when such assessment is made and regardless whether any credit
is then in use or available hereunder.
Section 10.4. Survival of Representations. All representations and
warranties made herein or in certificates given pursuant hereto shall survive
the execution and delivery of this Agreement and the other Credit Documents, and
shall continue in full force and effect with respect to the date as of which
they were made as long as the Borrower has any Obligation hereunder or any
Commitment hereunder is in effect.
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Section 10.5. Survival of Indemnities. All indemnities and all other
provisions relative to reimbursement to the Agent and the Lenders of amounts
sufficient to protect the yield of the Lenders or the Agent with respect to the
Loans or the Agent Loans, as applicable, shall survive the termination of this
Agreement and the other Credit Documents and the payment of the Loans and all
other Obligations or Agent Obligations, as applicable, for a period of one (1)
year.
Section 10.6. Setoff. In addition to any rights now or hereafter granted
under applicable law and not by way of limitation of any such rights, upon the
occurrence of, and throughout the continuance of, any Default or Event of
Default, the Agent and each of the Lenders and each subsequent holder of any of
the Notes is hereby authorized by the Borrower at any time or from time to time,
without notice to the Borrower, to any Subsidiary of the Borrower or to any
other Person, any such notice being hereby expressly waived, to set off and to
appropriate and to apply any and all deposits (general or special, including,
but not limited to, Indebtedness evidenced by certificates of deposit, whether
matured or unmatured, but not including trust accounts, and in whatever currency
denominated) and any other Indebtedness at any time held or owing by the Agent
or the Lenders or that subsequent holder to or for the credit or the account of
the Borrower, whether or not matured, against and on account of the obligations
and liabilities of the Borrower to the Agent or the Lenders or that subsequent
holder under the Credit Documents, including, but not limited to, all claims of
any nature or description arising out of or connected with the Credit Documents,
irrespective of whether or not (i) the Agent or any of the Lenders or that
subsequent holder shall have made any demand hereunder or (ii) the principal of
or the interest on the Loans, the Notes and other amounts due hereunder shall
have become due and payable hereunder and although said obligations and
liabilities, or any of them, may be contingent or unmatured. The Agent and the
Lenders agree, if there shall be any other Lenders pursuant to Section 10.10(b),
that if a Lender receives and retains any payment, whether by setoff or
application of deposit balances or otherwise, on any of the Loans or L/C
Obligations in excess of its ratable share of payments on all such Obligations
then owed to the Lenders hereunder, then such Lender shall purchase for cash at
face value, but without recourse, ratably from each of the other Lenders such
amount of the Loans or L/C Obligations, or participations therein, held by such
Lender (or interest therein) as shall be necessary to cause such Lender to share
such excess payment ratably with all the other Lenders; provided, however, that
if any such purchase is made by any Lender, and if such excess payment or part
thereof is thereafter recovered from such purchasing Lender, the related
purchases from the other Lenders shall be rescinded ratably and the purchase
price restored as to the portion of such excess payment so recovered, with
interest pro rata, to the extent the purchasing Lender is required to pay
interest on the amount restored.
Section 10.7. Notices. Except as otherwise specified herein, all notices
under the Credit Documents shall be in writing (including cable, telecopy or
telex) and shall be given to a party hereunder at its address, telecopier number
or telex numbers set forth below or such other address, telecopier number or
telex as such party may hereafter specify by notice to the Lenders or the
Borrower, as applicable, given by courier, by United States certified or
registered mail, by telegram or by other telecommunication device capable of
creating a written record of such notice and its receipt. Notices under the
Credit Documents shall be addressed to the Agent and the Lenders as set forth on
the signature pages hereto and to the Borrower as follows:
PalEx, Inc.
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240 East Main Street
Bartow, Florida 33830
Attention: Mr. Casey A. Fletcher
Telephone: (941) 533-1147
Fax No.: (941) 519-9259
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with a copy to
PalEx, Inc.
1360 Post Oak Blvd., Suite 800
Houston, Texas 77056
Attention: Mr. Edward Rhyne
Telephone: (713) 350-6036
Fax No.: (713) 350-6031
Each such notice, request or other communication shall be effective (i) if
given by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section 10.7 and a confirmation of receipt of such telecopy
has been received by the sender, (ii) if given by telex, when such telex is
transmitted to the telex number specified in this Section 10.7 and the answer
back is received by sender, (iii) if given by courier, when delivered, (iv) if
given by mail, five (5) days after such communication is deposited in the mail,
registered with return receipt requested, addressed as aforesaid or (v) if given
by any other means, when delivered at the addresses specified in this Section
10.7; provided that any notice given pursuant to Section 2 shall be effective
only upon receipt and, provided further, that any notice that but for this
provision would be effective after the close of business on a Business Day or on
a day that is not a Business Day shall be effective at the opening of business
on the next Business Day.
Section 10.8. Counterparts. This Agreement may be executed in any number
of counterparts, and by the different parties on different counterpart signature
pages, each of which when executed shall be deemed an original but all such
counterparts taken together shall constitute one and the same Agreement.
Section 10.9. Successors and Assigns. This Agreement shall be binding
upon the Borrower, the Agent and the Lenders and their respective successors and
assigns, and shall inure to the benefit of the Borrower, the Agent and the
Lenders and their respective successors and assigns, including any subsequent
holder of the Notes. The Borrower may not assign any of its rights or
obligations under any Credit Document without the consent of the Agent and all
of the Lenders.
Section 10.10. Sales and Transfers of Borrowings and Notes; Participations
in Borrowings and Notes.
(a) Any Lender may at any time sell to one or more banks ("Participants"),
participating interests in any Borrowing owing to such Lender, any Note held by
such Lender, any Commitment of such Lender or any other interest of such Lender
hereunder, provided that no Lender may sell any participating interests in any
such Borrowing, Note, Commitment or other interest hereunder without also
selling to such Participant the appropriate pro rata share of its Borrowings,
Notes, Commitments and other interests hereunder, and provided further that no
Lender shall transfer, grant or assign any participation under which the
Participant shall have rights to vote upon or consent to any matter to be
decided by the Lender or the Majority Lenders hereunder or under any Credit
Document or approve any amendment to or waiver of this Agreement or any other
Credit Document except to the extent such amendment or waiver would (i) increase
the amount of such Lender's Commitment and such increase
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would affect such Participant, (ii) reduce the principal of, or interest on, any
of such Lender's Borrowings, or any fees or other amounts payable to such Lender
hereunder and such reduction would affect such Participant, (iii) postpone any
date fixed for any scheduled payment of principal of, or interest on, any of
such Lender's Borrowings, or any fees or other amounts payable to such Lender
hereunder, or (iv) release any Collateral for any Obligation (including, without
limitation, any Subsidiary Guaranty or any Stock Pledge Agreement), except as
otherwise specifically provided in any Credit Document. In the event of any such
sale by a Lender of participating interests to a Participant, such Lender's
obligations under this Agreement to the other parties to this Agreement shall
remain unchanged, such Lender shall remain solely responsible for the
performance thereof, such Lender shall remain the holder of any such Note for
all purposes under this Agreement and the Borrower and the Agent shall continue
to deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement. The Borrower agrees that if amounts
outstanding under this Agreement and the Notes are due and unpaid, or shall have
been declared or shall have become due and payable upon the occurrence of an
Event of Default, each Participant shall be deemed to have the right of setoff
in respect of its participating interest in amounts owing under this Agreement
and any Note to the same extent as if the amount of its participating interest
were owing directly to it as a Lender under this Agreement or any Note, provided
that such right of setoff shall be subject to the obligation of such Participant
to share with the Lenders, and the Lenders agree to share with such Participant,
as provided in Section 10.6. The Borrower also agrees that each Participant
shall be entitled to the benefits of Sections 2.12 and 8.3 with respect to its
participation in the Commitments and the Borrowings outstanding from time to
time, provided that no Participant shall be entitled to receive any greater
amount pursuant to such Sections than the transferor Lender would have been
entitled to receive in respect of the amount of the participation transferred.
(b) Any Lender may at any time sell to any Lender or any Affiliate
thereof, and, with the consent of the Agent and the Borrower (which shall not be
unreasonably withheld or delayed), to one or more banks or other financial
institutions (a "Purchasing Lender"), all or any part of its rights and
obligations under this Agreement and the Notes, pursuant to an Assignment
Agreement in the form attached as Exhibit 10.10 hereto, executed by such
Purchasing Lender and such transferor Lender (and, in the case of a Purchasing
Lender which is not then a Lender or an Affiliate thereof, by the Borrower and
the Agent) and delivered to the Agent; provided that, each such sale to a
Purchasing Lender shall be in an amount of $5,000,000 or more, or if in a lesser
amount, such sale shall be of all of the Lender's rights and obligations under
this Agreement and all of the Notes payable to it to one eligible assignee.
Notwithstanding the above, any Lender may sell to one or more eligible assignees
all or any part of their rights and obligations under this Agreement and the
Notes with only the consent of the Agent (which shall not be unreasonably
withheld) if an Event of Default shall have occurred and be continuing. No
Lender may sell any Loans to a Purchasing Lender without also selling to such
Purchasing Lender the appropriate pro rata share of its Borrowings, Notes,
Commitments and other interests hereunder, including participations in Letters
of Credit hereunder; provided that, the Agent shall not be required to sell its
Agent Loans at such time as it may sell any other portion of its Borrowings,
Notes, Commitments and other interests hereunder. Upon such execution, delivery,
acceptance and recording, from and after the effective date of the transfer
determined pursuant to such Assignment Agreement (x) the Purchasing Lender
thereunder shall be a party hereto and, to the extent provided
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<PAGE>
in such Assignment Agreement, have the rights and obligations of a Lender
hereunder with a Commitment as set forth therein and (y) the transferor Lender
thereunder shall, to the extent provided in such Assignment Agreement, be
released from its obligations under this Agreement (and, in the case of an
Assignment Agreement covering all or the remaining portion of a transferor
Lender's rights and obligations under this Agreement, such transferor Lender
shall cease to be a party hereto). Such Assignment Agreement shall be deemed to
amend this Agreement to the extent, and only to the extent, necessary to reflect
the addition of such Purchasing Lender and the resulting adjustment of
Commitments and Percentages arising from the purchase by such Purchasing Lender
of all or a portion of the rights and obligations of such transferor Lender
under this Agreement, the Notes and the other Credit Documents. On or prior to
the effective date of the transfer determined pursuant to such Assignment
Agreement, the Borrower, at its own expense, shall execute and deliver to the
Agent in exchange for any surrendered Notes, new Notes as appropriate to the
order of such Purchasing Lender in an amount equal to the Commitments assumed by
it pursuant to such Assignment Agreement, and, if the transferor Lender has
retained a Commitment or Borrowing hereunder, new Notes to the order of the
transferor Lender in an amount equal to the Commitments or Borrowings retained
by it hereunder. Such new Notes shall be dated the Initial Borrowing Date and
shall otherwise be in the form of the Notes replaced thereby. The Notes
surrendered by the transferor Lender shall be returned by the Agent to the
Borrower marked "cancelled."
(c) Upon its receipt of an Assignment Agreement executed by a transferor
Lender, a Purchasing Lender and the Agent (and, in the case of a Purchasing
Lender that is not then a Lender or an Affiliate thereof, by the Borrower),
together with payment to the Agent hereunder of a registration and processing
fee of $3,500 (unless the transfer is from a Lender to an Affiliate of such
Lender), the Agent shall (i) promptly accept such Assignment Agreement, and (ii)
on the effective date of the transfer determined pursuant thereto give notice of
such acceptance and recordation to the Lenders and the Borrower.
(d) The provisions of the foregoing clauses (b) and (c) shall not apply to
or restrict, or require the consent of or any notice to any Person to
effectuate, the pledge or assignment by any Lender of its rights under this
Agreement and its Notes to any Federal Reserve Bank.
(e) If, pursuant to this Section 10.10 any interest in this Agreement or
any Note is transferred to any transferee which is organized under the laws of
any jurisdiction other than the United States of America or any State thereof,
the transferor Lender shall cause such transferee, concurrently with the
effectiveness of such transfer, (i) to represent to the transferor Lender (for
the benefit of the transferor Lender, the Agent and the Borrower) that under
applicable law and treaties no taxes will be required to be withheld by the
Agent, the Borrower or the transferor Lender with respect to any payments to be
made to such transferee in respect of the Loans or the L/C Obligations, (ii) to
furnish to the transferor Lender (and, in the case of any Purchasing Lender, the
Agent and the Borrower) either U.S. Internal Revenue Service Form 4224 or U.S.
Internal Revenue Service Form 1001 or such successor forms as shall be adopted
from time to time by the relevant United States taxing authorities (wherein such
transferee claims entitlement to complete exemption from U.S. federal
withholding tax on all interest payments hereunder), and (iii) to agree (for the
benefit of the transferor Lender, the Agent and the Borrower) to provide the
transferor Lender (and, in the case of any Purchasing Lender, the Agent and the
Borrower) a new Form 4224 or Form 1001 upon the expiration or obsolescence of
any previously delivered form and comparable statements in accordance with
applicable U.S. laws and
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regulations and amendments dully executed and completed by such transferee, and
to comply from time to time with all applicable U.S. laws and regulations with
regard to such withholding tax exemption.
Section 10.11. Amendments. Any provision of the Credit Documents may be
amended or waived if, but only if, such amendment or waiver is in writing and is
signed by (a) the Borrower, (b) the Majority Lenders (in the case of a consent
or waiver, the Borrower may rely on the consent or waiver of the Agent on behalf
of the Majority Lenders, the Agent agreeing to obtain the necessary consents or
waivers from the Majority Lenders before providing such consent or waiver), and
(c) if the rights or duties of the Agent are affected thereby, the Agent;
provided that:
(i) no amendment or waiver shall (A) increase the Commitment Amount without
the consent of all Lenders or increase any Commitment of any Lender without the
consent of such Lender, (B) postpone the Maturity Date without the consent of
all Lenders (and the Agent in the case of Agent Loans) or reduce the amount of
or postpone the date for any scheduled payment of any principal of or interest
on any Loan, Reimbursement Obligation or of any fee or any other amounts payable
hereunder without the consent of each Lender owed such Obligation or (C) release
any Collateral or any Subsidiary Guaranty without the consent of all the Lenders
and the Agent; and
(ii) no amendment or waiver shall, unless signed by each Lender, change the
provisions of this Section 10.11 or the definition of Majority Lenders or affect
the number of Lenders required to take any action under any other provision of
the Credit Documents.
Section 10.12. Headings. Section headings used in this Agreement are
for reference only and shall not affect the construction of this Agreement.
Section 10.13. Legal Fees, Other Costs and Indemnification. Subject
to the limitations set forth in Section 4.1(a)(v), the Borrower, upon demand by
the Agent or any of the Lenders, agrees to pay the reasonable fees and
disbursements of legal counsel to Agent or any Lender in connection with the
preparation and execution of the Credit Documents, any amendment, waiver or
consent related thereto, whether or not the transactions contemplated therein
are consummated, any Default or Event of Default by the Borrower hereunder and
any enforcement (including, without limitation, all workout and bankruptcy
proceedings) of any of the Credit Documents or collection of any Obligations;
provided that the Borrower shall only have to pay the reasonable fees and
disbursements of one law firm in connection therewith unless the Agent, any
Lender or their counsel is of the reasonable opinion that representation by one
law firm would not be feasible or that a conflict of interest would exist. The
Borrower further agrees to indemnify the Agent and each Lender and its
respective directors, officers, shareholders, employees and attorneys
(collectively, the "Indemnified Parties"), against all losses, claims, damages,
penalties, judgments, liabilities and expenses (including, without limitation,
all reasonable attorneys' fees and other reasonable expenses of litigation or
preparation therefor, whether or not the Indemnified Party is a party thereto)
which any of them may pay or incur arising out of or relating to (a) any Credit
Document, the Loans, the Letters of Credit or the application or proposed
application by the Borrower of the proceeds of any Loan, REGARDLESS OF WHETHER
SUCH CLAIMS OR ACTIONS ARE FOUNDED IN WHOLE OR IN PART UPON THE ALLEGED SIMPLE
OR CONTRIBUTORY NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES AND/OR ANY OF THEIR
RESPECTIVE DIRECTORS, OFFICERS, SHAREHOLDERS,
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EMPLOYEES OR ATTORNEYS, (b) any investigation of any third party or any
governmental authority involving the Agent or any Lender and related to any use
made or proposed to be made by the Borrower of the proceeds of the Borrowings,
or any transaction financed or to be financed in whole or in part, directly or
indirectly with the proceeds of any Borrowing, and (c) any investigation of any
third party or any governmental authority, litigation or proceeding, related to
any environmental cleanup, audit, compliance or other matter relating to any
Environmental Law or the presence of any Hazardous Material (including, without
limitation, any losses, liabilities, damages, injuries, costs, expenses or
claims asserted or arising under any Environmental Law) with respect to the
Borrower or any of its Subsidiaries, regardless of whether caused by, or within
the control of, the Borrower or any of its Subsidiaries; provided, however, that
the Borrower shall not be obligated to indemnify any Indemnified Party for any
of the foregoing arising out of (i) such Indemnified Party's gross negligence or
willful misconduct, (ii) the Agent's failure to pay under any Letter of Credit
after the presentation to it of a request required to be paid under applicable
law, or (iii) the Agent's or any Lender's breach of any material provision of
any Credit Document. The Borrower, upon demand by the Indemnified Party at any
time, shall reimburse the Indemnified Party for any legal or other expenses
incurred in connection with investigating or defending against any of the
foregoing except if the same is excluded from indemnification pursuant to the
provisions of the foregoing sentence.
Section 10.14. Governing Law; Submission to Jurisdiction; Waiver of
Jury Trial.
(A) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS, AND THE RIGHTS AND
DUTIES OF THE PARTIES THERETO, SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS.
(B) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HERETO
AGREE THAT ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH, THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF
THE LENDERS OR THE BORROWER MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF THE
STATE OF TEXAS SITTING IN HARRIS COUNTY OR THE UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF TEXAS. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION
OF THE COURTS OF THE STATE OF TEXAS AND THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF TEXAS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH
ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN
CONNECTION WITH SUCH LITIGATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS, BY
REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE
STATE OF TEXAS. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER
HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY HAVE OR
HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY
SUCH COURT
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REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE
ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER
THROUGH SERVICE OF NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF
EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER
HEREBY IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER
CREDIT DOCUMENTS.
(C) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO
WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR
DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION HEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN
CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING
SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
Section 10.15. Confidentiality. The Agent and each Lender agrees it
will not disclose without the Borrower's consent (other than to its employees,
auditors, counsel or other professional advisors or to its Affiliates) any
information concerning the Borrower or any of its Subsidiaries furnished
pursuant to any of the Credit Documents; provided that the Agent and any Lender
may disclose any such information (i) that has become generally available to the
public other than through the Agent or the Lenders or that was previously known
to the Agent or such Lender or comes from a source other than the Borrower or
any of its Subsidiaries, (ii) if required or appropriate in any examination or
audit or any report, statement or testimony submitted to any federal or state
regulatory body having or claiming to have jurisdiction over the Agent or such
Lender, (iii) if required or appropriate in response to any summons or subpoena
or in connection with any litigation, (iv) in order to comply with any law,
order, regulation or ruling applicable to Agent or such Lender, (v) to any
prospective or actual permitted transferee in connection with any contemplated
or actual permitted transfer of any interest in the Note by such Lender, and
(vi) in connection with the exercise of any remedies by the Agent or any Lender;
provided that such actual or prospective transferee executes an agreement with
the applicable Lender containing provisions substantially identical to those
contained in this Section 10.15 prior to such transferee's receipt of any such
information.
Section 10.16. Severability. Any provision of this Agreement that
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
Section 10.17. Change in Accounting Principles or Tax Laws. If (i)
any change in accounting principles from those used in the preparation of the
financial statements of the Borrower referred to in Section 5.9 is hereafter
occasioned by the promulgation of rules, regulations,
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pronouncements and opinions by or required by the Financial Accounting Standards
Board or the American Institute of Certified Public Accounts (or successors
thereto or agencies with similar functions) and such change materially affects
the calculation of any component of any financial covenant, standard or term
found in this Agreement, or (ii) there is a material change in federal or
foreign tax laws which materially affects the Borrower's ability to comply with
the financial covenants, standards or terms found in this Agreement, the
Borrower, the Agent and the Lenders agree to enter into negotiations in order to
amend such provisions so as to equitably reflect such changes with the desired
result that the criteria for evaluating the Borrower's and its Subsidiaries'
consolidated financial condition shall be the same after such changes as if such
changes had not been made. Unless and until such provisions have been so
amended, the provisions of this Agreement shall govern.
Section 10.18. Effectiveness. This Agreement shall become effective on
the date (the "Effective Date") on which the Borrower, the Agent and each Lender
has signed and delivered to the Agent a counterparty signature page hereto or,
in the case of a Lender, the Agent has received telex or facsimile notice that
such a counterpart has been signed and mailed to the Agent.
Section 10.19. Notice. The Credit Documents constitute the entire
understanding among the Borrower, the Agent and the Lenders and supersede all
earlier or contemporaneous agreements, whether written or oral, concerning the
subject matter of the Credit Documents. THIS WRITTEN AGREEMENT TOGETHER WITH
THE OTHER CREDIT DOCUMENTS REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their duly authorized officers as of the day and
year first above written.
BORROWER:
PALEX, INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
RIDGE PALLETS, INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
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LENDERS:
-------
Percentage of Commitment: 28.00% BANK ONE, TEXAS, NA, as Administrative Agent
and as a Lender
By:_____________________________________
Name:___________________________________
Title:__________________________________
Address for Notices:
- -------------------
Bank One, Texas, NA
P.O. Box 2629
Houston, TX 77252-2629
Attention: John Elam
Telephone No.: (713) 751-3806
Fax No.: (713) 751-6199
Telex No.: 6734165
Answerback: BONE DAL
Payment Instructions:
- --------------------
Name of Credit Bank: Bank One, Texas, NA
City, State: Houston, Texas
Method of Payment: ABA #111000614
For Credit To: Bank One, Texas, NA
Account No.: 0749905618
Reference: PalEx, Inc.
Attention: Cheryl Darbonne
Lending Office:
- --------------
Bank One, Texas, NA
910 Travis
Houston, TX 77002
Attention: John Elam
Telephone No.: (713) 751-3806
Fax No.: (713) 751-6199
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Percentage of Commitment: 20.00% NATIONAL CITY BANK OF COLUMBUS, as Lender
By:______________________________________
Name: Michael J. Durbin
Title: Assistant Vice President
Address for Notices:
- -------------------
National City Bank
155 E. Broad Street
Columbus, Ohio 43251-0034
Attention: Michael Durbin
Telephone No.: (614) 463-8844
Fax No.: (614) 463-8572
Payment Instructions:
- --------------------
Name of Credit Bank: National City Bank of Columbus
City, State: Columbus, Ohio
Method of Payment: ABA #041000124
For Credit To: National City Bank of Columbus
Account No.: 151804
Reference: PalEx, Inc.
Attention: Debbie Smithers (614) 463-7227
Lending Office:
- --------------
National City Bank
155 E. Broad Street
Columbus, Ohio 43251-0034
Telephone No.: (614) 463-8844
Fax No.: (614) 463-8572
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Percentage of Commitment: 20.00% WELLS FARGO BANK, as Lender
By:_______________________________
Name: Matt Jurgens
Title: Assistant Vice President
Address for Notices:
- -------------------
Wells Fargo Bank
Santa Clara Valley Region
121 Park Center Plaza, 3rd. Fl.
P.O. Box 720010
San Jose, CA 95172
Attention: Matt Jurgens
Telephone No.: (408) 277-6709
Fax No.: (408) 295-0639
Telex No.: __________________
Answerback: _________________
Payment Instructions:
- --------------------
Name of Credit Bank: Wells Fargo Bank
City, State: San Jose, California
Method of Payment: ABA #121000248
For Credit To: Wells Fargo Bank
Account No.: 2712507201
Reference: PalEx, Inc., Obligor #_______, Note #_______
Lending Office:
- --------------
Wells Fargo Bank
Santa Clara Valley Region
121 Park Center Plaza, 3rd. Fl.
P.O. Box 720010
San Jose, CA 95172
Attention: Matt Jurgens
Telephone No.: (408) 277-6709
Fax No.: (408) 295-0639
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Percentage of Commitment: 12.00% COMERICA BANK, as Lender
By:_____________________________________
Name: Kim A. Uhlemann
Title: Vice President
Address for Notices:
- -------------------
4100 Spring Valley Rd., Suite 900
Dallas, TX 75244
Attention: Kim A. Uhlemann
Telephone No.: (214) 818-2545
Fax No.: (214) 818-2550
Telex No.: N/A
Answerback: N/A
Payment Instructions:
- --------------------
Name of Credit Bank: Comerica Bank
City, State:
Method of Payment: ABA #072000096
For Credit To: Commercial Loan Servicing
Account No.: 21585-90010
Reference: PalEx, Inc.
Lending Office:
- --------------
Comerica Bank
P.O. Box 75000
Detroit, MI 48275-5130
Telephone No.: (702) 791-4804
Fax No.: (702) 791-2371
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Percentage of Commitment: 12.00% BANQUE PARIBAS, as Lender
By:_________________________________
Name:_______________________________
Title:______________________________
Address for Notices:
- -------------------
Banque Paribas
1200 Smith St., Suite 3100
Houston, Texas 77002
Attention: Scott Clingan
Telephone No.: (713) 659-4811
Fax No.: (713) 659-5234
Telex No.: 166514 or 166343
Answerback: PARIBAS HOU E
with copies to:
Banque Paribas - New York
787 Seventh Avenue
New York, NY 10019
Attn: Tim Deason - Legal Dept.
Telephone No.: (212) 841-2063
Fax No.: (212) 841-2599
Payment Instructions:
- --------------------
Name of Credit Bank: Bankers Trust Company
City, State: New York, NY
Method of Payment: ABA #021001033
For Credit To: For Account 04202195 - Banque Paribas New York
Account No.: For Further Credit to A/C #2144-001545 Banque Paribas
Houston Agency
Reference: PalEx, Inc.
Attention: Leah Evans-Hughes
Lending Office:
- --------------
Banque Paribas
1200 Smith St., Suite 3100
Houston, Texas 77002
Telephone No.: (713) 659-4811
Fax No.: (713) 659-5305
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<PAGE>
Percentage of Commitment: 8.00% THE SUMITOMO BANK, LIMITED, as Lender
By:_______________________________
Name:_____________________________
Title:____________________________
By:_______________________________
Name:_____________________________
Title:____________________________
Address for Notices:
The Sumitomo Bank, Ltd.
Houston Center Office
909 Fannin, Suite 3750
Houston, TX 77010-1086
Attention: Bruce Portillo
Telephone No.: (713) 759-0770
Payment Instructions:
- --------------------
Name of Credit Bank: The Sumitomo Bank, Limited
City, State: Chicago, IL
Method of Payment: ABA #071001850
For Credit To: The Sumitomo Bank, Limited
Reference: PalEx, Inc.
Lending Office:
- --------------
The Sumitomo Bank, Ltd.
233 S. Wacker Drive, Suite 5400
Chicago, IL 60606
Telephone No.: (312) 876-1995
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EXHIBIT 10.19
GUARANTY
THIS GUARANTY (this "Guaranty") dated as of January 29, 1998, is from
____________________________, a ___________ corporation (the "Guarantor"), to
the Lenders referred to hereinafter and Bank One, Texas, NA, as Agent for the
Lenders (in such capacity the "Agent").
W I T N E S S E T H:
A. PalEx, Inc. (the "Borrower"), a Delaware corporation, the various
financial institutions (collectively, the "Lenders") as are or may from time to
time become parties thereto and the Agent have entered into that certain Secured
Credit Agreement dated as of January 29, 1998 (herein, as the same may be
amended, modified, supplemented, extended, rearranged, and/or restated from time
to time, called the "Credit Agreement"), pursuant to which, upon the terms and
conditions therein set forth, (a) the Lenders have agreed to make Revolving
Loans to the Borrower, which Revolving Loans are evidenced by Notes of the
Borrower dated January 29, 1998, in the aggregate original principal amount of
$125,000,000, payable the order of the Lenders, respectively, and the Agent may,
in its sole discretion make Agent Loans to the Borrower, in a principal amount
of up to $5,000,000 pursuant to its Note, (herein, as amended, extended,
modified, rearranged and/or supplemented, from time to time together with any
promissory notes given in extension, replacement, rearrangement, modification
and/or substitution thereof or therefor, collectively called the "Notes") and
(b) the Agent on behalf of the Lenders has agreed to issue Letters of Credit for
the account of Borrower. Capitalized terms used herein without definition shall
have the meanings assigned in the Credit Agreement.
B. As a condition precedent to the making of the Loans and the
issuance of the Letters of Credit under the Credit Agreement, the Guarantor is
required to execute and deliver this Guaranty.
C. The Guarantor has duly authorized the execution, delivery and
performance of this Guaranty.
D. It is in the best interests of the Guarantor to execute this
Guaranty inasmuch as the Guarantor will derive substantial direct and indirect
benefits from the Loans made from time to time to the Borrower and the issuance
of Letters of Credit by the Agent and the Lenders pursuant to the Credit
Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in order to induce the Agent
and the Lenders to make Loans (including the initial Loans) to the Borrower and
to issue Letters of Credit pursuant to the Credit Agreement, the Guarantor
agrees, for the benefit of the Agent and each Lender, as follows:
<PAGE>
ARTICLE I
GUARANTY
1.1 Guaranty. For value received, and in consideration of any loan or
other financial accommodation, heretofore or hereafter at any time made or
granted to the Borrower by the Agent and the Lenders, the Guarantor hereby
unconditionally guarantees the full and prompt payment when due, whether by
acceleration or otherwise, and at all times thereafter, of all obligations of
the Borrower to the Agent and each Lender and their successors and assigns,
howsoever created, arising or evidenced, whether direct or indirect, primary or
secondary, absolute or contingent, joint or several, or now or hereafter
existing or due or to become due, including, without limitation, all such
amounts which would become due but for the operation of the automatic stay under
Section 362(a) of the United States Bankruptcy Code, 11 U.S.C. (S) 362(a), and
the operation of Sections 502(b) and 506(b) of such Bankruptcy Code, 11 U.S.C.
(S) 502(b) and (S) 506(b), under and in connection with the Credit Agreement,
including, without limitation under (a) the Notes, and (b) the Letters of
Credit, including any Reimbursement Obligations with respect thereto (all such
obligations being hereinafter collectively called the "Liabilities"), and the
Guarantor further agrees to pay all reasonable expenses (including reasonable
attorneys' fees and legal expenses) paid or incurred by the Agent and any Lender
in endeavoring to collect the Liabilities, or any part thereof, and in enforcing
this Guaranty. Anything herein contained to the contrary notwithstanding, the
amount of this Guaranty, however, shall not exceed the maximum amount which the
Guarantor could pay under this Guaranty without having such payment set aside as
a fraudulent transfer or conveyance or similar action under such Bankruptcy Code
or any applicable state law.
1.2. Bankruptcy. The Guarantor hereby agrees that, in the event of the
dissolution or insolvency of the Borrower or the Guarantor, or the inability or
failure of the Borrower or the Guarantor to pay its debts as they become due, or
an assignment by the Borrower or the Guarantor for the benefit of creditors, or
the commencement of any case or proceeding in respect of the Borrower or the
Guarantor under any bankruptcy, insolvency or similar laws, and if such event
shall occur at a time when any of the Liabilities may not then be due and
payable, the Guarantor will pay to the Lender forthwith the full amount which
would be payable hereunder by the Guarantor as if all Liabilities were then due
and payable.
1.3. Setoff. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of, and throughout the continuance of, any Event of Default under the
Credit Agreement, the Agent and each Lender and each subsequent holder of any of
the Notes is hereby authorized by the Guarantor without notice to the Borrower,
the Guarantor or any other Person, any such notice being hereby expressly
waived, to set off and to appropriate and to apply any and all deposits (general
or special, including, but not limited to, Indebtedness evidenced by
certificates of deposit, whether matured or unmatured, but not including trust
accounts, and in whatever currency denominated) and any other Indebtedness at
any time held or owing by the Agent, that Lender or that subsequent holder to or
for the credit or the account of the Guarantor, whether or not matured, against
and on
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<PAGE>
account of the obligations and liabilities of the Borrower or the Guarantor to
the Agent, such Lender or such subsequent holder under the Credit Documents,
including, but not limited to, all claims of any nature or description arising
out of or connected with the Credit Documents irrespective of whether or not (a)
the Agent, such Lender or such subsequent holder shall have made any demand
hereunder, or (b) the principal of or the interest on the Loans, the L/C
Obligations or any other amounts due hereunder shall have become due and payable
and although said obligations and liabilities, or any of them, may be contingent
or unmatured.
1.4. Guaranty Absolute, etc. This Guaranty shall in all respects be a
continuing, absolute and unconditional Guaranty, and shall remain in full force
and effect (notwithstanding, without limitation, the dissolution of the Borrower
or the Guarantor or that at any time or from time to time all Liabilities may
have been paid in full), until all Liabilities (including any renewals,
extensions and/or rearrangements of any thereof) and all interest thereon and
all reasonable expenses (including reasonable attorneys' fees and legal
expenses) paid or incurred by the Agent and the Lenders in endeavoring to
collect the Liabilities and in enforcing this Guaranty shall have been finally
paid in full and the Commitments have been permanently terminated.
1.5. Reinstatement. The Guarantor further agrees that, if at any time all
or any part of any payment theretofore applied by the Agent or any Lender to any
of the Liabilities is or must be rescinded or returned by the Agent or any
Lender for any reason whatsoever (including, without limitation, the insolvency,
bankruptcy or reorganization of the Borrower), such Liabilities shall, for the
purposes of this Guaranty, to the extent that such payment is or must be
rescinded or returned, be deemed to have continued in existence, notwithstanding
such application by the Agent or any Lender, and this Guaranty shall continue to
be effective or be reinstated, as the case may be, as to such Liabilities, all
as though such application by the Agent or any Lender had not been made.
1.6 Rights of the Lenders. The Agent or any Lender may, from time to
time, at its sole discretion and without notice to the Guarantor, and without
affecting the obligations of the Guarantor hereunder, which shall remain in full
force and effect, take any or all of the following actions:
(a) retain or obtain a lien upon or a security interest in any
property to secure any of the Liabilities or any obligation hereunder;
(b) retain or obtain the primary or secondary obligation of any
obligor or obligors, in addition to the Guarantor, with respect to any of
the Liabilities;
(c) extend or renew for one or more periods (whether or not longer
than the original period), alter or exchange any of the Liabilities, or
release or compromise any obligation of the Guarantor hereunder or any
obligation of any nature of any other obligor with respect to any of the
Liabilities;
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<PAGE>
(d) extend or renew for one or more periods (whether or not longer
than the original period) or release, compromise, alter or exchange any
obligations of any nature of any obligor with respect to any such property
securing any of the Liabilities; or
(e) resort to the Guarantor for payment of any of the Liabilities,
whether or not the Lender shall have proceeded against any other obligor
primarily or secondarily obligated with respect to any of the Liabilities
(all of the actions referred to in this clause being hereby expressly
waived by the Guarantor).
1.7. Application of Payments. Any amounts received by the Agent or any
Lender from whatsoever source on account of the Liabilities may be applied by it
toward the payment of such of the Liabilities, and in such order of application,
as the Agent or any Lender may from time to time elect.
1.8. Waiver. (a) The Guarantor hereby expressly waives:
(i) notice of the acceptance by the Agent or any Lender of this
Guaranty;
(ii) notice of the existence or creation or non-payment of all or
any of the Liabilities;
(iii) presentment for payment, demand, protest, notice of intent
to accelerate, notice of acceleration, notice of dishonor and all
other notices whatsoever; and
(iv) any right to require marshalling of assets and all diligence
in collection or protection of or realization upon the Liabilities or
any thereof, any obligation hereunder, or any security for or guaranty
of any of the foregoing.
(b) No delay on the part of the Agent or any Lender in the exercise of
any right or remedy shall operate as a waiver thereof, and no single or
partial exercise by the Agent or any Lender of any right or remedy shall
preclude other or further exercise thereof or the exercise of any other
right or remedy; nor shall any modification or waiver of any of the
provisions of this Guaranty be binding upon the Agent or any Lender except
as expressly set forth in a writing duly signed and delivered on behalf of
the Agent or such Lender. No action of the Agent or any Lender permitted
hereunder shall in any way affect or impair the rights of the Agent or any
Lender and the obligations of the Guarantor under this Guaranty. The
obligations of the Guarantor under this Guaranty shall be absolute and
unconditional irrespective of any circumstance whatsoever which might
constitute a legal or equitable discharge or defense of the Guarantor. The
Guarantor hereby acknowledges that there are no conditions to the
effectiveness of this Guaranty.
-4-
<PAGE>
1.9. Subrogation. No payment made by or for the account of the Guarantor
pursuant to this Guaranty shall entitle the Guarantor by subrogation or
otherwise to demand or receive any payments by the Borrower or from or out of
any properties of the Borrower until the Liabilities shall have been paid in
full and the Commitments terminated. The Guarantor shall not exercise any right
or remedy against the Borrower or any properties of the Borrower by reason of
any performance by the Guarantor of this Guaranty until the Liabilities shall
have been paid in full.
1.10. Subordination. The Guarantor hereby subordinates its right to
payment from the Borrower of any obligations, howsoever created, arising or
evidenced, whether direct or indirect absolute or contingent, now or hereafter
existing or due or to become due (collectively, "Liabilities") to the
Liabilities of the Borrower to the Agent and the Lenders, and no payments or
other distributions whatsoever in respect of any such Liabilities owing to the
Guarantor, nor shall any property or assets of the Borrower be applied to the
purchase, acquisition or retirement of any such Liabilities owing to the
Guarantor; provided that payments on such Liabilities permitted under the Credit
Agreement may be made at any time no Default or Event of Default shall have
occurred and be continuing. Any payments received by the Guarantor in respect
of any such Liabilities owing to it other than as expressly provided herein
shall be held in trust for the Lenders.
1.11. Excess Liabilities. The creation or existence from time to time
of Liabilities in excess of the amount to which the right of recovery under this
Guaranty is limited, if any, is hereby authorized, without notice to the
Guarantor, and shall in no way affect or impair the rights of the Lender and the
obligation of the Guarantor under this Guaranty.
1.12. Successors, Transferees and Assigns. The Agent and each Lender
may, from time to time, without notice to the Guarantor, assign or transfer any
or all of the Liabilities or any interest therein in accordance with the terms
of the Credit Agreement; and, notwithstanding any such assignment or transfer or
any subsequent assignment or transfer thereof, such Liabilities shall be and
remain Liabilities for the purposes of this Guaranty, and each and every
immediate and successive assignee or transferee of any of the Liabilities or of
any interest therein shall, to the extent of the interest of such assignee or
transferee in the Liabilities, be entitled to the benefits of this Guaranty to
the same extent as if such assignee or transferee were the transferring Lender;
provided, however, that, unless the transferring Lender shall otherwise consent
in writing, the transferring Lender shall have an unimpaired right, prior and
superior to that of any such assignee or transferee, to enforce this Guaranty,
for the benefit of the transferring Lender as to those of the Liabilities which
the transferring Lender has not assigned or transferred.
-5-
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Independent Means of Obtaining Information. The Guarantor hereby
represents and warrants to the Agent and each Lender that it now has and will
continue to have independent means of obtaining information concerning the
affairs, operations, financial condition, business and prospects of the
Borrower.
2.2 Authorization; No Conflict. The Guarantor hereby further represents
and warrants to the Agent and each Lender that
(a) the execution and delivery of this Guaranty, and the performance
by the Guarantor of its obligations hereunder, are within the Guarantor's
corporate powers and have been duly authorized by all necessary corporate
action on the part of the Guarantor; and
(b) this Guaranty has been duly executed and delivered on behalf of
the Guarantor and is the legal, valid and binding obligation of the
Guarantor, enforceable in accordance with its terms subject as to
enforcement only to bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally
and equitable principles relating to or limiting creditors' rights
generally, the making and performance of which do not and will not
contravene or conflict with the articles of incorporation and by-laws or
other corporate governance documents of the Guarantor or violate or
constitute a default under any law, any presently existing requirement or
restriction imposed by any judicial, arbitral or governmental
instrumentality or any agreement, instrument or indenture by which the
Guarantor is bound.
2.3 Validity and Binding Nature. This Guaranty shall be binding upon the
Guarantor, and upon the successors and assigns of the Guarantor, and shall
include any successor or successors, whether immediate or remote, to such
corporation; provided, however, that the Guarantor may not assign any of its
obligations hereunder without the prior written consent of the Agent and the
Lenders except as may be provided in the Credit Agreement.
ARTICLE III
MISCELLANEOUS PROVISIONS
3.1 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. This
Guaranty, and the rights and duties of the parties hereto, shall be construed in
accordance with and governed by the internal laws of the State of Texas. Each
party hereto hereby submits to the nonexclusive jurisdiction of the United
States District Court for the Southern District of Texas and of any Texas state
court sitting in Houston, Texas for purposes of all legal proceedings arising
out of or relating to this Guaranty or the transactions contemplated hereby.
Each party hereto irrevocably waives,
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<PAGE>
to the fullest extent permitted by law, any objection it may now or hereafter
have to the laying of the venue of any such proceeding brought in such a court
and any claim that any such proceeding brought in such a court has been brought
in an inconvenient forum. EACH PARTY TO THIS GUARANTY HEREBY IRREVOCABLY WAIVES
ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING
OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY.
3.2. Severability. Wherever possible, each provision of this Guaranty
shall be interpreted in such manner as to be effective and valid under
applicable laws, but if any provision of this Guaranty shall be prohibited by or
invalid under such laws, such provision shall be ineffective to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Guaranty.
3.3 Notices. Except as otherwise specified herein, all notices under this
Guaranty shall be in writing (including cable, telecopy or telex) and shall be
given to the Guarantor at its address, telecopier number or telex number set
forth on the signature page hereof or such other address, telecopier number or
telex number as the Guarantor may hereafter specify by notice to the Agent,
given by courier, by United States certified or registered mail, by telegram or
by other telecommunication device capable of creating a written record of such
notice and its receipt. Each such notice, request or other communication shall
be effective (i) if given by telecopier, when such telecopy is transmitted to
the telecopier number specified in this Section on the signature pages hereof
and a confirmation of receipt of such telecopy has been received by the sender,
(ii) if given by telex, when such telex is transmitted to the telex number
specified on the signature pages hereof and the answerback is received by
sender, (iii) if given by courier, when delivered, (iv) if given by mail, five
(5) days after such communication is deposited in the mail, certified or
registered with return receipt requested, or (v) if given by any other means,
when delivered at the addresses specified on the signature page hereof.
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly
executed and delivered by its duly authorized officer as of the date first above
written.
-------------------
Address: By:________________________________
________________ Name:______________________________
________________ Title:_____________________________
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<PAGE>
EXHIBIT 11.1
PalEx, Inc. and Subsidiaries
Statement Regarding Computation of Net Income (Loss) per Share
(In Thousands, except Share and Per Share Data)
<TABLE>
<CAPTION>
One Month
Year Ended Year Ended Ended Year Ended
November 30, November 30, December 31, December 28,
1995 1996 1996 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ 3,590 $ 5,676 $ (66) $ 7,152
Weighted Average Shares Outstanding 6,054,446 6,054,446 6,054,446 11,937,724
---------- ---------- ---------- -----------
Shares used in computing Basic net income (loss) per share 6,054,446 6,054,446 6,054,446 11,937,724
========== ========== ========== ===========
Basic net income (loss) per share $ 0.59 $ 0.94 $ (0.01) $ 0.60
========== ========== ========== ===========
Dilutive effect of outstanding options 0 0 0 352,218
Shares used in computing Diluted net income (loss) per share 6,054,446 6,054,446 6,054,446 12,289,942
========== ========== ========== ===========
Diluted net income (loss) per share $ 0.59 $ 0.94 $ (0.01) $ 0.58
========== ========== ========== ===========
</TABLE>
Exhibit 11.1 - Page 1
<PAGE>
EXHIBIT 21.1
PALEX, INC.
List of Subsidiaries
Name State of Incorporation
- ---- ----------------------
PalEx Container Systems, Inc. Delaware
Fraser Industries, Inc. Texas
Interstate Pallet Co., Inc. Virginia
Ridge Pallets, Inc. Florida
Sonoma Pacific Company, Inc. California
Sheffield Lumber & Pallet Company, Inc. North Carolina
New London Pallet, Inc. Wisconsin
NLD, Inc. Delaware
NLP Transport, Inc. Delaware
Bay Area Pallet Company Delaware
Summers Pallet Company, Inc. Delaware
American Pallet Recyclers, Inc. Delaware
Acme Barrel Company, Inc. Delaware
Container Services Company SW, Inc. Delaware
Container Services Company NW, Inc. Delaware
Environmental Recyclers of Colorado, Inc. Colorado
Drum Service Co. of Florida, Inc. Florida
Southern Pallet Acquisition, Inc. Delaware
Capital Pallet, Incorporated Texas
Pallett Outlet Company, Inc. Delaware
Exhibit 21.1 - Page 1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included, in this Annual Report on Form 10-K into the Company's
previously filed Registration Statement on Form S-8 (SEC File No. 333-48239).
ARTHUR ANDERSEN LLP
Houston, Texas
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> NOV-30-1996 DEC-28-1997
<PERIOD-START> DEC-01-1995 JAN-01-1997
<PERIOD-END> NOV-30-1996 DEC-28-1997
<CASH> 666 5,131
<SECURITIES> 0 0
<RECEIVABLES> 6,844 13,623
<ALLOWANCES> (178) (465)
<INVENTORY> 7,378 18,156
<CURRENT-ASSETS> 15,257 39,354
<PP&E> 34,920 51,936
<DEPRECIATION> (14,863) (21,054)
<TOTAL-ASSETS> 37,129 96,562
<CURRENT-LIABILITIES> 11,917 8,166
<BONDS> 0 0
0 0
0 0
<COMMON> 60 140
<OTHER-SE> 17,994 60,152
<TOTAL-LIABILITY-AND-EQUITY> 37,129 96,562
<SALES> 96,047 162,848
<TOTAL-REVENUES> 96,047 162,848
<CGS> 79,990 136,242
<TOTAL-COSTS> 87,638 149,534
<OTHER-EXPENSES> 41 127
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,210 1,150
<INCOME-PRETAX> 7,158 12,037
<INCOME-TAX> 1,482 4,885
<INCOME-CONTINUING> 5,676 7,152
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,676 7,152
<EPS-PRIMARY> .94 .60
<EPS-DILUTED> .94 .58
</TABLE>
